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The AfCFTA Investment Protocol: An Opportunity to Converge and Propel the Pan African Investment Code (PAIC) Insights from the Negotiations of the PAIC by Stefanie Schacherer*

4 May 2021 10:27 AM | Anonymous member (Administrator)

Paper presented at the AfAA 2nd Annual International Arbitration Conference, 15th - 16th April 2021.

1         Introduction

The Pan-African Investment Code (PAIC) is the first continent-wide African model investment treaty elaborated under the auspices of the African Union.[1] The PAIC has been drafted from the perspective of developing and least-developed countries with a view to promote sustainable development. The instrument contains a number of Africa-specific and innovative features of which some are yet unique in investment treaty practice. Likewise, the PAIC solidifies a trend towards greater harmonization of approaches across the continent and fosters Africa as an investment rule maker globally. 

The PAIC contains many innovative features and makes sustainable development its overarching objective. It reformulates traditional investment treaty language by inserting, for instance, exceptions to many of the standards of protection such as MFN and national treatment. It also introduces new provisions such as clauses on obligations for investors in relation to human rights, corporate social responsibility, use of natural re-sources, and land-grabbing. In addition, the PAIC omits certain investment standards which have been interpreted by investment tribunals in broad and unpredictable ways, such as fair and equitable (FET). The PAIC spells out horizontal obligations on how state contracts and public-private partnerships should be designed; how African states should adapt their labour policies and resource development; and how investors can help to promote technology transfer, clean technologies and environmental protection. Lastly, the PAIC gives countries the discretion to implement ISDS. Moreover, the PAIC has, since its adoption in March 2016, influenced the drafting of subsequent bilateral and regional investment instruments in Africa as well as national investment laws of certain African countries. To some extent the objective of sustainable development has already found its way into the AfCFTA Investment Protocol since the title of the Protocol has, reportedly, been changed to AfCFTA Protocol on Sustainable Investment. Now to what extent the Protocol will adopt similar approaches and provisions needs to be seen throughout the course of the upcoming negotiations.

2         The Elaboration and Negotiations of the PAIC

At the continental level, it is the African Union (AU)[2] that is mandated by its Member States to enhance the political and socio-economic integration of the continent and to promote sustainable development.[3] The most important integration endeavours currently undertaken by the AU are the establishment of the African Economic Community by the year 2034 as well as the establishment and finalisation of a continent-wide Free Trade Area.[4]

With the aim of enhancing economic integration, African Ministers responsible for continental integration decided in 2008 to initiate the work on a comprehensive investment code for Africa. The declared aim of the initiative was to attract greater flows of investments into Africa and to facilitate intra-African cross-border investments. Thus, the elaboration of the PAIC had started. From the beginning, it was the intention of the AU and its Member States to elaborate a text that would address Africa-specific needs. African independent experts drafted the text over several years. The groups of experts were composed of representatives coming from the different African regional economic communities (RECs), from academia as well as the private sector. 

The process of elaboration can roughly be divided into three phases. In its first phase, the group of experts compiled African best practices in the field and elaborated a first draft. The next and decisive phase was during the year 2015, when the PAIC text was discussed at expert level. Two meetings of independent experts, all from Africa, were held in May 2015 in Tunisia and another one in September 2015 in Mauritius. Experts of AU Member States then reviewed the work of the independent experts during a continent-wide meeting in Uganda that took place in December 2015. The third phase started in the year 2016. At a ministerial meeting in Addis Ababa in March 2016, the competent African ministers approved the work of the PAIC. At the last meeting in Nairobi in November 2016, finally, governmental representatives agreed to adopt the PAIC as a non-binding model investment treaty.

3         Building Common Ground for the Regulation of Foreign Investment in Africa 

The negotiations of the PAIC have highlighted that there are subject-matters and approaches for which a majority of African countries seem to agree. Three aspects that have been uncontroversial in the course of the negotiations. First, the need to have sustainable development as the overarching objective of the instrument and to integrate sustainable development concerns throughout the substantive and procedural provisions of the PAIC. Second, and by the same token, delegates negotiating the PAIC agreed on having investor obligations in the text, which are directly addressed to the investors. Third, another feature of the PAIC which was less controversial was the limitation of the scope of the instrument to post-establishment commitments.

