The AfCFTA's Investment Protocol: The Bell Tolls For First-generation Intra-African BITs And Their More Conventional Investor Protections

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In February 2023, the Member States of the African Union (the "AU") adopted the Protocol on Investment (the "Protocol" – the January 2023 version is publicly available here)...
Worldwide Government, Public Sector
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Introduction

In February 2023, the Member States of the African Union (the "AU") adopted the Protocol on Investment (the "Protocol" – the January 2023 version is publicly available here) to the Agreement Establishing the African Continental Free Trade Area (the "AfCFTA"). The Protocol is currently open for signature, ratification and accession by the Parties to the AfCFTA (Article 48 of the Protocol). The Protocol will enter into force 30 days after the deposit of the 22nd instrument of ratification (Article 23(3) of the AfCFTA). The ratification progress made by the Parties is not publicly known, but it is understood that these efforts are under way.

This Blog Post aims at underlining four of the main consequences that will flow from the entry into force of the Protocol in the near future: (i) the termination of all intra-African bilateral investment treaties ("BITs"); (ii) the conferral of watered-down protections upon investors; (iii) the imposition of obligations upon investors and the attempted creation of extraterritorial investor liability; and (iv) the unlikelihood that the Protocol's work-in-progress Annex on dispute settlement will ultimately provide for investor-State dispute settlement ("ISDS").

The conclusion to this Blog Post takes a step back and draws out two main overall takeaways from this ongoing development. First, the Protocol will have limited effect in practice due to the marginal amounts of intra-African foreign direct investment ("FDI") stock, especially when compared with non-African FDI stocks in Africa, and due to the fact that non-African investors have thus far brought the great majority of ISDS claims against African States. Second, BIT protections for AU investors in AU Member States will decrease, but BIT protections for non-African investors in AU Member States will remain untouched.

I. The Investment Protocol seeks to terminate intra-African BITs and to water down investor protections in existing regional investment agreements

To date, African States have signed 183 intra-African BITs (excluding already terminated BITs). Intra-African BITs between AU Member States account for 156 of these 183 BITs, a quarter of which (39) are in force. Article 49(1) of the Protocol mandates the termination of all BITs concluded between Parties to the Protocol within five years of the Protocol's entry into force. Accordingly, 156 are scheduled for termination within five years of the Protocol's entry into force.

Article 49(1) of the Protocol is reminiscent of the European Union (the "EU") Member States' adoption of the Agreement for the Termination of all Intra-EU Bilateral Investment Treaties, which entered into force on 29 August 2020.

Article 49(1) of the Protocol provides that upon termination of the existing BITs, "their survival clauses shall also be terminated." Such provision defeats the very aim of sunset clauses in BITs, i.e.,to provide stability by making their provisions survive for a certain time after their termination. This provision will likely stir up controversy over whether investors have acquired those rights under international law, and whether this means that States cannot then unilaterally terminate those rights once conferred.

Article 49(3) of the Protocol further provides that Parties to the Protocol shall use their "best endeavours" to "review and revise" regional investment agreements adopted by African Regional Economic Communities (RECs) (to date, African States have signed 12 treaties containing investment provisions, involving the RECs recognized by the AU; see here) in order to "achieve alignment" with the Protocol within 5 to 10 years from its entry into force.

While some RECs contain provisions similar to those in the Protocol, for the most part they do not seem to embody a reform-oriented approach that goes as far as that of the Protocol. The Protocol's vaguely formulated obligation regarding RECs opens the door to a watering down of investor protections in the continent and to uncertainty and unpredictability, as it does not set any guidance as to what "achiev[ing] alignment" entails.

II. The Investment Protocol sets out watered-down investor protections

  1. Providing for multiple carve outs to the Protocol

Article 3(3) of the Protocol carves out multiples areas from the scope of the Protocol: (i) government procurement; (ii) State Party subsidies or grants; (iii) taxation measures; and (iv) special advantages accorded by development finance institutions.

Article 3(3) of the Protocol also excludes from the Protocol's coverage investments made by State-Owned Enterprises as well as "investments made with capital or assets of illegal origin".

While other IIAs may exclude one or more of these areas in a similar or narrower fashion, the Protocol's chosen method for excluding investments having an illegal origin is unusual. Article 3(3) does not provide any indication as to what the expression "illegal origin" is intended to refer to. This vaguely-worded expression opens the door to an unpredictably broad exclusion.

  1. Discarding FET

Article 17 of the Protocol replaces Fair and Equitable Treatment ("FET") with the narrower Administrative and Judicial Treatment ("AJT").

