Bileateral Investment Treaties (BITs) Coming Back To Bite

Published by TIA

See related blog post on ICSID. 

African governments once rushed into signing Bilateral Investment Treaties (BITs) to encourage FDI. Lawyers are however now calling for new models.

With much of Africa’s investment coming from abroad, how governments manage complaints from foreign companies is a vital determinant of the business environment. For decades, foreign investors depended on diplomatic protection from home governments in their overseas adventures, which occasionally gave rise to “gunboat diplomacy”. The US, for example, sent troops into Latin America 34 times to settle commercial disputes.

Since the 1960s, and spiking in the 1990s, a more formal investment approach was attempted in the form of bilateral investment treaties (BITs). These state-to-state agreements establish how governments handle investors from each other’s country, covering fair and equitable treatment, security, and compensation for expropriation, in assets but also, in some cases, in shares, stocks, bonds and other modalities. While BITs infringe sovereignty, in that disputes are settled in international tribunals and not domestic courts, many developing countries saw them as a way of signalling their attractiveness for foreign investment.

The number of treaties has grown exponentially, to around 2,500 today. The number of claims is growing too. Philip Morris, Total, Mobil, Shell, Siemens and Cargill have all taken states to arbitration, with Sri Lanka suffering the first award against a developing country in 1990. Twenty-six percent of new claims in 2010 had an African or Middle Eastern state party involved. In Africa, Zimbabwe, Tanzania, Namibia, Liberia, Algeria and Senegal have all faced actions. There are likely to be more disputes in areas such as mining, water and agriculture, according to Mahnaz Malik, an investment arbitration lawyer at the Chambers of Arthur Marriott QC at 12 Gray’s Inn Square. She warns that events such as the Arab Spring can generate a flood of claims.

But so far, South Africa is arguably the most prominent in the African context. Pretoria signed 30 BITs post-1994 to attract private investment. The new government had inherited a society that was among the most unequal in the world, where the vast majority of black South Africans had been excluded from meaningful economic activity under apartheid. As part of a set of initiatives to redress this inheritance and to meet the government’s constitutional obligation to create a more open and equitable society based on human rights, Black Economic Empowerment (BEE) programmes were initiated.

In 2007, a group of investors from Italy and Luxembourg filed a claim at the Convention of the International Centre for Settlement of Investment Disputes (ICSID), arguing that South Africa’s 2002 Minerals and Petroleum Resources Development Act (MPRDA) contained provisions that amounted to expropriation of their mineral rights, thus violating the BITs South Africa had signed with both countries. The MPRDA, a separate piece of legislation from BEE that aims to transform the minerals industry in South Africa, requires that holders of mineral rights undertake equity or equity-equivalent obligations; requirements emerging from consultations between the government and relevant parties, including representatives of the claimants. The South African government defended the MPRDA by arguing that it protected existing mineral rights and allowed for their uninterrupted use so long as companies also met the government’s wider transformational obligations in some accepted combination. In a punitive judgment, the Icsid tribunal dismissed the claimant’s case, ordered them to pay the legal costs of the South African government, and prevented claimants from bringing any such action again in future.

On the basis of similar reviews conducted internationally, notably, in the US, Norway, and certain Latin American states, South Africa launched a lengthy BIT review, the conclusion of which is that the country will not enter any new treaties unless there are “compelling economic reasons”, says Xavier Carim, deputy director general of the international trade and economic development division of South Africa’s Department of Trade and Industry. “The very fact that narrow, shortsighted commercial interests can subject progressive and laudable government policies to international arbitration, the outcomes of which are unpredictable, creates unacceptable risks that can have a chilling impact on legitimate public policy making,” he says, noting that there have been inconsistencies in the rulings taken by tribunals over similar cases.

It would be simplistic to characterise BITs as simply giving rise to clashes between progressive government policy and corporate interests. In some cases, such as a SOABI v. Senegal dispute, the problem was a largely technical disagreement over terms and conditions of a low cost housing programme.

