THE AFRICAN CONTINENTAL FREE TRADE AGREEMENT: A NEW PATHWAY FOR AFRICA?

Authors: Peter Leon, Ernst Muller and Natasha Rachwal

Evolution of the AfCFTA 

A significant milestone has been reached in the economic integration of Africa, with the creation of the African Continental Free Trade Area (“AfCFTA”). Opened for adoption at the African Union (“AU”) Summit in Kigali in March 2018, the Agreement establishing the AfCFTA (“AfCFTA Agreement”) has been signed by 54 of the 55 AU member states (tiny Eritrea being the lone exception), and ratified by 28, including major economies such as Egypt, Ghana, Kenya and South Africa, but not Nigeria. AfCFTA entered into force in May 2019, a month after the requisite 22 states deposited their instruments of ratification with the Chairperson of the AU Commission (satisfying the minimum requirement for the Agreement’s entry into force). For trading purposes, however, the AfCFTA only becomes operational on 1 July 2020.

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GOVERNANCE OF AFRICA’S MINERAL RESOURCES

Author: Peter Leon

Peter Leon’s notes delivered during the EAST AND CENTRAL AFRICA MINING FORUM.

INTRODUCTION 

AFRICA’S RESOURCE CURSE: IDENTIFYING POTENTIAL SOLUTIONS TO GOVERN AFRICA’S MINERALS. 

The African continent is endowed with abundant natural resources, including about thirty per cent of the world’s mineral reserves.

Historically, however, most resource-rich African countries have been categorized as low income countries. In fact, analysts have observed a negative impact of resource abundance—particularly mineral resources—on long-term economic growth.

To establish the key drivers of the long-term negative impact, analysts have studied the growth in per capita income in forty-seven African countries from 1990 to 2014 and compared it with each country’s primary resource (agriculture, fisheries, forestry and hunting) as well as oil and mineral resource production during the same period.

The results of their analysis indicates that the phenomenon, known as the resource curse, is primarily owing to market related factors (especially commodity price fluctuations) which, in turn, are aggravated by political factors that relate to institutional quality and rent-seeking.

The most significant and insidious effect of resource abundance is often the destabilising effects suffered by other economic sectors when a country becomes overly dependent on exports of a single natural resource.

Studies indicate that there tends to be a direct correlation between commodity prices and gross domestic product (“GDP“).

The fluctuations in commodity prices in turn affect the GDP of the country if the country is largely dependent on the commodity in question. African countries where this trend was recently observed include the Democratic Republic of Congo, Gabon, Sudan and Nigeria.

The effect of fluctuating commodity prices is exacerbated in countries where little economic diversification has taken place, and the economy thus remains overly dependent on the income derived from exports of specific raw commodities.

A leading example is Zambia, where economic development has been hamstrung by over-reliance on copper exports, accounting for over 60 per cent of export earnings in 2018, and insufficient reinvestments of the income from the depletion of its natural capital.

Despite the economic causes underlying the paradox, the impression that African states are not reaping the benefits of their mineral wealth also gives rise to a growing discontentment with the disparity between the profits which foreign investors receive through the exploitation of the mineral resources and the poverty in which the citizens live.

This has given rise to various disputes. Recent examples include those between Acacia Mining plc and Tanzania, First Quantum Mining and Zambia, Vedanta Resources Holdings Limited and Zambia as well as the Gerald Group and Sierra Leone.

In an attempt to address this, a number of African governments have embarked on sweeping mineral law and fiscal reform. As part of the process, the governments often:

  • introduce higher royalties and windfall profit taxes;
  • issue significant new tax assessments;
  • introduce or increase compulsory minimum quotas for:
  • shareholding and board representation by the host state or its citizens;
  • local beneficiation, often through export restrictions;
  • procurement of local goods and services (including financial services);
  • recruitment and promotion of local personnel; and
  • importantly, renegotiate investor-state contracts that stand in the way of these measures.

These changes to a country’s mineral law regime are often without the support of the mining sector, which can lead to further animosity between the government and foreign investors.

Such reforms can likewise constitute a breach of the protection afforded to mineral right holders under the mineral development agreements to which they and the host governments are party. To assert their rights, investors frequently invoke the stabilisation provisions provided for in such agreements and refer these disputes to international arbitration.

Ironically, the disputes between foreign investors and host governments tend to be rooted in the historic imbalances which arise from the mineral development agreements themselves.

While the ability to regulate the economic consequences occasioned by the resource curse lies squarely with the domain of the African governments, it should be possible to better regulate the long term relationship between the host governments and foreign investors.

In this regard, the OECD’s recently approved Guiding Principles for Durable Extractive Contracts (Guiding Principles) set out eight principles that host governments and investors can use as a common reference for future negotiations of enduring, sustainable and mutually beneficial extractive contracts.