3.1        The Objective of Sustainable Development

Preambles have a primary significance as to how an IIA will be interpreted in the event of a dispute between the parties or between an investor and a State.[5] Today, new and broader investment treaty objectives have become more and more relevant, one of which is certainly the objective of sustainable development.[6] In the African context, sustainable development goals are crucial given the important economic, social and environmental challenges the continent is still facing. 

The Preamble of the PAIC recognizes that the promotion of sustainable development requires investments (para. 7). Yet, these investments should have positive spill-over effects such as to facilitate job creation, promote technology transfer, support long-term economic growth and contribute effectively to the fight against poverty.[7] The Preamble specifically refers to the right of AU Member States to regulate all aspects relating to investments within their territories with a view to promote sustainable development objectives.[8] The drafters of the PAIC did not intend to disregard the protection of investors and investments, but stressed the need to achieve an overall balance of the rights and obligations among AU Member States and the investors under the PAIC (para. 11). The Preamble emphasizes also the need to promote corruption free investment and improved laws and regulations that promote transparency and accountability in governance (para. 9). The PAIC in fact seeks to promote responsible investments. 

To be consistent with the sustainable development objectives as inscribed in the Preamble, the PAIC starts off with a first article addressing its primary objective:

“The objective of this Code is to promote, facilitate and protect investments that foster the sustainable development of each Member State, and in particular, the Member State where the investment is located”.[9]

The objective statement is yet another clear link between investments and sustainable development is made.[10]

3.2        Investor Obligations 

Balancing the rights and obligations has become a mainstream reform approach of most countries. And the most common way to do so is the reaffirmation of the right to regulate of the host state to regulate matters of public interest. The PAIC is no different in this respect. However, the more innovative and noteworthy aspect in the PAIC is the incorporation of investors’ obligations in the corpus of rules applicable to investors and investments. These obligations directly imposed upon investors. In other words, they are direct obligations. Such investor obligations go beyond mere questions of compliance with national laws and involve how foreign investors should actively contribute to achieve development goals of host states. In contrast, several IIAs contain indirect investor obligations, which are obligations that require the contracting parties – so States and not investors - to adopt measures aimed at regulating the behaviour of foreign investors. In contrast hereto stand direct investor obligations, which are obligations directly addressed to foreign investors. Direct obligations can mostly be found in African investment instruments. Otherwise, they have not yet gained widespread recognition in international investment treaty practice. The PAIC and also many other African instruments include comprehensive provisions relating to many sustainable development issues, such as environmental protection, socio-political obligations, anti-corruption, respect for human and labour rights, technology transfer and education. 

As outlined above, the PAIC is intended to be a balanced legal instrument. In this respect, it contains a specific chapter on the direct obligations of investors,[11] counterbalancing the chapter on the guarantees of treatment for investors and investments. The chapter on investors’ obligations contains six provisions entitled: (1) framework for corporate governance, (2) socio-political obligations, (3) bribery, (4) corporate social responsibility (CSR), (5) obligations as to the use of natural resources and (6) business ethics and human rights. Under the PAIC, an investor has to comply with national and international standards of corporate governance for the sector concerned. The investor is required to comply in particular with transparency and accounting standards.[12] 

There is likelihood that the Protocol will continue this trend as next to the PAIC, several other African instruments, such as the ECOWIC, SADC Model, EAC Model, Morocco-Nigeria BIT, all contain what has been called direct investor obligations. Lastly, including investor obligations always comes with the caveat of how to enforce them effectively. The PAIC is the express possibility for a State to file a claim against an investor in an investor-State arbitration, a so-called counterclaim. It is noteworthy that the Convention on the Settlement of Investment Disputes Between States and Nationals of Other States (ICSID Convention) accepts counterclaims under certain conditions.[13] However, in practice, tribunals often enough deny jurisdiction on counterclaims due to the absence of a clear treaty provision expressly allowing for such claims by the State.[14] The inclusion of an express reference to counterclaims thus clarifies any doubt that investors do consent to the tribunal’s jurisdiction over these claims. Yet, there are very few examples of treaties that contain an express reference to counterclaims. the PAIC provision dealing with counterclaims reads as follows:

