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Screening of foreign investments raises red flags


Screening of foreign investments raises red flags

The new policy sends a negative signal to investors, and the way it is institutionalised may be prone to abuse

Azwimpheleli Langalanga

During his State of the Nation address, President Cyril Ramaphosa bemoaned the concentrated nature of the SA economy. This legacy issue has been a subject of the country’s competition policy for the past two decades, with the ANC resolving at its last policy conference to amend legislation to give the competition authorities more powers. It was therefore unsurprising that Ramaphosa made the announcement to sign into law the Competition Amendment Bill. However, one aspect of the act has nothing to do with competition policy: for the first time in SA the legislation introduces an investment-screening mechanism based on national security.
Normally, this clause should have been located within the highly contested Protection of Investment Act. It is important to point out that national security screening of investments is international practice and has increased over the years as countries started receiving a lot of investments from China. What is usually at issue is the application of national security review on incoming foreign direct investment (FDI).
The Competition Amendment Bill confers the president with the powers to constitute a national security review committee on foreign investments. This committee will be composed of cabinet members (mostly from the security cluster), public officials, the Competition Commission and regulating authorities, among others. While there is no definition of what constitutes national security, the bill empowers the president to gazette a list of “national security interests” in the services and goods sectors. Once the list is published, any foreigner investing in these sectors will be subject to an automatic review.
The bill further deals with the question of national interest by making a list of what in national security review parlance is referred to as critical infrastructure. SA deems critical infrastructure to include defence, sensitive technology, security infrastructure, supply of vital goods and services, enablement of espionage, foreign relationship, economic and social stability, and terrorism. A foreign investment would therefore be reviewed and possibly rejected if it affects one of these areas.
While the list contains classic national security dimensions such as terrorism, defence and espionage, it is the ambiguous areas that are worrying. These include economic and social stability and diplomatic relations, which are seen as too wide and prone to abuse and manipulation. The bill stipulates that the envisaged foreign investments review committee will have to deliver its verdict within 60 days.
The screening of foreign investments based on security considerations allows national authorities to review and deny entry of investments that threaten national security. While this precedes China’s economic rise, its investors have borne the brunt of most national security screening exposure and denial of entry. Due to the clause’s notorious application against Chinese investors, it has been dubbed the China clause.
At a global level, the powerful Committee on Foreign Investment in the US (CFIUS) has been most active in screening foreign investments. The CFIUS has barred many investments from China, especially in the IT and semiconductor space. Recently, the US has, through the same committee, raised serious national security questions around Huawei.
Fellow Organisation for Economic Co-operation and Development (OECD) countries, including the EU, also screen investments based on national security, while others are in the process of adopting similar mechanisms. The UK, for instance, published a white paper in 2018 aimed at updating the country’s national security screening framework.
Fear factor
The rationale behind screening foreign investments on national security tend to be anchored on three main considerations. First, the fear that a foreign firm, especially in the IT sector, might leak sensitive military and/or intelligence or dual-use technologies to their home countries or firms. Second, governments have an apprehension that foreigners investing heavily in the IT sector might conduct espionage due to their access to the back end of servers. The third consideration is that foreign firms might give their home states a monopoly on critical goods or services.
It is not clear what has prompted SA to introduce national security screening of foreign investments. One can only suspect that with the anti-imperial rhetoric from the ANC during the end of the Zuma years, the securocrats might have felt a need to create such a mechanism.
Relatedly, it can be assumed that the screening is unlikely to be directed at China, which is considered an ally, but to those countries that are considered adversaries. The SA approach raises numerous red flags. Besides potentially sending a negative signal to foreign investors, the manner in which it is institutionalised is problematic. The bill confers too much power on the executive in general, and the presidency in particular. The legislation mandates the president to constitute the foreign investment screening committee, while parliament has no role.
In the US, for instance, it is a parliamentary committee that is at the forefront of such decision-making.
The process envisaged in the bill is opaque, rests solely within the executive and may be prone to abuse and arbitrary decision-making. Ideally, either the finance or trade and industry committees should be the ones making the considerations. Another better option would have been to introduce a new ad-hoc parliamentary committee that would comprise members from the finance, trade and industry and intelligence committees to decide on whether an investment should be allowed.
Another worrying feature is the wide conception of national security, which leaves room for arbitrary decision-making. Furthermore, an inherent feature of national security screening is that it mostly applies to the IT industry. This is a sector identified for development in SA. It is therefore advisable that the application of the new legislation does not unnecessarily impede the attraction of foreign investments into this crucial sector.
SA is indeed not necessarily pushing the envelope in uncharted territory with regards to screening foreign investments based on national security considerations, which has become more of a necessity with the rise of an ambitious state-led capitalist China. This is because lines are blurred between private and state interests.
SA could have a more independent and stronger institutional set-up for the investment-screening mechanism. Such an institutional framework is absent in the new bill.
Furthermore, the process should be consistent, transparent, timely and subjected to the necessary checks and balances.
• Langalanga is a senior associate with Tutwa Consulting Group, specialising in international trade and investment policy.

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