The purpose of the principles is to assist host governments and investors using them to:

  • structure their on-going relationship in an integrated manner to promote long term sustainable development, while attracting and sustaining investment;
  • foster alignment of expectations and convergence towards agreed objectives;
  • provide mechanisms that can accommodate and respond in a predictable manner to potentially significant changes in circumstances;
  • build trust to strengthen mutual confidence and reduce risk for both parties; and
  • ensure a fair share for all parties to the contract and optimise the value from resource development through equitable, sustainable and mutually beneficial contracts and operations.

Under the Guiding Principles extractives contracts are likely to be durable if they:

are aligned with the long-term vision and strategy, defined by the host government on how the extractive sector can fit into and contribute to broader sustainable development objectives;

are anchored in a transparent, constructive long-term commercial relationship and operational partnership between host governments, investors and communities, to fulfil agreed and understood objectives based on shared and realistic expectations that are managed throughout the life-cycle of the project;

balance the legitimate interests of host governments, investors, and communities, with due account taken, where relevant, of the specific rights of affected indigenous peoples recognised under applicable international and/or national law;

seek to optimise the value from resource development for all stakeholders, including economic, social and environmental outcomes. This would include identifying and managing potential adverse environmental, health, safety and social impacts of the extractive project and establish clear roles and responsibilities for the host government and the investor for the prevention, mitigation and remediation of those impacts, in consultation with affected communities;

are negotiated and based on the continued sharing, in good faith, of key financial and technical data to build a common understanding of the performance, main risks and opportunities of the project throughout its life-cycle;

operate in a sound investment and business climate which must be underpinned by a fair, transparent and clear legal and regulatory framework and enforced in a non-discriminatory manner;

are consistent with applicable laws, applicable international and regional treaties, and anticipate that host governments may introduce bona fide, non-arbitrary, and non-discriminatory changes in law and applicable regulations, covering non-fiscal regulatory areas to pursue legitimate public interest objectives; and

are underpinned by a fiscal system that is consistent with the governments’ overall economic and fiscal objectives and provides a fair sharing of financial benefits between the investor and the host government, taking into consideration the potential risks, rewards, and country circumstances.

While there is no one ideal fiscal regime, host governments ought to identify the optimal mix of fiscal instruments and terms to meet their objectives. In my experience, a predictable fiscal regime that includes responsive terms defined in legislation and or contracts to adjust the allocation of overall financial benefits between host governments and investors contributes to the long-term sustainability of extractive contracts and reduces the incentives for either party to seek renegotiation of terms.

The costs attributable to compliance with changes in law and regulations, and wholly, necessarily and exclusively related to project specific operations, in turn, should be treated as any other project costs for purposes of tax deductibility, and cost recovery in production sharing contracts.

If such changes in law and or applicable regulations result in the investor’s inability to perform its material obligations under the contract or if they lead to a material adverse change that undermines the economic viability of the project, durable extractive contracts require the parties to engage in good faith discussions which might eventually lead the parties to agree to renegotiate the terms of the contract.

Ultimately, transparency, predictability and a process of continued dialogue between the host governments and investors are key to the success of a project and an equitable sharing of benefits that result from the exploitation of the minerals.


For more information, please contact Peter Leon or your usual Herbert Smith Freehills contact:

Peter Leon
Peter Leon
Co-Chair of Africa Practice Group, Johannesburg
+27 10 500 2620

LAGOS DRINKS RECEPTION

 

An HSF team including Martin Kavanagh, Nina Bowyer, Will Breeze, Chris Parker, James Doe, Olivier Binyingo and Joanne Elson are hosting a drinks reception for clients and contacts in Lagos on Thursday 17 October. We would be delighted if you could join us as it will be an excellent opportunity to catch up with industry contacts and friends in a relaxed and social atmosphere. Please contact us if you’d like to join us on the evening.


To RSVP or to get more information about this event, please contact Jenna Cavanagh:

Jenna Cavanagh
Jenna Cavanagh
Senior Business Development Executive
+44 793 520 3828

HERBERT SMITH FREEHILLS SUPPORTS “THE AFRICAN PROMISE”

Authors: Paula Hodges QC, Jonathan Ripley-Evans and Gregory Travaini 

International arbitration does not lack critics. A particularly common criticism is the absence of cultural and ethnic diversity among arbitrators. In the words of Sarah François-Poncet of Salans, some twenty years ago, the usual suspects are ‘pale, male, and stale’. Despite numerous initiatives to support and encourage diversity, and the diversification of the pools from which candidates are selected, there is still much progress to be made. The problem is particularly acute when it comes to African arbitrators.

