Prof Riekie Wandrag UWC

1. Understanding Investment Terminology Prof Riekie Wandrag UWC

2. …FDI done well can make very significant contributions to economies, both developing and developed, and to sustainable development at the local, national, and global levels. (Howard Mann)

3. Introduction DTI objective: “to promote direct investment in the South African economy to accelerate job creation, facilitate industrial development and increase exports” By: creating “an appropriate regulatory framework that ensures investor confidence and creates an enabling environment for business.”

4. Introduction BUT: Keeping in mind Government’s sovereign right and duty to regulate in the public interest “APPROPRIATE LEGAL FRAMEWORK” Must achieve balance between protection and attraction of Foreign Direct Investment and Government’s right / duty to regulate in public interest

5. National Legal Framework of FDI • Promotion and Protection of Investment Bill 2015 • To be interpreted with reference to Customary International Law / Investment Law • Constitution, s 232 • Customary international law is law in the Republic unless it is inconsistent with the Constitution or an Act of Parliament. • Constitution, s 233 • When interpreting any legislation, every court must prefer any reasonable interpretation of the legislation that is consistent with international law over any alternative interpretation that is inconsistent with international law

6. International Legal Framework of FDI • No international / multilateral regulation of FDI • Bilateral Investment Treaties (BIT’s) / International Investment Agreements (IIA’s) • Increasingly investment chapters in Regional FTA’s • Codes of Conduct / Guidelines (World Bank, OECD) • Decisions from dispute settlement tribunals (ICJ / ICSID) • Customary International Law / Investment Law • Promotion and Protection of Investment Bill 2015?

7. Investment Terminology Foreign Direct Investment (FDI): “Transfer of tangible or intangible assets from one country to another for purpose of their use in that country to generate wealth under total or partial control of investor.” (Sornarajah) Requires physical presence in host country, longer duration and control of investor Portfolio / Equity Investment “Movement of money for purposes of buying shares / securities in foreign market.” Lack of physical presence, lack of control / management from investor

8. FDI Terminology Definition of Investment : OECD : • FDI: cross-border investment by a resident entity in one economy • objective of obtaining a lasting interest in an enterprise resident in another economy. • Implies the existence of a long-term relationship between the direct investor and the enterprise and • a significant degree of influence by the direct investor on the management of the enterprise. SaliniCostruttori S.P.A & Itals Trade S.P.A v Kingdom of Morocco (2001) ICSID: • Contribution in money, kind or industry • Long duration • Presence of risk for investor • Promotion of economic development

9. FDI Terminology Definition of Investment : Promotion and Protection of Investment Bill 2015 Cl 2: Any lawful enterprise established, acquired or expanded by investor in accordance with laws of Republic, commits resources of economic value, reasonable period of time, anticipation of profit; Holding / acquisition of shares / debentures or other ownership of such enterprise Holding / acquisition of juristic person outside Republic, or merger outside Republic, in as far as it has effect in the Republic. LARGELY COMPLIES WITH DEFINITIONS ACCEPTED IN INTERNATIONAL LAW, SHOULD WITHSTAND SCRUTINY

10. FDI Terminology Definition of Investor: Promotion and Protection of Investment Bill 2015 Investor: Any enterprise making an investment in the Republic regardless nationality Investment: Any lawful enterprise established / acquired/ expanded by investor (enterprise)…. Right of Establishment: Right of investor (enterprise) through an enterprise, to invest (establish / acquire enterprise) Enterprise: Any natural or juristic persons, whether incorporated or not (and irrespective of nationality)

11. FDI Terminology Standards of Treatment of Foreign Investors: Non-Discrimination: Most Favoured Nation Treatment(MFN) Non-discrimination between investments from different countries Relevant in BIT’s: Giving investors from parties to BIT’s right to claim any better treatment / protection awarded to investors from a third country Not relevant in national legislation – all investors to be treated equally

