Trade and foreign direct investment stimulus in Africa: impacts on dispute resolution

Christopher Moore

Cleary Gottlieb Steen & Hamilton, London

cmoore@cgsh.com

Laurie Achtouk-Spivak

Cleary Gottlieb Steen & Hamilton, Paris

lachtoukspivak@cgsh.com

Naomi Tarawali

Cleary Gottlieb Steen & Hamilton, London

ntarawali@cgsh.com

Zeineb Bouraoui

Cleary Gottlieb Steen & Hamilton, Paris

zbouraoui@cgsh.com

As the Covid-19 pandemic continues to preoccupy populations and governments across the globe, threatening years of global economic progress, the recent African Continental Free Trade Area Agreement (AfCFTA) promises to stimulate recovery in Africa and transform the largest continent in the world into a trading powerhouse of 1.3 billion people.[1] AfCFTA’s plan is ambitious: it prescribes the opening of nearly all African nations to establish a single market covering trade and investment, which would have a combined GDP of US$3.4 trillion. According to the World Bank, AfCFTA has the potential to boost Africa’s income by US$450bn by 2035, while adding US$76bn in income to the rest of the world.[2]

AfCFTA and FDI

Free trading under AfCFTA was officially launched on 1 January 2021 after a six-month delay due to the Covid-19 outbreak.[3] Fifty-four of the 55 member states of the African Union have signed the consolidated AfCFTA to date, the only exception being Eritrea. To complement the implementation of the agreement, coordination is taking place between the AfCFTA Secretariat and the African Export and Import Bank (Afreximbank), a pan-African multilateral financial institution, to implement the Pan-African Payment and Settlement System (PAPSS) project. This will tackle the difficulties of multi-currency convertibility.[4]

The new agreement is seen as an opportunity for Africa to promote and support foreign direct investment (FDI) flows from abroad while simultaneously stimulating intracontinental trading and investment. The proposed mechanisms to achieve these goals include:

• lowering tariffs to boost intraregional trade in manufacturing and ultimately increase both intracontinental and external exports;
• reducing non-tariff barriers such as burdensome bureaucracy and technical requirements; and
• improving infrastructure and streamlining administrative procedures, particularly at the borders.[5]

But, as states look to re-write the playbook on trade and investment, it is unclear what protections – whether substantive or procedural – will be available to private investors in this new integrated African trade framework.

Currently, three of the continent’s seven regional preferential trade agreements provide a clear framework for investment protection: the Common Market for East and South Africa (COMESA), the East African Community agreement (EAC), and the South African Development Community agreement (SADC).[6] In the near future, AfCFTA will also include an Investment Protocol that will build on existing regional and national frameworks for investment, to provide a more consolidated architecture for foreign investment protection. It is set to replace existing intra-African bilateral investment treaties (BITs) and provide a basis for future investment agreement negotiations, including with non-African countries.[7] The process for determining the specific content of the Investment Protocol is currently underway; clarification of the precise nature of protections to be provided will be critical to investors in the region.

The Investment Protocol is of particular importance to certain key industries, such as the natural resources sector, which makes up over 40 per cent of the continent’s exports and has been hard hit by the Covid-19 pandemic. Foreign direct investment in natural resources projects in Africa is essential for economic development, but it is also subject to higher levels of political risk and instability than other sectors. The impact of Covid-19 was felt early in the pandemic: there was a dramatic fall in demand as China (Africa’s biggest trading partner) shut its borders and cancelled orders, and the value of greenfield project announcements in Q1 2020 fell 82 per cent for extractive industries and 75 per cent for petroleum and chemicals.[8]

AfCFTA’s impact on foreign investors operating in Africa

Negotiation of the Investment Protocol is currently underway as part of the second phase of AfCFTA negotiations, which were delayed due to the global pandemic. The Assembly of Heads of State and Government, which has guided the negotiation process throughout, has directed that the Investment Protocol must be finalised by the end of 2021.

