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East Africa – Opportunities in the Pearl of Africa

10 December 2014

In September 2014 Malcolm Dowden, a consultant in our Energy & Natural Resources team, joined a high-level trade delegation to East Africa, organised by UKTI and led by the Lord Mayor of London.

Malcolm designed and led a series of training workshops on Public Private Partnerships, energy and infrastructure projects in the region. 

The sessions were designed for the emerging and rapidly-developing PPP units of the governments of Uganda, Tanzania and Kenya. During the visit, the delegation received full economic, political and security briefings from UKTI to highlight not only risks, but also the significant opportunities for business in the region.

Certainly, economic growth rates in the region are impressive. For example, the UK is Uganda’s largest cumulative foreign direct investor, with investments worth £0.7bn. Uganda is a democratic republic and has experienced steady growth averaging 6% annually over the last two decades. The strengths of the market include government commitment to the private sector together with total repatriation of profits and re-export support schemes. 

Kenya also remains an important trading partner for UK companies, with investments worth around £1.8bn from over 60 British companies. In 2012 exports of goods from the UK to Kenya were valued at £386m, while UK imports of goods from Kenya were worth £335m. In each case there are significant security risks, not least from Al Shabab militants such as those responsible for the recent bus attack in northern Kenya or for the 2013 attack on Nairobi’s Westgate Shopping Mall. 

However, UKTI and the British High Commission were keen to point out the areas of highest risk (for example, the coastal region around Mombasa and counties near the Somali border) and to stress that the country remains open for business. Doing business in the region is challenging, but by no means impossible.

There are some extremely attractive opportunities. In Uganda, for example, the story of the moment is the unusually successful pattern of oil exploration. Large-scale Ugandan oil deposits, described as Africa’s biggest on-shore oil discovery in 20 years, were announced in 2006 and subsequently proven by the drilling of numerous successful test wells.

Estimated reserves are about 2.5 billion barrels, a figure that may increase with new exploration, and a projected maximum daily production rate of some 125,000 barrels per day (bpd) – though some place this as high as 200,000 bpd.

These figures mean that Uganda stands to join the ranks of mid-sized oil producers, roughly comparable to Gabon, the Republic of Congo, Chad and Trinidad and Tobago. Proven reserves place it in 40th place in global rankings.

However, Uganda’s oil is difficult to access and challenging to transport and process. It will require significant investment – estimated at $10 billion – to develop its oil fields and many years to come on-stream. When commercial volumes of oil were confirmed in 2006, it was hoped that production could begin by 2009.

To date, production has yet to commence, delayed by disputes between the government and oil companies, controversies over the terms of production-sharing agreements (PSAs) between them, and disputes over taxation.

It is not expected that commercial-scale production will begin until 2016, and delays to beginning development of the field could push this back still further. Full production will not be reached until the early 2020s at least.

There are also more generalised areas of challenge.  Looking beyond the oil fields themselves, the region’s transport, energy, communications and social infrastructure requires huge investment – and that is the context within which PPP legislation is being introduced and implemented throughout East Africa.

Uganda’s PPP strategy was published in 2010.  Its proposed PPP Act was sent to  the President for signature in July 2014, but remained in limbo due to industry concerns about key provisions – not least a clause requiring full Parliamentary approval, possibly on a line-by-line basis, for any PPP contract. Any such requirement would risk fatal delays to any project. 

Consequently, the Bill was sent back to Parliament for further consideration – most recently on 3 December 2014 by the Parliamentary Finance Committee.

Projects are not wholly stalled until the legislation is in force.  The PPP unit has proceeded with several projects on a purely contractual basis and has a pipeline of further projects awaiting attention.

However, given that a key purpose of the PPP legislation is to ensure transparency, fairness and efficiency in the procurement process (all key factors when seeking significant foreign investment) there is fear that legislative delay risks deterring investment and limiting the pace of development.

Throughout the region, legislative provisions are only part of the story.  Energy and any other infrastructure projects must recognize and address a wide range of communal rights over land and resources.

Although only sparsely and sporadically documented, communal rights enjoy constitutional protection and have the capacity to delay or disrupt projects. A feature common to successful and durable projects is early and meaningful engagement with communities likely to be affected by development or resource exploration and exploitation. 

During September’s training workshops with the PPP units and private practice lawyers in the region the design and implementation of effective dispute resolution mechanisms, available at low or no cost to the affected communities, emerged as a key practical concern. 

One consequence might well be to improve the prospects of success for future responses to government tenders that explicitly and convincingly address that issue. Going into the region with concrete and legally-sound proposals for effective community engagement and dispute resolution would maximize the chances of securing development without the risks and problems encountered in other parts of Africa, such as the January 2013 judgment against Shell Oil in the Hague relating to oil spillages and land damage in Nigeria. 

Carefully-drafted and sensibly implemented, community engagement and dispute resolution procedures can also pay positive dividends as laws and standards on corporate responsibility, governance and reporting continue to tighten up.             

This article was written by Clive Hopewell.

For more information contact Clive on +44 (0)207 203 5203 or clive.hopewell@crsblaw.com