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The Protocol on Investment to the Agreement Establishing the African Continental Free Trade Area: What’s in it and what’s next for the Continent?

The Protocol on Investment to the Agreement Establishing the African Continental Free Trade Area: What’s in it and what’s next for the Continent?

IISD-Investment Treaty News | 31st May 2023

By Danish; Hamed El-Kady; Makane Moïse Mbengue; Suzy Nikièma; and Daniel Uribe

The Protocol on Investment (POI or Protocol)to the Agreement Establishing the African Continental Free Trade Area (AfCFTA) has been adopted by African Heads of State on February 18/19, 2023, during the 36th African Union Summit in Addis Ababa, Ethiopia.[1] This is a momentous occasion for the continent, as the Protocol reflects and signals a common African position on various key areas related to investment governance. Phase I of the negotiations dealt with negotiations on trade in goods and trade in services, while Phase II, which includes the POI, Protocol on Intellectual Property, and Protocol on Competition, is well on course. A further Phase III will involve negotiations for an E-commerce Protocol.

In December 2021, African negotiators embarked on a yearlong process to develop the text of the POI, culminating in a final version that defines the promotion, facilitation, and protection of intra-African investments. Furthermore, the POI establishes a Pan-African Trade and Investment agency, while also providing guidance for further negotiations via an annex on the settlement and management of disputes under the Protocol.

While there have been several iterations of the initial draft, the final POI as adopted incorporates innovative provisions, building on decades of investment policy reform such as the Pan-African Investment Code, the investment instruments of the Regional Economic Communities, bilateral investment treaties concluded by African states, and national investment laws. In addition, it integrates innovative principles from other relevant international investment instruments, agreements, and frameworks like the United Nations Conference on Trade and Development (UNCTAD) Investment Policy Framework for Sustainable Development. The need to integrate both best practices in Africa and those at the global level was one of the many important objectives included in the Annex on the Modalities and Principles for Negotiating the AfCFTA POI adopted in September 2021 to guide the process and timeframes for negotiations.

The Protocol acknowledges the need for more and better sustainable investment and aims to spearhead it through industrialization, poverty reduction, and developing a more vibrant and dynamic private sector while enhancing investment-related human rights and human development, among others. The ultimate ambition is to make Africa a destination for sustainable investments.

This policy brief elaborates some of the POI’s main features that can lead to achieving these bold and transformative ambitions.

Centralizing Sustainability as a Core of Economic Transformation: The preamble, objectives, and purpose of the Protocol
The preamble is a key part of the POI, as it introduces the objectives and intentions of the negotiators of the agreement and serves as guidance for its application and interpretation by various stakeholders, including communities, governments, and investors today and in the future. Importantly, the preamble has a sustainability criterion incorporated in it, which is also reflected in the POI’s objectives (Article 2) and scope (Article 3), immediately underscoring the centrality of this theme. It also takes into account UNCTAD’s investment policy instruments that support new-generation investment policies for inclusive growth and sustainable development. Furthermore, the preamble recognizes the significant contribution investment can make to poverty reduction and human development. It also highlights the importance of inclusivity by encouraging investment activities that benefit economically disadvantaged areas, small and medium-sized enterprises, local communities, Indigenous Peoples, and underrepresented groups, including women and youth. Importantly, the POI recognizes the different levels of development of African countries in the implementation of its commitments.

Promoting and Facilitating Intra-African “Investors” and “Investments” to Enhance Regional Integration
The POI provides clear definitions on a range of key issues such as “sustainable development,” “home state,” “host state,” “investor,” and “investment” among others. The addition of a definition of “investment-related human rights” is of particular importance, as it considers the latest concerns expressed by developing countries and communities around the world and highlighted by the Working Group on Business and Human Rights. The POI extends the compatibility of international investment agreements (IIAs) and human rights to environmental, health, and core labour rights.

Under the definitions in Article 1, the POI provides for an investor that is a “natural person” and an investor that is an “enterprise.” In respect of an investor who is a natural person, it defines an investor as “a national of a State Party in accordance with its laws and regulations, who has made an investment in the territory of another State Party,” meaning the Protocol is only applicable to African investors investing in any one of the 55 jurisdictions. In addition, it already anticipates scenarios of dual citizenship and states that “such a natural person shall be deemed to be exclusively a national of the country of her or his effective nationality or where she/he ordinarily permanently resides.” This prevents dual nationals outside the region from using the Protocol to invest back into their home state. In respect of an investor that is an enterprise, the definition provided requires that “the enterprise has made an investment in the territory of the host state.”

