African Continental Free Trade Agreement Will Spur More US Investment in Africa’s Oil & Power Industries

author by Mike Ehrenstein on Mar. 25, 2020

International International Trade 

Summary: US Investment in Africa’s Oil & Power Industries

The African Continental Free Trade Agreement (AfCFTA) will spur substantial additional U.S. investment in Africa’s oil and power industries. The AfCFTA envisions a continent-wide single market for goods and services with free movement of business, persons and investments. It has been signed by 53 of 54 nations on the continent and as of July 2019, had been ratified by 27 nations. If successfully implemented, the AfCFTA will create an enormous single market—today boasting 1.3 billion consumers and six of the ten fasting growing economies in the world.

Historically, cumbersome bilateral trade agreements, tariffs and other obstacles hampered intra-African commerce. The AfCFTA seeks to expand intra African trade, enhance competitiveness and support economic growth by progressively eliminating tariff and non-tariff impediments.  The elimination of these trade hinderances promises to improve efficiency, encourage competition, and incentivize creation of solutions to regional challenges through regional economies of scale. If successful, the AfCFTA portends a virtuous cycle of increasing intra-African trade attracting further investment and resulting in improved economies and conditions for African people. In particular, the removal of impediments to intra-African trade by AfCFTA heralds additional U.S. public and private investment in Africa’s oil and power value chains, because increased investment is consistent with both US policy and sound business judgment.

U.S. Policy Supports Additional Investment After AfCFTA

U.S. Policy supports increased investment after AfCFTA. The US-Africa strategy announced by National Security Advisor, John Bolton, on December 13, 2018 expressly aims to further U.S. interest on the continent by recognizing that Africa’s stability, prosperity and independence—not its economic or resource subjugation are in the U.S. national interest. The U.S. strategy in Africa bets that the long-term best interests of the U.S. and the long-term best interests of African nations are aligned through greater liberty and increased capitalism–goals consistent with those articulated by the AfCFTA.

Bolton’s articulation of U.S. policy is hardly the typical vague “diplomo–speak.” Indeed, his statement of policy builds on previous concrete U.S. commitments and serves as the foundation for subsequent U.S. undertakings. Consider, for example, Power Africa as a reflection of U.S. policy. Launched in June 2013 by President Barak Obama, Power Africa is a U.S. government led partnership, whose stated goal is to increase access to electricity in sub-Saharan Africa by adding more than 30,000 megawatts (MW) of cleaner, more efficient capacity and connecting 60 million homes and business to electricity. Power Africa is one of the largest public-private partnerships in development history with more than $54 billion (as of 2017), in commitments from more than 150 public and private-sector partners. To date, Power Africa and its partners have helped 120 power projects comprising more than 10,200MW to reach financial close with a total investment of more than $15 billion.

Consider also enactment of the Better Utilization of Investments Leading to Development Act (the “Build Act”), signed into law by President Donald J. Trump in October 2018. The Build Act consolidates, modernizes and reforms the U.S. government’s development finance capabilities and more than doubles (to $60 Billion) previous support for investment in developing countries.   One program enabled by the Build Act is Prosper Africa, a U.S. government initiative to unlock opportunities to do business in Africa by coordinating the resources of more than 15 U.S. agencies to support public and commercial transactions between U.S. and Africa.

Power Africa, the Build Act and Prosper Africa are substantial reflections of U.S. values and policy encouraging capitalism and investment in Africa to support Africa’s independence and self-reliance—the same goals at the heart of AfCFTA. Yet, these material examples of robust U.S. support for investment in Africa are practically ethereal in comparison to U.S. potential investment should AfCFTA prove successful. On March 20, 2019, the U.S. Deputy Secretary of State, John Sullivan, spoke at a trade and investment luncheon in Angola. There, he noted that the United States remains the largest private foreign investor in Africa.  He said, “From 2001 to 2017, our yearly investment in Africa increased from $9 Billion to $50 Billion, creating new business opportunities across the continent. “But even with that increase, we are merely scratching the surface of the available pool of capital the United States can invest in Africa.”

Or ponder the Joint Statement Between the United States of America and the African Union Concerning the Development of the AfCFTA, on August 5, 2019.  In that statement, Deputy U.S. Trade Representative CJ Mahoney and African Union Commissioner Albert Muchanga recognized the U.S. and AU’s common goals to: (1) increase continental trade under the AfCFTA and (2) increase trade and investment between the United States and Africa, “eventually leading to a continental trade partnership between the United States and Africa.” Imagine the possibilities of a free trade agreement between the US, the largest economy in the world, and all of Africa! Clearly AfCFTA is consistent with US policy—and AfCFTA will help generate the environment for sound investment into Africa.

Increased Investment After AfCFTA is Consistent with Sound Business Judgment

AfCFTA will trigger substantial additional U.S. investment, because AfCFTA changes the value proposition for U.S. investors by providing a larger market with lower risk. First, AfCFTA expands the market which can be served. By providing a single market with reduced cross border barriers, investors can undertake larger revenue projects on a regional rather than merely national scale. Prior to AfCFTA, approximately 25% of all intra-African exports in 2017 were for oil, gas and electrical energy. Now, with the economies of scale available for regional power solutions, we can reasonably expect the power export market to markedly expand. The anticipated prospect of regional power solutions is already attracting increased investment in African power projects, which would have been unfeasible prior to AfCFTA. For example, Botswana and Namibia are developing a huge 5000MW solar project to provide and trade power with 12 neighboring countries. Supported in part by Power Africa and other members of the World Economic Forum, this heavyweight project will create investment opportunity for every aspect of goods and services along the program’s value chain.

AfCFTA also promises to change the value proposition for U.S. investment by reducing risk. In addition to reducing costs from tariffs and non-trade barriers, AfCFTA promises to provide a protocol for the reasonable resolution of investor-state disputes.  This protocol, presently anticipated to be delivered and adopted by June of 2020, should make investment with African countries, particularly in capital intensive oil and power, less risky for the investors and for African countries. Before AfCFTA, in addition to normal business risk, investment in Africa’s oil and power industries was subject to a host of additional risks, ranging from post contract regulation or taxation to outright expropriation. Wary of local judiciaries serving the contracting countries, investors sought to protect their investments through arbitration and litigation subject to a patchwork of treaties and contractual clauses—with mixed results.

In some instances, African countries appear to have been treated unfairly, as with the $9 Billion arbitration award against Nigeria for what appears to be speculative anticipated lost profits from a failed gas processing deal. In other instances, collection by investors of any award or judgment remained unpredictable where it could not be obtained directly from the contracting country and had to be pursued through other treaties like the NY Convention or ICSID Convention—a process complicated by, among other things disparate implementing national laws.  Hopefully, the AfCFTA protocol on investor state dispute resolution will further encourage investment by reducing the risk associated with prosecution of investor state claims by providing a transparent, binding and efficient means for investors and states to enforce the reasonable economic expectations arising under their agreements.

Because AfCFTA is consistent with U.S. policy and because it improves the value proposition for investors by providing a larger market with lower risks, AfCFTA will attract substantial additional investment into Africa’s oil and power industries.

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AfCFTA to create substantial additional U.S. investment in Africa’s oil & power industries.

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