Indeed, a few months ago, in a trademark and contract dispute with clothing company Iconix Brand Group Inc., African-American rapper and entrepreneur Jay-Z complained that only three of the more than 200 arbitrators on the American Arbitration Association’s Large and Complex Cases database identified as African-American, leaving him with “no choice at all” to appoint a candidate. Jay-Z’s counsel held that the lack of ethnic diversity deprived litigants of color of a meaningful opportunity to have their claims heard by a panel of arbitrators reflecting their backgrounds and life experience, which would constitute unconscious racial bias and would in fine void Jay-Z’s agreement to arbitrate.

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FIRM-SPONSORED AFRICARB EVENT IN HONG KONG BRINGS AFRICA TO ASIA

Author: Greg Travaini

The firm played a key role supporting AfricArb’s first dedicated event in Asia, helping to raise the firm’s profile in the Asian and African arbitration communities.

AfricArb was created by a group of young legal professionals with a shared interest in Arbitration and Africa. The Hong Kong events builds on similarly successful ones organised in Paris and Mauritius.

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HERBERT SMITH FREEHILLS EXPANDS SOUTH AFRICAN OFFICE WITH THREE SENIOR HIRES

Global law firm Herbert Smith Freehills today announced that three leading South African lawyers will join the firm in its Johannesburg office. The hires – two partners and a senior consultant – are bringing well established teams with them, resulting in a total of 13 appointments.

Expanding Herbert Smith Freehills’ corporate, competition and technology & telecoms offerings, the three senior hires bring a total of 77 years’ experience advising high-profile South African and global companies.

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FIRM SPONSORS MAURITIUS ARBITRATION WEEK AND AFRICARB, FORGING CLOSER BETWEEN AFRICA AND ASIA

 

After a successful first edition in May 2018, the MCCI Arbitration and Mediation Center (MARC) hosted the second Mauritius Arbitration Week from 10 to 14 June 2019, which the firm was once again proud to sponsor. This year, the focus was on bridging Africa and Asia.

Hong Kong senior associate Greg Travaini was one of the panellists featured during the MARC Conference on ‘Mauritius: A Bridge between Africa and Asia’. He also organised, as founding member, AfricArb’s first dedicated seminar in Africa on Chinese-African BITs: Facing New Challenges.

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HERBERT SMITH FREEHILLS ATTENDS AFRICA ENERGY FORUM IN LISBON

Author: Joanne Elson 

The 21st Africa Energy Forum (AEF) took place on the 11th to 14th June 2019 in Lisbon, Portugal. The annual AEF is the largest Africa energy gathering of the year and easily draws over a 1000 delegates from all over the globe, including many government officials, public private sector representatives, developers, dealmakers, investors and business leaders, each with their focus on energy in Africa. This year renewable power together with new technologies in the battery storage and off-grid sectors were inescapable in their prominence. However, hydro, conventional power, LNG and oil & gas remain of key strategic importance in a number of jurisdictions.

Africa as an emerging market presents an opportunity to investors of all kinds and, in particular, development finance institutions with investment capital. These opportunities were discussed in great detail in highly focused sessions and break away meetings over the four day conference. Both public and private partnership investment opportunities were promoted in order to mobilise inward investment into the region. The delegates found the conference to be insightful and important given the ever prominent issue of power on the continent. Another key focus was on the ever increasing debt of governments either by way of direct guarantee liabilities or contingent liabilities with respect to their State utilities’ obligations.

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DJIBOUTI BECOMES 163RD SIGNATORY OF THE ICSID CONVENTION

Authors: Andrew Cannon, Natalie Yarrow and Rebecca Warder 

The Republic of Djibouti is the latest country to become a signatory to the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (the ICSID Convention). Djibouti’s Minister of Economy and Finance, Ilyas Moussa Dawaleh, signed the ICSID Convention on 12 April 2019. Djibouti must now ratify the ICSID Convention in order for it to become a Contracting State (or Member State) to the ICSID Convention, and for the ICISD Convention to come into force for Djibouti.

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AFRICAN NATIONS MUST RESIST SIREN SONG OF RESOURCE NATIONALISM

Author: Peter Leon, Co-Chair of Africa Practice Group 

Countries that shun populist moves appear more attractive as commodity prices fall

In South Africa, President Cyril Ramaphosa announced the ANC would amend the country’s constitution to allow land expropriation without compensation ©Reuters

The spectre of resource nationalism is again rearing its head across Africa, leading to significant regulatory intrusions in Tanzania, the Democratic Republic of Congo and South Africa — all major mining jurisdictions.

Unlike the outright nationalisations undertaken by many postcolonial African (as well as Latin American) governments in the 1960s and 1970s, resource nationalism refers to the more modern trend of governments adopting fiscal and regulatory measures to exert greater control.

In July 2017, Tanzania enacted three laws asserting “permanent sovereignty” over its natural resources including oil and gas while drastically amending the country’s mining code.

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