Getting Africa Ready for Sustainable Energy Investments

December 13, 2016

In September 2015, countries of the world adopted a set of goals to end poverty, protect the planet, and ensure prosperity for all. Collectively these goals were termed ‘Sustainable Development Goals’ to be achieved by 2030. This article focuses on achieving sustainable energy for all as contained in Goal 7.

 

Energy remains an important driver of economic growth. Yet, it contributes significantly to climate change. In the UN estimation, it contributes to 60% of total global greenhouse gas emissions.[1] Over 1.2 billion people live without electricity and the concentration of these people are in Sub-Saharan Africa and South-Asia.[2] The negative impact of inadequate access to electricity pervades different sectors of the economy. Industries have to resort to alternative energy sources which cost more. In the end, consumers bear the cost. In the midst of this problem, the UN under Goal 7 is concerned with ensuring access to affordable, reliable, sustainable and modern energy for all.

 

The estimated cost of switching to more sustainable energy infrastructure each year would entail increasing investments in the energy sector from $400 billion to $1.25 trillion by 2030. A large chunk of these investments have to be made in Sub-Saharan Africa and South Asia which suffer a deficit in energy supply.

 

The International Energy Charter (“the charter”, an update on the European Energy Charter)[3] provides a global framework for addressing the deficit in energy supply and improving sustainable energy development. The East African Community (EAC), and the Economic Community of Central African States (ECCAS) were the African regional economic groups which signed the Charter on November 25, 2016. The signing was done at the 27th meeting of the International Energy Charter Conference and Ministerial Meeting held on November 25th – 26th, 2016 in Tokyo, Japan. By their signature, they became observers. The Economic Community of West African States (ECOWAS) and the following African countries previously signed the charter: Benin, Burundi, Chad, Mauritania, Morocco, Rwanda, Senegal, Swaziland, Tanzania and Uganda. [4] As signatories to the charter, these countries commit to developing their energy sectors in a responsible and sustainable manner by incorporating best practices in cooperation with other members of the Charter.

 

 Source: EAC

 

 

The Charter provides a means of bringing together energy producing, transiting and consuming countries who are guided by a multilateral set of rules for global energy governance.[5] The Charter respects the sovereignty of states over its energy resources. It is not binding. Rather, it is a mere declaration of political intention aimed at strengthening energy cooperation between its signatories. Countries which have signed and ratified the Energy Charter Treaty (ECT)[6] are however bound by it. African countries are yet to accede to the ECT (although concrete steps have been made by a few to do so).[7] Under the ECT a multilateral framework for cross-border cooperation in the energy industry is created. Specifically, countries which have the ECT in force would be obligated to ensuring the following objectives:

 

  1. Alleviating market distortions and anti-competition practices in the energy sector.

  2. Facilitating the transit of energy materials and products without discriminating on the basis of origin, destination, ownership or pricing of such materials.

  3. Encouraging relevant entities to cooperate in modernizing energy transport facilities and (subject to an international agreement) to treat energy materials and products in transit in no less favorable way as those originating or destined for its own area.

  4. Eliminating existing and creating no new obstacles to the transfer of technology in Energy Materials and Products.

  5. Promoting conditions for access to its capital markets by companies and nationals of other contracting parties to finance trade in Energy Materials and Products and investments in the Energy Sector.

  6. Encouraging and creating stable, equitable, favorable and transparent conditions for investors of other contracting states to make investments in its state.

  7. According a foreign investor the same treatment (in terms of compensation) it would its local investors for losses owing to war, armed conflict, civil disturbance or other similar event in its jurisdiction. Additionally, the contracting state must compensate the investor for losses arising from a requisition or destruction of the investment by its forces or authorities.

  8. Directing it policies toward preventing or minimizing environmental degradation, improving energy efficiency, developing and using renewable energy sources, and promoting the use of cleaner fuels. Additionally, promoting research, development and application of energy efficient and environmentally sound technologies.

  9. Diversifying energy sources and supply routes.[8]

 

By enforcing the above obligations, contracting states get to bridge the gap in energy demand, create policies for investors to conduct their investments sustainably without polluting the environment, and create economic development. In the end, it is a win-win for all and we get closer to the UN’s sustainable development goals.

 

The impact of the above objectives may be minimal without a firmer commitment from African countries and regional economic groups. This is especially important as Sub-Saharan Africa is a principal casualty of the deficit in energy supply. Signing the charter is certainly a first step in the right direction. The ECT would address the problem African countries face in attracting investors into the energy sector. Lack of a relatively favorable regulatory environment has been an impediment to attracting Foreign Direct Investment. Apart from Mauritius which ranks 32 on the world-bank ease of doing business index, many African countries especially in Central, West, and East Africa rank poorly.[9] Factors considered in the ranking include starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting minority investors, paying taxes, trading across borders, enforcing contracts, and resolving insolvency. It has been noted that acceding to the treaty would help stabilize political commitment to ensure universal energy access as well as build confidence in energy markets regulation.[10] This would facilitate sound investment and business decisions.[11]

 

Beyond building strong institutions that encourage private investment, other steps African countries would have to take is entering into investment agreements. In a discussion between the Deputy Secretary General (Productive and Social Sectors) of the EAC, Hon. Christophe Bazivamo, and the Japanese Ambassador for Regional Economic Communities, Amb. Fujita, the latter expressed the need to sign investment and double tax agreements between Japan and EAC partner states to encourage increased investments in the energy sector.[13] The reason for this is obvious- to reduce the cost of investing in the energy sector. Investors are more interested in reducing cost and maximizing profits. According to an UNCTAD report, from an investor’s perspective, International Investment Agreements act as an insurance policy especially for investments in countries with unfavorable country-risk ratings.[14]

 

However, in negotiating bilateral investment treaties, African countries must take into consideration their peculiar circumstances and policy objectives. This would for instance involve taking into consideration the level of development of a particular country which should be commensurate with the level of protection a country can give.

 

Similarly, care must be taken in the negotiation of tax treaties to ensure multinational corporations are unable to shift profits to tax havens or easily engage in treaty shopping. The incorporation of limitation of benefits clauses in such tax treaties could help prevent instances of ineligible persons claiming benefits under a tax treaty.

 

The road to achieving the UN sustainable development goal of affordable, reliable, sustainable and modern energy by 2030 may at first seem unnavigable. However with effective policy changes by African governments which reflect the objectives of the ECT, we would be closer to our destination in no time.

 

 

[1] UN Doc., Affordable and Clean Energy: Why it Matters

 

[2] Id.

 

[3] See Text of the International Energy Charter

 

[4] Signatories of the International Energy Charter (2015)

 

[5] The International Energy Charter, Summary

 

[6] See text of the Consolidated Energy Charter Treaty

 

[7] See list of signatories

 

[8] See Note 6

 

[9] The World Bank Doing Business Report (2016)

 

[10] Matteo Barra & Tomasz Bak, Mobilising Sustainable Energy Investments in Africa

 

[11] Id.

 

[12] EAC Signs International Energy Charter

 

[13] UNCTAD (2015)

 

 

 

 

Modupe O. Otoide is an international tax specialist with a graduate degree in international taxation from the New York University School of Law. Her core practice areas include tax planning and taxation of cross border mergers and acquisitions.

 

 

 

 

 

 

 

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