Now Reading
Investment in Africa: Free Trade Area Agreement Powers Continent’s Energy Future

Investment in Africa: Free Trade Area Agreement Powers Continent’s Energy Future

The continent’s most electrified nations, concentrated largely in North Africa but including South Africa, Ghana, and Kenya, boast higher urbanization rates, attract more investment, and foster more socio -economic development than their neighbors. Investments in the infrastructures of electrified nations draw innovation and diversification of energy sourcing, with renewables increasingly playing a key role in the coveted green energy transition.

The recently implemented Agreement on African Continental Free Trade Area (AfCFTA) provides opportunities for investors in the energy sector to access the African market under a modernized, streamlined scheme that is poised to boost its energy future.

What is AfCFTA?

Established in 2019 to strengthen Africa’s economic status and stability, AfCFTA is the world’s largest free trade area. Among its objectives is eliminating tariffs on goods traded among and between African countries. To date, 48 countries have ratified AfCFTA as State Parties, with seven of them already implementing and trading under its mechanisms and protocols as of October 2024.

AfCFTA market projection is significant, with the combined GDP expected to reach US$7 trillion by 2035, and $29 trillion by 2050. The World Bank foresees an increase in foreign direct investment (FDI) in this trade area of up to 111% by 2035.

AfCFTA’s investment incentives

AfCFTA offers both immediate and long-term incentives by:

•reducing tariffs and enhancing the efficiency of customs procedures. Specifically, the Protocol on Trade in Goods requires member states to progressively eliminate import duties and its Protocol on Trade in Services eliminates restrictions on international transfers and payments.

•replacing all intra-African bilateral treaties and to harmonize and modernize trade laws, with 43 member nations agreeing to align with the Investment Protocol within five years of its entering into force.

•specifically stimulating infrastructure development to include power, transportation, and telecommunications access and, in turn, lowering business costs.

•promoting greater investment protection to enable a unified, transparent dispute resolution regime through international arbitration.

Protection of investments made under AfCFTA and dispute resolution

Historically, investments in Africa — including in energy and related sectors such as mining — were made pursuant to bilateral treaties which provided protection for the foreign investor in respect of the project. However, most bilateral treaties were contracted by and between European, American or Australian investors. Thus, bilateral treaties between specific African countries were rare, with many having become either inoperative or in effect with fragmented and incomplete provisions.

AfCFTA phases out all intra-African BITs in favor of an integrated, and modern regime. This means that African capital can be deployed on African projects with much greater legal certainty. Given the rebalancing of geopolitical events, it is expected that the appetite for intra-African investment will be abundant, and bolstered still by these legal protections. This will pave the way for a more diversified investor base in Africa.

The hope and expectation are that African investors will promote African content, resulting in more or better stakeholder and cultural engagement. The economic proposition should generate more jobs, bring better business practices and innovation, and enhance revenue.

Provisions addressing private investment (including public-private-partnerships) under the AfCFTA are set out in the Protocol on Investment (the “Protocol”). The Protocol sets out the framework of protections in respect of eligible investments made pursuant to the AfCFTA. Eligible investment is defined on an enterprise-basis rather than on the basis of the nationality of the investor per se. Annex 1 of the Protocol includes an Investor-State Dispute Settlement mechanism under various arbitration rules (including International Centre for Settlement of Investment Disputes (ICSID), ICSID Additional Facility, United Nations Commission on International Trade Law (UNCITRAL) and African arbitration institutions).

International arbitration is the typical recourse should a dispute manifest in relation to the investment. The energy sector is specifically marked by large-scale and high-capital investments, and disputes tend to arise over the course of the project’s history.

Disputes concern a variety of issues, including those regarding onerous or arbitrary legal or fiscal features, legal terms of investment relating to distribution and utilization of national grids, participation requirements, stakeholder issues relating to shareholder, government or community affairs issues, as well as the potential of expropriation. Additionally, disputes over pricing, transfer of funds, energy tariffs, or force majeure events are prevalent.

Reflecting its modernity, the Protocol seeks to strike a more balanced set of performance obligations by the host state and the investor. Compared to bilateral treaties which often are silent on the specific scope of obligations on the investor, the Protocol is express and avails host states with the option to file counterclaims against the investor relating to its compliance with laws on human rights and labor rights, environmental protection, anti-corruption, and taxation.

