Investment in the sub-Saharan energy sector: a promising future for arbitration?Netspace
In recent years, many economies in sub-Saharan Africa have grown at an unparalleled rate. Economic fortunes are on the upswing, populations are booming and international investment is flowing into the continent.
A consequence of this has been a commensurate increase in the emergence of disputes. This is creating an opportunity for states and interested parties to consider whether existing dispute resolution frameworks are fit for purpose.
Commonly, parties operating in the energy sector decline to resolve disputes before the local courts, preferring instead to submit disputes to confidential arbitration, often in a foreign jurisdiction. This is due to a perception, sometimes justifiably, that such courts may be slow, inconsistent or vulnerable to bias.
Politicisation of the power sector
After decades of under investment, power generation and distribution infrastructure has not kept pace with economic and population growth. Two out of three people in sub-Saharan Africa lack sufficient access to electricity. Private commercial enterprises are hampered by an expensive and unreliable power supply, which inhibits economic growth. Consequently, focus has turned to the creation or expansion of domestic generating capacity through the building and operation of new power plants or the restoration and upgrading of existing facilities. However, many countries have faced difficulty financing the required infrastructure as low savings rates and low tax revenues have limited the available pool of domestic finance. To address this funding gap, external investment has been sought. Some countries, such as Nigeria, have embarked on widespread programmes of privatisation, offering scope for the involvement of foreign investors.
Due to a combination of historical, cultural and economic factors, participation in the power sector in sub-Saharan Africa is particularly prone to politicisation. Although economic constraints may compel governments to embark on joint ventures with foreign investors, politicians remain alert to the political benefits to be gained by delivering flagship, high profile and popular power projects. This can encourage an overly interventionist approach, with states often requiring that equity participation in power projects is shared with local partners.
This politicisation can contribute to the emergence of disputes. For example, politically motivated requirements to partner with local entities may put a joint venture under strain if there is an imbalance between the finance, resources, or expertise that each party can contribute to a project. This can be exacerbated by political instability or economic volatility, which can rapidly undermine the fortunes of a local partner or the prospects of a project.
In jurisdictions where the sector has not traditionally been rigorously supervised or regulated, intense public scrutiny can encourage the initiation of widespread legal and regulatory reforms. The pursuit of more interventionist oversight may put further pressure on commercial contracts in countries like Tanzania and Angola, which have initiated high profile power sector reforms, vital components of which relate to the expansion of the role of sector regulators.
The elusive African seat
Despite the location of both assets and parties in sub-Saharan Africa, contracts with foreign investors commonly stipulate that when disputes arise, they will be resolved by international arbitration outside not only the host state, but outside of Africa. The International Chamber of Commerce’s recently published statistics for 2016 indicate that despite a 50% surge in arbitrations registered involving sub-Saharan African parties, (including a record number of 30 Nigerian parties), the total number of sub-Saharan African-seated arbitrations remained startlingly low. Just three sub-Saharan African cities were chosen as seats out of 966 new cases filed.
The reluctance of foreign investors and local parties to arbitrate in Africa is attributable to many factors. Politicisation of the sector can stoke the fears of foreign investors that projects are particularly vulnerable to corruption or bias. Investors worry that a well-connected local player or state-affiliated entity may have an opportunity to exert pressure on the local government or court system, which could unfairly prejudice any pending or ongoing dispute. On a practical level, parties may also be wary of the logistical challenges that are presented by arbitrating in some sub-Saharan African jurisdictions. These include the ready availability of facilities, arbitrators and experts, as well as potential travel or visa issues for participants in the process.
Foreign investors (whose financial resources may buy them significant bargaining power as the project documents are negotiated at the outset) may insist on arbitration in established arbitral seats such as London or Paris. Investors are often familiar with such seats, trusting the transparent and predictable track record of the supervisory courts in relation to fundamental issues such as the granting of interim relief or challenges to the award. There may be concerns that certain sub-Saharan jurisdictions lack a sufficiently evolved or prescriptive legislative framework to oversee proceedings in the same way. For example, Tanzania’s Arbitration Act is based on the English Arbitration Act of 1889 and is therefore significantly outdated, affording the local courts wide powers of supervision and intervention that are not available under the UNCITRAL Model Law and most modern arbitration legislation.
