After S&P Global Ratings’ decision to downgrade SA’s sovereign credit rating to subinvestment grade ("junk" status), in swift response to "the executive changes initiated by President Zuma" on March 30, it is important to analyse the institutional weaknesses that allow the executive arm of government to go virtually unchecked in altering the country’s economic destiny, as well as how to correct them.
Among the many judicial defeats the Zuma administration has suffered this year was a critical judgment by a full bench of the High Court in Pretoria in February, which found it was unconstitutional for the Cabinet unilaterally to terminate SA’s membership of the International Criminal Court (ICC) without prior approval by Parliament.
Somewhat uncharacteristically, the Cabinet lodged no appeal against the judgment, leaving it a binding precedent on the proper procedure for SA to alter its international treaty relations. While the judgment has potentially derailed the government’s efforts to exit the ICC, its effect may be much wider, reaching into the rough waters of foreign investment and trade.
The court’s reasoning was obvious but rigorous, grounded in the doctrine of the separation of powers. The Constitution prescribes that while the national executive negotiates and signs international agreements, such as the Rome Statute that created the ICC, it cannot become binding on SA unless and until Parliament resolves to ratify it. "It must therefore, perforce, be Parliament which has the power to decide whether an international agreement ceases to bind the country."
Describing a ratified treaty as "a social contract between the people of SA, through their elected representatives in the legislature, and the national executive", which "gives rise to the rights and obligations expressed in such international agreement", the court held that the executive cannot, "without first seeking the approval of the people of SA, terminate those rights and obligations".
This is not to give international agreements any elevated status in South African law. On the contrary, national legislation works the same way. The executive drafts and introduces bills, but only Parliament has the power to turn them into binding acts; and the same goes for any bills designed to amend or repeal existing acts. In short, Parliament makes laws and Cabinet cannot unilaterally unmake them lest it trench on the separation of powers.
Finally, the court rejected the Cabinet’s plea that Parliament could cure the unconstitutionality of Cabinet’s decision by ratifying it retrospectively: "an invalid act, being a nullity, cannot be ratified". This pronouncement could have significant implications for a range of other important treaties the Zuma administration has purportedly terminated in the past five years, specifically in the field of foreign investment.
Between 1994 and 2009, SA signed bilateral investment treaties with 49 foreign states from every continent including major sources of inward investment, such as the UK, Germany and China, as well as major destinations for SA’s outward investments, such as Nigeria and Mozambique. Half of these treaties have entered into force, following ratification by SA’s Parliament and that of the host state.
Such treaties guarantee that enterprises making investments from one country into the other are entitled to certain standards of treatment, such as full compensation for expropriation and freedom from discriminatory, arbitrary or abusive regulation.
Importantly, they enable investors to enforce these standards directly by taking the host government to international arbitration without needing diplomatic impetus from their home government.
SA’s investment protection regime was expanded vastly by the Southern African Development Community Protocol on Finance and Investment (SADC Protocol), which former president Thabo Mbeki signed in 2006 and Parliament ratified in 2008. Aimed at the "stimulation of investment flows and technology transfer and innovation into the region", the SADC Protocol guaranteed treaty-type protection to investors from anywhere in the world, enforceable through international arbitration (after exhaustion of any available remedies within the host state).
However, following two arbitration claims brought against SA under its treaties with Switzerland, Belgium-Luxembourg and Italy, the Zuma administration decided in 2010 that existing treaties should be "evaluated and renegotiated" by an interministerial committee led by the trade and industry minister.
However, the committee’s mandate seems to have been reinterpreted: between 2012 and 2015, no treaties were renegotiated but 13 were unilaterally terminated (those with Austria, Belgium-Luxembourg, Denmark, France, Finland, Italy, Germany, Greece, the Netherlands, Spain, Sweden, Switzerland and the UK).
The termination notices sent to these countries were never tabled, debated or even formally disclosed in Parliament. While two terminations were made public by the affected foreign states, the remainder came to light parenthetically, during deliberations in late 2015 on the Protection of Investment Bill, which reduced the standards of protection given to investors by bilateral investment treaties and removed their recourse to international arbitration.
When confronted with criticism that the bill was inconsistent with the SADC Protocol, the Department of Trade and Industry claimed it was amending the protocol to conform to the bill, but refused to divulge any details about this process to Parliament.
Despite warnings that these measures would impair SA’s investment image, Zuma endorsed them by signing the Protection of Investment Act on December 13 2015 – the same Sunday he was cajoled into appointing Pravin Gordhan as finance minister only four days after alarming the markets with his unexplained dismissal of Nhlanhla Nene.
The government’s rationale for these investment reforms overlaps with its justification for withdrawing from the ICC, which is twofold. First, although multilateral rules-based systems are desirable in principle, they prejudice developing countries in practice. Second, "political solutions" are more appropriate than strict legal processes to resolve disputes implicating the powers of sovereign states and their officials.
These arguments have not been properly tested in Parliament. Forsaking multilateral efforts to improve the ICC and the institutions of international investment law, the Cabinet has instead rejected them altogether.
The amendment to the SADC Protocol, undertaken without public or parliamentary input, is extremely far-reaching. It strips foreign investors from outside the SADC of any protection (subverting the protocol’s raison d’être: to stimulate "investment flows … into the region"). Moreover, it reduces the protection afforded even to investors from within the SADC: narrowing the categories of protected investment; restricting the definition of expropriation and diluting the standard of compensation; removing the right to "fair and equitable treatment"; and excluding investors’ recourse to international arbitration.
The government’s efforts to amend the SADC Protocol so radically, as well as its unilateral termination of 13 treaties, may well be unconstitutional, as they would have the effect of extinguishing existing rights and obligations without the prior approval of Parliament, which created those rights and obligations through ratification. Accordingly, these executive decisions could fall to be set aside and their consequences reversed. That is what the Constitution commands, as the high court affirmed in respect of SA’s purported withdrawal from the ICC.
Thus, if the executive wishes to retract the country’s international treaty promises, whether they were to protect human rights or foreign investments, it must place a formal proposal before Parliament, where the merits may be openly debated and decided, finally, by the country’s elected representatives.
This will restore some balance in the separation of powers and allow Parliament (and by extension the participating public) to play a meaningful part in framing the country’s approach to the complex diplomatic and economic implications of international treaties such as bilateral investment treaties, the SADC Protocol and the Rome Statute of the ICC.
If these constitutional transgressions can be corrected by the courts if not by Cabinet itself, this could be an important part of the institutional rehabilitation SA urgently needs if its investment-grade credit rating has any chance of being restored.
Leon is a partner and co-chair of the Africa practice at Herbert Smith Freehills; Winks is an independent legal consultant and a visiting researcher at the University of Johannesburg