In Zimbabwe, cases have been brought in objection to the ruling Zanu-PF party’s arbitrary and at times violent land reform programme. Broad and ambiguous terms have been a central problem of many agreements, says Jansen Calamita, senior research fellow in international trade and investment law at the British Institute of Comparative and International Law. “BITs are an agreement by the host state to accept the application of external standards to determine the legality of its actions – standards above and beyond the state’s constitution and national law. If the standards agreed are not clear – as they largely are not – it will be left to tribunals to give meaning and effect to those standards.”

Some lawyers believe the first wave of BITs were signed too fast, with text penned by a closely-knit group of Western lawyers. The majority of BITs reflect the texts developed to promote the 1960s anti-communist, post-decolonisation protection agenda for European investors, says Ms Malik. She believes capacity to understand complex investment law issues is not always present in developing country negotiators. She notes that the imbalance becomes more acute as negotiations are often based on the developed country’s model. In a speech at the London School of Economics, Randall Williams of the South African Trade Department claimed to have seen negotiators making agreements without the presence of a lawyer.

Latin American governments have come out strongly in opposition to prevailing norms. In 2009, Ecuador’s vice minister of foreign affairs, Lautaro Pozo, said BITs reflected a “fifty year old ideology” and that many countries signed them without sufficient understanding of their implications. BITs did not, in his reckoning, reflect the objectives of developing states, especially on issues of the environment and human rights.

In one case, Philip Morris tried to sue Uruguay for copyright infringement when it ruled that cigarette packets needed to carry health warnings. Bolivian President Evo Morales claims that international arbitration offends state sovereignty, with Bolivia, Ecuador and most recently Venezuela denouncing Icsid, the Washington-based arbitration body, part of the World Bank Group, which settles nearly half of claims. India and Mexico have both refused to be party to the Icsid Convention, and Brazil has not ratified any BITs.

Others are more upbeat. “I think the backlash against investment treaties is overstated,” says Anthony Sinclair, a partner at law firm Allen & Overy. “Countries continue to sign these treaties at a rate of about 50 a year.” Mr Sinclair acknowledges there is “fine-tuning and recalibrating” of text, especially in terms of public interest regulation. “At the same time, countries are in search of growth, for which foreign investment is key.”

There is no credible analysis proving the effect of BITs on investment, which would be very hard to quantify. Furthermore, BITs are not the sole determinant of investment. China is a prolific signatory, but continues to invest in countries without BITs – in contrast to Germany, where risk insurance is only issued to companies if they are operating in a country with a German treaty. Yet whenever governments and investors are discussing major cross-border investment, “everybody” on both sides is talking about investment treaties, Mr Sinclair claims.

The focus on treaties should not draw attention away from domestic reforms which could lessen the investment risk. Guinea-Bissau has undertaken domestic reform, turning a single court system dealing with everything from divorces to commercial disputes, into a more differentiated structure with commercial courts run by appropriately trained legal teams and judges, says Raimundo Pereira, speaker of the Parliament of Guinea-Bissau. Nonetheless, bilateral frameworks do appear to be of growing importance to investors.

Despite the frustrations, there is little that can be done about existing treaties until they expire, at which point clearer text can be negotiated, or countries can withdraw. Pulling out of active treaties altogether is unlikely. Even South Africa has not done so, given the diplomatic downsides. The goal of African legal teams is to improve the text in future agreements.

To date, many African governments employed international law firms to advise on treaties. While this helps buffet their expertise in negotiations, capacity-building of African government lawyers is needed. Rukia Baruti recently founded the African International Legal Awareness (AILA) programme, which in late 2011 organised a week long BIT training workshop. Participants included lawyers from Liberia, Ghana, Uganda, the Gambia, Egypt and South Africa. Baruti organised the workshop, held in London, after attending an investment conference in Mauritius, where many African attendees were unfamiliar with investment treaty arbitration.

