Investment protocol holds the key to AfCFTA’s success

The protocol on investment in the agreement establishing the African Continental Free Trade Area (AfCFTA) was concluded in October 2022 and adopted at ministerial level. The “zero draft” was submitted to the assembly of heads of states for review and adoption in February this year at the AU in Addis Ababa.

The investment protocol reflects and signals a common position on various areas related to investment governance, and defines the protection, promotion and facilitation of intra-African investments in trade-related infrastructure by African investors, in both the public and private sectors.

The AfCFTA secretariat states that the role of financial investment is not only critical to the achievement of the objectives of the agreement, but that an investment protocol will assist in establishing a transparent and sound continental legal framework on investment, taking into account the interests of state parties and investors.

The investment protocol will facilitate continental co-ordination and exploit economies of scale in improving investment frameworks and policies across AfCFTA member states. It also includes provisions on dispute resolution, in particular those between investors and states, and between member states.  The protocol further establishes  a mechanism for knowledge-sharing and policy dialogue around good practices in public- and private-sector investing.

Unified investment protection

One of the main impacts of the investment protocol is that it provides for the termination of intra-African bilateral investment treaties. Instead, the protocol aims to establish a unified framework for investment protection across the continent to avoid inconsistent, incoherent, and sometimes contradictory provisions.

A unified framework for investment protection has many implications. It provides a single set of rules and procedures for investment protection across the continent, which is expected to promote investment flows and enhance investor confidence. It eliminates the possibility of conflicts between different investment protection regimes. Also, it contributes to greater coherence and co-ordination of investment policy-making across the continent, as parties to the investment protocol are obligated to comply with its provisions.

However, bilateral investment treaties will continue to provide protection to investors and their investments after their termination, in accordance with applicable sunset provisions. That will affect existing bilateral relations and national policies on cross-border investing, so investors need to be prepared for this change.

The termination of intra-African bilateral investment treaties does not affect the rights and obligations of investors under existing such agreements with non-African countries. The investment protocol encourages state parties to renegotiate those treaties to ensure compliance with the protocol’s provisions, but investors may continue to rely on those treaties for investment protection.

In accordance with recent developments in international investment law, the investment protocol will confirm new generation investment principles, such as the right of each African state to rebalance the rights and obligations of investors and host states, and to regulate in the public interest to achieve sustainable development, and other legitimate social and economic policy objectives.

Legal obligations

Investors must also comply with laws and policies to protect human rights, labour rights and the environment. Last, there is the principle that investors must promote and enforce anti-corruption and anti-bribery measures, and protect the rights of indigenous people. Accordingly, the investment protocol provides for certain safeguards to ensure that such regulation is not discriminatory or arbitrary.

The biggest value from the above is that the investment protocol is not only limited to financial investment; it requires consideration of issues relating to human rights, corruption, environmental sustainability and social and economic policies. In other words, it adopts an environmental, social & governance (ESG) strategy, a set of standards that require socially conscious investors and investments to be made. Therefore, private, public and international investors ought to make investments bearing in mind the need to manage risks and opportunities related to ESG considerations.

Another important component is the inclusion of standards of protection, which include guarantees against unlawful expropriation, the most-favoured nation treatment standard, the national treatment standard, physical protection and security and free transfer of funds, all with exceptions. Investments have a considerable amount of protection in the investment infrastructure on the continent. To enforce investment agreements, investors can always rely on these standards of protection for enforcement purposes.

Besides these standards, the investment protocol establishes mechanisms to settle disputes between investors and host states, including an investor-state dispute settlement (ISDS) mechanism. And it allows investment disputes to be resolved between investors and states using mediation between the investor and host state. Where an amicable resolution is not achieved through mediation or other means, investors may deliver a written notice to the state to refer the dispute to arbitration. The arbitration can either go to the International Centre for Settlement of Investment Disputes or any African institution that facilitates arbitrations.

Far-reaching impact

The AfCFTA investment protocol is expected to have a wide-ranging impact on public and private investments, entrepreneurship and innovation, international investors and migration in Africa. By providing a more predictable and stable investment environment, the protocol is expected to boost investment flows within Africa, while providing greater protection for foreign investors through the ISDS mechanism. That is likely to result in an increase in foreign direct investment inflows, which will contribute to economic development and growth.

Furthermore, the protocol aims to reduce investment barriers such as restrictive regulations and bureaucracy, which ought to increase opportunities for private sector investment in Africa. That will create more jobs and increase government revenues.

SMEs are expected to benefit greatly from the protocol as it creates more entrepreneurship opportunities in Africa. By reducing investment barriers and increasing access to financing, SMEs can contribute further to economic growth. Finally, the protocol is expected to reduce the number of African entrepreneurs and investors migrating elsewhere in search of opportunities. The protocol is intended to encourage such people to remain in Africa by creating a more favourable investment environment — making Africa the next frontier for investment and growth.

To give effect to the investment protocol, AfCFTA member states ought to develop action-orientated regional guidelines at the national level to provide practical steps to improve the investment climate across the continent. Those guidelines should be accompanied by instruments to support the implementation processes, including monitoring indicators to benchmark reforms and their impact. Further, the regional economic mechanisms must facilitate implementation of the investment protocol and ensure member states are accountable.

Sithole, a legal practitioner and consultant in international business, trade and investment law, is managing partner at Amila Africa. Mokgonyana is a legal and development practitioner with Re4m Envoy and Conflict Check, focusing on intersectional human rights protection, effective implementation of international law and peacebuilding.