17 May 2023
Would the drafters of the AfCFTA investment protocol kowtow to the interests of only investors ?
The recently leaked investment protocol of the African Continental Free Trade Area (AfCFTA) shows the investor-state dispute resolution will be set out after the adoption of the protocol. The stakes are high for the drafters, governments, civil society organisations, and social movements. As investors are strongly lobbying for the inclusion of the problematic investor-state dispute settlement (ISDS) as the superior dispute resolution mechanism, what happens to the right of states to regulate in the interest of the public ?
The AfCFTA aims to be the biggest trade area, bringing together 55 countries and sub-regional and regional economic blocs and aligning other global bilateral and multilateral trade agreements. Among those pushing for the trade deal can be found trade experts, former governments and heads of States, corporations, multilateral organisations like the World Bank and the World Trade Organisation (WTO).
Firstly, it is said to promote inter-Africa trade, unlike previous trade deals or agreements mainly focusing on the EU/Africa or the US/Africa, to mention a few. Even though these countries are not homogenous, the assumption is that the trade area provides equal opportunity to all the countries, generating a combined gross domestic product (GDP) valued at US$3.4 trillion for the continent’s population of about 1.3 billion. Secondly, the trade agreement, which is the flagship project of Agenda 2063-Africa’s development framework, is mostly driven by leaders of State parties of the African Union, thus providing it with a strong political impetus. And the States have developed massive campaigns to promote it. Thirdly, the rollout comes at a time when the entire continent and the rest of the world are faced with fiscal and debt crises, the ramifications of the COVID-19 pandemic, and the Russia-Ukraine war, which impact the cost of energy, food prices, and inflation, with the potential to temper the global political and economic order.
The agreement is therefore presented by its promoters as an opportunity for Africa to look within, while other western countries are hunting for new trade partners and seeking to rejuvenate existing trade relationships. The narrative underpinning the need for such an agreement has also managed to convince some civil society organisations (CSO)-who hitherto had been critical of trade agreements, due to the campaign built by promoters.
The AfCFTA secretariat has reported about the guided trade between seven of the member states— Cameroon, Egypt, Ghana, Kenya, Mauritius, Rwanda, and Tanzania—began in July 2022. Additionally, other multilateral and bilateral trade agreements with Africa are finding entry points into the trade area.
Is AfCFTA without challenges ?
Like any free trade agreement, AfCFTA relies on the same free-market capitalism dogma and export-based development model, which has failed to deliver for the public interest. Added to that, a number of challenges abound. There are still restrictions on trade in the region. The cost of logistics is unbearable for exporters and importers alike. For example, for a small or medium-sized enterprise (SME) in Ghana to ship items worth $300 to Uganda, it ends up paying double or triple the price of the item for transport, depending on which transport service is used. The payment system poses challenges. There is no single currency for the region except for the CFA Franc Zone, which connects 20 countries—sixteen of which come from the West Africa Economic and Monetary Union and six from the Central African Economic and Monetary Union. Transactions are carried out in USD, and about 80% of payments are routed outside of the continent, which makes international payments very expensive, especially for small domestic businesses. AfCFTA projects to rely heavily on the use of Special Economic Zones, an avenue for abuse of labour rights, and revenue losses through tax incentives for corporations.
While the conversation about industrialisation and how to get it done is essential for developing countries, the question of domestic resource mobilisation to invest in State institutions, and the role of State-owned Enterprises (SOE) and local enterprises are not even part of the discussions. There are clear examples of some SOE in Global South countries who have exhibited potential to lead the industrialisation agenda.
Nothing new—it’s all about attracting foreign direct investment
Africa’s economy has always been about attracting foreign direct investment. From providing tax incentives to multinational companies, liberalising the labour market, unbundling the energy sector, and allowing private sector participation in strategic public services, the objective has always been to create an avenue for international capital to extract more profit. And AfCFTA is going to be heavily dependent on foreign direct investment without guarantees that economies would significantly transform, decent jobs created, and subsequently reduce the level of income inequalities among citizens.
In the report “Making the Most of the African Continental Free Trade Area”, the World Bank highlights the need to use trade and foreign direct investment as an anchor to boost growth and reduce poverty. The continent is considered to be doing poorly as a destination for foreign direct investment (FDI) and participation in global value chains. Recognising the potential of FDI, the continent is advised to remove barriers to investment and trade in goods and services to attract foreign direct investment. The report argues that countries with larger markets and fewer restrictions on trade attract more foreign direct investment, both inside and outside the continent. The expectation is that multinational companies with heavy financial muscles will take advantage of intra-African trade and invest in the region. There are also expectations that domestic companies will also take advantage, but by collaborating with big corporations based in the Global North. This is once again the same mantra underlying the proponents of free trade agreements, according to which attracting FDI magically generates better conditions for people.
