BITs a challenge to regional integration in Africa

International investment agreements, especially bilateral investment treaties (BITs), that have come to preoccupy some African countries pose a major challenge to Africa's integration agenda, writes Yao Graham.

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OVER the past two decades, as part of the push to attract foreign investment, African countries have been signing international investment agreements (IIAs), mainly bilateral investment treaties (BITs), with little attention to tradeoffs such as loss of national and regional policy space.

IIAs also take the form of investment provisions in free trade agreements such as in the Economic Partnership Agreement (EPA) between the European Union (EU) and the Caribbean countries (CARIFORUM). It has sections on investment, competition and services, all of which have investment protection implications. The EPAs being negotiated between the EU and various African regional groupings have rendezvous clauses for negotiations on investment issues similar to what is contained in the CARIFORUM EPA. A number of North African countries have free trade agreements with Europe which also contain investment provisions.

Then there is a third category which is regional investment agreements. For example, there is a COMESA (Common Market for Eastern and Southern Africa) investment area agreement; the SADC (Southern African Development Community) protocol on finance and investment, and the ECOWAS (Economic Community of West African States) Energy Protocol which is an obscure but very important agreement.

So far African countries have signed close to 1,000 BITs. According to the United Nations Conference on Trade and Development (UNCTAD), by the end of 2013, Africa's bilateral investment agreements amounted to 27% of global BITs. Formally speaking, these state-to-state agreements are reciprocal frameworks for the management of investment flows between countries. Between most African countries and their partners in the BITs, however, formal reciprocity does not mean substantive reciprocity because most African countries are not capital exporters and usually sign these agreements as investment attraction agreements while the capital-exporting countries sign them as investment protection agreements. So different purposes have driven the signing of these agreements. 

The signing of BITs globally has been declining since a peak in the mid-1990s. The African pattern of signing BITs mirrors the declining global trend. This is not surprising because African countries are not demandeurs of BITs but takers, so if those who are pushing for them slow down, it will be reflected in what happens in Africa.

In recent times, however, negotiations have been initiated for a number of major regional or bilateral investment agreements the outcomes of which will have implications well beyond those directly involved. These include the Trans-Pacific Partnership which involves the US and a number of major players in Asia; the negotiations involving ASEAN, Australia, China, India, Japan, New Zealand and Korea; the EU-US Transatlantic Trade and Investment Partnership; and in Africa there is the trilateral free trade area between SADC, the East African Community (EAC) and COMESA. An African investment treaty is also said to be in the offing. It has been estimated that these agreements cover 76 countries and about half the world's population with a combined GDP of 90% of the world's GDP.

Germany has got the largest number of BITs in Africa, 42, China has 34 and the UK 22. Despite the decline in the overall push for BITs, Africa remains a target with demands from Asian countries and notably Canada which has been particularly aggressive. In fact the Canadian foreign minister early this year publicly celebrated the fact that under the Stephen Harper government, 2013 was Canada's most successful year for the signing of BITs particularly in Africa. In 2013 it signed agreements with Tanzania, Cote d'Ivoire, Cameroon, Madagascar, Mali, Nigeria, Senegal and Zambia, while it has ongoing negotiations with Ghana, Tunisia and Burkina Faso. The US has also signed BITs in Africa, with Cameroon, the Democratic Republic of Congo, Congo Republic, Egypt, Morocco, Mozambique, Senegal and Rwanda.

In addition to the bilateral investment treaties, the US has been signing Trade and Investment Framework Agreements (TIFAs). These are understandings very broadly put, but what they really create is a political and legal framework within which specific demands are made on the signatory countries regarding the treatment of US investment. So although strictly speaking they do not belong to the classic category of international investment agreements, the TIFAs serve that purpose. The US' African Growth and Opportunity Act (AGOA), a unilateral preferential market access framework for qualifying countries, also contains investment-related conditionalities which serve investment protection and investment liberalisation functions.

A look at the pattern of actual investment flows into Africa shows that most have gone into resource extraction, with large amounts going into some of the most difficult countries such as Nigeria, hardly a model of stability, particularly in the zones where oil extraction is taking place. Angola continued to receive American investment during the civil war even as the US was arming the opposition. 

There are issues with so many of these investment agreements. The broad effect is the restriction on policy space as a quid pro quo for expected investment inflows. There is an imbalance between the state and investors in terms of rights and obligations under such agreements, usually in favour of the investor. The state agrees to give up a lot of its power to regulate investment even in regard to protecting identified public policies.

The institutional management of investment agreement negotiations in many countries is problematic in terms of the analysis of the clauses. In many African countries, there is also a challenge of coherence. This is not simply policy coherence across sectors but also policy coherence even across different BITs because usually each capital-exporting country comes in with different demands, differences in definitions and so on.