The definition of investment itself also provides for an “enterprise-based” approach while integrating an illustrative and non-exhaustive list of assets that an enterprise may own. An “enterprise-based” definition usually incorporated in newer-generation agreements extends treaty coverage only to investments made in the form of an enterprise, thus requiring it to be established in the host state in order to qualify as a covered investment under the Protocol (for recent treaty practice see, for example, Brazil–India Bilateral Investment Treaty (BIT) (2020), Article 2.4; Congo–Morocco BIT (2018), Article 1.1; Intra-MERCOSUR Cooperation and Facilitation Investment Protocol (2017), Article 3.3; Morocco–Nigeria BIT (2016), Article 1). Indeed, enterprises, rather than assets alone, are the form of investment that are most likely to bring the key benefits associated with foreign direct investment, including job creation, tax revenues, and skills and technology transfers. This kind of definition also makes it clear that only assets owned through an “enterprise” are included in the scope of coverage; therefore, such assets are not protected per se as stand-alone assets. The reference to “substantial business activities” (itself a defined term under the Protocol) in the definition of an enterprise and the list of circumstances that may indicate that “substantial business activities” is designed to discourage the practice known as “treaty shopping.” This is where an investor that is a company strategically changes its corporate nationality to access the benefits of a treaty to which it would not otherwise be entitled. Importantly, the POI makes it clear that covered investments should have a list of characteristics which include a significant contribution to the host state’s sustainable development.

Significantly, and in line with modern IIA practices, the definition of investment expressly excludes government debt securities, such as bonds issued by governments; portfolio investment (i.e., those that constitute less than 10% of the shares of the enterprise or that don’t give the investor effective management rights over the enterprise); as well as contractual claims to money like contracts for the sale of goods or services by a national or enterprise. Typically, these kinds of investments do not lead to technology transfer, training of local employees, or other benefits associated with a locally established enterprise.

Importantly, the POI also includes a denial of benefits clause (Article 5) that covers various situations in which investors and/or their investments may be in conflict with the objectives of the Protocol or other specified national public purposes. Among these is, for instance, a situation in which an investor is in breach of some of its obligations under the Protocol (see below).

Each Country Shall Admit Investments in Accordance with Its Domestic Laws and Regulations

The definition of investment also requires that an investment be made in conformity with the host state party’s laws and regulations. This is an important inclusion and provides a potentially useful jurisdictional bar to dispute settlement proceedings brought by or on behalf of an investment that was not established, acquired, or expanded in compliance with national laws—for example an investment made through corruption. This practice is in line with regional and broader global goals on sustainable investment.

Article 4 on the admission of investments reaffirms this importance and obliges state parties to apply their domestic law relating to admissions of investments. This ensures state sovereignty and the exercise of policy space to achieve national development objectives while being consistent with the overall ambitions of the AfCFTA to create a single, unified continental market.

The POI only applies to investments in the post-establishment phase as highlighted in the definitions (Article 1), that is, investments that have been permitted to be established in the state parties’ territory through proper screening mechanisms, in compliance with national laws and regulations.

The Scope of Application and What’s Excluded from the Protocol
The POI aims to have more balance between the rights granted to investors vis-à-vis their obligations to the host state. In this regard, Article 3 refers to the rights and obligations of state parties, investments, and investors, as defined and similarly excludes certain subject matter from the scope of coverage of the Protocol in its entirety. This early framing provision is important in giving clarity to all actors.

Notably, the article excludes from its scope such things as laws or regulations regarding taxation, government procurement, government subsidies or grants under national development programs, operations of public debt and state enterprise debt restructuring, and investments made with capital or assets of illegal origin, among others. These functions are singled out because they are regarded as critical to the sovereign function of the state and its ability to raise and spend public revenues in line with its development objectives and priorities.