“By building capacity and increasing awareness of the consequences of concluding investment treaties, African states will, before signing such treaties, carefully examine the meaning and consider the provisions. This would go a long way to avoiding disputes involving African states.”  Mr Sinclair speaks approvingly of AILA, in which his firm participated. “There is no shortage of good will on the part of international lawyers to contribute on a pro bono basis. The issue is whether there are enough people with sufficient inspiration and energy, like Rukia, to organise these activities. Otherwise busy lawyers in firms or chambers, or in academic careers, may not be able to produce something like this themselves.”

Aila has since been approached by African governments to deliver training in-country. Similarly, the International Institute for Sustainable Development has conducted training courses for African government officials in country and at a regional level.  It is important to note that while bilateral treaties have been overwhelmingly North-South in the past, that is changing in reflection of growing South-South economic interaction. Current BITs between developing countries include Mozambique-Indonesia, Djibouti-China and Eritrea-Uganda. South-South deals provide a platform to create more development-orientated texts, but often the European template is copied over. Regional treaties on the other hand tend to create more bespoke texts.

“I have found that debate is healthier in regional dynamics compared to a bilateral context,” says Ms Malik. A recent COMESA Agreement treaty contains more nuanced obligations than those found typically in bilateral treaties, she claims, including provisions to allow tribunals to take greater account of the development status of the host state. The COMESA treaty also omitted the full protection and security standard, a controversial feature in many BITs which puts hefty responsibilities on states. Algeria was taken to tribunal to pay damages related to civil unrest during the civil war. Similarly, Congo faced a claim for riots on the streets of Kinshasa.

The COMESA treaty, and new model texts, exhibit the potential for designing modern templates, says Ms Malik. “It shows African countries that they are not tied to the old European model. It paves the way for innovation in terms of making the treaties better balanced.”

Published by TIA : 05 March, 2012

A Look at Turkey's Trade Policy and FTA with Mauritius

Turkey concluded an FTA with the first Sub Saharan African country, Mauritius, on September 9th 2011 and is expected to initiate negotiations with other EPA and EC FTA signatories.  This is because the customs union between Turkey and the EU, which entered into force on 1 January 1996, has been the main factor shaping Turkey's foreign trade policy.  In addition, the EU opened accession negotiations with Turkey in October 2005 and guidance on reform priorities is provided through the Accession Partnership, adopted in February 2008.

In the EU-Turkey customs union, the EU unilaterally eliminated all customs duties and equivalent measures for industrial products and processed agricultural products when the trade-related provisions of the Interim Agreement of the Protocol entered into force in September 1971, whereas Turkey as a developing country was accorded a transition period of 22 years.  

The EC-Turkey customs union also provides for a common external tariff for the products covered, and foresees that Turkey will align its trade-related legislation with the EU acquis in several areas essential for market access, e.g. with respect to product standards.  The customs union covers all industrial products as well as the industrial component of processed agricultural goods, TRIPS, and competition policy, but does not extend to agricultural commodities, services, or government procurement.  The EU however offers Turkey a preferential regime on imports of certain agricultural products. Negotiations on services and government procurement were launched in 2000, but are now part of Turkey's accession process. 

The customs union also provides provision for:

• free movement (elimination of customs duties and quantitative restrictions) 
• alignment of Turkey on the EC common external tariff, including preferential arrangements (even GSP), and harmonisation of commercial policy measures;
• approximation of customs law, and
• approximation of other laws (intellectual property, competition, taxation, etc.)
• the adoption by Turkey of measures equivalent to the EU's common commercial policy

The European Union remains Turkey's most important trading partner and investor.  For instance, the EU accounted for nearly 70% of total FDI inflows into Turkey during 2005-10.  Nearly 40% of its imports come from the EU, and just over 50% of exports go to the EU. Machinery and transport equipment dominate EU imports from Turkey followed by manufactured articles which account for 24.3%. Main EU exports to Turkey are machinery and transport material (45.1%), chemical products (17.1%) and manufactured goods (15.1%).Globally,  Turkey ranks 7th in the EU's top import list and 5th as an export market.  However, the dominance of the EU in Turkey's foreign trade has declined markedly over the last five years, reflecting a notable shift in Turkish exports towards growth markets in its neighbourhood, in North Africa, certain CIS countries, and in Asia. 