12. FDI Terminology Non-Discrimination: National Treatment: (NT) Non-discrimination between foreign investors and nationals (local investors) Trade interpretation (WTO): Foreign goods/ services /IP should receive treatment no less favourable than “like” (similar / identical) local goods Customary International Law interpretation: Treatment of persons and property of aliens: Calvo Doctrine (favoured by Latin American Countries): Aliens and their property are entitled only to the same treatment accorded to nationals of the host country under its national laws

13. FDI Terminology National Treatment: Continued… Doctrine of State responsibility for injuries to aliens and their property (historically supported by developed countries) : Customary international law establishes a minimum international standard of treatment to which aliens are entitled, (which could be higher than treatment given to nationals, where national treatment standard low)

14. FDI Terminology National Treatment: Continued. Investment Interpretation (UNCTAD): Principlewhereby host country extends to foreign investors treatment that is at least as favourable as the treatment that it accords to national investors in like circumstances. • Aimed at achieving degree of competitive equality between foreign and national investors. • Typically subject to exceptions: • General (public health, morals, national security) • Subject specific (taxation, intellectual property) • Country specific exceptions: country reserves right to differentiate for reasons of national economic and social policy

15. FDI Terminology Fair and EquitableTreatment (FET): Principle of “equitable treatment “ dates back to 1948 Havana Charter for the ITO. Currently most BIT’s and IIA’s and regional agreements provide for the fair and equitable standard of treatment of investors./ investments Interpretation problematic – no precise definition: Waste Management v Mexico: Fair and Equitable treatment standard breached by State conduct that is arbitrary, grossly unfair, unjust or idiosyncratic, is discriminatory and exposes the claimant to sectional or racial prejudice, or involves a lack of due process leading to an outcome which offends judicial propriety Differences in wording and extensive interpretations of FET places undue burden on host states, and may infringe on right to regulate in public intereet

16. FDI Terminology FET: Continued… FET often linked to National Treatment in treaty formulation. Also in World Bank Guidelines on Treatment of Foreign Direct Investment (1992): • Each state will extend to investment fair and equitable treatment – • With respect to bulk of rights of investor, this must be treatment as favourable as that accorded to national investors in similar circumstances • With respect to aspects not relevant to national investors, state must not discriminate between foreign investors on basis of nationality (MFN)

17. FDI Terminology Standards of Treatment: Continued… Full Protection and Security; (FPS) Most investment treaties require foreign investments to be given “full protection and security” Established principle in Customary International Law : failure to provide protection to alien threatened by violence creates responsibility for host state. Confirmed in Investment Law,.

18. FDI Terminology Full Protection and Security; (FPS) cont.. World Bank Guidelines: In all cases, full protection and security will be accorded to investor’s rights re ownership, control and substantial benefits over property, including IP Customary interpretation relating to diminution of physical security of investment (Saluka v Czech Republic- ICSID) BUT: BiwaterGauff Ltd v United Rep of Tanzania FPS requires state to guarantee stable and secure physical, commercial and legal environment Expanded interpretation places onerous burden on states

19. FDI Terminology Standards of Treatment: Continued… Promotion and Protection of Investment Bill 2015 MFN: No MFN clause specified – not relevant as long as Bill does not take nationality into consideration FET: Not included. Not necessary as per World Bank Guidelines as NT is provided for Wise to leave out in view of onerous responsibilities created by international jurisprudence. NT: Cl 7: The Republic must give effect to national treatment and treat foreign investors / investments no less favourable than it treats SA investors / business operations in like circumstances

20. FDI Terminology Promotion and Protection of Investment Bill 2015: Like circumstances: • Not specifically defined, but to be examined on merits of each case with reference to the effect of the investment on the Republic, third persons and the local community, employment, the environment as well as the sector of investment and the aim of the measure involved. • Cl7(4) contains list of subject specific (taxation, procurement, subsidies) exceptions, as well as equality, national heritage and development measures Very wide description of like circumstance, will cause uncertainty. Subject specific and policy based exceptions in line with international practice as mentioned by UNCTAD – retaining right to govern in public interest

21. FDI Terminology Promotion and Protection of Investment Bill 2015: FPS: No clause providing for FPS. Cl 8: The Republic must accord investors / investment level of physical security as generally provided to domestic investors - subject to available resources and capacity Compatible with Customary International Investment Law?