Some states see the Investment Protocol as an opportunity to terminate first generation intra-African BITs that seldom preserved host states’ right to regulate in the public interest.[9] While AfCFTA highlights the need to establish ‘clear, transparent, predictable and mutually-advantageous rules’,[10] many believe that this imperative means that the Investment Protocol is likely to include more circumscribed protections for foreign investors to ensure the preservation of the signatory state’s right to regulate. In an effort to ensure that foreign investors’ access to investment treaty arbitration does not unduly circumscribe the host state’s right to regulate in the public interest, some African states have begun efforts to renegotiate some of the nearly 900 bilateral and multilateral investment agreements containing investor-state dispute settlement (ISDS) provisions, in favour of mechanisms placing greater emphasis on states’ rights to act in the public interest and to ensure compliance with local laws.

It remains unclear whether the Investment Protocol will include provisions on ISDS.[11] Recent trends in the region would suggest that African states are moving towards excluding or imposing restrictions on the possibility to resort to investor-state treaty arbitration as a dispute resolution mechanism in regional agreements and BITs.[12] The so-called second and third-generation BITs that emerged in the early 2000s exhibited this desire to modernise investment treaties, tending to include language with a view to re-balancing investor protection with states’ right to regulate. Treaties such as the 2016 Morocco-Nigeria BIT are an example of this recent trend. It is anticipated that the Investment Protocol will incorporate provisions on how individual states should protect the rights of third-country investors under their national legal systems.[13] It is not yet confirmed whether states will grant private foreign investors a right of access to investor-state dispute resolution mechanisms, but the Investment Protocol may follow the model of second and third-generation BITs.

Striking the right balance between harmonisation of foreign investment regulation and meeting the interests of both private investors and member states is key to ensuring that a steady flow of FDI reaches the continent. In a best-case scenario, the Investment Protocol could result in a major step forward for African nations by effectively modernising, consolidating and harmonising the legal framework for foreign investment in the continent, which would benefit both intracontinental FDI and external FDI.

The Pan-African Investment Code (PAIC), the first continent-wide African model investment treaty developed by the African Union, is likely to act as a benchmark for the provisions included in the Investment Protocol. This may mean more restrictive protections for foreign investors than many existing bilateral and multilateral agreements. By way of example, the PAIC contains several exceptions to many of the standards of protection, such as most favoured nation (MFN) and national treatment,[14] and does not include a fair and equitable treatment clause.[15]

There is also considerable scope for innovation in the drafting of the Investment Protocol, in line with the ongoing trend of so-called ‘Africanisation’ of international arbitration.[16] For example, there is speculation that sustainable development will be an explicit focus of the Investment Protocol, not least because the title of the Protocol has reportedly been changed to the AfCFTA Protocol on Sustainable Investment.[17] The current negotiations on the Investment Protocol are taking place against the backdrop of an increasing focus on climate change, and economic, social and governance factors in ISDS. This topical narrative is likely to have an impact on the outcome of the negotiations. Moreover, the PAIC explicitly aims to promote sustainable development by imposing obligations on investors in relation to human rights, corporate social responsibility, use of natural resources and land-grabbing.[18] If the Investment Protocol takes a similar approach, as it is anticipated to do, there is potential for the inclusion of provisions promoting sustainability goals that place direct obligations on investors, and corresponding provisions allowing for counterclaims by host states if investors breach such obligations.[19]

The African arbitration landscape

As negotiations on the Investment Protocol are progressing, the use of international arbitration as a dispute resolution mechanism is growing at a rapid pace on the continent, and has at times proven controversial. For foreign investors, internationally established institutional rules of the International Court of Arbitration of the International Chamber of Commerce (ICC), London Court for International Arbitration (LCIA), or the International Centre for the Settlement of Investment Disputes (ICSID) provide the comfort of perceived neutrality, stability, predictability and independence to solve private commercial disputes or investor-state disputes.[20] However, certain African states have been outspoken about their dissatisfaction with these institutional frameworks, and with international arbitration more generally. Some states, like Tanzania, also have taken a strict approach of passing legislation requiring investment disputes to be resolved locally.[21]