Other main Turkish export markets in 2010 were Iraq (5.3%), Russia (4.1 %), USA (3.4%), United Arab Emirates (2.9%) and Iran (2.7%). Imports into Turkey came from other key markets include: Russia (11.7%), China (9.4%), USA (6.7%), Iran (4.2%) and South Korea (2.6%). 

Turkey currently has about 17 FTAs in force which include one with the EFTA countries, Israel, Macedonia (FYR), Croatia, Bosnia-Herzegovina, Palestinian Authority, Tunisia, Morocco Syria, Egypt, Albania, Montenegro, Serbia, Georgia, Chile, Jordan, Lebanon and Mauritius.

The Mauritius-Turkey FTA provides enhanced duty free access on most industrial products.  All Mauritian industrial products will enter Turkey duty free with the exception of some 70 lines related to textiles which will be phased on four years.  Mauritius in return will offer duty free access to more than 80% of its tariff lines to Turkish industrial products.  In any case Mauritius is a duty free island with over 80% of applied tariffs at zero. 

Why the exclusion of agricultural products? Turkey, even though a member of the G-33 , ranks amongst the largest agricultural producers in the world and the main crop is wheat of which the country is over 90% self-sufficient. With corn, Turkey is about 80% self-sufficient and is a net-exporter of barley. Other major crops include fruit and vegetables, nuts, tobacco, cotton, and sugar. Turkey is also one of the major milk producers in the world, predominantly for domestic consumption of cheese and yoghurt.  While Turkey has specialized feed lots and dairy farms, and large-scale commercial poultry farms, livestock production is mainly extensive and small-scale.  

Useful to note that Turkish agricultural policy was adopted with a view to aligning it more closely with the EU Common Agricultural Policy.  Turkey's main policy objectives are food security and food safety, and raising the self-sufficiency level for selected net-imported products;  improving productivity and competitiveness;  ensuring sustainable farm incomes;  rural development;  and improving institutional capacity.

For comparison, by the end of 2007, the 6 ESA EPA States: Comoros, Madagascar, Mauritius, Seychelles, Zambia and Zimbabwe agreed an interim EPA with the EU. Mauritius in that agreement submitted an individual schedule which is annexed to the interim EPA and liberalises 96% of EU imports into Mauritius compared to a liberalisation of 80% with Turkey, possibly due to the inclusion of some agricultural products in the EPA.

What appears unfortunate in the Mauritius-Turkey FTA is that Turkey seems to have offered market access predominately in industrial goods, where Turkey is competitive. However few SSA African countries are neither productive nor competitive in industrial manufacturing. With Turkey being an emerging industrial exporter, the loss of revenue on the import side for African countries could be an area of concern. In agriculture, Turkey provides subsidized support which is equivalent to the EU Common Agricultural Policy.  

The EU Single Market Services Directive

The Directive on Services in the Internal Market (the Services Directive 2006/123/EC) was adopted in December 2006. The Directive liberalises the internal EC services market in that it requires Member States to abolish discriminatory requirements, such as nationality or residence requirements, and particularly restrictive requirements, such as “economic needs” tests (requiring businesses to prove to the authorities that there is a demand for their services). It also requires the review of other burdensome requirements which may not always be justified (such as territorial restrictions or minimum number of employees).