Accordingly, State Parties shall ensure that investors and investments "are not subject to treatment which constitutes a fundamental denial of justice [...], an evident denial of due process, a manifest arbitrariness, a discrimination based on gender, race or religious beliefs, or an abusive treatment in administrative and judicial proceedings." Article 17(2) of the Protocol explicitly states that such treatment "shall not be interpreted as equivalent to fair and equitable treatment" and "includes the minimum standard of treatment [...]".

This formulation is a clear endeavor to deviate from the more traditional and unencumbered formulations of FET as expressed, for example, in Article 2(2) of the 2006 Egypt-Ethiopia BIT, which broadly provides that investments "shall at all times be accorded fair and equitable treatment [...]" without circumscribing the scope of FET.

It is important to note that the Protocol refers to the minimum standard of treatment ("MST"). While Article 17(2) seeks to exclude FET from its scope, the net result might not differ significantly from the way arbitral tribunals have applied FET as part of treaty provisions that explicitly link it with MST (e.g., former Article 1105 of the NAFTA and its successor Article 14.6 of the USMCA).

  1. Emptying anti-discrimination provisions of their substance

Both the National Treatment ("NT") and the Most-Favored Nation ("MFN") provisions in Articles 12 to 16 of the Protocol amount to considerably weakened protections against discrimination as compared with traditional NT and MFN provisions (see, e.g., the formulation of NT and MFN in Article 4 of the 2009 Burundi-Kenya BIT: "[e]ach Contracting Party shall accord to investments of investors [...] treatment which shall not be less favorable than that accorded either to investments of its own or investments of investors of any third State.")

First, Article 12 and 14 of the Protocol expressly limit NT and MFN protections to the post-establishment phase of the investment.

Second, Article 12(2) of the Protocol sets out a long list of additional factors to consider when assessing the existence of "like circumstances". These additional factors are clearly intended to shift the focus away from the effects of the measure at issue on the investor and/or its investment, and towards concerns arising out of civil society stakeholders and the regulatory process.

Third, Article 13 of the Protocol carves out of the NT provision: (i) a wide array of public interest measures; (ii) national development measures; and (iii) measures aimed at addressing the needs of unspecified disadvantaged persons, groups or regions. Parties further reserve the right to adopt or maintain exceptions to the NT provision for "sectors or geographical regions that represent strategic importance for the Host State". These exceptions are unspecified and leave unfettered discretion to State Parties in adopting such exceptions going forward, without giving investors any advance notice.

Fourth, the "treatment" for purposes of the MFN provision excludes: (i) dispute settlement procedures; (ii) provisions on admissibility and jurisdiction; and (iii) substantive obligations in other IIAs (Article 14(3) of the Protocol). This leaves covered investors with little substantive protection against discrimination to investors from third States in comparison with the more traditional wording of MFN provisions in other international investment agreements ("IIAs") which would generally include these areas.

  1. Narrowly circumscribing the right to compensation in the event of an expropriation

The Protocol's provisions on expropriation outline a narrower framework than the more usual types of provisions on expropriation in IIAs (see, e.g., Article V of the 1997 Egypt-Malawi BIT).

First, Article 20(2) of the Protocol limits the scope of what can be deemed to amount to an expropriation by excluding "[n]on-discriminatory regulatory actions [...] designed to protect legitimate public policy objectives [...]". In this respect, the Protocol's provisions on expropriation resemble those of other recent IIAs (see, e.g., Article 7(6) of the 2019 Central African Republic – Rwanda BIT and Annex 8-A(3) of the 2014 CETA).

Second, Articles 19 and 21 of the Protocol set forth some unusual limitations with regard to compensation for expropriation. As a first limitation, Articles 19(1)(d) and 21(1) seem to water down the traditional requirement for compensation to be "made without delay", or "without undue delay" (see, e.g., Article 6 of the 2009 Mauritius-Tanzania BIT and Article 5(3) of the 2006 Gambia-Morocco BIT) by stating that compensation should be "paid within a reasonable period of time".

As a second limitation, the Protocol deviates from the prevailing standard of providing "prompt, adequate and effective compensation" (see, e.g., Article 6 of the 2009 Mauritius-Tanzania BIT) by subjecting the assessment of fair and adequate compensation to: (i) the domestic laws and regulations of the host State; (Article 19(1)(d) of the Protocol); (ii) "an equitable balance between the public interest and interest of those affected" (Article 21(2) of the Protocol); and (iii) "all relevant circumstances" which include the current and past use of the investment, its fair market value, the expropriation's purpose, the profits that the investment generated, the investor's past conduct, and the investment's duration (Article 21(2) of the Protocol).

  1. Opting for a circumscribed guarantee of protection and security

Finally, Article 18 of the Protocol restricts the scope of the traditional standard of Full Protection and Security ("FPS") as set out for example in Article 4(3) of the 2019 Central African Republic – Rwanda BIT which provides that: "[i]nvestments made by investors of each Party [...] shall enjoy full protection and security in the territory of the other Party".

