KO QUATERLY · document or instrument in writing granted under the Act, to any person authorizing the importation, exportation, generation, transmission, distribution and supply of

1KO QUATERLYM I D Y E A R J O U R N A L

KO QUATERLYM I D Y E A R J O U R N A L

JULY 2019

AN ANALYSIS OF THE NEWLY ENACTED ENERGY ACT 2019

VISION 2030’SAGENDA TOWARDS AN INDUSTRIALIZED KENYA

STRUCTURING OF CORPORATE SOCIAL RESPONSIBILITY.

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We have invested in training, experience and focus in gaining in-depth understanding in order to provide industry experience along with technical and practical insight

KO Associates


CONTENTS

CONTRIBUTORS

Crispine OdhiamboManaging Partner

Alex OduolAssociate

Joyce MuthoniAssociate

Lewis GichehaAssociate

Safiya KaruaLawyer

Wilson Wahome Lawyer

Alex KuboSeniour Associate

Alvin AttaloAssociate

CLIENT ALERT CONTEMPORIZING THE ENERGY LEGISLATIVE FRAMEWORK IN KENYA

KPLC MORATORIUM ON POWER PURCHASE AGREEMENTS:

KRA:SETTING THE STANDARDS IN TAX COLLECTION

VISION 2030’S AGENDA TOWARDS AN INDUSTRIALIZED KENYA.

INSIDER TRADING CONCERNS IN MERGERS AND ACQUISITIONS

A MESSAGE TO CONTRACTORS

STRUCTURING OF CORPORATE SOCIAL RESPONSIBILITY

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About KO AssociatesKO Associates is a Leading African law firm and a member firm of Citadel Law Africa with well-established expertise and focus on Project finance, Infrastructure advisory, Corporate M&A, Banking & Finance; Project Finance, Technology & Intellectual Property, Trade and Investment, Energy Projects; and Dispute Resolution. The team at KO has the right blend of Legal and Sectoral expertise as well as a proven record in advising project developers, financiers, public institutions, corporations, Multinationals and listed firms that operate in Kenya and Africa as a whole.

Our Vision is to be a World Class Law Firm with roots in the African Continent offering high quality legal services across the globe. We would do this by focusing on our mission of offering timely, practical and innovative legal solutions to clients in our areas of expertise.

Our ApproachOur approach relies on our commitment to providing counsel and advisory in projects that greatly impact communities by transforming their lives by bringing long term benefits to them .

Our goal is to be the firm of choice for clients with respect to their most challenging legal issues, most significant projects and the most critical initiatives. We strive to be innovative and create valued outcomes for our clients, which supports our vision for the future.

Innovativeness and constructiveness are our legacy. In our work strive to be innovative, to think and create valued outcomes for our clients which support our vision for the future. We encourage our people to be creative, entrepreneurial and to share their knowledge and expertise with their colleagues.

We are a client centered firm. Our goal is to be the firm of choice for clients with respect to their most challenging legal issues, most significant projects and the most critical initiatives. Our success is driven by that of our clients. Our clients are at the heart of how we work and we always anticipate what they will face next, adapt to the changes and provide them with the very best team, processes and solutions.

AwardsKO has distinguished itself as a highly rated commercial law firm and consistently achieves thehighest rankings.


KEY PEOPLE

STEPHEN KIPTINNESSSenior Partner

CRISPINE ODHIAMBO Managing Partner

MARTIN OBUOPartner

ALEX KUBOSenior Associate

ALEX ODUOLAssociate

JOYCE MUTHONIAssociate

ALVIN ATTALOAssociate

WILSON WAHOMEAssociate

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CLIENT ALERT CONTEMPORIZING THE ENERGY LEGISLATIVE FRAMEWORK IN KENYAAn Analysis of the Newly Enacted Energy Act 2019

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In March 2019, President Uhuru Kenyatta signed the Energy Act 2019 into law. This enactment served to overhaul the old and outdated energy legislative framework in light of the contemporaneous advancements made in the energy sector.


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Key Highlights

• The Energy Act 2019 establishes three key institutions in the energy sector that is the Energy and Petroleum Regulatory Authority (EPRA), the Rural Electrification and Renewable Energy Corporation and the Nuclear Power and Energy Agency.

• It calls for an integrated national energy plan every three years and requires inclusive consultations with relevant stakeholders in developing and reviewing energy plans.

• The New Act also makes provision for the licensing of coal electrical power generation including transportation of coal

• The New Act depicts Kenya’s commitment towards nuclear energy generation in the future.