The EU member States were provided a three-year transitional period to transpose the Directive into national legislation. However, several member States missed the end-2009 deadline, and work to implement the Directive continued throughout 2010. The Directive requires the Member States to simplify procedures and formalities that service providers need to comply with. In particular, it requires Member States to remove unjustified and disproportionate burdens and to substantially facilitate: the establishment of a business, i.e. cases in which a natural or legal person wants to set up a permanent establishment in a Member State, and the cross-border provision of services, i.e. cases in which a business wants to supply services across borders in another Member State, without setting up an establishment there. 

During 2010, the Commission was monitoring the implementation by the member States, of both the new legal frameworks adopted in order to implement the Services Directive as well as their efforts to establish operational "Points of Single Contact" (PSCs), notably the online portals providing businesses with information about the requirements and procedures to be complied with, and the "Internal Market Information Systems" facilitating administrative cooperation between the authorities of the member States. The PSCs are certainly the most visible benefit of the Services Directive for businesses. They are meant to become fully fledged e-government portals allowing future entrepreneurs and existing businesses to easily obtain online all relevant information relating to their activities (applicable regulations, procedures to be completed, deadlines, etc.) with the ability to apply online and across borders. 

Although the vast majority of the member States have chosen to implement the general principles and obligations of the Directive through a single act, implementation of the general principles has been carried out through several acts in France and Germany. In addition, all member States have had to amend or abrogate existing legislation to ensure conformity with the provisions of the Directive.

The Services Directive does not harmonize national legislation applicable to the services sector, but obliges member States to screen their authorization schemes to ensure that they are maintained only if non-discriminatory, justified by an overriding reason relating to public interest, and proportionate.

The Services Directive applies to the provision of a wide range of services – to private individuals and businesses – barring a few specific exceptions. For example, it covers: 

distributive trades (including retail and wholesale of goods and services) 

the activities of most regulated professions (such as legal and tax advisers, architects, engineers, accountants, surveyors) 

construction services and crafts 

business-related services (such as office maintenance, management consultancy, event organisation, debt recovery, advertising and recruitment services) 

tourism services (e.g. travel agents) 

leisure services (e.g. sports centres and amusement parks) 

installation and maintenance of equipment 

information society services (e.g. publishing – print and web, news agencies, computer programming) 

accommodation and food services (hotels, restaurants and caterers) 

training and education services 

rentals and leasing services (including car rental) 

real estate services 

household support services (e.g. cleaning, gardening and private nannies). 

The Services Directive does not apply to the following services, which are explicitly excluded:

financial services 

electronic communications services with respect to matters covered by other community instruments 

transport services falling into Title V of the EC Treaty 

healthcare services provided by health professionals to patients to assess, maintain or restore their state of health where those activities are reserved to a regulated health profession 

temporary work agencies' services 

private security services 

audiovisual services 

gambling 

certain social services provided by the State, by providers mandated by the State or by charities recognised as such by the State 

services provided by notaries and bailiffs (appointed by an official act of government). 

The Commission has not drawn up concrete plans to cover the other excluded services. Services activities are in any event always subject to the EC Treaty provisions, notably the fundamental freedoms of establishment (Article 43) and free movement of services (Article 49). The Services Directive applies only to EU (EEA) citizens and legal entities established in the EU (EEA), and does not oblige member States to consider changes applicable to non-EU services suppliers. 

COMESA-EAC and SADC Launch Climate Change Intitiative

The East African Community (EAC), Common Market for Eastern and Southern Africa (COMESA) and the Southern Africa Development Community (SADC) have launched a joint five-year Programme on Climate Change Adaptation and Mitigation. The focus of the Programme is increasing investments in climate resilient and carbon efficient agriculture (climate-smart agriculture) and its linkages to forestry, land use and energy practices by 2016. The programme has received $20 million funding from the Royal Government of Norway, the European Union Commission and UK’s Department of International Development (DfID), signifying an exemplary partnership between Africa and Europe on climate change.

