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J.B. Cronjé is a researcher at the Trade Law Centre (tralac) in Stellenbosch, South Africa. He holds a LL.M (International Trade) and LL.B from the University of Stellenbosch.
May 12, 2014
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South African 51% Ownership Law Faces Industry Hostility and Legislative Hurdles
When: 13-15 May 2014 Where: Gallagher Convention Centre, Johannesburg, Gauteng
The Private Security Industry Amendment Bill, which contains a controversial provision limiting foreign ownership and control of South African private security businesses to a maximum of 49%, was recently passed by both the National Assembly and the National Council of Provinces.
The Bill must now be submitted to the President for assent and signature before it enters into law.
The aim of the Bill is to amend certain provisions in the principal act, Private Security Industry Regulation Act 56 of 2001, to improve oversight and regulation of the industry.
It also gives the Minister of Police discretionary power to prescribe different percentages of ownership and control for different categories of security businesses. A number of multinational firms operate in South Africa’s private security industry.
The main objections to the introduction of limitations on foreign ownership are that expropriation of foreign assets will discourage investment beyond just the private security sector, lead to job losses and jeopardise the safety and security of persons relying on the services of foreign owned private security firms such as G4S, Chubb, ADT and Securitas.
These firms also provide many other fire and security services such as cash in transit services for the financial services sector.
The Minister of Police has dispelled these claims and argues that foreign ownership of private security firms poses a threat to national security. In his remarks to the National Assembly on the debate of the Bill, the Minister said the limitation of foreign ownership “is necessary because the line between private security companies and private military companies is increasingly blurred.
Blurred lines
The UN has recognised the blurring of these lines and these entities are now referred to as private military and security companies – an all-encompassing phrase. Equally private security companies are increasingly used in the field of intelligence.” Evidence to support this claim remains absent.
Some commentators have argued in the media that the Bill will not pass constitutional muster due to irregularities in the way the Bill was passed through the Portfolio Committee on Police and that it violates South Africa’s international obligations under existing Bilateral Investment Treaties (BITs), the General Agreement on Trade in Services (GATS) of the World Trade Organization (WTO) and the Protocol on Finance and Investment (FIP) of the Southern African Development Community (SADC).
The Constitution of the Republic of South Africa Act 108 of 1996 provides that the President must now either assent to and sign the Bill, or if he has reservations about its constitutionality, refer it back to the National Assembly for reconsideration.
If, after reconsideration, the Bill fully accommodates the President’s reservations, he must assent to and sign the Bill, or refer it to the Constitutional Court for a decision on its constitutionality. If the Constitutional Court decides the Bill is constitutional, the President must assent to and sign the Bill.
Even once the President has assented to and signed the Bill, one third of the members of the National Assembly may still apply to the Constitutional Court for an order declaring the Act unconstitutional. The Court may also make an interim order that all or part of the Act has no force until it has decided the matter.
Article 233 of the Constitution provides “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.”
The World Trade Organization
Of particular interest to this article are South Africa’s international obligations. As a Member of the WTO, South Africa must fulfil in good faith all the obligations assumed by it under the various WTO Agreements including the GATS.
South Africa has undertaken commitments in a number of services sectors with respect to foreign services and foreign services suppliers. These commitments specify the terms, limitations and conditions on market access and the conditions and qualifications on national treatment the country can maintain or introduce in the sectors where such commitments were undertaken.
South Africa made extensive liberalisation commitments on ‘investigation and security’ services under GATS by allowing the cross border supply of investigation and security services into South Africa; the consumption of investigation and security services abroad; the establishment of foreign owned and controlled investigation and security services businesses in South Africa; and the temporary movement of foreigners active in the security and investigation services sector to South Africa.
Investigation and security services’ is defined in the United Nation’s Provisional Central Product Classification (UN CPC) which subdivides the sector into: investigation services; security consultation services; alarm monitoring services; armoured car services; guard services; and other security services not elsewhere classified.
This definition corresponds to the definition of security services and security activities regulated in the Act. South Africa’s GATS commitments are legally binding and domestic regulation on the private security industry must therefore adhere to these international law obligations.
The proposed provision in the Bill limiting foreign ownership and control of security businesses to a maximum of 49% would violate South Africa’s market access commitment on the establishment of foreign services suppliers.
This particular commitment provides that the country shall not maintain or introduce measures that would limit the participation of foreign capital in terms of maximum percentage limits on foreign shareholding or the total value of individual or aggregate foreign investment.
Non-compliance
In the case of non-compliance with any obligation, any WTO Member may invoke dispute settlement proceedings to seek the withdrawal of the inconsistent measure. The GATS does make provision for the modification or withdrawal of a country’s commitments, but requires such a country to enter into negotiations with any affected Member State and reach agreement on compensatory adjustments.
