Introduction
With Somalia’s accession to the East African Community (EAC), the internal market of this community is also becoming increasingly attractive for foreign investments. A common market with over 300 million populations is developing, and there is not only a common internal market. It also has an excellent strategic location from the Indian Ocean to the Atlantic, is rich in raw materials and has a young population. Even if there are still considerable deficits in implementing the ambitious goals it has set itself, the EAC has the potential to become one of Africa’s most dynamic and stable regions.
Both state and private actors are increasingly recognising this. The EU, in particular, sees the EAC as a sister organisation. Solutions to problems are, therefore, increasingly being discussed at the EU Commission level with the EAC Secretariat, and solution strategies are being developed at the EAC level. One example is the “African Vaccine Manufacturing Accelerator”[1] initiative. The EU and various countries, including Germany, France, the UK, the USA, Canada, Norway, Japan and the Gates Foundation, are endeavouring to relocate vaccine production to Africa through a joint initiative. The background is that the African continent currently imports 99 percent of its vaccines from other parts of the world at exorbitant costs, highlighted by the Covid-19 pandemic and the uneven distribution of vaccines. The new programme aims to shift vaccine production to Africa in order to gain more sovereignty and avoid a repeat of history. Billions have already been made available for this purpose. The EAC is an ideal partner for this because one initiative can reach around a quarter of Africa’s population. For European companies, it is an opportunity to establish sustainable locations in Africa.
However, even if the potential has been recognised politically, the state structures in the EAC countries are still lagging far behind. There are deficits in implementing EAC regulations, nationalistic tendencies[2] and, in some cases, considerable differences in the starting preconditions. As a result, there is often a wide gap between aspirations and reality or goals and actual feasibility. On the one hand, this is due to state imbalances between donor countries and recipient countries and the often-inaccurate assessment of the EAC countries’ implementation capabilities. However, it is also because the private sector in donor countries still only perceives Africa as a sales market and less as a future market where they need to have their production sites. It is primarily private actors who can turn the right idea of the EAC into a successful EAC for the people. A change in support structures away from almost exclusive state cooperation towards state-supported private cooperation can not only unleash colossal potential but also be in the interests of the EAC itself, given the economic challenges in the donor countries, particularly in Europe. This applies to medical products as well as to trade, services and agriculture. One thing is clear: the EAC must also become an economic success for its citizens. An essential key to this is creating an investment-friendly and secure environment.
The basic framework of international investment protection
However, how does such investment protection work? Basically, in the form of international treaties between states, they grant their investors protection under international law. Around 3,000 bilateral and multilateral investment promotion and protection treaties worldwide[3] offer legal protection to direct investments by foreign natural or legal persons in a foreign state, particularly against measures that impair ownership, such as expropriation without compensation. The best-known multilateral treaties in Europe are the investment protection provisions negotiated between the EU and Canada (CETA) and between the EU and the USA (TTIP). However, public reactions to them, such as chlorinated chicken[4], show that building bridges between one economic and legal system can be challenging. Even when it comes to highly developed economic systems with democratic legal systems, be it hygiene regulations, data protection, legal protection or the authorisation of certain goods for their markets. The big problems often lie in the small details.
Such treaties are primarily concluded to ensure a standardised interpretation of investment protection and its practical implementation in the countries concerned. This is intended to take account of the different conceptions of the rule of law and avoid state discrimination against foreign investors. Without such treaties, investors would have to rely on uncertain legal channels before national courts in the host country or even only on diplomatic intervention. Guaranteed protection of the investment is, therefore, one of the most important investment requirements, and this applies all the more in markets in Africa that are not yet established under the rule of law, i.e., in the EAC.
The most important regulatory areas of such treaties include[5]
- protection against expropriation without compensation
- Justice and equitable treatment = fair and equitable treatment (FET)
- Full protection and security = full protection and security
- Most favoured nation treatment (MFN)
- National treatment = protection against discrimination
- Protection against the breach of state commitments, so-called “umbrella” clause
- Unrestricted transfer of capital and income
In addition to the material regulations, an essential factor is how disputes are resolved. Some investment protection treaties, therefore, provide for investor-state arbitration to settle investment disputes. They enable investors to assert their rights independently of national courts. The treaties regulate when the investor can initiate arbitration proceedings and according to which arbitration rules the tribunal should be composed. Most investment protection agreements also give the investor the right to bring an action before an international arbitration tribunal, known as an investor-state dispute settlement.