The three RECs comprising the Tripartite will synergize on their respective comparative advantages that include: main-streaming climate change in national and regional policies and strategies; climate resilient and climate smart agriculture; vulnerability assessment and disaster risk reduction approaches; and climate change policy negotiations to provide African solutions to climate change.

EAC’s key achievements in the area of climate change over the last few years include: approval of the EAC Climate Change Policy and issuance a Declaration on Food Security and Climate Change by the EAC Summit; the establishment of the EAC Climate Change Fund and Climate Change Coordination Unit at the EAC Secretariat; as well as the development of a Regional Climate Change Position as input to the African Common Negotiating Position on Climate Change.

See full article here and previous articles on climate change here.

Legal constraints on the EU’s ability to withdraw EPA preferences

Dr Lorand Bartels provides useful and timely advice on the legal constraints behind the EU's ability to withdraw EPA preferences from ACP States and he identifies various problems with the EC Commission’s proposal.   These include steps taken towards ratification i.e. progress to date and the mechanism of provisional application. 

He concludes by stating that EC Council Regulation 1528/2007 can only be terminated in accordance with Article 25(2) of the Vienna Convention on On the Law of Treaties. This provision lists three ways in which this can be done: by agreement between the parties; according to the treaty itself; and when the party seeking to terminate notifies the other party or parties that it does not intend to become a party to the treaty. Where these conditions are not satisfied, the provisions of the treaty being provisionally applied are treated as applicable for that party.

While the EU can still remove ACP countries from the list of beneficiaries, if it wishes to do this, it must notify them of its intention not to become a party to the respective agreements. What it cannot do is remove beneficiaries from Annex I of the Regulation as the Commission is proposing to do - not, at least, without violating Article 25(2) of the Vienna Convention on the Law of Treaties, and thereby also EU law itself.

Assess full article here and see previous EPA posts here.

China and EAC Sign Trade and Investment Framework Agreement

The Framework Agreement between EAC and China focuses on the promotion of commodity trade, exchange of visits by business people from EAC and China, co-operation in investment, infrastructure development, human resource development and training. The two sides also created a Joint Committee on Economy, Trade, Investment and Technical Cooperation (JCET) as the implementation framework for the Agreement. 

This is a different type agreement from the EPAs. It focuses on market enabling assistance in areas such as infrastructure development, skills development and private sector engagement. In fact, China has indicated she will provide funding for feasibility studies on roads and infrastructure. The focus on commodity trade also signals willingness to expand agricultural production and processing of agricultural commodities and thereby enhancement of the value chain.

World Bank Unveils Portal On Diaspora Remittances to Africa

This transparency is important.

Send Money Africa provides data on the cost of sending and receiving relatively small amounts of money from selected countries worldwide to a number of African countries, as well as within the African continent. The objective of the database is to increase transparency in the market and provide migrants with complete and reliable information on all the components of the transaction. Send Money Africa allows the users to compare the costs applied by several providers to send and receive money from 15 major sending countries to 27 African receiving countries, for a total of 50 "country corridors".

See country corridors here.

EAC Finalizes Industrialisation Policy and Strategy

East African Community (EAC) Secretariat is in the final stages of completing a regional industrialization policy which is to among others promote regional industries.

EAC is in the process of formulating its Industrialization policy and strategy, which is expected to provide a detailed regional framework for cooperation in the field of Industrial and small and medium enterprises (SME) development," said the EAC Head of Corporate Communications and Public Affairs Richard Owora.

He revealed that the regional industries whose economic benefits extend beyond national boundaries that have been identified include: pharmaceutical, automotive, agricultural machinery and tools, basic metal, petrochemicals, Information Communication Technology (ICT) and computer and SME development among others. 

"That is why the secretariat with support from the Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) held a five-day experts meeting to review the draft EAC industrialization policy and strategy in Uganda. He said the discussions revolved around formulating policy inputs and recommendations from the stakeholders for the finalization of the policy and strategy, identification of priority regional industries to be promoted on comparative advantages, identification of policy interventions projects and programmes to be undertaken at national and regional levels and to update the draft final documents.

