The AfCFTA Investment Protocol will change the landscape of investment protection in Africa: opportunities and risks for investors

Africa’s importance in the world economy has grown remarkably over the years. While the number of intra-African exports has increased, it remains low compared to levels in Europe, Asia and North America. In this context, the ambitious African Continental Free Trade Area (AfCFTA) Agreement, signed by 54 African States (all the African States except Eritrea), that entered into force in 2019, aims to promote trade liberalization and economic integration. This is in turn expected to lead to a massive income boost and a decrease in poverty. As the role of intra-African investments is crucial to achieving these goals, the AfCFTA is accompanied by an Investment Protocol. The Investment Protocol aims to promote and protect intra-African investments, while making sure to foster sustainable economic development. This is achieved by incorporating certain investor duties as well as complementing the provisions of the Protocol and each Member State’s regulatory regime that reflects its specific economic development needs. When adopted, the Investment Protocol will substitute all existing intra-African bilateral investment treaties (BITs) and will thus significantly change the African investment protection landscape.

Background on the Investment Protocol

The Investment Protocol is going to affect a variety of sectors throughout the continent, including energy, mining, manufacturing and services. South Africa, with a diversified economy and well-developed financial sector, is the largest regional source of intra-African investments. Other countries, such as Egypt, Nigeria and Morocco, are also gaining ground.

The Heads of State adopted the draft Investment Protocol in February 2023. The Protocol will enter into force thirty days after the deposit of the twenty second instrument of ratification. Once it is entered into force, the Investment Protocol will guarantee one of the geographically most widespread investment treaty protection regimes.

Mitigating risks of intra-African investments

Foreign investment protection in Africa is currently regulated by various BITs and other regional treaties. While every African country is party to at least one of these BITs, 173 out of 515 currently in force are intra-African. So far, there have been only ten reported intra-African investor-State arbitrations, brought against Algeria, Congo, Lesotho, Madagascar, Mauritius and Senegal. With the envisaged growth of infra-African investments, disputes are also expected to increase.

Although most BITs have similar provisions, investment protection in Africa is characterized by inconsistent and, in some parts, conflicting regulations and measures. Since existing BITs between the parties to the Investment Protocol will be terminated upon the entry into force of the Protocol, it is a unique opportunity to disentangle this complex, fragmented system and enhance legal certainty for investors.

The Protocol’s key investment protection pillars include:

• prohibition against expropriation without compensation;
• physical protection and security;
• free transfer of funds without unreasonable delay;
• fair administrative and judicial treatment; and
• prohibition against discrimination.

Although a general fair and equitable treatment standard, present in most intra-African BITs, is not included, the combined effect of the above standards (especially that of fair administrative and judicial treatment) arguably provides a similar level of protection. States will be required to lay out transparent and foreseeable investment policies.

With the view to guarantee a balance between investors’ and States’ interests, under the Investment Protocol, States retain the right to adopt regulatory or other measures to ensure that investments are made in a way to ensure sustainable and environmentally and socially acceptable growth. In order to enjoy treaty protection, investors will have to comply with these legal frameworks and should therefore familiarise themselves with the specific domestic regulatory regimes when making their investments. Moreover, the Protocol expressly requires investors to comply with domestic and international laws and policies concerning:

• the protection of human and labour rights and business ethics;
• environmental protection;
• the protection of indigenous peoples’ and local communities’ rights;
• anti-corruption;
• corporate social responsibility and governance; and
• taxation.

Special attention should be given to the protection of human and labour rights, business ethics and the environment since these obligations go beyond the requirements included in most BITs.

Member States’ consent to arbitration

The Investment Protocol also provides for investor-State dispute settlement mechanisms. Under Annex 1 of the Protocol investors will be able to bring claims under several arbitration rules (including ICSID and its additional facility, UNCITRAL and any African arbitration institution or dispute resolution centre). Investors should nevertheless be aware that Annex 1 also expressly envisages counterclaims for damages resulting from breaches of investors’ obligations under the Investment Protocol (e.g., environmental protection or human rights). Bringing a dispute under the Investment Protocol may therefore expose investors to the risk of counterclaims.  

Outlook

Although the Investment Protocol has not entered into force yet, this first comprehensive investment agreement at the continental level will have far-reaching effects on the African investment landscape. It has the potential to induce economic integration, growth and development both on a regional and on a continental level. Investors will benefit from increased transparency regarding legal frameworks and, potentially, decreased risks when it comes to intra-African investments. While the transition from existing BITs to the Investment Protocol may raise complex legal questions, especially with respect to the possibility of terminating the BITs’ sunset clauses as well as its impact on pending arbitration proceedings, the Investment Protocol will, in general, result in a higher level of uniformity as well as regulatory harmonisation and thus, increased legal certainty for investors. While these factors make intra-African investments more attractive, it will be crucial for investors to ensure compliance with the above-mentioned investors’ obligations.