Africa MonthlyAugust 2014

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Contents

1 Editorial

2 Mining

2 TMT

2 Infrastructure

3 Power

3 Renewables

4 Water

4 Oil and Gas

4 China and Africa

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EditorialInvestment In Africa – Current Tax ImplicationsIn the battle for foreign investment it is fair to say that Africa has made the transition from spectator to competitor in recent years. Whilst there is consensus that Africa’s vast natural resource base has encouraged foreign investment, the impact of African tax policies in the form of tax incentives and exemptions has been more hotly contested, and rapidly-changing tax systems can lead to disputes which can be time consuming and costly to resolve.

This article will review some of the tax pitfalls that can arise when investing in Africa and in doing so, highlight how these obstacles can be overcome. This issue has particular relevance given that there is a general movement in Africa away from a reliance on foreign aid to an emphasis on tax revenue to generate income, one effect of which has been greater scrutiny of existing and potential treaty agreements.

Two cases in Uganda illustrate the issues that have arisen for one particular company in the natural resources sector, Tullow Oil. In the first, Heritage sold its rights in two petroleum exploration areas in Uganda to Tullow Oil. The Government claimed that tax was due from Heritage on the transaction, and placed the burden of paying the tax on the purchaser, as a recovery from an agent of a non-resident under local laws. Tullow paid the tax on the basis it would be indemnified by Heritage under a clause of the Sale and Purchase agreement. The dispute then focussed on whether Tullow was able to claim under this agreement, and so was taken to the UK Courts as a dispute between the parties. In July 2014, the Court of Appeal decided in favour of Tullow.

At its simplest level, this case highlights the need to be aware that capital gains taxation may vary from the UK in respect of transactions between non-residents. On closer inspection of the case however, further points can be extrapolated. Heritage questioned the validity of the Government’s claim for tax, and argued that Tullow should not have agreed to withhold tax. On this basis, one of the arguments was that this did not constitute a ‘tax’ claim and therefore the tax indemnity did not cover it.

In a region where tax policy is so prone to change, it is vital to determine and define what constitutes tax for the purpose of a contract. Heritage also contended that Tullow had not met the notice requirements claiming this was a condition precedent to the indemnity. The court rejected this claim, holding that clear drafting would be required in order for notice to constitute a condition for liability. Tullow’s victory in the UK Courts means that Heritage will have to continue its arguments on validity of the charge with the tax authority in Uganda.

In the second case, the Ugandan tax authority sought capital gains tax on another disposal, this time by Tullow. Tullow argued that it had a tax exemption contained in a production sharing agreement. However, the Court rejected Tullow’s claims on the basis that the exemption was approved by a former Ugandan energy minister who had no legal authority to grant the exemption. The judgment has resulted in Tullow being ordered to pay $407 million in capital gains tax, unless successful at appeal.

This is perhaps a more worrying case from the foreign investor’s perspective because as the chief executive of Tullow rightly points out the ruling ‘ignores a contractual term signed by a government minister in Uganda’, a document most investors would think it was reasonable to rely on. This ruling, which shows companies cannot rely on agreements negotiated in good faith with governments, is a glaring reminder that the current tax regime in Africa can be precarious and uncertain. Whilst over generous tax incentives may not be the best way to raise revenues, instability of the tax system will deter the foreign investment which is vital for growth.

In light of these cases, two practical points can be taken away. Firstly, foreign investors should expect the unexpected and think laterally so that agreements can be made robust in order to withstand fluctuations in political opinion and will. Secondly, and perhaps most importantly, having first-rate dispute resolution mechanisms should be at the heart of all agreements, in order to resolve problems when they do arise.