If a foreign investor has suffered damage to its investment due to a breach of the host country’s state protection obligations, it can sue the host state before an international court. The competent arbitration tribunal is specified in the agreements. However, reference is made to the International Centre for Settlements of Investments Disputes (ICSID). The ICSID supports the settlement of investment disputes that have arisen. To this end, it provides the organisation and administration of proceedings, premises and technical aids. The ICSID itself does not act as an arbitrator or mediator. It supports the implementation of arbitration/mediation proceedings in cross-border investments by establishing specific rules and taking on administrative tasks. The ICSID can, therefore, not be regarded as a permanent court of law. The advantage is, however, that it is optional to exhaust a court of law in the host country first and that ICSID proceedings can be initiated directly. This prevents lengthy and possibly unfair proceedings in the host countries.
ICSID arbitration awards are valid like final domestic judgements. They are directly enforceable without the host states having the option to intervene. Due to ICSID’s institutional proximity to the World Bank, it can generally be assumed that the arbitration awards are highly accepted in the host countries. However, there are other arbitration proceedings, for example, under the rules of UNCITRAL or the International Chamber of Commerce in Paris. Their arbitration awards are generally internationally enforceable following the New York Convention. However, compared to the ICSID procedure, the weakness is that there are possibilities for intervention by the host states in these cases, such as the reference to the ordre public.
What is the situation regarding investment protection in Somalia?
First, there is the EAC Court of Justice (EACJ). The EACJ has original jurisdiction over the interpretation and application of the Treaty except where the Treaty confers such jurisdiction to national courts of Partner States.[6] Further, the EACJ has arbitral and advisory jurisdiction.[7] Article 32 (c) of the Treaty gives the Court jurisdiction to hear and determine any matter arising from an arbitration clause contained in a contract or agreement. In light of this jurisdiction, the EACJ Rules of Arbitration were promulgated in 2012 to facilitate the arbitral jurisdiction of the EACJ.[8] Unless the parties have stipulated a specific law, the EACJ arbitral tribunal determines an applicable law according to fair standards.[9] Enforceability is governed by the enforcement laws of the country in which enforcement is sought.[10]
That means the EACJ, although primarily intended for proceedings in which at least one of the parties is a partner state, can act as the competent arbitration tribunal via a jurisdiction agreement. This distinguishes the EAC’s system of jurisdiction from that of the EU, for example, where the ECJ considers such – state-organised arbitration – to be a quasi-conflict with the principle of the rule of law. In Africa, on the other hand, a trend is emerging. The Common Market for Eastern and Southern Africa (COMESA) and the Economic Community of West African States (ECOWAS) have also conferred arbitration jurisdiction on their regional courts. However, it remains to be seen whether these arbitration tribunals will ultimately prove their worth. So far, these options have remained in place.
That may also be because the enforcement of EAC decisions is ultimately left to the national enforcement systems. Suppose an agreement is reached on EAC arbitration out of concern about the unpredictability of the Somali legal system. In that case, this is ultimately only a delay before the inevitable confrontation with the Somali judicial system. There is no legal provision for the unconditional Enforceability of such decisions. Regarding disputes between a Somali company and foreign investors, it is conceivable to take the case to the EAC Court of Arbitration to have a better chance of obtaining a judgment. However, the arbitration clause must also be based on a corresponding law.
Somalia’s new investment protection law
Of much greater interest to foreign investors is that Somalia has been a contracting party to ICSID since 30 March 1968.[11] Somalia’s new Investment and Investor Protection Law (law no. 11 of 2023 (Investment Protection Act), which only came into force in March 2023, refers in Art. 16 para. 3 I-III not only to the ICSID Rules of Procedure but also to those of UNCITRAL. There is thus a clear commitment to international arbitration tribunals and institutions, which are also secured with an enforceability clause in Art. 16 para. 4. The guarantees for protecting foreign investments enshrined in Articles 4, 10 and 11, as well as the commitment to a free-market economy and the free movement of capital in Article 12, are also beneficial.
The protection against expropriation without compensation in Art. 13, as well as the protection of property and the possibility of acquiring property in Art. 12 and national treatment in Art. 9, should also be mentioned. Art. 8 establishes the most favoured nation (MFN) principle, according to which trade advantages granted to one contracting party must be granted to all contracting parties as part of the principle of equality. In addition to the possibility of appealing to ICSID, the new investment protection law also provides for the possibility of judicial and arbitral settlement in Somalia itself, Art. 15, 16.