"The goal of cooperation in industrial development is to enable partner states to collectively and individually attain accelerated, harmonious, and balanced development, as envisioned in the EAC Treaty," he said adding that the draft policy and strategy has identified several industries, which will be promoted through collective community efforts, so as to realize economies of scale and attain international competitiveness.

Uganda's Director of Trade, Industry and Co-operative in the Ministry of Trade, Industry and Co-operative, Mr Samuel Ssenkungu noted that industrialization and technological diffusion have both potential to make a sustainable contribution to economic growth and job creation in the region.

EAC to review Rules of Origin

Business Daily

The East African Community is set to review border passage rules for goods, paving the way for more Kenyan exports to access the regional market. The bloc’s custom and trade division has invited consultants to align the rules of origin with changes in manufacturing to facilitate intra-regional trade in the region.

“We expect the reviewed rules of origin to capture as many changes including transport costs that have grown in importance for firms,” Peter Kiguta, EAC’s director-general in charge of trade and custom said in a telephone interview.

Mr Kiguta also said the review would prepare the region for an eventual merger with Comesa and SADC. The rules will also be phased out once a single EAC revenue collector is set up.

Trade Mark East Africa has floated the tender asking consultants to simplify the rules of origin so that they can be implemented easily.

The present rules of origin only allow goods produced wholly from local inputs to cross national borders without attracting custom taxes.

Goods produced from imported raw materials also enjoy duty-free treatment where the exporter can prove that at least 35 per cent of the ex-factory value was added within the region.

The proof is usually that the local transformation process has moved the product to a tariff category different from that of imported parts or inputs.

The application of this rule has been controversial, with traders claiming it is selectively applied by customs officials to bar Kenyan products from entering Tanzania, Uganda, Rwanda and Burundi.

The partners phased out duties on Kenyan goods that meet these rules from January after the end of the transition period. Some of the vehicles from the Nairobi-based General Motors East Africa and CMC Motors are among products affected by the rules of origin.

While assemblers stake their claim to the regional market on the number of jobs and operations involved, border officials have maintained that the process entails very little transformation on the completely knocked down vehicle parts.

The beauty products sold by Inter-consumer Products Ltd; Nido, Milk and Nescafe produced by Nestle Kenya; television sets manufactured by Aucma Digital Technology Africa; and lubricants manufactured by Kenol/Kobil have also encountered similar restrictions at border posts.

“Our market share has grown significantly in the region since the EAC’s verification mission cleared our products last year with Uganda becoming our largest market,” Charles Njogu, KenolKobil’s spokesman, said on Tuesday.

Kenya Revenue Authority officials said the rules of origin are now outdated because of rapid changes that have taken place since they were conceived more than six years ago.

The officials said they are encountering cases where genuine goods are being locked out simply because the rules are blind to their unique circumstances. The use of technology and other cost-efficient production techniques has rendered the 35 per cent value addition threshold irrelevant, KRA said, adding that a change in tariff heading alone would be more objective.

“Use of total cost to determine local value addition is not objective,” an official who could not be named under KRA protocols said yesterday. “An operation that contributed 35 per cent to total cost six years ago may have fallen to 20 per cent due to cost cutting. The RoO does not factor in investments that contribute to efficiency

Lately, Kenyan edible oil firms such as Kapa Oil and Bidco Oil have been fighting to defend their markets from custom officials who maintain the refining of imported crude palm oils does not meet the value addition threshold.

The firms import crude palm mainly from Asia to manufacture products such as cooking fats and soaps which they export to EAC and Comesa countries.

“In this case, refining process is the huge but hidden investment that must be recognised for the rules of origin to make sense to exporters,” said the KRA official.

EPA Negotiations

The European Commission (EC) finally announced today that countries that have concluded an Economic Partnership Agreement (EPA) but not taken the necessary steps to ratify and implement it would no longer benefit from the EPA market access to Europe as from 1st January 2014.

