People & Money

Investment Arbitration as Regulatory Chill on Policy Reform in Africa

By Olumide Abimbola

The fear of arbitration claims has resulted in “regulatory chill,” where governments are afraid to make policy changes for fear that they might be deemed as expropriation if the changes adversely affect an investor. This fear came up, for example, at the beginning of the COVID-19 pandemic.”

In 2014, Union Fenosa Gas (UFG), a Spanish company, filed an international arbitration case against the Government of Egypt at the World Bank’s International Centre for Settlement of Investment Disputes (ICSID). After four years of arbitration, the government was asked to pay the investors more than USD2 billion in compensation—plus interest and associated legal and arbitration costs.

What allowed UFG to file an arbitration claim against Egypt is a bilateral investment treaty (BIT) signed between Egypt and Spain in 1992. The BITs are some of the most potent international legal instruments. There are more than 2,600 of them, and most contain investor-state dispute-resolution (ISDS) provisions that allow investors to seek compensations in one of a few secretive arbitral tribunals—should they deem their investment to have been expropriated by a host government. One of such tribunal systems is administered by the World Bank-linked ICSID.

Provisions under ISDS are non-reciprocal: states cannot file claims against investors. States also cannot ignore claims filed against them or refuse to ignore rulings of arbitral tribunals. If they do, the investor could get an arbitral court decision that allows it to seize the state’s commercial assets in almost any jurisdiction. The costs to states are more than just the compensations; the cost of participation in an arbitration process under the ICSID tribunal system is on average almost USD5 million for respondents (states).

Although African states have been on the receiving end of an increasing number of investor claims (more than 15% in the ICSID system), Africans make up only 2% of arbitrators, conciliators, and ad-hoc committee members. Tribunals are constituted ad-hoc, which adds to the unpredictable nature and the high fees the few specialists who can serve on them are able to charge.

The fear of arbitration claims has resulted in “regulatory chill,” where governments are afraid to make policy changes for fear that they might be deemed as expropriation if the changes adversely affect an investor. This fear came up, for example, at the beginning of the COVID-19 pandemic. In addition to the emergency measures needed to address health, economic and financial implications triggered by the pandemic, governments are afraid that they might end up with expensive investor ISDS claims—as the emergency measures might be considered as expropriation. This might explain the muted policy response to the pandemic across many jurisdictions.

The climate change connection

The ISDSs are also influencing measures to address climate change. A recent report by the International Institute for Environment and Development (IIED) states that if proposed actions to keep global warming to between 1.5°C and 2°C above preindustrial levels are implemented, oil and gas worth around USD5 trillion dollars will become stranded assets. That is, it will no longer be commercially viable to exploit them, in this case, due to the adoption of policies that will help address climate change. According to the report, implementing measures that strand assets could open states up to ISDS claims.

Also Read: NESG’s Ighodalo Says Poor Governance Made Nigeria Miss Out on $19tn Investment, FG Predicts Short Recession

African governments that depend on natural resources are therefore facing risks on several fronts. According to a discussion paper from the United Nations University Institute for Natural Resources in Africa (UNU-INRA), African countries that depend on natural resources (nine out of 10 countries) face the risk of a drastic reduction in revenues, which will negatively impact social spending and adversely affect the implementation of climate adaptation measures.

If they choose to keep developing fossil fuels, they risk being locked out of newer, cleaner technologies while literally fueling further climate breakdown, of which Africa is already among the hardest hit regions with serious implications for agriculture, livelihoods, water supplies, and food security among many others. On the other hand, according to the IIED report, if they adopt measures that strand assets, they are open to arbitration claims and litigations.

What is the way out?

The conversation regarding climate change, adaptation measures, and stranded assets as they relate to Africa, which has been advanced by UNU-INRA, needs to also include the risk of ISDS claims. Research that connects the dots and quantifies the implication of the interaction of these aspects needs to be done. Such research could come up with possible policy options for African governments, as well as negotiation positions under the United Nations Framework Convention on Climate Change (UNFCCC).

In the meantime, the ISDS aspect, which encompasses much more than climate adaptation measures and threatens the sovereign rights of states to make policies, can already be addressed. Aside from unilateral decisions to terminate BITs, which South Africa, Namibia, and Tanzania have done (although Tanzania still had claims filed against it under the terminated treaty) there are currently two opportunities to do this on a continental level.

First, African countries need to make a forceful contribution to the ongoing negotiations on reforming the ISDS framework being coordinated by the United Nations Commission on International Trade Law (UNCITRAL). The European Union has proposed a new Multilateral Investment Court, which would do away with ad-hoc tribunals and instead create a formal court. Tellingly, this proposal does not include a reciprocal arrangement—the EU recently cancelled all BITs among EU members; and its entities are more likely to be claimants than respondents.

Also Read: Foreign Portfolio Investments in Nigeria Climb to N38.98 billion

South Africa has made a powerful submission to UNCITRAL. It seeks a new paradigm for understanding foreign direct investments (FDI) and investment treaties—including a proposal to grants rights to other stakeholders to file claims against investors. Africa as a whole should also make a submission. But first, Africa needs to craft its own position.

Negotiations for the Investment Protocol of the African Continental Free Trade Area (AfCFTA) offers an opportunity to consider what an African position on ISDS would be. A new AfCFTA Investment Protocol could rationalize existing intra-African BITs (there are more than 170 of them) and other regional investment legal frameworks.

More importantly, although the protocol will only cover intra-African investment, it can already spell out certain principles, such as investor obligations and the protection of policy space. The template can then serve as a model for investment agreements between African states and third parties. It could even be something around which an African submission to the UNCITRAL could be based. The shadowy world of BITs is in definite need of some African alternatives.

This piece was first published on Africa Is a Country.

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