The conspicuous mirroring of the standards otherwise contained in international agreements in the Investment Protection Law is necessary because Somalia currently has neither bilateral trade and investment agreements nor double taxation agreements. One exception is Somalia’s and Uganda’s bilateral trade and investment agreement from 2022. The entire law is therefore a one-sided umbrella clause, if you like. With the legal clarification, Somalia is binding itself almost unilaterally to the usual standards under international law, which is very positive.
However, one thing is important for foreign investors to know. It is worth noting that pursuant to article 7 paragraph 3 in the Federal Republic of Somalia it is prohibited to establish any investment contrary to the Islamic religion, culture, public order or which may have adverse effects on the environment or climate. The reference is to the ban on investing in alcoholic products, betting or tourism activities incompatible with religion, culture and local customs. Environment protection and climate change prevention is self-explaining.
Finally, the Foreign Investment Act must also be taken into account, particularly when considering the investment conditions in Somalia. Law no. 13 of 26 January 2016 is the fundamental law that regulates foreign investment in Somalia. This law provides that both natural persons and legal foreign entities can invest in Somalia. The foreign citizen or company who intends to invest in Somalia shall present his investment project according to the procedure established pursuant to article 8, par.1 and 2. The types of permitted investment means are:
- Convertible foreign currency, according to the instructions of the Central Bank of Somalia;
- Machinery;
- Equipment and spare parts imported according to current laws;
- Intellectual property rights protected or registered in Somalia and related to goods and services produced or sold in the country;
- Financial resources allocated to research and feasibility studies for investment and profit reinvestment projects.
The Investment Promotion Office (IPO) assists foreign investors by providing those facilitations with the necessary information regarding investment opportunities, application procedures, obtaining the permits and licenses necessary to start economic activity in Somalia, Art.6. If the candidate investor meets all the requirements established by the law, the Foreign Investment Board (FIB) grants approval and issues a foreign investor certificate. The FIB determines the value of the foreign investment (Art.4).
Also exciting for potential investors is the fact that Somalia is a member of the Multilateral Investment Guarantee Agency, the international institution that aims to promote investments in developing countries by offering insurance against political and economic (but not commercial) risks.
Assessment
In conclusion, the Somali legislation on foreign investment (law n.13 of 2016) and investment and investor protection (law n.11 of 2023), interpreted and implemented according to the constitutional provisions (article 26) and according to other national laws (bilateral and multilateral treaties of which Somalia has signed and ratified thus being an integral part of the laws in force in the federal republic of Somalia), offer guarantees of more than satisfactory protection for investing in Somalia. It means that, at least on paper, modern legislation makes it easier for foreign investors to invest in Somalia.
However, it is more complicated. There are three main reasons for this: Firstly, the Enforceability of the entire statehood in Somalia is not yet at a level where even internationally obtained judgements can be easily enforced. The existing enforcement structures in Somalia need to be more capable of enforcing national and international decisions. What may still work with judgements against the Somali state may look quite different when enforcing judgements against Somali business-people.
There is also a question mark over the guaranteed economic freedoms. Article 11, for example, grants the possibility of land ownership. However, land law is one of the most sensitive issues in the traditional legal system (Xeer). Here, the state’s right to organise conflicts with traditional law and will take much work to implement in practice. Similar issues arise in competition law, antitrust law and the protection of investments against “robust” dealings with competitors.
In addition, there are minor technical issues in the law’s wording, such as the isolated or blind references to “general laws” and the references to the provisional constitution, which is still under review, leaving the legal practitioner somewhat perplexed.
However, the most significant question mark is probably to be found in Art. 16. It is true that a quasi-unilateral state consent to the ICSID proceedings is formulated here. However, the law assumes that a government-led mediation procedure (Art. 16 para. 1) and a judicial procedure (Art. 16 para. 2) will be conducted first. Only in the event of disagreement with the decision of the Somali judiciary should the path to ICSID be opened. In the case of investments in which the Somali government is a contractual partner, this may still have to be contractually amended with the Somali government. However, in the case of purely private investments, it would be an obligation to exhaust the legal process in Somalia. As a reminder, this concerns disputes in which foreign investments are jeopardised by measures taken by the host country’s government, such as expropriations. Article 26 of the ICSID Convention indeed permits such a regulation. However, such a provision contradicts the actual meaning and purpose of an ICSID regulation. The neutral instance is intended to avoid one-sided, lengthy and expensive proceedings in the host country. Such preliminary proceedings are, therefore, usually dispensed with.[12]
It would be desirable in a future amendment to make Art. 16 para. 1 and 2 are optional, and they enable private investors, in particular, to go directly to ICSID. Furthermore, the references to the other laws could be clarified and adapted to the current membership of the EAC. For example, decisions of the EACJ arbitration tribunal could be equated with ICSID decisions, even if only declaratively.