The EC Market Access Regulation (MAR) 1528 of 1st January 2008 provides duty free quota free market access for African Caribbean and Pacific countries that have concluded an EPA. The Regulation requires countries to sign, ratify and implement the Agreement within a “reasonable period of time”. At it currently stands, the MAR is a temporary, unilateral instrument of the EU to ensure that, pending the implementation of the agreement by ACP countries, there would be no trade disruption.

A quick glance at it reveals the following facts: Only 18 island countries from the 36 ACP countries that had initialled or signed an arrangement have concluded the agreement. The other remaining countries are yet to complete the contract, with the risk of seeing their marriage cancelled.

The announcement of this proposal is no surprise: Trade Commissioner De Grucht and other representatives of the European Commission have constantly been warning that this situation was not sustainable and would therefore have to end at some point in time.

The proposal will come into effect on 1st January 2014, after approval by the Council. It is worth mentioning here that MAR 1528 in 2008, was adopted prior to the Lisbon Treaty, and therefore the Parliament will not have to give its assent to it. The timing is also not surprising: 1st January 2014 is also the time when the new Generalised System of Preferences (GSP) Regulation should come into effect. It is also the date when the countries that have signed and ratified an EPA will have to start implementing their respective trade liberalisation commitments (remember some countries had a 5 year moratorium before starting liberalisation).

The message is therefore clear: if countries want to continue to benefit from EPA market access, either they have to sign and start implementing their existing EPA or conclude a new regional EPA. For others, either they will fall under one of the schemes of the new GSP (i.e. Everything but Arms, Standard GSP or GSP Plus) or they will have no preferences (as might be the case for Botswana and Namibia).

What does this imply?

This coming year will be a political litmus test for the relationship between the EU and its African and Pacific partners. If from a legal and a “coherence” perspective the Proposal of the EU is well understood, there are also good reasons why, four years down the road, since the MAR in 2008, nothing has happened. First, some compromise on many issues, including on the accompanying development measures, are yet to be agreed. Moreover, most countries are also engaged in building their regional integration agenda: many are either consolidating their existing customs union or setting it up. And Europe is well placed to know that regional integration takes time. So while a deadline by 1st January 2014 might seem a reasonable time for the EU, it is in fact very short for the proper sequencing of regional agenda with trade negotiations with third countries. Finally, some might have simply lost interest in the process.

So, like in 2007, expect some tensions in the coming months: some countries might be pressured to sign, ratify and implement the EPA that might not fulfil their ambitions and interests in terms of content, timing and geographical configuration by fear of market disruption, in particular if they risk loosing preferential access to the EU. Others might simply walk out. If no common position can be found at the regional level, the EPAs could seriously disrupt any regional integration effort.

But 2014 is not 2007. The world has changed and this time the response might be different. The financial crisis invited itself to the dance, Africa has gained a lot more confidence in its economic prospects and the increasing importance of “emerging” partners has brought in a new geopolitical dynamism, de facto reducing the leverage of the EU.

Finally, it takes two to tango. African and Pacific countries now have to reveal their strategies, interests and preferences regarding their relationship with the EU. It is a question of political will in many cases and for those interested in an EPA, it will require some effort to reach a compromise. At the same time, while one might understand the European logic to put an end to an instrument that has remained “temporary” for too long and is not compatible with rules of the WTO, there are still some “contentious issues” that remain unresolved. The EU has also to reveal its cards on how far it would be willing to accommodate some genuine concerns that are blocking the negotiations. Setting a deadline is therefore not sufficient, the EU should come up with concrete proposals on how to move the negotiations forward.

Just putting a deadline could open the way for a new impetus to the current negotiations towards the conclusion of regional EPAs. But it could well turn out to be a guillotine if no flexibility is provided to advance the negotiations.

By San Bilal and Isabelle Ramdoo. 

For a another report on this see here.