Investor-state disputes in Africa

BY Ignacio Torterola Bethel Kassa

Africa has continued to attract foreign investments from across the globe. In 2018, foreign investment in Africa increased by 6 percent with Egypt and South Africa receiving the largest shares of the investment. Foreign investment in Egypt increased by 7 percent with real estate, food processing, oil and gas exploration, and renewable energy taking the major share of investment. South Africa reported the next highest foreign investment in mining, petroleum refining, food processing, information and communication technologies, and renewable energy. In West Africa, Ghana received the largest foreign investment and Ethiopia took the highest share of foreign investment in East Africa.

The United Nations Conference on Trade and Development (UNCTAD) predicts that the recently enacted African Continental Free Trade Agreement (AfCFTA) will likely increase foreign investment in Africa. In March 2018, forty-nine African Union member states signed the AfCFTA with a mission of creating a single trade market, and five more, including Nigeria, have since signed it. Having now received the ratification of 27 member states, the AfCFTA will now soon go into effect. The United Nations Economic Commission for Africa (UNECA) anticipates that this agreement will increase intra-African trade by 52.3 percent.

Bilateral and multilateral investment agreements 

Having recognized the key role of investment in economic growth, most African states have entered into various international investment agreements (IIAs), assuming a link between foreign direct investment and IIAs. The Convention of the International Centre for Settlement of Investment Disputes (ICSID) has been ratified by 45 African states and 53 are members of the Multilateral Investment Guarantee Agency (MIGA). To date, African states have entered into more than 1000 bilateral investment treaties (BITs) geared towards attracting foreign investment.

African Regional Economic Communities, established to foster regional integration and ultimately continental integration, have also been active in crafting regional investment agreements. This includes the Investment Agreement for the Common Market for Eastern and Southern Africa COMESA Common Investment Area (CCIA), the Supplementary Act adopting Community Rules on Investment and Modalities for their implementation with the Economic Community of West African States (ECOWAS), the Southern African Development Community (SADC) Protocol on Finance and Investment and the model BIT, and the East African Community (EAC) model BIT.

At a continental level, African member states, under the auspices of the African Union (AU), adopted the Pan-African Investment Code (PAIC) in April 2016. The PAIC is a testament of African states desire to shift from the traditional international investment agreement (IIA) ideologies and accommodate states’ interest in ensuring sustainable development.

The code stands for the promotion and protection of investment but also preserves the host state’s power to develop and execute policies that advance sustainable development. The PAIC imposes numerous responsibilities on investors. It obliges investors to comply with human rights, intellectual property rights, environmental law, corporate social responsibility rules, and anti-bribery rules. Unlike traditional IIAs, the PAIC has omitted the fair and equitable and full protection and security standard and only provides limited protections for investors in areas, such as most favoured nation and national treatment. The code has kept investors’ right to resolve their dispute with the host state through arbitration. However, it only permits such disputes to be arbitrated by an African dispute resolution centre and governed by UNCTRAL rules. Although not binding, the African Union has called on member states to adopt the code as a guiding instrument in entering or re-negotiating investment agreements.

Foreign investment disputes involving African states 

In May 2017, out of 613 cases brought under the ICSID Convention and Additional Facility Rules, 135 cases involved African states, of which 45 percent were brought based on states’ consent in BITs. The main sectors of dispute were oil, gas and mining investment. Africa has continued to receive an increasing number of investor claims. In 2018, African states were a party to 12 investment disputes out of a total of 56 investor-state disputes registered under the ICSID Convention and Additional Facility rules.

The better way forward: investor-state dispute strategies

 In the late 1980s, Argentina fell into hyper-inflation and dire economic condition. To rein in this problem, Argentina pegged the Argentine currency to the United States dollar along with an assurance of non-reversibility. The country also deregulated and privatized various sectors, such as oil, power and telecommunications. In January 2002, Argentina abandoned the convertibility regime as the economic crises made it impossible for the country to maintain the exchange rate. It also decreed the compulsory conversion of all dollar dominated contracts, indebtedness and contracts into pesos (pesification).