There Are Clear and Well-Crafted Exceptions and Carve-outs to Every Investment Protection Standard.
Chapter 3 (Articles 12-23) of the POI contains the standards of protection and treatment of investors and investments. Importantly, each standard has exceptions and carve-outs on public interest measures to clarify the scope of the standard of treatment. This kind of drafting gives clarity and certainty to investors on what is and what isn’t a standard of protection. In addition, it signals that reasonable investment protection is given and not absolute protection, unlike investment agreements of the past that prioritized the latter over states’ right to regulate in the public interest or overall sustainable development objectives. However, these old-generation agreements were also less clear on various elements, creating uncertainty among stakeholders.

For instance, Article 12 on national treatment aims to prevent nationality-based discrimination and to guarantee foreign investors a level-playing field with comparable domestic investors investing “in like circumstances.” Importantly, the guarantee of national treatment is afforded only in the post-establishment phase (as denoted by the words “management, conduct, operation, use, expansion and sale”). This leaves the parties free to determine in their national laws which sectors should be open to foreign investment and which should be reserved for nationals.

Unlike old IIAs’ provisions that include the fair and equitable treatment (FET) standard, the POI has done away with it and instead incorporates an innovative standard of fair administrative and judicial treatment. FET is a controversial provision in investor–state dispute settlement (ISDS), which has become a “catch-all” clause for investors to challenge any state measure. As such, it is the most successful basis for investor–state arbitration claims and, despite its widespread inclusion, the precise meaning of the term remains uncertain. Consequently, investment tribunals have tried to formulate a definition while interpreting the provision, increasingly expanding its scope and content over time (see, e.g., here). The divergent interpretations, coupled with the wide scope of the FET standard, result in unpredictability for states and constraints on their right to regulate.

The alternative approach of the POI on administrative and judicial treatment instead provides key and legitimate protection to investors, such as protecting them from fundamental and evident denial of justice; manifest arbitrariness; discrimination based on gender, race, or religious beliefs, which is different from discrimination based on nationality; and abusive treatment, such as harassment, coercion, and duress.

Investment Promotion and Facilitation Included in the Protocol
The POI adopts a comprehensive and modern approach to investment policy-making. Unlike old-generation IIAs that cover only investment protection, the POI includes a full chapter on investment promotion and facilitation. This chapter regulates regional cooperation in support of investment flows between and among the parties. Among other things, the chapter includes innovative best-efforts obligations to promote “investments that contribute to gender equality, the empowerment of women, youth and people with disabilities” (Article 6(g)). Beyond that, the chapter encourages the parties to streamline investment administration procedures and requirements, including visa and permit facilitation, setting up of “one-stop shops,” aftercare services and digitalization procedures (Article 7(3)). Significantly, the investment facilitation chapter in the POI features important flexibilities—the majority of obligations are conditioned on national law and states’ capacity.

Promoting Sustainable Investment to Address Climate Change and Health Pandemics While Minimizing ISDS Risks
COVID-19 and the climate crisis have had a significant impact on foreign direct investment (FDI). We also now see an increasing ISDS risk to states regarding various regulatory measures they have put in place in response to the COVID-19 pandemic. Reacting to the challenge of climate change, the POI regulates incentives for sustainable investments, for instance, by allowing and encouraging incentives for low-carbon investments. The chapter on sustainable development-related issues also includes investment promotion and facilitation provisions that relate to specific thematic areas, such as climate action. The latter also includes commitments to not lower environment, labour, and consumer standards with the aim of attracting foreign investment. The parties to the Protocol also commit themselves to the publication of relevant laws and regulations, subject to their capabilities (Article 10), and to designating national focal points. The POI also reaffirms the ability of states to regulate in the public interest to respond to challenges related to pandemics and climate change.

As an example of a climate-sensitive provision, the inclusion of the words “in like circumstances” in Article 12 (dealing with national treatment) protects the rights of states to discriminate between different investors and investments on the basis of characteristics that are not linked to nationality. For example, to encourage the production of renewable energy, states may want to treat investors in this sector more favourably than investors engaged in fossil fuel production (Article 12.2(b)). Similarly, a state might wish to regulate one operation more heavily—and therefore less favourably—than another similar operation because it is situated in an environmentally sensitive area. Article 13 gives categories of exception to the obligation on state parties to provide national treatment, such as measures taken to protect or enhance legitimate public morals, public health, climate action, essential security interests, and protection of the environment—increasingly important areas for regulation.

