AfCFTA Agreement - Business Media MAGS

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AfCFTA Agreement

The impact on African trade.

The African Continental Free Trade Area (AfCFTA) is a continent-wide free trade zone for African states that have deposited instruments of ratification with the African Union Commission, as required by the Agreement Establishing the AfCFTA (the AfCFTA Agreement).

The AfCFTA Agreement, which has been endorsed by 52 of the 55 AU member states, promotes sustainable intra-African trade by progressively eliminating tariffs and non-tariff barriers to trade, cooperating on customs matters and the implementation of trade facilitation measures, and seeking to establish and maintain an institutional framework for the implementation and administration of the AfCFTA, among other things.

The agreement entered into force on 30 May 2019 – four months after South Africa ratified it – and was concluded under Phase I of the AfCFTA framework, which included negotiations surrounding the protocols on trade in goods and services and dispute settlement procedures.

While this is a significant political achievement, it does not mean that free intra-African trade will commence immediately, as several protocols and legal instruments are still to be finalised.

To this end, a number of key Phase I issues remain to be negotiated, including schedules of tariff concessions, and rules of origin. In addition, Phase II negotiations, which commenced in February 2019, are focused on developing the legal texts and policy documents around three predominant issues – competition, policy and intellectual property rights.

The focus of this article is the much-anticipated Investment Protocol, the legal text which is expected to be available for adoption in January 2021.

The Investment Protocol and investor protection provisions

Negotiations around the Investment Protocol have piqued the interest of both African and foreign investors alike.

One of the key questions relating to the impending Investment Protocol, however, is whether it will contain binding commitments and, if so, the effect this will have on foreign direct investment (FDI) across the AfCFTA.

Article 4 (c) of the AfCFTA Agreement currently provides, among others, that state parties must “cooperate on investment, intellectual property rights and competition policy” for the purpose of fulfilling and realising the general objectives of the agreement.

If this is to be read as a peremptory provision that is binding on state parties, then the question must be asked as to whether an obligation to include binding provisions in the Investment Protocol arises and, if so, what the effect of this is on domestic legislation of state parties.

Within the South African context, these questions are particularly complex given the uncertainty around international investment treaties following South Africa’s shift in policy relating to bilateral investment treaties (BITs), and whether the Investment Protocol will align with the of Investments Act 22 of 2015 (PIA).

South Africa’s movement away from BITs and the PIA

Historically, South Africa has encouraged the conclusion of BITs as part of its foreign investment strategy, entering into and ratifying around 30 BITs between 1994 and 1998.

However, following the landmark case Piero Foresti v The Republic of South Africa, instituted during 2006, the South African Department of Trade and Industry was commissioned to conduct a full review into its BIT policy framework which resulted in a significant overhaul of its investment policies.

The Foresti case involved eight claimants with similar interests who alleged that the South African government breached certain provisions of two separate BITs – one with Italy and one with the Belgo-Luxembourg Economic Union.

Briefly put, the claims were premised on the alleged expropriation of mining rights, which the claimants argued was affected by the promulgation of the Mineral and Petroleum Resources Development Act (MPRDA), coupled with the Mining Charter of 13 August 2004.

The expropriation contention was advanced on two bases.

First, the claimants said the MPRDA had the effect of transferring all mining rights into the custodianship of the state.

Second, it was argued that the Mining Charter, by obliging mining companies to divest ownership to previously disadvantaged persons, also breached the BITs.

The case was settled, but the South African government was dissatisfied with the possibility that foreign investors might impact domestic policy using the terms of existing BITs.

The matter ultimately resulted in South Africa cancelling BITs, or letting them lapse, in an effort to prevent foreign investors from blocking domestic policy measures and thereby avoid “damaging binding investment rules with far-reaching consequences for development”.

In an effort to respond to the resultant investor concerns as to the protection of investment in South Africa, the PIA was enacted in 2015.

The PIA is a controversial piece of legislation which has been broadly criticised, in particular, for deterring rather than fostering FDI.

The impact of this policy shift by government on FDI is particularly profound in the capital-intensive mining, resources and energy sectors, where long-term policy certainty and asset security concerns are key investor considerations.

The Investment Protocol and South African policy/legislation

Trade Law Centre (Tralac), a South African public benefit organisation with expertise in trade governance across Africa, has stated that the AfCFTA Investment Protocol should be developed to facilitate quality FDI that seeks to support the developmental needs of the state parties, but also allows domestic policy space (or regulatory freedom) to determine the right kind of FDI, in accordance with the AfCFTA’s development goals, for example, FDI that supports productive capacity and the development of small and medium-sized enterprises.

However, mindful that the AfCFTA seeks to encourage intra-African trade and create an economic zone that attracts both African investment and FDI, one has to ask whether South Africa’s current attitude, and that of a number of other sub-Saharan African states such as Tanzania and Zambia, towards foreign investment treaties and the PIA, will align with the anticipated Investment Protocol.

Further, if the Investment Protocol is, in fact, binding on state parties, will South Africa be required to revise conflicting provisions in the PIA or any other legislation which is not seen to “cooperate” with the general objectives of the AfCFTA Agreement and/or doesn’t align with the Investment Protocol?

The answers to these questions and resultant impact on the South African mining sector will depend on a number of factors, including the outcome of ongoing Phase II negotiations, the government’s approach to the Investment Protocol and how it pre-empts the effects that the AfCFTA will have on primary industries, such as the mining industry.

This will require appropriate national rules, transparency, notification of national trade measures and compliance monitoring, as well as increased access to information on the implementation process itself.

Image: ©iStock-880123956

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