First, the afforded protection and security is limited to "physical" protection and security, and the word "full" is absent from the provision. As a result, the Protocol attempts to exclude legal protection and security and other interpretations of the FPS standard that go beyond physical protection and security.

Second, Article 18 of the Protocol states that physical protection and security is "subject to [a State Party's] capabilities", which refer to "the obligation of due diligence that a State Party shall exercise on its own territory in accordance with customary international law". This further dilutes the guaranteed protection and security threshold accorded to investors and their investments.

III. The Investment Protocol imposes obligations on investors and attempts to serve as an anchor for extraterritorial investor liability

Chapter 5 of the Protocol sets forth a series of obligations for investors. These include adhering to the host State's domestic laws (Article 32); complying with high standards of business ethics, labor, human rights and corporate governance (Articles 33 and 39); respecting the environment and the rights of indigenous communities (Articles 34 and 35); refraining from interfering in the host State's internal affairs and from engaging in corrupt practices (Articles 36 and 37); and endeavoring to contribute to the host State's sustainable development (Articles 36 and 38).

Article 47 of the Protocol goes further and attempts to act as a source of extraterritorial liability for investors. Specifically, it states that: "[i]nvestors and investments [...] shall be subject to civil actions for liability in the judicial process of their Home State for the acts, decisions or omissions made in the Host State in relation to the investment where [they] [...] lead to damage, personal injuries or loss of life in the Host State."

This provision is an unprecedented attempt in an IIA to overcome jurisdictional issues of territoriality and forum non conveniens among other hurdles. To take full stock of its practical implications and the difficulties that its implementation will inevitably raise goes beyond the scope of this Blog Post. At the very least, its application will encounter opposition and resistance from investors against whom such proceedings are instituted.

IV. The final version of the Investment Protocol's Draft Annex on dispute settlement is unlikely to provide for ISDS

Parties to the Protocol intended to finalize its Annex on dispute settlement within a year of the Protocol's adoption as per Article 46(3) of the Protocol. While the Annex is not yet finalized, an initial draft of the Annex ("Draft Annex") is available as part of a previous draft of the Protocol.

Articles 5 to 21 of the Draft Annex provide for ISDS. Article 6 of the Draft Annex states that investors may submit an arbitral claim under the ICSID Rules, the UNCITRAL Rules, or "under any other arbitration institution or [...] arbitration rules."

This embrace of traditional ISDS does not align with the Protocol's departure from traditional substantive investor protections. It similarly does not reflect the decisions by some African States to discard ISDS altogether. For example, Section 13 of South Africa's 2015 Protection of Investment Act: (i) excludes ISDS altogether; (ii) identifies mediation as the main dispute resolution mechanism; and (iii) merely reserves South Africa's right to consent to State-to-State international arbitration subject to the exhaustion of domestic remedies.

In light of such an example, it would be surprising if the final version of the Protocol's Annex on dispute settlement included advance consent by host States to ISDS and/or a standing and unilateral offer for investors to submit their claims under the arbitral rules of their choosing.

Conclusion

Notwithstanding the considerable changes that the Protocol aims at ushering in, its practical effects will likely be limited. This is because the Protocol decreases protections that intra-African BITs accord to intra-African investors, but has no effect on protections that non-intra-African BITs accord to non-African investors in Africa.

First, the Protocol's effect will impact only a minor proportion of FDI stock in Africa (i.e., intra-African FDI), since the vast majority of FDI stock in Africa originates from non-African investors.

Based on FDI stock, the main economies investing in Africa in 2022 were the Netherlands (USD 109 billion), France (USD 58 billion), the United States (USD 46 billion), the United Kingdom (USD 46 billion) and China (USD 41 billion), followed by Italy (USD 29 billion), Singapore (USD 24 billion), Germany (USD 13 billion) and Switzerland (USD 13 billion).

By comparison, South Africa, consistently the main source of intra-African FDI, was the only African economy to crack the top-10 ranking of FDI investors into Africa by stock with USD 33 billion in 2022.

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Second, the great majority of ISDS claims against AU Member States have thus far arisen under IIAs between African and non-African States, as opposed to intra-African IIAs. A rough estimate based on UNCTAD's Investment Dispute Settlement Navigator (and its publicly available information updated as of 31 December 2023) indicates that African investors initiated less than 10% of ISDS cases against African States. Should FDI and ISDS trends remain the same, this data suggests that the Protocol will have no effect on approximately 90% of ISDS cases that investors may initiate against African States following the Protocol's entry into force.

Ultimately, AU investors (and in particular South African investors) in AU Member States are the primary losers under the Protocol. While scraping intra-EU BITs left EU investors with the EU's own comprehensive legal system, the same cannot be said of AU investors whose rights under intra-African BITs the Protocol erodes.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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