When read extensively, these obligations may enable nations to bring claims and counterclaims against investors. These are unique, progressive provisions.

AfCFTA’s impact on cross-border energy sector investment

AfCFTA is already stoking considerable cross-border interest in Africa’s energy sector. By dismantling trade barriers such as tariffs, it is set to increase cross-border trade, reduce energy costs, and spur the development of a more comprehensive and better integrated infrastructure.

In addition, its member nations have established economic incentives specifically relevant to the energy sector. For instance, electrical energy produced by member nations, along with “mineral [p]roducts and other non-living natural resources extracted from the ground, seabed, below seabed and in the Territory of a State Party,” are defined as “wholly obtained” and eligible for preferential tariff treatment when traded within AfCFTA.

The U.N. Economic Commission for Africa predicts that tariff removal alone will boost intra-African exports of energy and mining products between 5% ($4.5 billion) and 11% ($9 billion), even though means of production, such as electrical power and fuel, used in the process of manufacturing a product but not incorporated or included in a final product are deemed “neutral elements” and without preferential treatment.

As AfCFTA meets its economic objectives, Africa’s energy sector will see growth in both domestic and global trade and investment. Larger-scaled renewable energy projects — like Namibia’s and Botswana’s solar energy project that is already set to trade and share energy among 12 neighboring countries — will increase, with fewer cross-border barriers.

Similarly, South Africa, Nigeria, and Egypt are positioned to take advantage of AfCFTA’s energy-sharing platform by increasing their exports of solar, wind, and gas energy to neighboring countries. The trade area also has the potential to expand the natural gas sector — particularly for major gas producers in Mozambique, Nigeria, and Tanzania — as well as attract investors to Kenya’s geothermal energy sector.

The African Union (AU) launched the Africa Single Electricity Market initiative in 2021 to sustainably advance the continent’s electricity sector, create a unified continental market, enhance human development, expand economic opportunities across the continent, and drive productive transformation, industrialization, digitalization, and job creation.

Although there are other efforts to develop functional regional electricity markets, such as the Eastern Africa Power Pool (EAPP), Southern Africa Power Pool (SAPP), West African Power Pool (WAPP), Central Africa Power Pool (CAPP), and Comité Maghrébin de l’Electricité (COMELEC), most of the continent’s national electricity markets remain independent in practice. AfCFTA thus presents an opportunity and impetus to create a truly interconnected continental electricity market in Africa.

See Also

Global support for AfCFTA

The global community has already shown support for the implementation of AfCFTA. For instance, on May 6, 2024, the U.S.-Africa Strategic Trade and Investment Partnership Act was introduced in the U.S. House of Representations. Introduced to bolster the U.S.-Africa partnership and with significant potential to advance the Africa Continental Free Trade Area agreement, this proposed legislation seeks to improve trade relations between the U.S. and Africa.

The Gulf Cooperation Council (GCC), an alliance consisting of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and UAE, has also taken steps to enhance trade and economic engagement with Africa, with Council member companies announcing 73 foreign direct projects with a value of more than $53 billion in 2023 alone. AfCFTA will also accelerate trade and investments with China, Africa’s largest trading partner and creditor, and Europe by offering businesses in both nations access to a larger unified market.

Conclusion

AfCFTA is set to unlock unparalleled opportunities for investors eager to engage in Africa’s dynamic energy markets. By streamlining market access and fostering cooperation among African nations on joint renewable energy ventures, this huge free trade area creates fertile ground for transformative public-private partnerships with the potential to reshape the continent’s energy landscape.

The introduction of robust, and equitable investment schemes further demonstrates the architect’s dedication to establishing a secure, predictable investment environment. This legal framework, which balances investor protections with state responsibilities, mitigates many of the current challenges of cross-border investments within Africa, making the continent increasingly attractive to global stakeholders.

Reuters

SUBSCRIBE TO GET OUR NEWSLETTERS:

SUBSCRIBE TO GET OUR NEWSLETTERS:

Scroll To Top

We have detected that you are using AdBlock Plus or other adblocking software which is causing you to not be able to view 360 Mozambique in its entirety.

Please add www.360mozambique.com to your adblocker’s whitelist or disable it by refreshing afterwards so you can view the site.