There are also some duplications in the two laws. Article 18 par.1 of the Foreign Investment Act from 2016 for example guarantees equal treatment of foreign investment at par with national investors; paragraph 2 establishes the prohibition of expropriation without the presence of a public interest that cannot be resolved otherwise; paragraph 3 establishes the right to compensation in case of expropriation, according to equity and at market price. Article 19 offers the foreign investor a dispute settlement mechanism, which is compliant with widely used international standards. However, exactly these regulations can also be found in the 2023 Act, in Art. 9, 13, 15 and 16.
However, this is merely manoeuvring criticism. The Somali legal system is under construction, and the efforts of the Somali government and parliament to catch up with international law are recognisable. Anyone expecting legal protection comparable to that in Europe or the USA will certainly not be satisfied with the new investment protection law, at least not with the ability of the administrations to enforce it. On the other hand, anyone who makes this a prerequisite for investment in Somalia fails to recognise the great opportunities currently available.
That is why this article is not intended as a plea against investing in Somalia but as an advertisement in favour of it. After all, with around 3,300 kilometres of coastline combined with a huge domestic market and a comparatively high level of security in large parts of the country, Somalia has regained a strategically important position in the market after a long time. This applies not only to regional markets such as the Arab region but also to the entire East-West trade, i.e. the trade of China, India and the ASEAN region with Africa.[13] In the coming years, this key position will lead to important trade flows passing through Somalia, which is not only part of the EAC but also a direct neighbour of Ethiopia, which with a population of around 100 million is an important market in its own right and will probably also push its way into the EAC in the foreseeable future. Therefore, Somalia has set the course for its economic future. More trade means more tax revenue, means more government opportunities, means greater legal certainty, means more investment opportunities.[14] Therefore, Private investment has never been as conducive to development as it is in Somalia. Bilateral investment agreements should accompany these investments.
[1] <https://ec.europa.eu/commission/presscorner/detail/en%5E/ip_24_3262> last accessed 23 July 2024.
[2] <https://africanlegalstudies.blog/2023/07/28/change-through-trade-east-african-community-starts-accession-negotiations-with-somalia/> last accessed 23 July 2024.
[3] <https://www.bmwk.de/Redaktion/DE/Artikel/Aussenwirtschaft/investitionsschutz.html> last accessed 23 July 2024.
[4] <https://www.deutschlandfunk.de/handelsabkommen-die-deutsche-angst-vorm-chlorhuehnchen-100.html> last accessed 23 July 2024.
[5] Taken from: <https://www.bmwk.de/Redaktion/DE/Artikel/Aussenwirtschaft/investitionsschutz.html> last accessed 23 July 2024.
[6] EAC Treaty, Art. 27.
[7] <https://www.researchgate.net/publication/373678193> last accessed 23 July 2024._JURISDICTIONAL_OVERLAPS_IN_TRADE_AND_INVESTMENT_DISPUTES_SETTLEMENT_IN_THE_EAC_REFLECTIONS_ON_THE_EAST_AFRICAN_COURT_OF_JUSTICE’S_’CONSTRAINED_JURISDICTION’_teaching_international_trade_law_regional_i.
[8] East African Court of Justice Rules of Arbitration, eacj.org, 8 March 2017.
[9] EACJ Rules of Arbitration, Rule 11.
[10] EACJ Rules of Arbitration, Rule 36.
[11] <https://icsid.worldbank.org/sites/default/files/ICSID%203/2024Jun13ICSID%203-ENG.pdf> last accessed 23 July 2024.
[12] Dolzer, Kriebaum, Schreuer, Principles of International Investment Law, 3rd. Editions, p. 381.
[13] A role that the coasts of the Horn of Africa once played until the Portuguese ended it by force of arms in the 16th century.
[14] Here I like to quote Björn Richter from GiZ-Team Arusha.
