Trade Negotiations Insights • Volume 7 • Number 10 • December 2008

Investing in East Africa: the role of negotiations in the East African Community-EU EPA

by Francis Mangeni

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Promotion of international and regional trade, as well as foreign and local investment is at the core of the very rationale of the East African Community. In response to limited market size, opportunities and clout faced by the individual partner states in a rapidly globalising and competitive world, East Africa is pursuing a strategy of economic and political integration through building a strong community. The Treaty establishing the EAC sets the objectives of this community as: “to develop policies and programmes aimed at widening and deepening cooperation among the Partner States in political, economic, social and cultural fields, research and technology, defence, security and legal and judicial affairs, for their mutual benefit.” The broad stages of the gradual and deeper integration of the East African Community are the formation of a customs union (formed on 1 January 1995), a common market (to be formed on 1 January 2010), a monetary union (to be formed by 2012), and political federation (proposed shortly thereafter). Negotiations for the common market have commenced in earnest on the basis of a draft protocol commissioned by the secretariat, which is expected to be completed by June 2009. According to the Treaty and the draft protocol, the common market will be characterised by free movement of goods, services, labour, and capital, and the recognition of the right of establishment and residence.

Against this backdrop, the continuing EPA negotiations should fully take the ongoing regional integration processes into account and promote the rapid achievement of the objectives of the East African Community. A key priority now is the successful negotiation and launching of the common market where there will be free movement of services, labour and capital, the recognition of the right of establishment and residence, and the consolidation of the customs union through the elimination of residual non-tariff barriers. EPA negotiations, including in the areas of development, services, and investment, should primarily aim to support the ongoing integration process, rather than act as a competing processes. In practical terms, this requires that important development and trade partners, such as the EU, give due priority to supporting the consolidation of the customs union and the successful launching and operation of the common market in all key areas including services and investment.

Like most countries, EAC nations have the primary offensive interest of attracting appropriate foreign direct investment (FDI) that will support rapid social economic development. Initiatives to attract FDI take various forms. At the national level, they include publicity of location advantages and the promotion of a good image for the country. They also include participation in trade fairs and business forums, and offensive missions by government officials at the highest political level to key countries that represent potential sources of FDI. In addition, it entails the establishment of investment liaison offices in countries that are possible sources of FDI. These initiatives are replicated at the regional level in the EAC, which is internationally marketed as a common investment area. In EPA negotiations, a primary offensive interest will be to attract EU investors into the EAC countries. EPA provisions on investment should therefore adopt a broad approach that goes beyond rules, to mechanisms that promote EAC countries as attractive investment destinations.

Development cooperation in investment is another major offensive interest. The main objectives and areas of development cooperation in investment include the following:

• Building of requisite modern physical and social infrastructure in order to remove or reduce high production costs, inaccessibility, and the poor image associated with infrastructure bottlenecks;
• Establishment and strengthening of national and regional investment regulatory and promotion authorities that can effectively assist in FDI inflows;
• Support the enhancement of the international competitiveness of the regional and national economies and particular industries so that products can be produced in sustainable quantities that meet growing demand and sold at competitive prices, while also being of a strong quality that meets applicable health and technical standards;
• Supporting small and medium size enterprises (SMEs), which constitute the backbone of manufacturing industries in EAC countries, through programmes that address their specific constraints such as access to credit, market information, and exportation and retailing facilities;
• Modernisation of commercial laws and regulations through the enactment of new laws and amendment of existing ones, as appropriate, as well as the establishment and strengthening of judicial mechanisms for protection of property and speedy dispute resolution;
• Promotion of technology and skills transfer and sharing, through effective mechanisms such as active information and dissemination programmes, licensing, training, attachments, partnerships, and strengthening and modernising EAC engineering and technology institutions;
• Accumulation of business, management and legal skills in order to address capacity constraints in the private sector and in government relating to successful running of investments and utilisation of available flexibility in agreements, as well as successful enforcement of rights and obligations in dispute settlement.

It is well to recall that the interim ESA-EU EPA has an extensive chapter on development where provisions on investment and private sector development are included as areas of cooperation. The agreement of the European Commission negotiators to these provisions in the ESA-EU EPA provides a strong starting point for negotiation in the EAC-EU EPA as areas of cooperation. It also gives this approach appropriate prioritisation over investment rules. Therefore, prioritising development cooperation in the area of investment over investment rules should remain an important offensive interest of EAC countries.

In terms of the rules themselves, on market access, EAC countries could be expected to pursue the following offensive interests:

• Use of a positive-list or list-in approach on the basis of the WTO General Agreement on Trade in Services (GATS) model, as agreed by the EU in the CARIFORUM-EU EPA;
• A narrow rather than expansive definition of “investment” in order to assist clarity of scope and obligations and to cover only genuine investment;
• Definition of “investment” to require substantial business activity in the country, in order to avoid fraudulent shells also qualifying as investments;
• Refusal of the Most Favoured Nation (MFN) clause requiring preferential treatment extending from the EU to other countries; preference instead could be made for limiting the MFN clause to major economies. If this approach is taken, there should be an additional clause requiring the EU to always match the better treatment offered to the EAC countries by any major economy and appropriate exceptions;
• Clear definition of “like circumstances” in order to clarify the scope and meaning of the MFN treatment and national treatment obligations;
• Appropriate limitations on national treatment in liberalised sectors;
• Restriction of a fair and equitable treatment obligation to the customary international law standard for non-nationals;
• Insistence on allowing a reasonable degree of performance requirements in order to promote linkages into the economy and generate multiplier benefits;
• Imposition of clear and appropriate obligations on investors in order to promote a good international image, which should also prove beneficial for the region;
• Provisions on security and general exceptions, as well as specific exceptions for balance of payment difficulties and the promotion of infant industries and SMEs. The right of government to regulate investment for achievement of important development and public policy objectives in accordance with national and regional laws should be preserved as well;
• Ensuring simple and flexible dispute settlement procedures;
• Attracting long-term and sustainable investors, rather than footloose or even speculative investors, which assists in retention and accumulation of national and regional investible capital stocks that promote social economic development;
• The right to prioritise and direct FDI into key growth sectors and industries, such as the pharmaceutical, agro-processing and extractive industries as well as energy, livestock, edible oil, foods and beverages, leather, dairy products, packaging, iron and steel, metal and metal products, building and construction, and storage;
• Taking a common approach to attracting FDI, and avoiding a race to the bottom in competing for FDI by generous incentives given by individual partner states under their investment laws.

Notes
1 Dr Francis Mangeni is a Legal Consultant with Lex Uganda Advocates and Solicitors
2 Article 5.1
3 Article 104