The positive impacts of FDI are not automatic, hence the relevance and importance of Chapter 4 on sustainable development-related issues. It includes articles on the right of states to regulate in the public interest; provides minimum standards on the environment, consumer, and labour protection; contains a dedicated article on investment and climate change, reaffirming commitments under the United Nations Framework Convention on Climate Change and the Paris Agreement; and addresses the transfer of technology.

The POI Sets a Gold Standard for Regulating Investor Obligations in IIAs
The POI sets the standard of rebalancing rights and obligations in investment treaty-making by including a dedicated chapter on investor obligations. First, it reaffirms that the obligations in the Protocol are without prejudice to the parties’ obligations to protect investment-related human rights, labour rights, and rights of Indigenous Peoples and local communities, and laws and policies in the areas of the environment, anti-corruption, anti-money laundering, anti-bribery, and taxation. The POI goes on to specify which norms in the mentioned areas investors must comply with.

The level of specificity on investor obligations is unprecedented for an IIA and thus is likely to constitute a reference point for the regulation of investor obligations in future investment treaties. In addition, the Protocol reaffirms the investors’ obligation to comply with domestic and international laws.

The Annex to Address an Investment Dispute Settlement Mechanism in the Future
Rules and procedures governing dispute prevention and the management and resolution of disputes between an investor of any of the African Union member states and the host state in which their investment is located shall be set out in an annex. Article 46 mentions that “this shall be negotiated after the adoption of the Protocol by Heads of State and Government and finalized within 12 months at the latest from the date of adoption of the Protocol.” Article 46 includes a rendezvous clause, which essentially is a clause under which the parties agree to negotiate and include detailed provisions on the settlement and management of disputes under the Protocol in the future. This makes it mandatory for the parties to the AfCFTA to negotiate such an annex on dispute settlement in due course and within the timeframe provided.

What Next for the Continent After Adoption?
The POI establishes a Pan-African Trade and Investment agency to assist national investment promotion agencies and the private sector in mobilizing financial resources, fostering business development, and providing technical and other support for the promotion and facilitation of investment in accordance with the provisions of the Protocol. Indeed, this is an important step toward creating an institutional architecture that will operationalize a coherent and clear continental vision on investment.

Along the same lines of streamlining investment standards, the POI spells out its relationship to other Protocols and IIAs concluded between African countries. Article 49 highlights the termination of existing intra-African BITs—including the sunset clauses—within 5 years of entry into force. For Regional Economic Community (REC) instruments, the Protocol highlights alignment within 5 to 10 years. The differences between the former and latter approaches result from the fact that most intra-African BITs are old generation and need termination, whereas REC instruments are more innovative and progressive, and their content is largely integrated into the Protocol itself.

It is likely that this Protocol will influence the future IIA negotiating positions of African countries and will have an impact beyond the African continent, setting a new continental standard for the negotiation or renegotiation of investment treaties and investment chapters in treaties between African states and third countries.

Accelerating the effective implementation of the POI of the AfCFTA will provide the region with a single, coherent, and modern continental investment framework. It will replace the current aging patchwork of intra-African investment rules that are prone to broad interpretations and that lack effective investment promotion and facilitation commitments. In doing so, it will also provide much-needed impetus for African countries to engage with third-party states to revise and reform their outdated BITs.

The POI will pro-actively stimulate intra-African investments, which remain below their potential, and will, through its Pan-African Investment Agency, ensure that African countries have an institutional backstopping mechanism on issues relating to continental investment policy-making.

The expected positive impact of the POI on intra-African FDI will not come at the expense of African countries’ right to regulate and take legitimate measures for the protection of public policy objectives. The carefully drafted refinements, exceptions, reservations, and carve-outs will ensure that African countries provide coverage under the POI only to investments that will have a real positive contribution on sustainable economic development. African countries and the AfCFTA Secretariat should be commended for having seized the opportunity to negotiate a landmark continental Investment Protocol and contributed to the “Africanization” of the investment regime. However, in order to capitalize on the substantial gains made during the negotiations, African countries must work together to expedite the implementation of the POI and operationalize its benefits for the governments, investors, and people.

 source: IISD