LEGISLATIVE CERTAINTY NEEDED TO KEEP RICHES FLOWING
David Nancarrow and Patrick Mohen look at the importance of certainty of law in delivering African resources projects.
United States President Barack Obama commenced his 2013 African tour with a speech in Senegal stating that "Africa is rising... This is going to be a continent that is on the move. It is young. It is vibrant and full of energy". Africa is indeed rising. According to the World Bank, half of the world's ten fastest growing economies are in Africa. However for Africa to continue its economic and social rise the continent must ensure it provides investors, both local and international, with political stability and clear, certain and transparent legislative systems.
PROJECTS IN THE PIPELINE
Recent years have seen unprecedented plans for modern infrastructure development in Africa.
On his recent tour President Obama announced the "Power Africa" initiative which plans to bring US$7bn of investment to African power and energy projects.
Huge plans are in place in East Africa in the form of the Lamu Port and Lamu Southern Sudan – Ethiopia Transport Corridor. In June the governments of South Sudan, Uganda, Kenya and Rwanda agreed to build two pipelines, one stretching from South Sudan to a new port at the Kenyan city of Lamu, and the other from Rwanda to the current Kenyan port of Mombasa.
In May, Tanzania announced that it had signed a framework agreement with China Merchants Holdings (International) Co Ltd for the construction of a new port, special economic zone and railway network that could require more than USD$10bn of investment.
Finding investors for such ambitious projects in Africa has historically been difficult to obtain from traditional sources. Countries suffering from political instability and legal uncertainty have often had little choice of investors but foreign aid and Chinese backed investors such as the China International Fund (CIF). Greater political stability and legal certainty will be required for Africa to attract a wider diversity of investors.
While all legislation changes, law in a developing or politically unstable country is particularly uncertain, and in some cases unclear and lacking in transparency.
As democracy and peace spread wider over Africa, DLA Piper is seeing pressure for legislative reform across the continent as countries seek to develop greater legal certainty and transparency around their mining industries.
The OHADA Treaty, which aims to harmonise business laws across member states, also continues to gain traction with the Democratic Republic of the Congo becoming the 17th member state in July.
BENEFITS FOR GOVERNMENT
Clear, certain and transparent legal regimes for mining will mean that African nations reap the benefits from the present resources boom. In May former UN chief Kofi Annan told the BBC that tax avoidance, secret mining deals and financial transfers were costing Africa US$38bn a year adding that "Africa loses twice as much money through these loopholes as it gets from donors."
BENEFITS FOR INVESTORS
Stable and certain legal systems will also make life easier for investors in Africa.
A lack of legislative certainty in Africa has left investors:
- uncertain as to what the law may be in the future
- unclear on the present laws meaning
- concerned regarding the laws often arbitrary, and in some countries, retrospective application
New laws and taxation
In developing countries such as the Democratic Republic of the Congo, DLA Piper has seen the difficulties investors face regarding:
- the uncertain and changing local regime on issues such as the use of foreign subcontractors and consultants
- concerns over the sometimes arbitrary and pecuniary way in which taxation laws are applied
Uncertainty regarding taxation means that contractors are rarely willing to take the risk for either the payment of taxes or any costs associated with a change in taxation law. These costs must then be borne by the investors. This is a serious deterrent for investors to develop projects in these countries.
Untried legislation in emerging jurisdictions
As new or developing jurisdictions create legislation, it is often unclear for investors how the new legislation will be applied.
In South Sudan, only independent since July 2011, the interaction between the newly passed Corporations Act and the Mining Act is unclear, untested and therefore unknown. Such lack of certainty is a serious deterrent to doing business.
Law with retrospective application
Law with retrospective application (law passed now that applies to events or deals in the past) is becoming an increasing concern for projects in Africa. Retrospective legislation can be an appropriate mechanism in some circumstances, however, if used indiscriminately law with retrospective application can shatter investor confidence and destroy planned projects or even make existing projects unviable.
Guinea Mining Review
At DLA Piper, as part of an international consortium of law firms, we are advising the Republic of Guinea on its review of current mining titles to ensure that existing mining titles comply with the new Mining Code 2011, brought in by the current government after the country transitioned to democracy in 2010.
Guinea is a prime example of newly found democratic political stability allowing a proper, transparent legislative system for mining to be established. DLA Piper's mission is to assist Guinea in ensuring the new Mining Code is followed and that Guinea's vast mineral resources provide a future for the nation.
A CONTINENT ON THE MOVE
Exploration projects have shown that Africa has huge mineral potential. However, business in Africa is still high risk leaving many investors reluctant to invest and governments in weak positions to attract quality investors. Political stability and a clear, certain and transparent legal system will be vital if planned projects are to eventuate and if African nations are to secure real and on-going benefits from their below the surface mineral wealth.
© DLA Piper
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