The measures led to massive investor claims. Foreign-owned public service and energy companies that allegedly had their income tied to US dollars sued the country for USD 48 million. Although almost all Argentine bilateral investment treaties (BITs) provided for dispute settlement mechanisms under the International Centre for Settlement of Investment Disputes (ICSID) Convention and UNCITRAL ad hoc arbitration proceedings, the majority of the claimants brought their claim under the ICSID Convention.

The Argentine legal team successfully defended Argentina. It used the annulment proceeding under the ICSID Convention to reverse three key awards rendered against it in CMS, Enron and, Sempra. Even when Argentina was on the losing end, the team helped in significantly reducing the size of the damages. Overall, it succeeded in reducing the amounts owed to less than 15 percent of the damages sought by investors.

There were some major take away points that can be adopted by states to curb investor-state disputes or to efficiently and successfully resolve disputes once an investor commences an arbitration.

Evaluate the actual link between bits and FDIs 

Countries should conduct an empirical study of the possible link between international investment agreements and foreign direct investment (FDI). A state should assess the cost and benefit of existing BITs by weighting the expenses that it has incurred or will potentially incur through investor claims against the amount of foreign direct investment and other associated benefits the country has received as a result of entering into such agreement.

A state can attract FDIs, while fulfilling its socio and economic objectives through new generation BIT, by addressing major bottleneck areas for investors, such as infrastructure, security, and bureaucracy. 

Review and reform existing investment agreements 

States should review the existing stock of BITs and create a model law that is more in line with its social and developmental objectives. They should extensively review investor-state tribunals’ interpretation of standard investment provisions, such as fair and equitable and most favoured nation treatments and analyse if such interpretation accords with their current interest. When crafting a model law, a state should take lessons and guidance from other new generation BITs, UNCTAD investment policy frameworks and UNCTAD 2015 Roadmap for international investment agreements (IIA) reform, as well as the Pan-African Investment Code (PAIC).

A well thought-out and designed model BIT will capture the state’s objective and help negotiators differentiate between those provisions that are not subject to negotiation and those that are more open for negotiations, prior to such task.  

Having determined investment policy objectives and framed a model BIT, states next should review and amend their investment agreements. Indeed, African states no longer see BITs as a mere symbol of friendship. Concerned with the rise of investor claims that quite often come with exorbitant costs, some African states have already amended their model BITs, terminated investment agreements or entered into new BITs.

Although the PAIC is not binding, states that have signed BITs since 2016 have incorporated some, if not all, the provisions of the code. For instance, the Rwanda-UAE, Nigeria-Morocco, Kenya-Japan, and Nigeria-Singapore BITs define investments similar to definition provided under the PAIC.  According to these treaties, in order to be protected under the BIT, an investment should fulfil the elements of certain duration, commitment of capital, expectation of gain or profit and iv) assumption of risk. This is similar to the Salini definition of investment. At a time where ICSID tribunals are relying less and less on the Salini test, African states are taking a clear stand by adopting the PAIC’s definition into their BITs.

In line with the PAIC, few states have also excluded certain assets from qualifying as an investment. The Ethiopia-Brazil and Nigeria-Morocco BIT have excluded debt securities issued by a state, portfolio investments and claims to money that arise from commercial contracts or extension of credit in connection with a commercial transaction. The Rwanda-UAE BIT has further excluded commercial contracts and extension of credit related to commercial transactions from the coverage of the BIT.

The recent BITs also include other innovative provisions that have been at the centre of international arbitration debate. The Rwanda-UAE BIT and the Nigeria- Morocco BIT, in line with PAIC, allow states to take regulatory measures without risk of liability. The Rwanda-UAE BIT permits states to take measures that will ensure that investments comply with the countries’ public health, security, environment, and labour law of the country. The Nigeria-Morocco BIT allows states to enact laws so to meet its goal of sustainable development and other policy objectives, in line with customary international law and other general principles of international law.

This BIT also includes other provisions that deviate from traditional investment treaty terms. It explicitly bans corruption and specifies the conducts that amount to corruption. It further obliges investors to maintain an environmental management system, uphold human rights and labour rights and provides for consolidation of claims submitted to different arbitrations.

Some states have gone as far as excluding international arbitration. In September 2018, Tanzania passed the Public-Private Partnership Act which limited dispute resolution to local arbitrations. In the same month, the country also notified the Netherlands of its intention to terminate their BIT. In July 2018, South Africa passed the Protection of Investment Act which excludes investor-state arbitrations and other major investment provisions such as the fair and equitable treatments and most favoured nation standards.