In seeming recognition of this potential breach, the South African Police Service, stated in their briefing note to the National Council of Provinces Committee on Security and Constitutional Development, that in order for “South Africa to withdraw from its commitments under GATS or BITs, there must be a sound basis for entering into negotiations with the other parties.
A sound justification for this to happen must exist. Grounds for justification could be for South Africa to entrench its national security, particularly as a development state and in the broader African Union context, the potential for private security companies to use its might, knowledge and weapons to destabilize the State, or be used by other agencies or States towards this end.
Regardless of the motivation for the modification or withdrawal of GATS commitments, any affected WTO Member may refer the matter to arbitration if agreement is not reached on any necessary compensatory adjustments.
South Africa may not modify or withdraw its commitments until it has made compensatory adjustments in conformity with the findings of the arbitration. If it does not adhere to these obligations, any affected WTO Member that participated in the arbitration may retaliate and withdraw substantially equivalent trade benefits.
Southern African Development Community
As a member of SADC, South Africa ratified the FIP on 4 February 2008. The FIP entered into force on 16 April 2010. Article 3 of the FIP provides that State Parties must “co-ordinate their investment regimes and cooperate to create a favourable investment climate in the Region as set out in Annex 1”.
The Annex applies to any investment in the territory of a host state regardless of the nationality of the investor. An investor is defined in Article 1 as a legal or natural person “that has been admitted to make or has made an investment”.
As far as the author is aware, South Africa does not have legislation regulating the admission of investment. The Annex lacks a provision on national treatment that would oblige South Africa to treat foreign investors no less favourably than nationals engaged in similar business activities.
The Annex does include other provisions on the treatment of investors including fair and equitable treatment clauses.
The Annex also contains provisions on investment protection, providing for prompt, adequate and effective compensation in the case of nationalisation or expropriation and contains a prohibition on State Parties to “arbitrarily, and without good reason, amend or otherwise modify to the detriment of investors, the terms, conditions and any benefits specified in the letter of authorisation” of an investment.
However, Article 14 contains a general exception provision which preserves the right to regulate in the “public interest” to ensure “investment activity is undertaken in a manner sensitive to health, safety and environmental concerns”.
The FIP provides for a system of recourse in the event of failure of implementation. The FIP is governed by a Committee of Ministers for Finance and Investment and operates entirely by consensus.
The committee is obliged to oversee the implementation of the Protocol, supervise the activities of its committees, sub-committees or institutions and must seek to resolve disputes on the interpretation, application or implementation of the Protocol.
If Member States are unable to resolve a dispute relating to any article in the Protocol, and an Annex relating to such article contains provisions on dispute resolution, then the provisions of that Annex must be applied in respect of the dispute.
In this case, Article 28 of the Annex provides disputes between an investor and a State Party that have not been amicably settled, after exhausting local remedies, shall be submitted to international arbitration. The parties may agree to refer the dispute to:
The SADC Tribunal
The International Centre for the Settlement of Investment Disputes (having regard to the provisions, where applicable, of the ICSID Convention and the Additional Facility for the Administration of Conciliation, Arbitration and Fact-Finding Proceedings)
An international arbitrator or ad hoc arbitral tribunal to be appointed by a special agreement or established under the Arbitration Rules of the United Nations Commission on International Trade Law (UNCITRAL).
If agreement cannot be reached on the any of the abovementioned alternative procedures, Article 28 (3) provides “the parties shall be bound to submit the dispute to arbitration under the Arbitration Rules of the United Nations Commission on International Trade Law as then in force.”
In August 2010, the SADC Summit of Heads of State and Government suspended the SADC Tribunal.
However, the strong wording of the provision suggests that State Parties have given the required prior consent needed to institute international arbitration proceedings.
It follows from this interpretation that the investor is guaranteed the right to bring his dispute before an arbitral tribunal which will decide its case based on the UNCITRAL Arbitration Rules.
Since the suspension of the SADC Tribunal in 2010, one investor, Swissbourgh Diamond Mines (Pty) Limited has, for example, exercised this right in terms of the FIP Annex 1 to institute international arbitral proceedings against Lesotho, a SADC Member and State Party to FIP, under the UNCITRAL Arbitration Rules.
Similarly, an affected investor in South Africa may submit a dispute for arbitration and thereafter apply to a local court to make an international arbitration award an order of court and enforceable because South Africa has ratified the United Nations’ Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 1958).
Bilateral Investment Treaties
According to the United Nation’s Trade and Development database on international investment agreements, South Africa has concluded BITs with almost 50 countries, including the United Kingdom, Italy, Switzerland and Sweden.