Where an investor or its investment is alleged by a Member State party in a dispute settlement proceeding under this Code to have failed to comply with its obligations under this Code or other relevant rules and principles of domestic and international law, the competent body hearing such a dispute shall consider whether this breach, if proven, is materially relevant to the issues before it, and if so, what mitigating or off-setting effects this may have on the merits of a claim or on any damages awarded in the event of such award”.[15]

The inclusion of a provision allowing counterclaims by States will ensure the enforceability of investor obligations contained in the PAIC.[16] This means that a State can invoke any violation of any relevant international treaty protecting the environment, human rights and labour standards under the PAIC’s provision on counterclaims. If the AfCFTA Protocol includes direct investor obligation, a provision should point out how the obligations will be enforced.[17]

3.3        Pre-establishment commitments 

The majority of existing IIAs only guarantee standards of treatment of foreign investment regarding the post-establishment phase, but there is a growing number of treaties that include commitments with respect to the pre-establishment phase. This is in particular the case with comprehensive FTAs.[18] Recent practice shows that besides the United States and Canada, the EU also has sought to include pre-entry commitments in its treaties.[19] Pre-establishment obligations are formulated by including references to MFN treatment as well as national treatment.[20] 

The drafters of the PAIC have been aware of current treaty practice, but considered that in the context of African countries such provisions may preclude a State from altering domestic law if circumstances so warrant in light of national sustainable development goals. To this effect, the PAIC’s MFN and national treatment provisions do not contain any reference to establishment, acquisition and expansion. In fact, the PAIC not only has a clear objective provision, it also explicitly excludes pre-establishment commitments. As Article 4.4 provides “for avoidance of doubt, establishment, acquisition and expansion under this Code only apply to the post-establishment phase”. It is an important policy choice to decide whether to extend the Protocol’s coverage to pre-establishment matters and, if so, to find the right balance between binding international commitments and domestic policy flexibility to keep strategic sectors of their economy closed to foreign investment. 

It will be important to consider this choice in relation to the definition of an investor. If the definition of an investor is limited to African investors, pre-establishment commitments might be a suitable option; why? Because it could foster intra-African cross-border investment and lastly, African economic integration. For instance, the under the COMESA (2017) coverage is limited to African investors. According to Art. 3(2) “this Agreement shall cover investments of COMESA investors made in the territory of Member States in accordance with their laws”. If the Protocol covers third country investors, pre-establishment obligations can significantly restrain the host state’s ability in accepting or refusing foreign investment based on economic development considerations (e.g., the development of infant industries). This is the approach in the PAIC (Art. 4(5) extends the scope to investors of third countries) but the PAIC does not cover pre-establishment phase of an investment.

4         The remaining controversial parts 

While the negotiations of the PAIC served as an excellent opportunity for exchange and consensus building, it also revealed that there are several aspects of international investment law, which remain controversial and for which it seems to be unlikely to find common ground in the near future.

4.1        Investor-State dispute settlement

Over the last years, ISDS became extremely controversial and probably constitutes the most controversial issue in today’s investment reform debate. The increase in the number of ISDS cases, the often very high sum of compensation and costs of arbitration as well as unexpected and inconsistent interpretations of IIAs by arbitral tribunals have resulted in rising criticism of the existing system. 

There are two general alternative ways discussed on how to reform ISDS: either to keep and reform it as some countries have done,[21] or to abandon and replace it with national courts or with by setting up an ombudsman system as some countries have done.[22] The global debate is perfectly mirrored in Africa, and ISDS did not fail to be the most controversial aspect during the elaboration of the PAIC. In fact, the provisions dealing with ISDS are the only ones in the PAIC on which no agreement between the drafters could be found. It is well known that South Africa, for instance, has a clear policy against ISDS. The country recently reviewed all of its IIAs and terminated most of them. The law that will be applicable to foreign investors in South Africa is the 2015 Promotion and Protection of Investment Bill, which does not contain ISDS.[23] During the PAIC experts’ meetings, South Africa, together with a couple of other countries, argued for the exclusion of ISDS.[24] In fact, all SADC Member States are meanwhile opposed to ISDS as is evidenced by the amendments of August 2016 to the SADC Protocol on Finance and Investment.[25] The amended version no longer contains any reference to ISDS and only provides for State-State dispute resolution.[26] 