Other states could follow suit in taking concrete steps for reforming and re-negotiating investment agreements within the permitted period. In this regard, a state should consider developing a system that will send out an alert when a BIT’s date of termination approaches. Such system will enable a state to terminate its old BIT within the permitted period and negotiate BITs that include new terms.

Establish and strengthen investor-state dispute management systems 

Setting up a strong investor-state dispute management system can enable states to efficiently and effectively resolve potential disputes. Peru and Colombia are some of the Latin American countries that have adopted and utilized such a system.

After experiencing its first international investment dispute, Peru established the State Coordination and Response System for International Investment Disputes (SICRECI) to prevent and resolve investment disputes. The SICRECI alerts on investment disputes and coordinates a timely response to investment disputes. It is composed of a coordinator, special commission and other public entities that have entered into agreements with foreign investors. In case of an investment dispute, the state is represented by a special commission that includes four permanent members from the ministry of economy and finance (MEF), Ministry of Foreign Affairs, Ministry of Justice and Pro-Investors, and Peru’s Private Investment Promotion Agency. The MEF leads the Commission which analyses the feasibility of investor claims, negotiate with investors, determine the need for outside counsel, and acts as a decision maker in the arbitration proceeding.

Colombia is another good example. In 2013, Colombia set up the High-Level Government Body (HLGB) to prevent and manage investment disputes. The HLGB is composed of members of the Board of Advisors of the National Agency of Legal Defence of the State, i.e. the Minister of Justice and Law, Minister of Finance, Minister of Foreign Affairs, Minister of Trade, Industry and Tourism, the Legal Secretary of the office of the president and two external advisors. Supported by the Inter-Institutional Support Group, the HLGB coordinates and recommends measures for preventing and managing investment disputes. The Director of Foreign Investment and Service of the Ministry of Trade and Industry leads the negotiation of IIAs and the defence of the state and any out of court settlement, in case of investor-state disputes.

Adopting a similar mechanism would enable states to prevent and otherwise effectively manage investment disputes. A lead agency can coordinate an information sharing structure where different governmental agencies are informed of the state’s obligation, notified of BITs that are approaching their termination periods, and alerted about investor grievances. It could also be the focal point to receive and address governmental agencies’ inquiries on whether certain actions could bring a legal consequence to the state or not.

A lead agency would also be vital in managing disputes. Once it receives complaints from an investor, the agency can take the necessary action to resolve the grievances before the investor commences an arbitration against the state. Even if an amicable solution is unlikely, creating a lead agency would enable a state to better organized and coordinated in defending itself.

Using local legal experts to solve disputes 

An in-house team is better positioned to understand the political, economic and diplomatic interest of the country. A team composed of a legally trained public officials will be core in successfully guiding and defending a state in investment disputes. This team can be complimented by external international or domestic law firms but the decision-making power should rest on the local counsel.

States should also advocate for a partnership between local and international firms in any arbitration involving a state. This will ensure a transfer of expertise and a better outcome for the country. Such a partnership would also contribute to the much-needed diversity in international arbitration. Despite the escalating claims against African states, Africans rarely sit as arbitrators. From a total of 246 arbitrators, conciliators and ad hoc committee members appointed for ICSID cases in 2018, only four were Africans. States can address this unproportionate representation by setting a mandatory requirement of cooperation between local and international firms.

Conclusion 

Investment in Africa is on the rise, but so are investment disputes that often result in multi-billion awards against states. Now is a high time for states to take concrete actions. States should take stock of existing BITs, draft a model BIT that is more in line with its sustainable development goals, and accordingly renegotiate new treaties.

The experience of some Latin American countries indicates that states could also greatly benefit from building investor-state dispute prevention and management system. Under such a system, the lead agency will train government agencies, receive and respond to government official inquiries, and address investors’ grievances before it advances to arbitration. Once a dispute arises, the lead agency will continue to play a crucial role by timely collecting information, coordinating with local and foreign legal experts, and assessing the best recourse for the state. Investment disputes can be a learning experience for a state. States could take advantage of such an unfortunate event by obliging foreign legal experts to partner with domestic legal experts, as a condition for hire.  (