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Africa Focus: Spring 2019
Protecting energy sector investors in West Africa
Insight

Protecting energy sector investors in West Africa

The Energy Protocol of the Economic Community of West African States seeks to attract power-sector investment

Unreliable, expensive power supplies have been key obstacles to commerce and industry in the region—and as a result, to economic growth.

According to the OECD, "Investment treaties were developed to protect investors of one country when investing in another country, to lower non-commercial risk for such investors, and overall to promote a sound investment climate."1 Although some commentators have opined that the network of bilateral investment treaties among African countries and between African countries and third countries is rather "underdeveloped, irregular and fragmentary,"2 African regional organizations have, in fact, entered into a variety of multilateral agreements to promote and protect intra-African foreign investment. These agreements, which include the Investment Agreement for the Common Market for Eastern and Southern Africa (COMESA) Common Investment Area and the Supplementary Act adopting Community Rules on Investment and the Modalities for their Implementation with the Economic Community of West African States (ECOWAS3, see Figure 1) give investors the opportunity to bring international claims against countries for wrongful measures impacting their investments.

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Energy sector investors will be pleased to know that, parallel to these multilateral "generalist" agreements, some African regional organizations have concluded sector-specific regional agreements for the energy sector. These include the ECOWAS Energy Protocol A/P4/1/03 signed by members of ECOWAS in 2003 (the "Energy Protocol"). This is an important development, given increasing demand for electricity in the ECOWAS countries and consequent emerging opportunities for investment (Figure 2). The Energy Protocol was inspired by the Energy Charter Treaty (ECT), a multilateral sector-specific international agreement allowing for investor-state claims that took effect in 1998. The ECT had some success with 51 countries worldwide becoming contracting parties. Its influence is apparent in the Energy Protocol, which likewise provides for investor-state dispute resolution.

250,000 GWh
Projected annual electricty demand for ECOWAS countries in 2030
IRENA

West Africa has long suffered from large energy deficits (both in supply and distribution). Unreliable and expensive power supplies have been significant obstacles to commerce and industry in the region and, as a result, to economic growth generally. The Energy Protocol forms part of a suite of measures adopted in the region to attract power sector investment. The challenges in the sector remain significant. The poor state of energy markets and national grids makes regional network integration difficult, and generation is highly dependent on expensive thermal power based on fossil fuels. The ECOWAS Centre for Renewable Energy and Energy Efficiency, established in 2010, seeks to encourage investment in more sustainable energy infrastructure through "the sustainable economic, social and environmental development of West Africa by improving access to modern, reliable and affordable energy services, energy security and reduction of negative environmental externalities of the energy system.4

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Given a recent trend toward reduced investment protection in some African countries such as Tanzania and South Africa,5 the Energy Protocol offers potentially valuable and often overlooked protection to energy sector investors in West Africa.

Based on information provided by ECOWAS, 13 out of 15 ECOWAS member states have ratified the Energy Protocol. At the time of publication, Côte d'Ivoire and Sierra Leone had yet to ratify. Pursuant to Article 39 of the Energy Protocol, since more than nine instruments of ratification have been deposited, the Energy Protocol has entered into force. Thus, investors from contracting parties to the Energy Protocol can now invoke the investment protections set out in Chapter III in relation to their investments in other contracting parties, which are summarized below.

 

"INVESTMENT" IS BROADLY DEFINED

Under the Energy Protocol, "investment" is broadly defined to include "every kind of asset, owned and controlled directly or indirectly by an Investor." It covers, among other things, tangible and intangible property, a company or business enterprise, shares, stock, or other forms of equity participation in a company or business enterprise, claims to money and claims to performance pursuant to a contract having an economic value and associated with an investment as well as any right conferred by law or contract or by virtue of any licenses and permits granted pursuant to law to undertake any economic activity in the energy sector.

In addition, the Energy Protocol extends "to any investment associated with an Economic Activity in the Energy Sector and to investments or classes of investments designated by a Contracting Party in its Area as "efficiency projects" and so notified to the Executive Secretariat of ECOWAS."6 This further provision means that an oil concession granted by virtue of a contract or law or a shareholding in an oil extraction joint venture company are investments under the Energy Protocol.7

 

"INVESTOR" IS DEFINED TO PROTECT THE TREATY'S INTENDED BENEFICIARIES

An investor is defined as a natural person having the citizenship or nationality of, or who resides or establishes an office in the area of, a contracting party or a company or other organization organized, or registered, in accordance with the law applicable in that contracting party. This definition is similar to the definition of investor under Article 1(7) of the ECT. However, under Article 17 of the Energy Protocol, each contracting party has, among other things, reserved the right to deny the investment protections of the Energy Protocol to a legal entity "if citizens or nationals of a third state own or control such entity and if that entity has no substantial business activities in the Area of the Contracting Party in which it is organized." This provision, which is generally referred to as a denial of benefits clause, is designed to exclude from treaty protections nationals of other countries that, through mailbox or shell companies, seek to benefit from provisions that the contracting parties to the Energy Protocol did not intend to afford them. The drafters presumably sought to ensure that the treaty's protections reached only the intended beneficiaries: West African companies. At the same time, local subsidiaries of multinationals will also benefit from the treaty's protections unless Article 17 of the Energy Protocol is triggered.

