East Africa is home to 15% of construction projects on the African continent with a total of 43 projects valued at US$27.4bn according to the 2016 Africa Construction Trends Report, produced by Deloitte. Many of these projects are cross-border initiatives and transport, energy and real estate account for the top three sectors. The majority of projects are government-backed and Chinese contractors are by far the most active, covering 41.9% of the market.
Of the top three mega projects in the region, the following stand out in value:
- The Grand Ethiopian Renaissance Dam ("GERD") valued at US$8.4bn;
- Kenya's Standard Gauge Railway ("SGR") valued at US$3.8bn; and
- Uganda's Karuma Hydro power Plant valued at US$2.2bn.
Given the size and diversity of the infrastructure industry, we have outlined in this article some of the principal problems generally faced by both governments and contractors participating in mega infrastructure projects in the region and how best to manage them.
Legal Challenges to Bid Awards
Public Procurement in East Africa, on average, amounts to between 10% to 30% of GDP. Legal challenges to bid awards are one of the principal problems encountered when dealing with public procurement. These challenges can drive up the cost considerably. Most challenges are founded on the basis that the rejection of the bid was "unfair". In particular, a bidder may argue that the bid has not been evaluated properly, i.e. in accordance with the criteria issued by the awarding authority. Or, alternatively, that the criteria are not clear enough and therefore cannot be applied properly or fairly across the board.
To mitigate the risk of legal challenges to bid awards, effective, fair and transparent tender evaluation is critical:
- Effectiveness: The main aim of any effective tender evaluation should be to determine the tender which best meets the needs of the public body, and achieves value for money. The evaluation should therefore identify the best available and affordable business solution, within applicable legal constraints, through a robust and defensible award process.
- Transparency: this is not simply about disclosure and openness, but also relates to the removal of discretion and subjectivity. An evaluation must be based on objective criteria that are released to bidders in advance. If the authority is delegating the evaluation to a third party, it is also important to ensure that there are no conflicts of interest. Members of the panel should therefore be required to disclose in advance any connections they have (past or present) to any of the bidders.
- Fairness and Equal treatment (non-discrimination): All bidders and potential bidders must be given the same opportunity, based on the same information and criteria, and evaluated in a non-discriminatory manner.
In addition to the above, it is also very important to consider corruption, which is a global problem in public procurement. Whether it is present or not, an allegation of corruption can give rise to a legal challenge as well as other potential legal proceedings. To prevent such challenges, many African countries are moving towards an e-procurement system, which is automated so as to remove the possibility of human error, discretion, subjectivity, manipulation of the results, political interference and corruption. Several successful projects have already been tendered, awarded and completed on this basis. Certain African states are leading the way in the development of such systems given the obvious benefits.
Force Majeure Clauses
Force majeure is a general concern for all projects, especially in emerging markets. Broadly it refers to an event outside the reasonable control of either employer or contractor, which is unavoidable in nature and potentially prevents either party from fulfilling its obligations under the contract. Force majeure clauses in contracts generally contain a non-exhaustive list of events that would constitute a force majeure (eg. war, rebellion, strikes, natural disasters, shortage or restriction of power supply, shortage of labour etc.). Construction contracts are not generally terminated for force majeure events. The events usually result in a suspension of the works and a request for an extension of time for completion and potentially added cost.
The drafting of your force majeure clause is very important. Before the parties commence drafting, they should appreciate and consider the types of risk that can arise in the specific region. Although commonly used standard form contracts (such as FIDIC) do list out a series of events, these are typically non-exhaustive. There are particular events that are peculiar to certain areas. For example, the 2014 Ebola outbreak in West Africa had a significant impact on a number of construction projects in the region. However, the outbreak had not been expressly considered in the majority of force majeure clauses. This led to a number of disputes arising between parties that could have been avoided had they taken this type of event into consideration during the drafting stage.
Dispute Resolution Clauses
Given the strong arbitration tradition in international trade and the general reluctance of foreign investors to go before local courts, international arbitration in Africa or involving African parties has seen considerable growth and East Africa is no exception.
Issues can easily arise when parties include dysfunctional arbitration clauses in their contracts. This can result in delay and additional costs being incurred by both parties, as satellite disputes can arise about the validity and scope of the arbitration agreement itself. Getting the drafting right is fundamental. Parties can turn to the model arbitral clauses provided by established arbitration institutions (such as the KIAC in Kigali or the LCA in Lagos) to limit the risk of future challenge. Particular attention needs to be given to the choice of seat. The seat determines the procedural law that will apply to the proceedings. It is also very important that parties select a jurisdiction that is arbitration friendly and that is a signatory to the New York Convention, as this will greatly assist any enforcement action that needs to be taken once the arbitral award is issued.
*This article first appeared in the September 2017 issue of Partnerships Bulletin (volume 22, issue 7) and is reproduced with kind permission of the publishers.