Despite criticism of ISDS, most African states offer foreign investors the possibility of bringing proceedings before an arbitral tribunal, based on a dispute resolution clause in a contract, a domestic investment law or a bilateral or regional treaty. In recent years, there has been support on the continent for developing strong regional arbitral institutions, such as in South Africa, Rwanda, Egypt, Nigeria, and Kenya. Arbitrations in local centres relying on African institutional rules are increasingly the preferred option to resolve intracontinental disputes, in particular when it comes to commercial arbitration.[22] According to a survey conducted by the School of Oriental and African Studies (SOAS), the number of cases administered by African arbitral institutions has increased significantly and steadily, demonstrating that these institutions are becoming more established and well-regarded.[23]

In addition, a number of recently enacted domestic investment laws, for example in Zimbabwe,[24] as well as new arbitration laws in Ghana and South Africa, point to a willingness to ensure access to arbitration for investment and/or commercial disputes. There has also been a complementary trend in arbitration conferences and seminars focusing on Africa, for example with the inauguration of the AfricArb Conference in Paris in 2018 and the inauguration of the African Arbitration Association’s Annual (AfAA) International Arbitration Conference in 2020.[25] The theme of the AfAA Second Annual Arbitration Conference that took place this year was (aptly) ‘Reform and Innovation in International Dispute Resolution: African Perspectives.’ This conference covered a range of topics that are of growing importance to the continent, ranging from AfCFTA’s yet to be enacted Investment Protocol and mediation as a mechanism for resolving disputes in Africa, to growing concerns about transparency and technology.

In parallel, Tanzania has taken steps to make international arbitration more attractive by passing a new Arbitration Act in February 2020. The Act adopts a strict approach in requiring investment disputes to be resolved locally, including a provision at Section 77 that anticipates the creation of the Tanzania Arbitration Centre to encourage local resolution. This Act has the potential to make Tanzania a go-to location for international arbitration in the region.[26] Along with the new laws mentioned above, this development demonstrates the increased willingness of several countries on the continent to provide more attractive legal frameworks to foreign investors with respect to dispute resolution.

The aforementioned SOAS Arbitration in Africa Survey 2020 Report highlights the largely positive experience businesses have had in conducting arbitration proceedings in Africa, thereby suggesting regional seats are an increasingly viable alternative to the more commonly selected international arbitral institutions, in particular for mid-sized disputes. In response to this trend, international arbitral institutions have taken steps to increase their presence and visibility in Africa and renewed their efforts to present themselves as the most attractive options for the resolution of intra-continental disputes. For instance, in 2018, the ICC Court launched an Africa Commission to develop the arbitral institution’s outreach and presence in the region going forward.[27] Recent statistics suggest that the ICC has had success in expanding its presence on the African continent: according to the most recent ICC Dispute Resolution Statistics, the number of ICC arbitrations seated in sub-Saharan Africa almost doubled from six in 2018 to eleven in 2019.[28] ​​​​​​​

The LCIA also continues to see a growing number of African parties involved in disputes governed by the LCIA Rules.[29] In addition, the ICC and the LCIA have both released new arbitral rules that encourage and facilitate electronic submissions and virtual hearings, which, although not specifically aimed at African states, should nonetheless positively assist these states with increasing saving on both costs and time in the conduct of arbitral proceedings.

Conclusion

The outcome of the new AfCFTA Investment Protocol likely will provide greater clarity of the scope of the protections and remedies that will be provided to intracontinental FDI in Africa. At the same time, the increased focus of international arbitration institutions on the continent and further development of regional arbitral centres, together with robust arbitration laws guaranteeing the neutrality of seats, mean that recourse to commercial arbitration is likely to remain a key route for enforcing protections for both African and foreign investors pursuing projects across the continent.