EACOP: Reaching alignment?
Conceptually, a line is simple to understand; but is a line a good thing or a bad thing? Context is paramount, as illustrated by Tanzania’s Minister for Energy Hon. January Makamba when opening last weekend’s Tanzania Uganda Oil and Gas Symposium (TUOGC) whose primary focus was the East African Crude Oil Pipeline (EACOP).
Contrasting lines that create division (such as borders) and those that unify (such as infrastructural projects), he highlighted EACOP as one such unifying line, and an anticipated stepping stone to other infrastructural investment (including future lines to connect Tanzania’s gas resources with the region (whether Kenya, Uganda, or Zambia)).
As a $3.5 billion project, and with an estimated $20 billion value chain, EACOP will create significant opportunities for Tanzanian and Ugandan businesses, and legislated local content requirements will encourage the use of local capacity wherever possible. Financial capacity was highlighted as a potential constraint for local investors, and there was discussion as to how to best address this, whether through the local banking system or otherwise. The Ugandan Minister for Energy and Mineral Development, Hon Ruth Nankabirwa highlighted the agreed common local content principles in the two countries including: priority for nationals in procurement; areas reserved for nationals; requirements in relation to quality (to meet international standards), and capacity building whether supplier development or training support (including, employee training plans as well as support to training institutions). At the same time she emphasised that whilst national participation is good, availability and competence are paramount if locals are to realise the opportunities.
For Uganda, the economic drivers are twofold as it will also reap the upstream dividend in terms of oil, for which the pipeline will be an enabler. For Tanzania, the economic benefits will arise not only from local multiplier impact of the pipeline project itself, but also the wider multiplier benefit of a stronger Ugandan economy for aggregate demand in the region. Importantly, the project will be a line in the sand to demonstrate that Tanzania is a good proposition for large scale private funded infrastructure investment. Though not the focus of the symposium, a positive update was given on the LNG project including that negotiations on the Host Government Agreement (HGA) which had started early in November, would resume this week.
Success on the LNG front would make any future diagrammatic rendition of our lines of energy connection much more complex as these would span not just pipelines to the region but also LNG shipping supply chains including to India, the ASEAN countries and China. For those of you familiar with the motorway outside Birmingham in the UK, the expression “spaghetti junction” comes to mind!
“Operational Minefields” was the topic for the panel that I sat on together with the Commissioner General of the Uganda Revenue Authority, and the Deputy Commissioner Large Taxpayers of the Tanzania Revenue Authority. Concerns I highlighted included the need to ensure (i) alignment between tax legislation and project commitments in the HGAs, (ii) minimal risk of “tax friction” whether double income taxation, or irrecoverable VAT, (iii) efficiency of processes in clearing project goods for contractors, and (iv) alignment on local content expectations. Although the two countries are marching in step on many issues, there are areas of divergence. For example, whilst Uganda is promulgating detailed enabling legislation (with an EACOP bill currently before their Parliament for a first reading), the approach in Tanzania appears to be different (for example, a much briefer enabling amendment to the tax administration legislation). Uganda has also bitten the bullet in seeking to minimise the risk of double taxation as its EACOP bill specifically address certain double tax risks; in addition, several years ago Uganda ratified the East African Community (EAC) double tax agreement, a document signed by EAC members states in 2010 and subsequently ratified by all with the exception of Tanzania (and Burundi). On a positive note, the two revenue authority representatives highlighted a number of steps being taken to ensure administrative efficiencies - for example, as regards the clearance of imported goods. A constant refrain was that project stakeholders should feel like they are operating in one country. However, local content was noted as an area of particular dissonance in terms of respective approaches in Tanzania (with a focus on local ownership percentage) and Uganda’ (where the focus is more on value addition (including local employment, consumption of local supplies, and other measures to add value locally). Indeed, one of the large travelling Ugandan contingent at TUOGC raised the concern that if not carefully managed the Tanzanian approach could be a recipe for rent seeking rather than genuine local value addition.
Another disconnect is the definition of “local” in the relevant country regulations, which does not make this joint (“Tanzanian and Ugandan”) for the purposes of the project but instead refers back to the nationality of the country (namely, Tanzanian in Tanzania and Ugandan in Uganda). In fact, given the commitments under the EAC Common Market protocol, and given this is a regional project, you might well ask why not define “local” as “East African”?
Whatever the challenges, the mood of the symposium was certainly upbeat. Successfully implemented the project could be a beacon for other investors looking at Tanzania, and a catalyst for steps towards the deeper EAC integration envisaged under the common market protocol (in particular in relation to the movement of people and services).
One thing is for sure: the need for more lines (of connection) was cogently conveyed. United we stand, divided we fall!
