Do South Africa's proposed changes to its mining legislation achieve the aim of creating more certainty for the industry? Or is it yet another blow for foreign investment? Jackwell Feris takes an in-depth look at the Draft Mineral and Petroleum Resources Development Bill, 2013 and asks; does South Africa afford sufficient protection to foreign investors in the mining sector?
With a relatively stable government and a regulatory environment that is widely considered as one of the best on the continent South Africa has been an attractive destination for mining. Its business regulatory framework is generally open to foreign investment, bar the usual obstacles foreign investors are confronted with when intending to enter a market. But, at a deeper level, does South Africa afford sufficient protection to foreign investors who hold mining rights or intend to acquire such rights?
The attractiveness of South Africa as an investment destination of choice for mining has seen a significant drop due to a number of factors. The mining industry has received a significant amount of bad publicity: policy uncertainty fuelled by the calls for the nationalisation of the country's mineral resources (which now appears to have been abandoned) during 2012; the recent proposed amendments to the country's mining legislation which are perceived to be unfriendly to investors; socio-economic concerns (i.e. black economic empowerment, job creation, huge economic disparities etc.); and dangerous labour unrest (evident from the Marikana tragedy in August 2012). All these events have added to South Africa's attractiveness as a mining investment destination decreasing annually.
The bad publicity in the mining industry has also had an effect on South Africa's economic outlook in general as is clear from the downgrading of South Africa's sovereign credit rating from a BBB+ to a BBB status by rating agency Fitch and Standard & Poor. The latest report released by Canadian-based Fraser Institute reflects that South Africa's ranking as a mining destination for 2013 has dropped from 53rd place in 2012 to 64th place out of 93 mining jurisdictions. As a country with a significant percentage of the world's exploitable mineral resources and at one stage considered as a very attractive mining destination something will drastically need to change in order to ensure that South Africa does not end-up as one of the least favourite mining investment destinations.
The South African government has attempted to create more certainty in the mining industry with the release of the Draft Mineral and Petroleum Resources Development Bill, 2013 which intends to amend the current mining legislation (Mineral and Petroleum Resources Development Act No. 28 of 2002 ("the MPRDA")). The Bill, however, seems to have added more fuel and uncertainty to the situation as it in a number of respects appears to increase the administrative hurdles for mining companies to comply with. The policy reason behind the South African government's proposed amendment to the mining legislation is to:
- improve the regulatory system
- remove ambiguities with the current legislation
- streamlining administrative process
- enhancing the beneficiation of minerals in the country
At an extensive public hearing process during September 2013 mining industry stakeholders raised their concerns with a number of proposed amendments in the Bill. At the top of the list were the new proposed regulation of the transfer of rights, new proposed system for application of rights and declaration of certain minerals or petroleum resources as strategic and/or designated minerals for beneficiation to a prescribed level prior to export. As a result of the overwhelming concerns raised by the interested and affected parties, the South African Department of Mineral Resources undertook to relook certain of the proposed amendments in order to achieve the objectives of the Bill. It will have to be seen to what extent the stakeholders' comments will be taken into account by government. There is still an extensive parliamentary process which needs to be followed prior to the Bill becoming force of law. In all likelihood any proposed amendments to the current mining legislation will only become law during 2014 or even later due to the general elections scheduled for 2014.
Security of Tenure for Rights
The main concern for any foreign investor is security of tenure for his/ her investment. Investors generally feel threatened when governments start promoting policy changes which could potentially have an adverse effect on the rights they enjoy. The proposed amendment to the MPRDA does not intend to amend the principle in the South African mining law that any mining right granted to a holder is a limited real right (a form of real ownership) in respect of the mineral and land to which such right relates. That alone indicates a security of tenure.
South Africa like most other countries, concluded a number of bilateral investment treaties (BIT) with countries with which it has important trade and investment relationships. In most instances these BITs contain a provision which prohibits the expropriation of investments made by foreign nationals in South Africa, save if such expropriation is "for a public purpose or in the national interest" accompanied by "immediate, full and effective compensation". Any expropriation of an investment of a foreign national by South Africa would be open to a potential breach of its BIT should such expropriation fail to comply with terms and conditions for expropriation as contained in the relevant BIT.
Protection of Investment
The majority of South Africa's BITs are coming to an end or are being terminated by the South African government. The government intends to in future regulate foreign investment by means of national legislation, contained within the draft Promotion and Protection of Investment Bill, 2013 ("the Investment Bill") which intends to provide a legal framework for investments and to address the legal protection of all investors in line with the South African constitutional requirements.
The Investment Bill seeks to achieve several balances between the rights and obligations of all investors in South Africa, the need to provide adequate and equal protection of foreign and domestic investors. The Investment Bill raises some concerns whether sufficient protection will be granted to foreign investors from a security of tenure perspective and specifically compensation in the event of expropriation of rights or interests in South Africa.
Despite the concerns South Africa does have a regulatory regime which protects foreign investors, as recourse is available to South African court's for foreign nationals in the event of expropriation. Recourse to international arbitration is limited and dependant on terms of the BIT with the foreign investor's country of origin.
Going forward, as the BITs expire or are terminated to be replaced by the proposed Investment Bill, recourse to international arbitration would not be possible and will be an additional factor a foreign investor needs to take into account when deciding to invest in South Africa.
It is for the South African government to ensure that the policies and proposed legislative changes for the mining industry and investment protection in general do not result in a further deterrence of investments in South Africa due to overly burdensome and illogical administrative red-tape, but that South Africa's attractiveness as a mining investment destination be regained.
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