However, many African countries still see a need for having ISDS in the PAIC in order to render their countries attractive for foreign investors. It is arguably true that foreign investors have poor trust in African judicial systems. Hence the need for ISDS seems, at least for the time being, inevitable. Among the countries in favour of ISDS was a consensus to shape provisions on ISDS in a manner so as to avoid the shortcomings of this mechanism and to address some of the criticism. Consequently, the ISDS provisions of the PAIC include a couple of important reform approaches, such as the exhaustion of local remedies. The traditional approach of IIAs is to provide for direct access to international arbitration for a foreign investor, usually after a ‘cooling-off period’.[27] It was for a long time considered that in many countries an independent judiciary cannot be taken for granted and that the defending State might influence the outcome of investor-State disputes in its own courts.[28] However, some authors argue that today the situation in most countries, including African countries, has changed; consequently the exhaustion of local remedies could and should revive.[29] 

According to UNCTAD, the requirement of dispute resolution before the domestic courts of the host country has several advantages, and not least might foster sound and well-working legal and judicial institutions in the host States.[30] SADC as well as IISD also consider this approach to be beneficial for host States, since notably the exhaustion of local remedies can prevent frivolous claims and avoid the considerable costs of international arbitration.[31] Recent treaty practice shows that the requirement of the exhaustion of local remedies remains quite rare with the exception of the Indian Model BIT.[32] The drafters of the PAIC decided to include the requirement for foreign investors to first exhaust local remedies in the Member State where their investment is located before a request for arbitration can be submitted.[33] In this way, investor-State arbitration becomes a remedy of last resort under the PAIC. 

In addition, the current version of the PAIC contains an important limitation to the investors’ access to ISDS. The State’s consent for arbitration is given on a case-by-case basis or on the basis of national law. ‘[T]he dispute may be resolved through arbitration, subject to the applicable laws of the host State and/or the mutual agreement of the disputing parties.’[34] This rather peculiar provision implies that if the host State’s law do not allow for ISDS, such as in the case of the South African Investment Bill,[35] ISDS cannot take place. And even if the host State’s law provides for ISDS, the investor would still need the agreement of the host State to initiate ISDS proceedings. Lastly, even in case of silence in the host State’s law, ISDS can only take place upon the mutual agreement of the disputing parties. In sum, the dispute settlement provisions of the PAIC thus seek in particular to avoid certain shortcomings of the existing ISDS system. 

4.2        The fate of existing African investment agreements 

The issue of the relationship with other investment agreements is addressed in the PAIC. The latter states as follows: “Member States may agree that this Code replaces the intra-African bilateral investment treaties (BITs) or investment chapters in intra-African trade agreements after a period of time determined by the Member States or after the termination period as set in the existing BITs and investment chapters in the trade agreements”[36]. This provision understands African integration in the long run and takes into account that continental integration demands a certain transitional period. The PAIC further clarifies that: “Member States may agree that in the case of a conflict between this Code and any intra-African BIT, investment chapter in any intra-African trade agreement, or regional investment arrangements, this Code shall take precedence”[37]. This provision would be crucial if the PAIC was adopted as a binding instrument as it clarifies the relationship with other investment agreements. In such a setting, the PAIC could ensure continent-wide coherence and legal certainty.  However, the provision is written in soft language and highlights that African countries could not agree to have the continent-wide instrument prevailing over regional and bilateral investment agreements. 

The Investment Protocol can be an excellent opportunity to terminate old intra-African BITs that reflect content-wise the model of European countries/the OECD. 

Especially for Africa, UNCTAD has stressed the challenges relating to existing intra-African BITs: “The fate of these first-generation treaties re-mains uncertain. If the new regional (and continental) IIAs under negotiation do not entail the replacement of older BITs, the result will be an undesirable multiplication of treaty layers. On the other hand, replacing existing BITs with new regional initiatives would contribute to the consolidation and harmonization of the international investment policy framework in Africa.” 

