Zooming in on the Investment Protocol to the AfCFTA: a new era for investment disputes across Africa?

Lexology | 20 June 2023
By Hogan Lovells

Zooming in on the Investment Protocol to the AfCFTA: a new era for investment disputes across Africa?

Following the entry into force of the Agreement Establishing the African Continental Free Trade Area (“AfCFTA”) in May 2019, intra-African cooperation recently took a further step forward with the adoption of its Investment Protocol (the “Protocol”). The Protocol aims to increase intra-African trade and investment by replacing all 173 intra-African bilateral investment treaties with a uniform set of investor protections, while balancing those protections with requirements placed on investors themselves, notably in promoting sustainable development. While this shows considerable forward strides, the annex to the Protocol, which will govern investor-state disputes (the “Annex”), is still in negotiation. This is a crucial aspect of the development of rights under the Protocol, and as such further developments should be monitored, as State parties consider whether to turn to traditional methods of investment dispute settlement mechanisms or more innovative solutions, such as an African investment court.

The modernisation of the African investment treaty system under the Protocol

The implementation of the African Continental Free Trade Area, the world’s largest free trade area by number of countries participating, has taken another step forward with the African Union’s adoption of the final draft of the Investment Protocol in February 2023 (for a full report on the AfCFTA itself, see our Report from November 2019). Phase 1 of the implementation of the AfCFTA included agreements covering trade in goods, trade in services and a dispute settlement mechanism related to those trading provisions. The area has taken further steps since then: trading under the AfCFTA officially started in January 2021, and as part of the roll-out eight countries have taken part in the area’s Guided Trade Initiative. Phase 2 of the process, currently underway, involves the adoption and subsequent entry into force of the Protocol, as well as other protocols on competition, intellectual property rights, digital trade and women and youth.

Since the Niger-Switzerland bilateral investment treaty (“BIT”) in 1962, African states have concluded more than 1000 BITs with countries around the world. This trend will change radically under the Protocol, as state parties will have an obligation to terminate all existing intra-African BITs within five years, and will no longer be permitted to agree further BITs amongst themselves. State parties may also account for the Protocol when negotiating and reviewing BITs with other states.

This may be viewed as a surprising step for a continent that has continued to negotiate and sign BITs in recent years: by 2022 the continent had collectively signed over 1000 BITs with countries around the world, and of 30 new BITs signed worldwide in 2017, half involved an African state. Nevertheless, there have been criticisms regarding the number and quantum of investment awards rendered against African States, and this overhaul of the existing investment treaty system includes elements that aim to strike a balance between the encouragement and protection of investments and investors and a conception of African states’ regulatory sovereignty.

Some key features of the Protocol include:

  • Limitations on investors and investments covered: the Protocol includes certain restrictions on the investors and investments protected by the treaty, which again suggest a rebalancing of the classic style BIT. For example, for dual nationals, the ‘effective nationality’ is applied, limiting the possibility for treaty shopping. Further, to qualify, an ‘investment’ should demonstrate economic development of the host State party, for example by maintaining substantial business in its territory.
  • Departing from the FET standard: the Protocol does not utilize the traditional formula of “fair and equitable treatment” to define the standard of treatment required from States, but rather sets out that investors and investments “are not subject to treatment which constitutes a fundamental denial of justice in criminal, civil and administrative adjudicative proceedings, an evident denial of due process in administrative and judicial proceedings, or manifest arbitrariness”. The Protocol explicitly clarifies that this is not equivalent to the fair and equitable treatment standard, suggesting a reaction by the States negotiating the Protocol to the manner in which such a standard has been interpreted.
  • ESG requirements: in terms of obligations on investors, the Protocol reflects elements of the Pan-African Investment Code, an Africa-wide model investment treaty, imposing for example obligations in relation to sustainable development and business ethics in order to gain access to the treaty protections. Such requirements also recall those included in recent intra-Africa treaties, such as the Morocco-Nigeria BIT signed in 2016. For example, under the Protocol investors are bound to comply with “high standards of business ethics, investment related human rights and labour standards”, including those set out by the International Labour Organisation.

Unfinished business: the resolution of investor-state disputes

Whilst the final draft of the Protocol itself has been agreed, the Annex is still being negotiated and will only be finalised in the coming months. An early draft of the Annex included traditional investor state dispute mechanisms: where an amicable resolution could not be achieved between the parties, the draft allows investors to bring investment claims under ICSID Rules, UNCITRAL Rules, or “any arbitration rules adopted by African institutions or Dispute Resolution Centres”, or under any other arbitration institution.

However, it is far from clear whether such clauses are to be maintained in the final Annex. There has been skepticism from certain quarters about the use of investor-state dispute settlement (“ISDS”) mechanisms in Africa, that may lead to the resolution mechanism in the early draft of the Annex being replaced or amended. Some States have withdrawn from investment arbitration agreements, and for instance the entry into force in 2018 of the Protection of Investment Act in South Africa foreclosed its future participation in international investment arbitration except in very limited circumstances. By contrast, the draft PAIC, which is often viewed as a predecessor to the AfCFTA, left it open to individual countries to decide whether or not to include ISDS in future agreements.

One potentially innovative solution would be the establishment of a permanent tribunal for investment dispute resolution, located in Africa. Supporters of this arrangement argue that it would allow for equitable dispute resolution that accounts for the needs of states as much as private investors, and would have experience of the local context in which disputes arise. It remains to be seen whether the final version of the Annex will pursue this option.

The impact of the Protocol

In line with the strong political will that has been driving the AfCFTA since it was first proposed, the Protocol is the latest example of the continuing desire to introduce a uniform system of investor treatment in all African states. Whilst the Protocol draws on recent drafts in investment treaty drafting, in particular the Pan-African Investor Code, it also represents a groundbreaking development in intra-African trade. Drafts and model documents that include protections similar to the Protocol have been seen in the past, but the fact that the AfCFTA is already in force and covers the whole of Africa gives the Protocol a much wider relevance.

Questions clearly remain, however, in relation to the resolution of investor-state disputes. The possibility that the Annex could reject standard ISDS mechanisms, perhaps in favor of an African investment court, would mirror the European Commission’s work to establish a Multilateral Investment Court, and would reflect an unprecedented approach to dispute resolution on the African continent.

The World Bank estimates that the AfCFTA will increase Africa’s income by $450 billion by 2035 and increase intra-African exports by more than 81%. While the protections of the Protocol show the State parties taking concrete steps towards the goal of increasing intra-African trade, the fact that the Annex, which will govern dispute resolution, remains in negotiation means the full impact of the Protocol remains uncertain. It will therefore be particularly important to continue monitoring developments in the coming months as this ambitious project of African harmonization continues to take shape.

Hogan Lovells - Thomas Kendra, Ledea Sawadogo-Lewis and Georgia Crawford

source: Lexology