22. FDI Terminology Rights of Investors in Customary International Investment Law: Right of Establishment: Customary International Law: State Sovereignty – states retain absolute control over the admission and establishment of aliens in their territory. Customary International Investment Law: Principle of State Sovereignty confirmed also relating to admission of foreign investors.

23. FDI Terminology Rights of Investors in Customary International Investment Law: Right of Establishment: continued… Charter of Economic Rights and Duties of States (CERDS): Art II: Each State has right to regulate and exercise authority over foreign investment in jurisdiction in accordance with laws and regulations and national priorities and objectives. World Bank Guidelines on the Treatment of Foreign Direct Investment: Art II: States will encourage investment, facilitate admission and establishment….BUT each State maintains right to make regulations to govern admission of FDI. States may refuse admission to proposed investment.

24. FDI Terminology Rights of Investors in Customary International Investment Law: Right of Establishment: continued… BUT: liberalisation of world economy led to more open, “investment friendly” national policies, granting greater market access YET: most states retain some measure of control over entry and establishment of foreign investment NT: concerns raised over avoidance of discrimination between foreign and national investors…..addressed through NT

25. FDI Terminology Rights of Investors in Customary International Investment Law: Right of Establishment: continued… Promotion and Protection of Investment Bill 2015: Cl 6: Act does not create right for foreign investor or prospective investor to establish investment in Republic All investments to be established in compliance with laws of Republic Compatible with Customary International Investment Law?

26. FDI Terminology Rights of Investors in Customary International Investment Law: Protection against unlawful Expropriation: Customary International Investment Law: State sovereignty: State has absolute power to regulate – cannot be totally prohibited form expropriating / taking property of nationals or foreigners BUT: limited by standards placed on how State may take property… “Lawful Expropriation:” States prohibited from directly or indirectly nationalizing or expropriating investment of foreign investor except for public purpose, on non­-discriminatory basis, in accordance with due process of law, and on payment of compensation

27. FDI Terminology Rights of Investors in Customary International Investment Law: Protection against unlawful Expropriation: World Bank Guidelines on the Treatment of Foreign Direct Investment: Art IV: State may not expropriate or otherwise take in whole or in part a foreign private investment or take measures which have similar effects, except in accordance with applicable legal procedures, in pursuance in good faith of a public purpose, without discrimination on the basis of nationality and against the payment of appropriate compensation. CERDS: Art 2: Each State has the right to nationalise, expropriate, transfer ownership of foreign property, in which case appropriate compensation should be paid, taking into consideration state laws and regulations in place, and all circumstances that state considers pertinent.

28. FDI Terminology Rights of Investors in Customary International Investment Law: Protection against unlawful Expropriation: Distinction between Direct and Indirect Expropriation: Direct Expropriation: • Nationalisation / confiscation – outright deprivation of property rights Indirect / Creeping Expropriation (Regulatory takings): • Slow , incremental encroachment on ownership rights of a foreign investor that diminishes the value of its investment. Ownership remains with foreign investor but rights of use of the property diminished as a result of state interference No uniform definition of indirect expropriation – difficult to interpret and classify. If not classified as expropriation – not entitled to compensation…..

29. FDI Terminology Rights of Investors in Customary International Investment Law: Protection against unlawful Expropriation: Elements of Lawful Expropriation: • Public Purpose: Uncontroversial. State’s determination of public purpose generally accepted. • Non-Discrimination: Traditionally referring to nationality.Racial discrimination per se unlawful in international law. Progressively discriminatory / arbitrary action, or any action without legitimate justification. • Due process of law / law of general application: Compliance with legislation, non-arbitrary . Breached by “...a wilful disregard of due process of law, an act which shocks, or at least surprises, a sense of juridical propriety” ELSI Case (ICJ)