The Investment Protocol can replace existing old-fashioned BITs between AU member states. The EU with all its recent IIAs, has replaced old BITs that its member states had with the partner country in question. The EU is doing this through all its recent IIAs (see, EU-Canada CETA, Annex 30-A, EU-Vietnam Investment Protection Agreement, Annex 6) 

5         Conclusion 

The drafters of the PAIC were inspired by the current international reform discussion. Thus, several of the ideas that can be found in the PAIC text are what can be called common approaches in the international discussion on reforming the investment law regime as a whole. Such ideas mainly concern the reformulation of certain treaty standards, the inclusion of societal concerns as well as the rethinking of the ISDS system. Africa, unlike Brazil, is not making a fundamental contestation of the system of IIAs. The PAIC is rather an African tuning or recalibration of an IIA. It reflects the development that new IIAs are no longer based on either the North American or European models, but that other regions also engage in shaping IIAs according to their level of economic development and social needs. 

The elaboration of the PAIC has permitted African countries to deliberate on their vision of the future shape of IIAs and to build awareness amongst them of the broader implications of foreign investment for their sustainable development. The PAIC thus reflects the broad consensus of all AU Member States on precise provisions over foreign investment regulation and endows Africa with a voice in the international debate on the future and reform of the international investment regime. In particular, the strong emphasis on sustainable development goals in the PAIC will serve as benchmark for the drafting and shaping of the future Investment Protocol to the AfCTA. The AfCTA represents an opportunity to foster trade integration in Africa but it also represents a crucial momentum for development-oriented regulation of investment and corporate activity in Africa. Investor-State relations should be based on a ‘win-win’ scenario and the PAIC has shown that investment law can provide for such an approach by better integrating investment facilitation and protection with the sustainable development objectives of African States.

____________________

Postdoctoral Research Fellow, National University of Singapore 

[1] Together with Professor Makane Moïse Mbengue, the author has been involved in the elaboration process from 2014-2015. Professor Mbengue has been the lead expert and negotiator. The views of the author do not necessarily reflect the views of the African Union or of other negotiators involved in the negotiation and drafting of the PAIC. Some of the information contained in this article is based on the experience of the author. The PAIC text (dated March 2016) is available at <http://repository.uneca.org/handle/10855/23009>.

[2] The African Union (AU) is a continental organization consisting of 55 African States. The AU was created in 2000 and established in 2001. Its headquarters are located in Addis Ababa, Ethiopia.

[3] Constitutive Act of the African Union (signed on 11 July 2000 and entered in 26 May 2001), Art.3 <www.achpr.org/instruments/au-constitutive-act/>.

[4] The Agreement establishing the AfCFTA, see <https://au.int/en/treaties/agreement-establishing-african-continental-free-trade-area>.

[5] Rudolf Dolzer and Margete Stevens, Bilateral Investment Treaties (Martinus Nijhoff, 1995), p. 20.

[6] UNCTAD, ‘Investment Policy Framework for Sustainable Development’ (2015) <http://unctad.org/fr/PublicationsLibrary/diaepcb2012d5_en.pdf> (hereafter: IPFSD). The term sustainable development is understood here as development, which relates to economic development, social development and the protection of the environment. See further also the contributions in Stephan W Schill et al (eds), International Investment Law and Development: Bridging the Gap (Edward Elgar 2015).

[7] PAIC, preamble, para 8.

[8] Ibid., para 10.

[9] PAIC, Art 1.

[10] See in the same sense, Art 2.2 of the SADC Protocol on Finance and Investment (signed on 18 August 2006), <http://investmentpolicyhub.unctad.org/Download/TreatyFile/2730>; In August 2016, SADC Member States have adopted an amended version of the Protocol on Finance and Investment.

[11] PAIC, chapter 4.

[12] Ibid.,, Art.19.1.

[13] ICSID Convention, Art. 46; see also Rule 40 ICSID Arbitration Rules. Yet Article 46 of the ICSID Convention does not, by itself, vest a tribunal with competence over counterclaims, the requirements of Article 25 of the ICSID Convention as well as of the applicable investment treaty must also be satisfied. See Urbaser v Argentina, ICSID Case No ARB/07/26, Award (8 December 2016),  para 1117.

