ISDS clauses in investment agreements drain millions of dollars from African taxpayers

Public Citizen, a nonprofit consumer advocacy organization founded in 1971 and headquartered in Washington, recently published on its website an alarming paper, issued in December 2024, titled “The Scramble for Africa Continues: Impacts of Investor-State Dispute Settlement on African Countries”. The paper argues that the trend to include in investment agreements a system to resolve disputes with host States known as "Investor-State Dispute Settlement" (ISDS) is costing millions of dollars to African taxpayers.

What Is the Investor-State Dispute Settlement (ISDS)?

ISDS is a clause embedded in investment agreements that allows foreign investors to sue before an arbitration body those States that are in breach of one or more obligations laid down by such agreements. This arbitration body can grant a monetary compensation to the investor irrespective of the fact that the breach was due to the need to protect the public interest and/or human rights. It thus happens that these States succumb to the economic rights of investors, despite they clash with public or collective interests considered as prioritary in their territories. Apart from compromising the regulatory sovereignty of such States, the ISDS system is often criticized because judged partial and not transparent, being arbitral proceedings generally opaque and secretive, compared to domestic legal systems, which have mechanisms to consider and safeguard the rights and interests of other individuals or groups that are non-parties in the controversy.

Since 1993, Public Citizen argues, African governments have been the target of 171 ISDS claims, mainly in construction, mining, and manufacturing. Typically initiated from investors headquartered in the Global North (with Australia, Europe, and the United States topping the list), arbitral rulings that are favorable to African States account only for 37%. In total, the paper calculates that such States have been condemned to pay over $5.7 billion of monetary compensations to foreign corporations, with an additional $19.5 billion that are still at stake in ongoing cases. However, due to the lack of publicly available information for many disputes, the paper admits that is possible that the actual amounts paid and claimed are significantly higher.

Most importantly, the resources to compensate foreign investors who win these arbitration cases are typically recovered by African States through tax increases on taxpayers, which contribute to worsening national economic conditions.

The African Continental Free Trade Agreement (AfCFTA) Protocol on Investment

The AfCFTA Protocol on Investment includes provisions related to State-to-State disputes and dispute prevention, while the specifics of investor-state disputes will be governed by a special Annex whose content is not yet available. As AfCFTA State parties have recently concluded negotiations on the Phase II Protocols (which also include the Protocols on Intellectual Property Rights, Competition Policy, Digital Trade and Women and Youth in Trade), the Annex to the Protocol on Investment is currently undergoing linguistic alignment before being formally published.

During the negotiation of this Annex there were differing views among AfCFTA States parties and the private sector on the inclusion of an ISDS mechanism in such regulation, even though at this point in time - especially in the light of the findings of the Public Citizen's paper - its incorporation appears very unlikely.