The South African government has indicated its intention to terminate many BITs as part of an ongoing effort to overhaul its investment protection regime. As part of this effort, it has published the Promotion and Protection of Investment Bill 2013 to replace the terminated BITs and to provide a uniform standard of treatment to foreign investors.
The Bill has caused much debate, because it is perceived to provide a lower level of investment protection than the BITs. In addition, the government is also developing a model BIT in line with the SADC Model BIT which will be used as a template in future BIT negotiations where there are compelling reasons for their conclusion.
Investment treaties are usually concluded between two states on a bilateral level in which they agree to offer certain standards of treatment to each other’s nationals. All Bilateral Investment Treaties (BITs) are different.
Their content and obligations usually vary on the treatment they provide to foreign investors; their provisions on investment protection; and dispute settlement mechanisms.
For example, the BIT concluded between South Africa and the United Kingdom provides national treatment, most-favoured nation treatment and fair and equitable treatment to nationals investing in each other’s territories.
In particular, the national treatment and most-favoured nation treatment clause (Article 3) provides “neither Contracting Party shall in its territory subject investments or returns of nationals or companies of the other Contracting Party to treatment less favourable than that which it accords to investments or returns of its own nationals or companies or to investments or returns of any third State”.
It provides further “neither Contracting Party shall in its territory subject nationals or companies of the other Contracting Party, as regards their management, maintenance, use, enjoyment or disposal of their investment, to treatment less favourable than that which it accords to its own nationals or companies of any third State.”
Securing national and most-favoured nation treatment ensures that investors are treated no less favourably within the host country than the nationals of the host country and those from third countries.
The fair and equitable clause (Article 2) offers a minimum standard of treatment for investments of nationals of the other Contracting Party and provides they shall at all times “enjoy full protection and safety in the territory of the other Contracting Party. Neither Contracting Party shall in any way impair by unreasonable or discriminatory measures the management, maintenance, use, enjoyment or disposal of investments in its territory”.
In general, investment protection provisions give investors the right to transfer investment funds out of the host country and to receive compensation for losses due to expropriation, armed conflict, revolution, or revolt in the host country.
The BIT between South Africa and the United Kingdom guarantees restitution, indemnification, compensation or other settlement in all of these and other instances (Article 4). It prohibits nationalisation or expropriation except for a public purpose on a non-discriminatory basis and against prompt, adequate and effective compensation.
Compensation must be paid in cases of direct government nationalisation or expropriation of an investment as well as indirect expropriation where investments are “subjected to measures having effect equivalent to nationalisation or expropriation” (Article 5). Compensation must amount to “the genuine value of the investment expropriated”.
International investment agreements usually provide for the settlement of disputes arising between the contracting parties and between an investor and a host state. The agreements often stipulate fixed periods for negotiations, followed by binding arbitration proceedings if negotiations are unsuccessful.
The BIT between South Africa and the United Kingdom provides for both types of dispute settlement. In case of investor-state dispute settlement, investors have the right to pursue the settlement of a dispute through international arbitration (Article 8).
The parties to the dispute may agree to refer the dispute either to the ICSID, the Court of Arbitration of the International Chamber of Commerce, or an ad hoc arbitration tribunal appointed by a special agreement or established under the UNCITRAL Arbitration Rules.
Conclusion
The provision in the Private Security Regulation Amendment Bill limiting foreign ownership and control of security businesses violates South Africa’s GATS commitment not to introduce measures what would limit the participation of foreign capital.
The country’s GATS commitments are legally binding. It is clear from the minutes of the Parliamentary Portfolio Committee on Police that the government is aware of the state’s GATS obligations and the imminent breach.
The Investment Annex of the FIP and the BITs concluded between South Africa and other countries afford affected investors access to an investor-state dispute settlement mechanism that allows them to take a dispute directly to international arbitration; bypassing the domestic legal system.
However, the Investment Annex of the FIP is an exception to this general rule and obliges aggrieved investors to first exhaust all domestic remedies before taking a dispute to international arbitration.
These agreements effectively assign arbitral panels (located outside the country) the authority to interpret and implement the agreements. The agreements impose binding investment rules on the country with far-reaching financial and policy consequences for the State.
Depending on the kind of international arbitration agreed upon, arbitration awards are not open to appeal and can be enforced through the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958) or the ISCID Convention.
The President has yet to assent to and sign the Bill into law. Given the concerns regarding the challenged provision in terms of South Africa’s international obligations, the President may still find it necessary to refer the Bill back to the National Assembly for reconsideration.
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South African 51% Ownership Law Faces Industry Hostility and Legislative HurdlesStipulating that private security companies in South Africa should be at least 51% South African-owned, the Private Security Industry Regulation Amendment Bill has been derided across the security industry.
JB Cronjé
IFSEC Insider | Security and Fire News and Resources
