AfCFTA will Create a Conducive Investment Climate, which Improve Africa’s Ability to Respond for Future Pandemics
- The African Union Development Agency has estimated that the pandemic will cause more than $101 billion of export earning losses in Africa, with oil-producing countries losing an estimated $65 billion.
- The AfCFTA has the potential to facilitate cross-border investment, support regional or continental economic integration and growth, stimulate industrial development, alleviate poverty through skills and technology transfer and create employment opportunities.
- The AfCFTA Investment Protocol is anticipated that inclusive growth and sustainable development will serve as key objectives and inform the negotiations as these are critical motivations for attracting intra-African investment.
Global trade has suffered since the beginning of the COVID-19 pandemic. The continent has found itself in a difficult position due to its heavy reliance on trade with the rest of the world. In total, about 53% of Africa’s imports come from countries where COVID-19 has had a significant impact. The African Union Development Agency has estimated that the pandemic will cause more than $101 billion of export earning losses in Africa, with oil-producing countries losing an estimated $65 billion. This severe impact on the economy makes Africa’s oil producers the major losers. For example, crude oil sales account for more than 50% of government revenues and over 90% of foreign exchange in Nigeria. Crude oil makes up 90% of Angola’s earnings and 73% of South Sudan’s.
Faced with the devastating pandemic, countries, and trading blocs have been forced to prioritize their citizens’ needs. Aid to Africa has also decreased as a result of the economic impact of the pandemic and rising nationalism. African countries need to work together to find answers for their current problems. The pandemic has uncovered weaknesses in the trade structures that support Africa’s economic strategy. Africa’s exports primarily focus on a few core commodities, such as crude oil, copper, and cocoa, all raw or unprocessed resources. These are shipped overseas for processing, whereas imported manufactured items from outside the continent account for most imports.
The pandemic caused the supply shortage of essential supplies. One of the repercussions of the recent trade interruptions has been a rise in the price of products needed to combat the pandemic. Necessities such as clothing, food, and medical supplies, are imported and Africa, unlike other continents, had few regional supply chains to rely on with intra-continental trade accounting for less than 15% of continental trade in 2019. The regulations of each African country govern the reduction of tariffs on essential products. Temporary export restrictions on basic goods are still in force in South Africa, Kenya, and Côte d’Ivoire, although tariffs on critical products have been eliminated in other countries.
To overcome the problems caused by the pandemic, it is critical to maximize the benefits of intra-African commerce. Intra-African trade accounts for a small percentage of African exports, albeit it has risen in recent years, from around 10% to approximately 17% in 2017. When compared to figures from other continents, the figure is low. Intra-continental exports, for example, account for 69%, 59%, and 59% of total exports in Europe, Asia, and North America, respectively. In light of these problems, Africa’s excessive reliance on extra-African commerce must be addressed, as well as the potential of intra-Africa trade. In 2018, the agreement establishing the African Continental Free Trade Area (AfCFTA) opened for signatures. The deal obliges member-states to remove tariffs on 90% of goods. Already, the AfCFTA is the world’s largest free trade area in terms of the number of participating countries.
The trade area is part of the African Union’s Agenda 2063 program, which includes agreements such as the protocol on the free movement of persons, the right to residence and establishment, and the single African air transport market (SAATM). The AfCFTA is part of a package of measures that have a broad scope but that, if properly implemented, could be a game-changer for states.
A free flow of supplies, food, and pharmaceutical items is required to respond to a pandemic. The AfCFTA and customs cooperation can help with the free movement of necessary supplies. Pharmaceuticals such as face masks, sanitizers, and personal protective equipment (PPE) are critical components of the pandemic’s health response. Food products must also be freely transportable across borders due to the food crisis during the pandemic. Thanks to the AfCFTA, African states will be better prepared to deal with any future pandemics.
For Africa to prepare for future pandemics, it will need a diversified economy. A well-diversified economy promotes long-term stability and resilience. The AfCFTA is in a great position to help African countries break into new trades, particularly inside Africa, given the current economic backdrop. Diversification is critical in the face of oncoming financial problems caused by events such as the pandemic, as observed in most developed economies. Most African economies, on the other hand, are heavily reliant on a single revenue source.
A continent-wide free trade area will lead to specialization in products in which African countries have a comparative advantage, resulting in increased productivity and efficiency in using resources. According to the Economic Commission for Africa’s (ECA) modeling, the AfCFTA will boost African trade by $50 billion to $70 billion. This suggests that between 2021 and 2040, the intra-African trade would grow by approximately 40% to 50%. This would have a positive impact on the economies of African countries.
Meanwhile, the preparations for the negotiations of the Investment Protocol under the AfCFTA agreement (The Agreement) are already underway though still in the early stages. The AfCFTA envisages, eventually, a single continental market for goods and services supported by the free movement of persons. To date, negotiations to conclude the phase I protocols (the Protocols on Trade in Goods, Trade in Services, Dispute Settlement) have made early progress. But key elements of the free trade area for trade in goods and services are still outstanding. Tariff concessions are still to be concluded and rules of origin for about 13% of tariff lines are not yet agreed. For trade-in services, specific commitments for the five priority services sectors (financial, communication, transport, tourism, and business services) are still being negotiated.