August 2014, Pinsent Masons LLP

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Africa UpdateMiningNewsGlencore, ArcelorMittal Seeking Stake in Simandou: ReportMining majors, Glencore and ArcelorMittal are both looking into acquiring a share of the Simandou iron-ore deposits in southern Guinea. The project, which will tap the world’s largest iron-ore deposits, is being developed by Rio Tinto and production is not expected until the end of 2018. (Mining.com)

Mali Cancels 130 Mining Permits After Sector Audit The Mines Ministry in Mali has cancelled 130 mining permits and the government plans to do a thorough assessment of all the contracts, titles and licenses currently registered. The permits that have been cancelled do not include mines in production already. (Reuters)

Rio Tinto Pulls Plug on Ill-Fated Mozambique Coal Venture Rio Tinto’s ends its short foray into the Mozambique coal sector by selling its coal assets for $50 million to an Indian joint venture. News of the sale is devastating and definitely a setback for Mozambique’s hungry desire to become a major player in the coal exportation arena. (Reuters)

OpportunitiesAccess to Water, Electricity Key Risk for Local Mining and MetalsCompanies Ernst & Young released a report on “Business risks facing mining and metals 2014/2015”, which stated that the biggest risks for mining companies is access to water and electricity. The report suggests South Africa needs to invest in alternative energy sources in order ensure that the flow of electricity remains reliable and enable mining companies to produce at full capacity. (Mining Weekly)

AngloGold Expects More Assets on the Block Before Year-End AngloGold Ashanti predicts that more mining majors will sell their assets soon in anticipation of a sudden drop in the price of commodities. A report conducted by Pricewaterhouse Coopers stated that the gold industry had lost US$110 billion in relation to its market capitalisation in 2013 which is the biggest drop since 1981. (Mining.com)

TMTNewsAfrica’s Tower Ownership Moves from MNOs to IndependentsAfrican tower transactions have attracted significant investment in recent years. Research by TowerXchange predicts that half of Africa’s towers will have moved from mobile network operators to independent tower companies by the end of next year. The movement is being driven by the huge costs associated with upgrading Africa’s networks from 2G to 3G. Mobile network operators now want to focus on monetising their towers. (Developing Telecoms)

Telecoms: Airtel Ghana commits GH200 million in network expansion Airtel Ghana plans to heavily invest in a network services expansion drive. Their focus will be on revamping data services and forms part of the company’s plans to offer an outstanding data experience to customers. Ghana’s Chamber of Telecommunications is also working to reduce disruption to subscribers by lessening the number of cable cuts. (Africa Report)

Fresh revenue stream for telcos as enterprise market expands Telecommunications companies operating in Africa are expanding their presence across the region in order to take advantage of the market opportunity presented by Sub-Saharan countries. It follows that many global and regional firms are increasing investment in cross-border internet infrastructure across the continent in the hope of capitalising on the growing demand for enterprise communications services. (Business Day)

African corporates gain appetite for debt When Helios Towers Nigeria recently looked to raise funds for the purchase of telecom tower masts, it turned to the international capital markets. The company plans to use the $250m bond to profit from Africa’s booming telecoms sector. The corporate issuance was also the first in Nigeria outside the banking and oil sectors. Other countries turning to the capital markets this year have included Ivory Coast, Kenya, Senegal and Morocco. (Financial Times)

Nigeria plans cut in telecoms infrastructure tax The Nigerian government is planning to lower taxes on telecoms infrastructure. In doing so, it hopes to encourage companies to increase spending its networks. The West African nation is home to over 127 million mobile phone users and represents the largest market in Africa by subscribers. (TeleGeography)

Mobile Money grows in Africa but hurdles remain Operators, regulators and experts alike are excited by the potential of mobile money accounts however, apart from in a handful countries such as Kenya, Uganda and Tanzania, the spread of the service has been slow. A fragmented and tough regulatory environment is often blamed, but another obstacle is the lack of technological skills needed to use the service. Whilst there are currently about 250 mobile money services in over 80 countries, almost none are interoperable meaning that electronic money can be moved only on the same network. (Gulf Business)

InfrastructureNewsKenya: Contracts Signed for the First Three Berths At the New Lamu Port in Kenya Under a newly signed Sh42 billion (US$477.54 million) contract between the Kenya Ports Authority and the China Communication Construction Company, the first three out of 29 berths will be built at the new Lamu Port. The whole port project, estimated to cost US$26 billion, includes construction of new roads, railways, airports, and oil pipelines, and it is hoped that it will bring about increased regional integration. (All Africa)