However, any comfort offered to foreign participants by arbitrating outside of Africa to avoid concerns about interference or deficiencies in the arbitral process, has little tangible benefit if the award must be enforced in a local jurisdiction. In such circumstances, the attitude and approach of the local courts remains vitally important. Investors may face difficulties enforcing in countries that have not ratified the New York Convention, such as Sierra Leone. Even in signatory countries, achieving enforcement may be problematic owing to excessive delays or inconsistent decisions before the local courts. There may also be jurisdiction specific obstacles, such as the Democratic Republic of Congo opting for a record of four reservations when ratifying the New York Convention.
In the absence of safeguards to protect investments through the arbitral process, investors may be unwilling to continue to commit funds to the region. This, in turn, will inhibit economic growth. International investors must be persuaded that funds committed will be protected by a transparent and predictable legal and regulatory framework, upheld by an impartial and effective judiciary. Governments must be responsive to concerns regarding the politicisation of the sector, as well as concerns regarding the conduct of arbitration in the region and enforcement of awards more generally.
The fact that local partners and state owned entities frequently consent to arbitrate disputes with foreign parties outside of Africa may reflect an appreciation of the concerns held by investors. Recognition of these concerns could prompt overdue legislative reform. Indeed, legislative reform is underway in many jurisdictions. This year, the lower house of South Africa’s parliament passed a long awaited bill adopting the UNCITRAL Model Law and the New York Convention has come into effect in Angola.
Although an encouraging first step, legislative changes in isolation cannot achieve a meaningful transformation of the legal framework if the experience and approach of the judiciary does not also keep pace. There have been high profile instances of local courts refusing to enforce arbitral awards on spurious grounds. If the judiciary fails to act transparently and predictably in support of the arbitral process, little progress will be achieved. However, following high profile legislative and institutional promotion of arbitration, an increase in judicial support has been evident in some jurisdictions, such as Nigeria and Mauritius. In other states, in order to address the potential divergence between legislation and the judiciary, proactive steps to work with the courts have been taken. An example is the Rwandan government’s apparently successful promotion of arbitration by engaging with the judicial community and providing training in relation to the arbitral process.
Alongside legislative reform and an evolving attitude to arbitration by the judiciary, arbitral institutions in Africa are playing an increasingly prominent role in attempting to address the concerns of foreign investors. This has included promoting arbitration in the region and hosting international events and conferences such as the Kigali Arbitration Centre’s hosting of the East Africa International Arbitration Conference of 2017.
The way forward
Foreign investors undoubtedly remain, with some justification, wary of conducting arbitration or enforcing arbitral awards in Africa. Corruption remains a concern. Although countries such as Botswana, Cape Verde, Rwanda and Mauritius have made great strides (being the highest ranked countries in the region to feature in Transparency International’s 2016 rankings), countries such as Nigeria, Ghana and South Africa have not performed so well.
Although concerted efforts are underway to ease investors’ trepidations, change in attitudes locally and internationally will take time. The short term may witness a more collaborative approach between international and local practitioners and institutions. States may follow the example set by Mauritius, which is a signatory to the New York Convention. It has enacted legislation based on UNCITRAL’s Model Law and has focused on international links with institutions and practitioners through the establishment of the LCIA-MIAC arbitration centre. It has also hosted prominent international arbitration events such as ICCA’s 2016 congress (attended by Stewarts partner and head of International Arbitration, Philippa Charles).
Practitioners may more regularly instruct local counsel or advise clients as to the merits of an African seat. This may be particularly relevant in jurisdictions where the government is heavily promoting local arbitration, such as in Kenya, where the Nairobi Centre for International Arbitration is automatically designated as the seat of proceedings for government contracts. If successful, this approach may provide an opportunity for foreign investors to capitalise on local knowledge and expertise through the instruction of local counsel, while also serving to continue to build up a strong local network of experienced practitioners and judiciary.
The recent increase in sub-Saharan African arbitration may prompt the International Chamber of Commerce to establish a local regional case management centre. This is something it has done in other regions experiencing a sharp growth in arbitral proceedings such as Brazil, Singapore and the UAE. Consideration may also be given to the development of specialised institutions, following the lead of the China/Africa Joint Arbitration Centre. This was established to provide a neutral and cost effective mechanism for the resolution of disputes between Chinese and African parties in the wake of massive Chinese investment into the continent.
Over the coming years, practitioners and institutions will have to adjust to the growing prominence of arbitration in sub-Saharan Africa. If positive legislative and judicial trends continue, they may result in the emergence of certain sub-Saharan countries as ‘safe’ seats. This would provide reassurance to foreign investors and continue to facilitate investment and development in the region.