If President Jacob Zuma signs the regulation amendment into law, South Africa's credibility will be put at risk, say critics.
The test case for what it takes to shatter investor confidence in South Africa is just one signature away from being written into law.
The Private Security Industry Regulation Amendment Bill, which includes a controversial clause that introduces a minimum 51% local shareholding requirement, has passed through the portfolio committee on police, the National Assembly and the National Council of Provinces and is at present sitting on President Jacob Zuma's desk waiting to be signed into law.
The developments are being closely watched by the global community, including large economies such as the European Union and the United States, which have written to Parliament voicing their concerns that the Bill violates existing investment treaties. The concern is that the law could force a sell-off to local parties.
The private security industry is anticipating a challenge in the Constitutional Court.
It could be based on what it is claimed were irregularities in the way the Bill was passed through the portfolio committee.
The ministry of police says it is a matter of national security and has dismissed fears about divestment. It has stated that, in implementing a foreign ownership cap, the correct procedures must be followed to protect investments and respect South Africa's international trade obligations.
But the EU delegation in South Africa expressed its unease over the Bill in a letter, dated February 27 2014, that was addressed to the ANC chief whip and the chairperson of the select committee on security and constitutional development in the National Council of Provinces.
Signed by Axel Pougin de la Maisonneuve, the head of economics and trade at the delegation, the letter said foreign equity caps would violate South Africa's commitment to unbounded market access under the General Agreement on Trade in Services (Gats) – a World Trade Organisation treaty to which South Africa is a signatory.
The delegation's letter said the cap would also contravene bilateral investment treaties. For example, the agreement between South Africa and the United Kingdom obliges the South African government not to impair the investments of British nationals or companies, or offer treatment less favourable than what it accords to its own nationals or companies.
Also, the investments of British companies "shall not be nationalised, expropriated or subjected to measures having effect equivalent to nationalisation or expropriation".
The British trade commissioner and the counsellor for economic and commercial affairs at the embassy of Sweden also wrote to the National Council of Provinces committee chairperson in support of the EU submission.
A letter from the American ambassador to South Africa, Patrick Gaspard, on February 28, also warned that the ownership requirement would violate South Africa's Gats commitments.
It was first announced in 2011 that changes would be made to the law governing private security firms. The Cabinet approved a Bill but only released it for comment later in 2012. Following representations made by interested parties to Parliament, the local ownership quota was removed – until November last year.
"That's when a very strange process was adopted," said Martin Hood, an attorney representing the Security Industry Alliance (SIA), which represents many of the private security companies.
A redrafted version, with the contentious clause reinstated was handed to the portfolio committee for debate the next day, but several parties objected to the developments and the matter was delayed.
It was then debated in January this year and was approved by the committee, despite the refusal of opposition MPs to vote on it.
Ratified and passed
The National Assembly ratified the Bill in February before the National Council of Provinces passed it in March.
Both Hood and the Democratic Alliance's spokesperson for police, Dianne Kohler-Barnard, said the procedure was irregular because the chairperson of the portfolio committee, Annelize van Wyk, had allegedly withheld letters that had been submitted by some embassies before the Bill was endorsed by the National Assembly.
But Van Wyk said the House had investigated the matter and said the claims were unfounded.
"I received one letter and I received it the day after we voted on the Bill. I was just cc'd [copied] in. I received another in December that I responded to."
Van Wyk said the issues raised in the December letter were not new and had been raised in the committee before.
She said the clause was not sneaked back into the Bill. "Throughout the deliberations, I reminded members it could come back."
In minutes from the National Council of Provinces committee meeting at which the Bill was adopted, Major General Philip Jacobs of the police's legal services division said the restriction on foreign ownership "spoke to the process required for the amendment or withdrawal of scheduled commitments to Gats, which [the] SAPS believed could be justified by the need for South Africa to protect its national security, which may be threatened by too large foreign ownership interest in the private security industry".
But he said that trade obligations had to be respected, and referred to a clause in the Bill that says the implementation of the foreign ownership cap "must be done in accordance with legislation promoting and protecting investment in the republic and the republic's international trade obligations".
Jacobs said, under Gats, if any signatories were not happy with the way the republic was dealing with something, it could go to arbitration. Therefore, South Africa's international obligations would not be ignored.
Kohler-Barnard described the passing of the Bill as a "political manoeuvre, as with so many Bills pushed through before the elections".
She said the clause on expropriation speaks of a minimum of 51% local ownership but leaves it up to the minister to decide on a higher figure. "It's a self-defeating Bill that should have never been put before us."
Pietman Roos, a senior policy consultant for the South African Chamber of Commerce and Industry (Sacci), said a blanket ownership provision is irrational. "We do believe the Bill in its current form is unlikely to pass constitutional muster."
Both Sacci and the SIA have requested Zuma not to sign the Bill.
Hood said the SIA has a number of objections, including procedural issues such as not enough information was provided to justify the need for the Bill.
He said it seemed to be government policy to ensure local ownership of the economy, as reflected the new mineral legislation, which stipulates a 20% free carry for the state in any new oil or gas venture. But the 51% proposed for the security industry is inconsistent with this.
Hood also said the ownership clause was unconstitutional as a forced sale of an asset would amount to arbitrary or irrational deprivation of property.
He added that many of the companies are owned by listed entities, whose shares are held by institutional investors. "On a practical level, this is unimplementable. How can you determine local ownership? It's impossible to find out," he said.
Another concern is that the legislation is written in such a way that the local ownership requirement covers the manufacturers and distributors of security equipment and, consequently, affects multinationals such as Sony and Bosch.
In his letter, Gaspard said almost all security technology is manufactured and distributed by international companies and "the proposed amendments could compel many of these companies to divest".