Removing barriers also means using ISDS
In AfCFTA, ISDS would represent as usual a separate legal system where investors can file lawsuits against African governments if those governments pass laws that restrict their (the company’s) ability to make profit, including future profits. These laws that governments enact may enhance the rights of employees, public services, and public health. This is why a critical look at the investment protocol is instructive.
Article 46 of the investment protocol directs how to deal with dispute resolutions. In the event that there is conflict between an investor and a host State, such conflicts can be resolved amicably, “through consultations, negotiations, conciliation, mediation, or other amicable dispute resolution mechanisms available in the Host State”. However, prior to conflict resolution, there is a preceding article 45 that talks about “dispute prevention and grievance management”. The article provides guidance on how to receive complaints from investors and the process to de-escalate and resolve them through competent state bodies.
There are two main concerns for both articles 45 and 46. The first is the assumption of trust. Both articles assume that investors have complete trust in State legal institutions. That has never been the case. Proponents of ISDS are an affront to state legal institutions. They have resorted to ISDS, citing reasons such as weak legal institutions at the State level, exemplified in the sluggish process of handling investor-State conflicts. They have also accused authoritarian regimes of taking unilateral decisions in the interest of the State, during conflicts. AfCFTA has not been left off the hook by these lobbyists and ISDS proponents.
As far back as 2020, a law firm specialized in arbitration, Herbert Smith Freehills, was lobbying for the Investor-State Dispute System (ISDS) to be included in the AFCFTA. In an article titled, “AfCFTA Protocol must provide a fair regulatory environment and protection for investors”, they called on the drafters of the agreement’s investment protocol to provide a right to recourse for investors by providing them protection and ensure these are enforced internationally. For indicating explicitly the rights of States to regulate, the article lampoons the Pan-African Investment Code, the Common Market for Eastern and Southern Africa Common Investment Agreement, and the Intra-African Bilateral Investment Treaties, describing them as investment instruments that depart from traditional investment protection models, and have loosely defined obligations for investors, while giving limited access to investor-State dispute settlements. Drafters are asked to rely on State protections provided for by most favoured nations and national treatment principles ; reform process pushed for by UNCITRAL Working Group Three and the European Union multilateral investment courts (MIC), and other alternatives and proposals such as the investment arbitration conventions. Unfortunately, both the reforms by the working group and the EU’s MIC does not change the major issue with ISDS - the unfettered power it provides to corporations to sue sovereign states. They also do not openly support State legal institutions to address these trade conflicts. In the last 10 years, CSOs and social movements have campaigned against ISDS in which ever reform state, including the EU MIC.
Secondly, the protocol does not provide any dispute mechanism, and that is a concern because it could be added at a later stage in an even less transparent way. According to the text, it will be set out in an annex after the adoption of the protocol. From the grapevine, South Africa and Tanzania are the two countries that opposed the ISDS provisions in the investment protocol for which reason it was removed, to be negotiated and released after the investment protocol has been adopted. It must be noted that in an earlier leaked version of the investment protocol, ISDS was included in the protocol.
If the position taken by South Africa and Tanzania is true, then once again, the two countries have shown forthrightness with their disagreement with ISDS. Upon expiration of the Bilateral Investment Treaty (BIT) with the Netherlands in 2019, Tanzania opted to discontinue the investment treaty. This was the country’s initiative to do away with investment treaties and contracts they consider gives unconscionable terms in favour of private investors at the expense of the state, through its Wealth and Resources Contracts (Review and No. 6 Re-Negotiation of Unconscionable Terms) Act, 2017.
South Africa had by 2010, terminated about 10 BITs with ISDS. Even though these terminations have come with challenges for the country, it goes to show the determination of countries to do away with BITs with ISDS provisions, due to their unconscionable provisions in favour investors. Unlike the usual argument, termination of BITs with ISDS has not affected South Africa’s ability to attract foreign direct investments. As reported by Public Citizen, since those terminations, FDI stock in South Africa has grown 10%, from 1.8 trillion Rand to 2.0 trillion Rand. After terminated BIT with Germany in August 2014, Germany’s FDI stock in South Africa climbed from an annual average of 93 billion Rand before termination to 95 billion Rand after termination.
Whether or not to include ISDS in AfCFTA would keenly be contested. For investors, it is about protecting their investments as they continue to make profits. There are 150 documented ISDS cases against African countries. Penalties and legal fees against these countries have been paid in total to the amount of US$5.38 billion. This is taxpayer money that ought to be used to build hospitals, pay the wages of teachers, and so on, in already heavily indebted countries.