PETER LEON: Security act contravenes SA’s commitments under General Agreement on Trade in Services

President Cyril Ramaphosa signed the controversial Private Security Industry Regulation Amendment Bill into law on September 23, more than seven years after the bill was passed by parliament and sent to former president Jacob Zuma for assent. When it was originally introduced to parliament in 2012 the bill attracted significant criticism, with particular focus placed on clause 20, which prescribes that a security business may only be registered to render security services in SA if it is at least 51% owned and controlled by SA citizens.

The bill also permits the police minister to prescribe different percentages of domestic ownership and control required as a prerequisite for the registration of security businesses operating in different market segments.

In addition to concerns about the effect of these measures on foreign direct investment and employment, the amendment act's provisions limiting foreign ownership and control of security businesses are in direct contravention of SA’s commitments under the General Agreement on Trade in Services (Gats). Following its accession to the Marrakesh agreement that established the World Trade Organisation in 1994, SA is obliged to fulfil all obligations assumed under the Marrakesh agreement and the suite of agreements annexed to it (which includes the Gats).

During the Uruguay Round, SA made a number of trade liberalisation commitments on market access and national treatment insofar as they relate to specific service sectors. Of these commitments the most pertinent for present purposes is that undertaken in respect of “investigation and security services”. Notably, in SA’s schedule of specific commitments it agreed to provide unconditional market access in respect of (i) the cross-border supply of investigation and security services, (ii) the consumption of investigation and security services abroad, and (iii) the establishment and commercial presence of foreign-owned and controlled investigation and security services businesses in SA. Owing to the unqualified inclusion of investigation and security services in SA’s schedule of commitments, the regulation of such services must comply with the specific obligations on market access set out in the Private Security Industry Regulation Amendment Bill into.

In this regard, Article XVI (2)(f) of the Gats prescribes that in sectors where market access commitments are undertaken the member state cannot maintain or adopt limitations on the participation of foreign capital in terms of a maximum percentage limit on foreign shareholding or the total value of individual or aggregate foreign investment. In the case of China — Measures Affecting Trading Rights and Distribution Services for Certain Publications & Audiovisual Entertainment Products, the WTO panel clarified in 2009 that this includes, among other things, prescribing a maximum percentage of capital that can be held by foreign investors. Section 20 of the amendment act, which limits foreign participation in the private security industry, would therefore appear to be an impermissible limitation of SA’s market access commitments under the Gats, and a clear contravention of Article XVI (2)(f).

While the amendments effected by the amendment act may be justified under one of the exceptions described in Article XIV of the Gats, none of these exceptions appears to be immediately applicable. Alternatively, there is scope for SA to modify or withdraw its specific commitments in its schedule of commitments under Article XXI of the Gats. Insofar as the SA government intends to do so, it would need to notify its intention to modify or withdraw its market access commitments in respect of investigation and security services to the WTO’s Council for Trade in Services no later than three months before the intended date of implementation of such modification or withdrawal. There is no indication that government has done so.

At the request of any member state affected by the proposed modification or withdrawal, the member state seeking to modify or withdraw a commitment is obliged to enter into negotiations with a view to reaching agreement on any necessary compensatory adjustments. That is, should SA seek to modify or withdraw its market access commitments on investigation and security services it may be obliged to make additional commitments in respect of other service sectors, to maintain “a general level of mutually advantageous commitments not less favourable to trade than that provided for in schedules of specific commitments prior to such negotiations”.

Should the member states reach agreement on compensatory adjustments they need to be made on a most-favoured-nation basis (other member states will be afforded similar benefits). If, however, the member states are unable to reach agreement, the matter may be referred to arbitration and the member state seeking to modify or withdraw its commitment may not do so until it has made compensatory adjustments in conformity with the findings of the arbitration.

As it is not yet clear when the amendment act will enter into force, there is still some scope for  government to modify or withdraw its market access commitment in respect of investigation and security services. While this may set an unwelcome precedent of SA reneging on its international trade law commitments, it would at the very least demonstrate respect for the procedural standards it agreed to adhere to when assenting to the Gats. However, should the government proceed to implement the amendment act without adjusting its market access commitments it may find itself facing significant backlash from trading partners, which could initiate dispute settlement proceedings by referring a complaint to the WTO’s dispute settlement body.

The implementation of the amendment act likewise risks provoking retaliation from the US under the African Growth and Opportunity Act (Agoa), in terms of which the US may determine whether countries such as SA have met certain eligibility standards, which require, among others, that the relevant country establish or make continual progress towards establishing (i) a market-based economy that incorporates “an open rules-based trading system”, and (iii) the elimination of barriers to US trade and investment.

If it is found that a country does not meet such standards the US may unilaterally terminate the beneficiary designation of that country, with the result that it loses those benefits afforded to it under Agoa. The US may take into consideration the amendment act's limitation of foreign ownership and control of security businesses in its annual review of SA's eligibility under Agoa.

The promulgation of the amendment act is just one in a series of recent trade policy measures aimed at protecting domestic industries through the use of market access restrictions and domestic content requirements. The department of trade, industry and competition has doggedly pursued the application of localisation policies, together with sector-specific master plans, which are aimed at restricting the use of imported inputs and finalised products notwithstanding their trade distorting effects, let alone SA’s commitments to fellow members of the Southern African Customs Union (Sacu) or the African Continental Free Trade Area (AfCFTA).

In addition, earlier in September, the department, in consultation with the Treasury and acting under the Preferential Procurement Regulations of 2017, in effect prohibited the use of imported cement in government-funded projects.

Collectively, this seems to signal a regrettable shift towards the autarkic industrialisation policies that the Mandela and Mbeki administrations abandoned between 1994 and 2007. In skewing competitive conditions in favour of domestic products and suppliers, SA may provoke its trading partners into applying retaliatory trade measures. Watch this space.

• Leon is partner and Africa co-chair at Herbert Smith Freehills.