The AfCFTA Investment Protocol
The main thrust of the Protocol on Trade in Goods is to boost intra-African trade (BIAT)’s goal of doubling intra-African trade by 2022 through the progressive elimination of tariffs and non-tariff barriers among the African countries. To achieve this, cooperation is necessary for the areas of Customs administration (CA), trade facilitation (TF), sanitary and phytosanitary (SPS), and technical barriers to trade (TBT). The Protocol on Trade in Services is about improving the competitiveness of services and promoting cross-border trade in services in Africa, boosting foreign direct investment (FDI), and promoting industrial development. To foster the rules-based approach in the implementation of the Agreement, the Protocol on Dispute Settlement ensures security, transparency, and predictability. Though not being integral to, but being complementary to the Agreement, the Protocol Relating to the free movement of persons, right of residence, and right of establishment seeks to institute continental qualifications framework for the mutual recognition of qualifications across the continent. Members are to refrain from discriminating against nationals of another member state when it comes to entering, residing, or establishing in their territory.
Investment in the current context of intra-African trade
The Pan African Investment Code (PAIC) refers to investment as an enterprise or a company (any duly constituted entity or otherwise incorporated, under the applicable laws and regulations of a Member State, provided that it maintains substantial business activity in the Member State in which it is located) which is established, acquired or expanded by an investor (being any national, company or enterprise of a Member State or a national, company or enterprise from any other country that has invested or has made investments in a Member State). The characteristics of investment include a commitment of capital or other resources, the expectation of profit or gain, the assumption of risk, substantial business activity, and a substantial contribution to the economic development of the host State. In short, investment can also be referred to as foreign direct investment (FDI) into the host country.
If properly negotiated and effectively implemented, the benefits of the investment protocol are numerous and far-reaching. It has the potential to facilitate cross-border investment, support regional or continental economic integration and growth, stimulate industrial development, alleviate poverty through skills and technology transfer and create employment opportunities. The resulting economies of scale will lead to reduced prices of goods and services for local consumption as well as augmented export diversification. Effective investment also reinforces forward and backward linkages that support regional and global value chains.
Building on the existing initiatives and developments in the State Parties and the RECs, AfCFTA generally envisages contributing to the movement of capital and natural persons as well as facilitating investment. Negotiations to conclude the Investment Protocol under phase II shall equally be following Article 5 principles of the AfCFTA Agreement.
Key features of the African investment governance landscape
Out of 852 bilateral investments treaties (BITs) concluded in Africa since the 1960s (this is around 28 percent of the global BITs), about 60 percent (515) are currently in force, and included in this number is 173 which are intra-African. Notably, countries from the northern region of Africa are the most actively involved in concluding new treaties. Egypt leads the pack with 100 concluded BITs while Morocco and Tunisia have concluded 68 and 55 BITs respectively. All African countries have signed at least one BIT. At the regional level, each of the 8 RECs, which serve as the building blocks of the AfCFTA has at least one instrument that relates directly or indirectly to investment. Notable regional investment initiatives include those from Southern Africa Development Community (SADC), Common Market for Eastern and Southern African (COMESA, Economic Community of the Western African States (ECOWAS), and East African Community (EAC).
SADC adopted a Protocol on Finance and Investment in 2006. It further developed a SADC Model Bilateral Investment Treaty Template in 2012. This was aimed at promoting harmonization of its Member States’ investment policies and laws under the overall goal of its earlier Protocol on Finance and Investment of 2006. Under this project, the specific objective was to develop a comprehensive approach for the Member States to choose or use all of the provisions as the foundation for developing their own Model Investment Treaty or guidelines for negotiating investment treaties.
COMESA adopted the COMESA Common Investment Area in 2007 (CCIA). This agreement established a competitive CCIA with a more liberal and transparent investment environment among the Member States. Its objectives are to substantially increase the free flow of investments into COMESA from both COMESA and non-COMESA sources; to jointly promote COMESA as an attractive investment area; to strengthen and increase the competitiveness of COMESA’s economic activities, and to gradually eliminate investment restrictions and conditions which may impede investment flows and the operation of investment projects in COMESA. It was the first investment agreement in the continent that attempted to limit the scope of protected investments. Ways in which it attempted to achieve this include – only protecting substantial economic activity in the host country, and rationalizing the standard State obligations towards foreign investors whilst concurrently preserving the interests of local communities. This agreement is yet to enter into force as the required minimum threshold of ratification (at least six member states) has not been met.
ECOWAS adopted the Protocol on Movement of Persons and Establishment in 1979 and the Protocol on Community Enterprises in 1984. In 2008, it went on to adopt the Supplementary Act on Common Investment Rules for the Community whose sole objective is to promote investment that supports sustainable development within the bloc. It also imposes a series of obligations on investors while limiting the standard investment protections – for example – it does not permit direct access to international arbitration.