[14] See Spyridon Roussalis v Romania, ICSID Case No ARB/06/1, Award (7 December 2011), paras 859-877 and Saluka Investments BV v The Czech Republic, UNCITRAL, Decision on Jurisdiction over the Czech Republic’s Counterclaim (7 May 2004).

[15] PAIC, Art. 43.1.

[16] There are other ways of enforcement of investors’ obligations, such as by creating a monetary liability in domestic courts of the host State for a breach of the treaty obligations by an investor, SADC Model BIT, Commentary 39.

[17] Next to counterclaims, other options are Such as civil action for liability in national courts of the investors’ home state (Morocco-Nigeria BIT, Art. 20; SADC Model BIT (2012), Art. 17; EAC Model, Art. 11); or conditioning IIA protection and access to ISDS to the respect of the investor obligations (See a European example, Investments made through corruption are excluded from the dispute settlement mechanism under EU IIAs, see e.g., CETA, Art. 8.18(3)).

[18] Starting with North American Free Trade Agreement (NAFTA) (signed 17 December 1992, entered into force 1 January 1994) arts 1102 and 1103 <http://investmentpolicyhub.unctad.org/Download/TreatyFile/2413>; see also TPP, Art.9.4.

[19] CETA arts 8.6 and 8.7; EU-Vietnam Free Trade Agreement (2018) <http://trade.ec.europa.eu/doclib/press/index.cfm?id=1437>, arts 8.3 et ff. This is interesting to note since traditional BITs of EU Member States do not cover commitments relating to the pre-establishment phase.

[20] See NAFTA, Art.1103; US Model BIT, Art.4; CPTPP, Art.9.4.

[21] Such as the establishment of a permanent investment court system in EU treaties see CETA, arts. 8.18 ff; see also EU-Vietnam Investment Protection Agreement <http://trade.ec.europa.eu/doclib/docs/2018/september/tradoc_157394.pdf> 3.1 ff. The Indian Model BIT, Art.14 prohibits investors to threaten the State to use ISDS in order to obtain benefices, limits the scope of claim, and foresees the exhaustion of local remedies.

[22] Such as South Africa and Brazil. See for the ombudsman system, Brazil-Malawi CIFA, arts 4 and 13.

[23] Promotion and Protection of Investment Bill of South Africa.

[24] SADC recommends the exclusion of ISDS, see 2012 SADC Model BIT, Art. 29.

[25] Agreement Amending Annex 1 (Co-operation on Investment) of the Protocol on Finance and Investment (signed 17 May 2017, not yet entered into force) (Agreement Amending Annex 1) <http://www.sadc.int/files/7114/9500/6315/Agreement_Amending_Annex_1_-_Cooperation_on_investment_-_on_the_Protocol_on_Finance__Investment_-_English_-_2016.pdf>. The instrument will be further discussed under Section 6.1.

[26] ibid.

[27] A number of IIAs require pursuing local remedies for a period of time, see eg Agreement between the Belgium-Luxembourg Economic Union and the Republic of Botswana on the Reciprocal Promotion and Protection of Investments (signed 7 June 2006, not yet in force), Art.12.2 <http://investmentpolicyhub.unctad.org/Download/TreatyFile/331>; Agreement between the Republic of Korea and the Government of the Republic of Argentina on the Promotion and Protection of Investments (signed 17 May 1994, entered into force 24 September 1996), Art.8.3(a) <http://investmentpolicyhub.unctad.org/Download/TreatyFile/102>.

[28] Dolzer and Schreuer, 235.

[29] See Sornarajah, 190.

[30] UNCTAD, IPFSD.

[31] IISD Model, Art.45; 2012 SADC Model BIT, Art.29.4(b).

[32] Indian Model BIT, Art. 14.3.

[33] PAIC, Art. 42.1(c)

[34] Ibid.

[35] Promotion and Protection of Investment Bill of South Africa, Art.13.

[36] Art. 3.2 PAIC.

[37] Art. 3.4 PAIC.



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