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South Africa: Billions Set Aside for Infrastructure Development It has been announced that R4.9 billion (US$455.8 million) has been provided to the Gauteng Department of Infrastructure Development in South Africa. The funds will be used for infrastructure projects, particularly in the health and education departments. (All Africa)

Zambia: AfDB Pledges Support to Kazungula Bridge Construction It has been announced that the Africa Development Bank (AfDB) will support the governments of Botswana and Zamibia to facilitate the construction of a key bridge, to help close the current funding gap of US$60 million. In total the construction of the Kazungula Bridge will require US$259 million. The bridge marks the point at which the Zamibia, Zimbabwe, Bostwana and Namibia borders meet, and is therefore crucial for cross-border economic development. (All Africa)

OpportunitiesKenya launches housing PPP 10,000 new houses will be built in Kenya under its National Housing Programme. A ‘request for qualifications’ for the project has been made. (PPP Bulletin)

Zimbabwe: NRZ Secures U.S.$460 Million South Africa Loan It is expected that the Development Bank of Southern Africa will award a US$460 million loan to the National Railways of Zimbabwe. If the deal is closed, the loan will provide funding for infrastructure rehabilitation works on Zimbabwe’s railways. (All Africa)

PowerNewsSouthern Africa: Time SADC Expedites Response to Power Deficit The Southern African Development Community (15 states in Southern Africa) has recognised the need for addressing the power deficit of the continent before it can continue its economic development. Investors in other sectors, including mining and manufacturing, are reluctant to invest in the continent due to the power deficiency and lack of electricity reliability. The countries recognised the need to work together in 1995 when there was an agreement to develop a regional infrastructure and unified power grid. However, development of this has been slow, as has the development of many of the proposed projects, such as the Grand Inga Falls project in the DRC, as the capitol required for such projects is hard to find. However, the big energy projects are required to help close the power gap. The dip in donor countries (post GFC) has also had an impact as many projects have had their funding pulled or delayed. (All Africa)

U.S. Debating “Historic” Support for Off-Grid Electricity in Africa With Congress having acted, pressure is on the Senate to pass a Bill that will direct US investment into developing Africa’s electricity supply. The first week in August will see a summit take place to focus on investment opportunities for the project and will be attended by US and African delegates. Though there has been an emphasis on renewable energy, the main interest of all

parties will be the natural gas reserves on the continent. There will also be a focus on the off grid market to battle the power issues in rural regions. (Thomas Reuters Foundation)

Opportunity Blackstone Backs Black Rhino to Invest in African Infrastructure and Power Development Blackstone have announced their partnership with Black Rhino. The global asset management firm has a history of working with the development and construction of energy projects, including those in Africa, and a Hydropower Plant in Uganda. Black Rhino was created with the sole purpose of energy and infrastructure development in Africa. They also believe strongly in working closely with African companies and corporations to ensure continuation of leadership and to develop and train their partners, particularly in regards to environmental and safety standards. (Wall Street Journal)

RenewablesNewsTata Power explores renewable energy opportunities Tata Power is looking to grow its green energy interests and is turning to Africa. Tata currently have two Wind Farm projects in South Africa under a joint-venture. They also currently offer advisory services to two Nigerian distribution companies. The company is looking to expand its capacity and increase the amount of contribution from clean energy to 25%. (All Africa)

Gambia: Energy Minister – Gambia Among Best Windows of Opportunities to Promote Renewable Energy The Gambian Minister of Energy has declared Gambia to be in a state of opportunity for the promotion and use of renewables. He highlights the importance of renewable energy and its role in generating income by removing the need for conventional plants and suggests that smaller countries, such as The Gambia, could bypass the requirement for conventional plants completely. The talk came at a training conference designed to incorporate women into the renewables market and emphasis was put on the opportunity for women to broadcast the merits of sustainable

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energy to their communities. The training also focused on introducing small renewable energy supply systems into homes and communities, aiming to increase self-sufficiency across the country. (The Point)