 

INVESTORS ARE ENTITLED TO FAIR AND EQUITABLE TREATMENT

Each contracting party undertakes to accord fair and equitable treatment at all times to investments of investors. While there is no universally accepted definition of the exact meaning and/ or scope of treatment that is "fair and equitable," investment treaty tribunals have typically condemned measures that frustrate an investor's legitimate expectations (e.g., decisions taken in violation of guarantees provided to investors in an attempt to induce their investment, such as in the context of privatizations) or measures that are arbitrary, lacking in due process, or taken in bad faith (e.g., prejudicial interference in the activity of an operator on spurious or pretextual grounds). For example, tariff-setting decisions issued by an independent regulator that cannot be traced back to an operator cost analysis or that are issued to implement political directives in violation of the regulator's duty of independence may constitute a breach of the fair and equitable standard.

 

INVESTORS ARE PROTECTED FROM ILLEGAL EXPROPRIATION

Article 13 of the Energy Protocol prohibits nationalization and expropriation, or measures having equivalent effects, except where they are justified by a purpose that is in the public interest, are not discriminatory, are carried out under due process of law, and are accompanied by the payment of prompt, adequate and effective compensation. A measure of expropriation that does not respect these conditions is considered an "illegal" expropriation in breach of the Energy Protocol. Investors should also note that Article 13's broad wording does not restrict their claims to direct takings of their investment by the state. Rather, Article 13 allows for claims of indirect expropriation (an expropriation that does not affect the legal title of the owner) or creeping expropriation (an expropriation that is achieved through a series of measures). Examples of indirect expropriation include the revocation of a permit resulting in the total loss of value of the investment. A creeping expropriation can occur, for instance, after a series of adverse regulatory decisions lead to the bankruptcy of the regulated operator. For example, a series of decisions to end or reduce subsidies to operators in renewable energies, which amount to a loss of the investments, may constitute a creeping expropriation.

 

INVESTORS BENEFIT FROM A MULTI-TIERED DISPUTE RESOLUTION MECHANISM

The Energy Protocol provides for essentially the same multi-tiered dispute resolution mechanism as the ECT. Article 26 of the Energy Protocol provides that disputes between a contracting party and an investor regarding an investment of the latter should be settled amicably if possible. If the dispute cannot be settled amicably within three months from the date either party requests amicable settlement, the investor benefits from an option to submit the dispute for resolution:

  • To the courts or administrative tribunals of the contracting party to the dispute
  • According to a previously agreed dispute settlement procedure or
  • In arbitration before the International Centre for Settlement of Investment Disputes, a sole arbitrator or ad hoc arbitration tribunal established under the Arbitration Rules of the United Nations Commission on International Trade Law, an arbitral proceeding under the Arbitration Institute of the Stockholm Chamber of Commerce or an arbitral proceeding under the organization for the Harmonization of Trade Laws in Africa

To the extent there is no prior agreement on a dispute settlement procedure, arbitration before an international arbitral tribunal should be an investor's preferred choice of forum to prosecute claims against states for breaches of the Energy Protocol. The Energy Protocol provides an important new avenue for redress for energy sector investors in West Africa.8 In this connection, it is worth noting that there have been 114 investor-state arbitrations registered under the ECT.9

Although the Energy Protocol has not yet served as a basis for an international arbitration claim, its contracting parties should be aware of the international obligations they enter into under the Energy Protocol, and of their potential international liability if they violate these obligations. Similarly, energy sector investors should keep this potential avenue for redress in mind when investment planning as well as during the life of their investment. If their investment is adversely impacted by state measures taken in violation of the Energy Protocol, investors may be able to claim damages for any resulting loss.

 

1 OECD Business and Finance Outlook 2016, Chapter 8: The impact of investment treaties on companies, shareholders and creditors, p. 224 (https://www.oecd.org/daf/inv/investment-policy/BFO-2016-Ch8-Investment-Treaties.pdf).
2 E. Denters, T. Gazzini, "The Role of African Regional Organizations in the Promotion and Protection of Foreign Investment," Journal of World Investment and Trade, 2017, Vol. 18, pp. 449-492, spec. p. 451.
3 ECOWAS is composed of: Benin, Burkina Faso, Cape Verde, Côte d'Ivoire, Gambia, Ghana, Guinea, Guinea-Bissau, Liberia, Mali, Niger, Nigeria, Senegal, Sierra Leone and Togo.
4 ECOWAS website: http://www.ecowas.int/specialized-agencies/ecowas-centre-for-renewable-energy-and-energy-efficiencyecreee/
5 South Africa terminated its bilateral investment treaties. Tanzania recently adopted legislation in the natural resources sector that, among other things, prohibits international dispute resolution in relation to the exploitation or extraction of natural resources.
6 "Economic Activity in the Energy Sector" means an economic activity concerning the exploration, extraction, refining, production, storage, land transport, transmission, distribution, trade, marketing or sale of energy materials and products (e.g., nuclear energy, coal, natural gas, petroleum and petroleum products and electrical energy) or concerning the distribution of heat to multiple  premises.
7 Article 1(13) of the Energy Protocol.
8 The Energy Protocol would be an additional remedy where there is already an intra-ECOWAS bilateral investment treaty or an alternative multilateral investment treaty.
9 https://energycharter.org/what-we-do/dispute-settlement/cases-up-to-18-may-2018/

 

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