BITs establish very broad standards which are subject to interpretation by tribunals. The tribunal function is vested in the investor-state dispute settlement mechanism which provides for treaty-based arbitration which has been found to be very intrusive and also with very expensive enforcement. One of the things about this mechanism is that it is one-sided in disciplining the role of the state because it is designed primarily to protect the investor, who can initiate an action under the arbitration provision. The mere threat of a suit or an award can force the abandonment of important public policy initiatives because the cost of arbitration is very high. Many African countries have to hire and pay expensive lawyers from outside the continent.

The wide coverage of definitions in BITs is another problem. The definition of investment, for example, can cover anything from derivatives to establishment of a firm and concrete direct investment. What is a state measure is also defined very broadly. For example, the Canada-Benin BIT defines this to include any law, regulation or procedure requirement or practice by any branch of government at any level of the state from district to national; the Rwanda-US BIT has the same provisions.

A BIT, being primarily about investment attraction, has its own very narrow logic which may not necessarily fit in with where a country's development policy is going. It effectively freezes the regulatory climate of the country as of the time the BIT is signed. Then there are burdensome obligations both in substance and in process and their institutional challenges. The reality is that, after these treaties are signed, there is a lot of work to do on what they mean in terms of policy. In many cases, nothing else is done until disputes arise and people start scrambling to try and work out what they mean and, worse still, realise the prohibitive cost of litigation.

The substance of the treaties poses a number of questions. Under the 'national treatment' provision in such agreements, once somebody's investment has entered your country under the BIT, the investor is to be treated like a national and cannot be discriminated against in any way. National treatment has led to a number of problems in some contexts. For example, when South Africa introduced its Black Economic Empowerment programme, it was sued by a number of foreign investors under various BITs who said the affirmative action to correct the ills of apartheid violated the national treatment non-discrimination provisions. So anything to do with localisation, local procurement rules and so on could potentially run foul of these provisions.

The 'most favoured nation' (MFN) provision - under which investors from one foreign country are to be treated no less favourably than those from any other foreign country - is also problematic, as is the principle of 'fair and equitable treatment' which has been interpreted very broadly. There are also restraints on performance requirements; for instance, if a country wants investors to be located in a particular place, train a given number of locals or transfer technology to contribute to national development in a particular way, it is no longer possible. North American BITs in particular are very strong in outlawing performance requirements. In fact the Rwanda-US BIT applies the prohibition even to third-party investors so that, even for non-US companies, Rwanda is required not to impose performance requirements.

The German model BIT of 2008 has national and MFN treatment in a single clause, but many BITs have them as separate clauses. The Rwanda-US and Canada-Tanzania BITs also have similar provisions and are quite extensive. The effects of national treatment and MFN treatment are immense. The World Bank did a study in 2012 in which it appeared to be moving back from its original position of 20 years ago when it said that all that governments in Africa should do was encourage foreign investment and hope that the firms would do the rest. In this study, which in a way was driven by the African Mining Vision (AMV), it put forward proposals for how local content in mining can be increased in West Africa, particularly on the input side. Unfortunately, to undertake that in the form of affirmative action will be in breach of the national treatment provision in some BITs. Some have argued, for example, that Nigeria's local-content legislation in petroleum possibly violates some of its BITs and World Trade Organisation (WTO) principles.

Another effect of these provisions relates to regional cooperation. If there is a regional cooperation agreement in, say, West Africa or in Africa with special terms to each other, unless there are some exceptions in the BITs around regional cooperation, the MFN provision will trigger enjoyment by all foreign investors. The MFN provision in BITs can thus blunt the momentum for South-South and regional cooperation.

The African Mining Vision, which has this vision of minerals and industrialisation, raises important questions about the coherence between the ambitions expressed in it and various initiatives in agriculture, industrialisation and so on vis-a-vis the terms accepted in these agreements. Things like value addition, local enterprise ownership and promotion are all called into question by some of the terms of BITs.

It is obvious that the various BITs being entered into by African countries pose dangers to the declared intentions of the same countries to integrate, as the BITs not only run counter to the national development policies of these countries but also conflict with regional and continental policies.                            

Yao Graham is coordinator of Third World Network-Africa, the Africa secretariat of TWN. Reproduced from TWN-Africa's African Agenda magazine (Vol. 17, No. 3), the above is an edited excerpt from a presentation he made at a colloquium on regional integration organised jointly by TWN-Africa and the United Nations Economic Commission for Africa (UNECA) on 6-8 May in Accra, Ghana.

*Third World Resurgence No. 290/291, October/November 2014, pp 5-7