In 2006, EAC adopted a model investment agreement. It was revised and adopted by the EAC Sectoral Council on Trade, Industry, Finance and Investment in 2015 as the EAC Model Investment Treaty or simply the EAC Template for its Members. Just like SADC and COMESA investment model agreements, EAC’s model provides features that the EAC Partner States incorporate into their respective national laws. The EAC Template is not a legally binding instrument but rather serves as a basis for investment negotiations by the EAC Member States with third-party countries. It also offers guidance in the form of specific treaty language to incorporate or use. In 2015 the member states of SADC, EAC, and COMESA launched the Tripartite Free Trade Area (TFTA) while negotiations are still to be concluded. Phase II negotiations for the TFTA will include rules on cross-border investment.
At the continental level, in 2008 the African Union (AU) launched the PAIC which it went on to adopt in 2015. The objective of the Code is to facilitate and protect the investment that fosters the sustainable development of each Member State, particularly the Member State where the investment is domiciled or located. In essence, the PAIC forms part of a new generation of investment promotion and protection instruments advocating for striking a balance between the rights and obligations of investors and States. Its key features include – providing possibilities for the African States to replace intra-African bilateral investment treaties and/or regional investment with the Code, facilitating foreign investment as opposed to focus only on its protection (this means that protection will be granted to those foreign investments that will entrench long-term sustainable developments simultaneously meeting the needs of African societies), and introducing new obligations for the investors in respect of social responsibilities, human rights protection, and sustainable use of natural resources. Though non-binding in the application, the Code has a provision for resolving conflicting investment laws. It suggests that the Code shall take precedence in instances of conflict between the Code and any other intra-African bilateral investment treaty, investment chapter in any intra-African trade agreement, or regional investment arrangements.
Gaps and challenges in the existing intra-African investment landscape
Some inherent challenges and gaps exist in the current intra-African investment landscape which the AfCFTA Investment protocol is anticipated to address. Investment promotion and protection across the continent is already marked by disjointed, in some cases contradictory and overlapping regulations. This fragmented landscape of investment instruments produces substantial uncertainty for investors.
As we’ve seen earlier, each REC has adopted a different investment model. The models are generally taking the form of guiding instruments to both individual Member States and the investors. Though lauded for its effort to promote the harmonization of investment protection at the continental level, no consensus was reached for the adoption of the PAIC, and the agreement is non-binding. The Code serves as a source of reference for African countries when concluding international treaties as well as updating their domestic investment legislation.
Towards an AfCFTA investment protocol
The phase II negotiations originally scheduled to commence towards the end of 2019 was delayed in taking off due to the unprecedented effects of the coronavirus pandemic. However, on the 3rd of May 2021, the 5th meeting of the AfCFTA Council of Ministers responsible for Trade was held in Accra, Ghana. It established the Committee on Investment to facilitate the negotiations.
It is anticipated that inclusive growth and sustainable development will serve as key objectives and inform the negotiations as these are critical motivations for attracting intra-African investment. In order to attract FDI that will support growth and sustainable development, it is necessary to find a balance between the rights and obligations of States and the investors. The inclusion of provisions such as anti-corruption, transparency, and other human rights issues attributable to investment will support inclusive growth and sustainable development.
Extensive negotiations and adoption of legally binding investment commitments in the form of investment promotion and facilitation, investment protection, investor obligations, and State commitments are the way to go. These four commitments should prominently emerge as the key pillars of the structure of the transformative and legally binding intra-African Investment Protocol under the AfCFTA to govern intra-African investment. Non-binding obligations and provisions are a recipe for weak and deteriorating investment governance.
Substantive issues for negotiation and adoption under legally binding State commitments include environment protection, consumer protection, labor protection, and financial reporting standards. These must be clear and predictable. Clarity and predictability must equally be extended to cover substantive issues under investor obligations. Substantive issues under the investor obligation commitments should include business ethics, human rights, compliance with domestic laws, anti-corruption, rights of indigenous people, corporate social responsibility, taxation, human rights, and capacity building. Under the investment promotion and facilitation pillar, specific commitments that need to be legally binding and adequately addressed are important. These include technical cooperation, shared principles or rules for administrative procedures, exchange of information between investment promotion agencies, dissemination of information to investors, shared review mechanisms, and best practice sharing platforms.
Expectations are high for an intra-African Investment Protocol that considers the use of dispute prevention, de-escalation, and alternative means of dispute resolution. Conciliation, mediation, and exhaustion of domestic remedies are examples of some of the dispute prevention and dispute resolutions that are expected to be included in the Protocol.
The development aspirations for Africa as contained in Agenda 2063 need a combination of foreign and domestic investment in the practical sense if these are to be realizable. In the same vein, it is imperative to create an appropriate investment climate at the continental level which is buttressed by robust laws and regulations, effective enforcement mechanisms, and strong institutions. Negotiations under Phase II of the AfCFTA present such a matchless opportunity to rewrite the investment rules governing intra-African investment.