30. FDI Terminology Rights of Investors in Customary International Investment Law: Protection against unlawful Expropriation: Elements of Lawful Expropriation: continued…….. • Compensation: Customary international law principle that taking of alien property requires compensation. • Standard of compensation due is controversial • UN Resolutions: Appropriate Compensation • CERDS: Art 2. Appropriate compensation, taking into consideration state laws and regulations in place, and all circumstances that state considers pertinent. • World Bank Guidelines on Treatment of Foreign Direct Investment: Art IV Appropriate compensation, meaning adequate, effective and prompt

31. FDI Terminology Rights of Investors in Customary International Investment Law: Protection against unlawful Expropriation: Elements of Lawful Expropriation: Compensation continued…….. Adequate: fair market value Effective: paid in currency of investor / convertible currency Prompt: paid without delay • Corresponds with Hull formula – Prompt , adequate and effective compensation • Favoured by developed countries, recently adopted in most (half ) BITs • Opposed by Calvo Doctrine: aliens have NO rights greater than citizens of the host country, including compensation. To be determined by national courts. • Favoured by developing, mostly Latin American Countries • BIT’s: In practice, many BITs refer to market value

32. FDI Terminology Protection against unlawful Expropriation: Promotion and Protection of Investment Bill 2015: No direct provision for expropriation Cl 9: Investors have the right to property in terms of S25 of Constitution S 39 of Constitution: When interpreting the Bill of Rights, a court, tribunal or forum— (b) must consider international law; This includes customary international law (State v. Makwanyane)

33. FDI Terminology Protection against unlawful Expropriation: Constitution, S 25: • No deprivation of property except law of general application, no law may permit arbitrary deprivation of property • Expropriation only in term of law of general application, public purpose / public interest and subject to compensation – as agreed to or determined by court • Compensation just and equitable, reflecting equitable balance between public interest and interest of affected parties. Reference to history / use of property, market value and land reform. Compatible with Customary International Law?

34. FDI Terminology Rights of Investors in Customary International Investment Law: Repatriation of Profits: Objective of investment to make profit and repatriate to home state Accepted in Customary International Law, guaranteed in most treaties Never absolute guarantee – may cause balance of problems for countries Promotion and Protection of Investment Bill 2015: Transfer of Funds Cl 10: Foreign investor may transfer funds, subject to taxation and applicable legislation. Compatible with Customary International Law?

35. FDI Terminology Rights of Investors in Customary International Investment Law: Dispute Settlement: Investor –State Disputes Customary International Law: State sovereignty includes judicial sovereignty over issues falling in its jurisdiction Disputes between State and investor should firstly be settled in local courts – exhaustion of local remedies. ELSI Case (ICJ): “Unable to accept that an important principle of customary international law should be held to have been tacitly dispensed with” Calvo Doctrine: Foreigners have no more rights than nationals, all disputes to be settled only in local courts

36. FDI Terminology Rights of Investors in Customary International Investment Law: Dispute Settlement: Investor – State Disputes CERDS: Art 2 Where compensation gives rise to controversy, it should be settled under domestic law and in its tribunals, unless mutually agreed otherwise World Bank Guidelines on Treatment of Foreign Direct Investment: Art V: Investor – State disputes normally settled through negotiations, failing which through national courts or other agreed mechanisms such as conciliation binding independent arbitration If agreement on independent arbitration, States encouraged to use ICSID or ICSID Additional Facility

37. FDI Terminology Rights of Investors in Customary International Investment Law: Dispute Settlement: Investor – State Disputes Investor State Disputes - natural imbalance of power Treaty practice to agree on Investor-State dispute settlement via binding international arbitration at ICSID, PCA with unilateral right for investor to instigate dispute settlement With or without exhaustion of local remedies Possible treaty provision for State-State dispute settlement through arbitration

38. FDI Terminology Rights of Investors in Customary International Investment Law: Dispute Settlement: Promotion and Protection of Investment Bill 2015: Cl 12: • Mediation at request of Investor affected by government action • Subject to applicable legislation, investor not precluded from approaching any competent court, independent tribunal / statutory body in Republic for resolution of investment dispute • Government may consent to international State-State arbitration, subject to exhaustion of domestic remedies Compatible with Customary International Law?