Opportunity Nigeria: Breakthrough in Solar Panel Manufacture Promises Cheap Energy The development of solar cells is set to rise as a breakthrough in technology promises cheaper and safer production. The new technology (using edible salt normally used in the production of tofu!) promises increased flexibility and ease of use. As the salt is found in sea water, it is much cheaper to acquire than the toxic cadmium chloride currently used (about 1% of the cost). The new method will also have an impact on waste disposal as the non-toxic salt use removes a lot of the costs and difficulties associated with safely disposing of toxic chemicals. This could prove to increase the competiveness of the solar industry as well as against traditional fossil fuels. (All Africa)

Water NewsWater Sanitation in South AfricaThe Select Committee on Social Services has warned the newly created Department of Water and Sanitation on the urgent need to find solutions to the current problem: citizens are not receiving enough quality water. The Minister, Ms Nomvula Mokonyane, stated that the problem is caused by a shortage of skills at local government level and thus emphasised the need for intervention to directly address such issues. She added that the Department has already begun to engage with provinces to find the best way to deal with the skills shortage and water provision. (All Africa)

Opportunity Drilling begins on South Africa’s first deep-water wellThe drilling operation for South Africa’s first deep-water well officially got underway on Thursday. The drill is located in the Outeniqua Basin, approximately 175km south of South Africa’s southern coast, and is operated by French multinational Total along with its partner Canadian Natural Resources International. The programme will take between three and four months – dependant on weather conditions – at an estimated cost of over R2 billion. Mineral Resources Minister Ngoako Ramatlhodi said the enterprise had great potential to increase the rate of economic growth and decrease unemployment levels. (Independent Online)

Oil and GasNewsOilfields in AngolaBP, a British multinational, has stated that it is going to spend a further $15bn in developing new oilfields in Angola. The

announcement comes after the company recorded a sharp rise in second quarter profits. The oil and gas producer has already invested more than $25bn into the project. (Oil Review Africa)

New GTL Facility in Mozambique Sasol has announced that it is going to look at building a gas-to-liquids (GTL) plant in the country alongside Sasol and Empresa Nacional de Hidrocarburos (ENH), the national oil company of Mozambique. Eni has already found 2.1 trillion cubic metres of gas offshore in its previous work there; ENH estimates that the country could have seven trillion cubic metres of reserves. (WorldStage News)

OpportunityAfrican Oil and Gas: ‘On the brink of a boom’PwC has released a report looking at events in the past year in Africa’s oil and gas sector. The report states that growth is greatly impeded by the long term problems of widespread corruption, poor infrastructure and a lack of skills. However, it concludes that the continent is ‘on the brink of a boom’ with East Africa especially offering significant potential for growth. (Oil Review Africa)

Africa Oil and Tullow Oil seek partner for Kenyan oilfields The two companies recently announced that they are looking for a third partner to develop their oil discoveries in Kenya. This statement comes after they found new oil reserves in North Kenya’s South Lokichar Basin. This discovery gives further weight to the view that East Africa is now the epicentre of hydrocarbon exploration. (Reuters Africa)

China and AfricaNewsUgandans begin to question the high price of the growing China-Africa pact The relationship between Uganda and China has been strained to breaking point following the execution of Ham Andrew Ngobi, a Ugandan citizen, for drug trafficking offenses. Ngobi often travelled to China to purchase clothes that he would sell in Uganda. His last words to his family were broadcast on Ugandan television, sparking anger and calls for a more hostile attitude towards China. (The Guardian)

OpportunityChinese Outsourcing Recent reports highlight that Chinese manufacturers are increasingly outsourcing to Africa. The companies are taking advantage of the low production costs offered by African countries in contrast to the rapidly increasing wage rates in China. Consequently, there are now over 2000 Chinese private businesses in Africa with the figure set to rise. (The Week Magazine)

Notes

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This note does not constitute legal advice. Specific legal advice should be taken before acting on any of the topics covered.Pinsent Masons LLP is a limited liability partnership registered in England & Wales (registered number: OC333653) authorised and regulated by the Solicitors Regulation Authority and the appropriate regulatory body in the other jurisdictions in which it operates. The word ‘partner’, used in relation to the LLP, refers to a member of the LLP or an employee or consultant of the

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