• The New Act introduces the concept of net-metering in Kenya allowing energy consumers with solar power generators to enter into net-metering agreements with distribution licensees.

In March 2019, President Uhuru Kenyatta signed the Energy Act 2019 into law. This enactment served to overhaul the old and outdated energy legislative framework in light of the contemporaneous advancements made in the energy sector. The Energy Act 2019 was also enacted in an effort to consolidate all the laws relating to the energy sector as well as set out the functions of the County and National Government in respect of promotion of renewable energy, exploration, recovery and commercial utilization of

geothermal energy as well as regulation of production, supply and utilization of electricity and other energy forms. The Energy Act also creates a legal framework for the regulation of midstream and downstream petroleum and coal activities.

Institutional Framework Under the Energy Act, 2019

There are three key institutions established under the new Energy Act 2019. These institutions include: • Energy and Petroleum

Regulatory Authority (EPRA).

• Rural Electrification and Renewable Energy Corporation (REREC).

• Nuclear Power and Energy Agency (NPEA).

Energy and Petroleum Regulatory Authority (EPRA)

EPRA is established under section 9 of the Act is mandated to: • Regulate generation,

importation, exportation, transmission, distribution, supply and usage of electrical energy with the exception of licensing of nuclear facilities;

• Regulate the importation, refining, exportation, transportation, storage and sale of petroleum and petroleum products with the exception of crude oil;

• Manage the production, conversion, distribution, supply, marketing and usage of renewable energy;

• Issue, renew, modify, suspend or revoke licenses and permits for all undertakings and activities in the energy sector; and

• Set, review and approve contracts, tariffs, adjust electric power tariffs and charges for

common user petroleum logistics facilities and petroleum products.

Rural Electrification and Renewable Energy Corporation (REREC)

REREC established under section 43 of the Act is tasked with the responsibility of: • Overseeing the

implementation of the Rural Electrification Programme;

• Managing the Rural Electrification Programme Fund; and

• Mobilization of funds for the Rural Electrification Programme.

In March 2019, President Uhuru Kenyatta signed the Energy Act

2019 into law. This enactment served

to overhaul the old and outdated energy legislative

framework in light of the

contemporaneous advancements

made in the energy sector.

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Nuclear Power and Energy Agency (NPEA)

NPEA is established under section 54 of the Act to carry out the function of: • Proposing policies and

legislation necessary for the successful implementation of a nuclear power programme; and

• Undertaking extensive public education and awareness on Kenya’s nuclear power programme.

Apart from the above three key institutions established under the Act, there are other institutions such as the Energy and Petroleum Tribunal and Renewable Energy Resource Advisory Committee. Persons aggrieved by a decision of the EPRA, are allowed under the Act to lodge an appeal to the Energy and Petroleum Tribunal within thirty (30) days of receipt of such decision.

The Renewable Energy Resource Advisory Committee

is an inter-ministerial technical committee instituted majorly to advise the relevant Cabinet Secretary on the licensing of renewable energy resources area, management of water towers and catchment areas, the management and development of renewable energy resources, amongst other advisory issues requested by the County Governments on matters related to renewable energy resources.

The CS may, on receiving an application for the extraction of geothermal resources in respect of any land, and in consultation with the Renewable Energy Resource Advisory Committee, grant a license, renew a license for a term not exceeding five (5) years, extend time to the licensee over part or the whole geothermal resources area.

For the purpose of the adoption and implementation of measures to conserve energy and improve efficiency in harnessing, processing, conversion, transportation, storage of energy,

EPRA is responsible for educating and providing information to the public regarding energy demand, management and conservation.

Various Energy Licenses Under the Energy Act, 2017

Section 2 of the Energy Act defines a license as any document or instrument in writing granted under the Act, to any person authorizing the importation, exportation, generation, transmission, distribution and supply of electrical energy or the exploration and production of geothermal energy, in the manner described in such document or instrument.

There are various licensing authorities established under the Act, including the Renewable Energy Advisory Committee, Nuclear Power and Energy Agency, the Cabinet Secretary, Energy and the Energy and Petroleum Regulatory Authority (‘the Authority’). Section 11 of

The CS may, on receiving an application for the extraction of geothermal resources in respect of any land, and in consultation with the Renewable Energy Resource Advisory Committee, grant a license, renew a license for a term not exceeding five (5) years, extend time to the licensee over part or the whole geothermal resources area.

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the Act empanels the Authority to grant licenses over all energy undertakings at any level. The Authority is vested with the power to issue, renew, modify, suspend or revoke licenses and permits for all undertakings and activities in the energy sector.

General Requirements for all Licenses under the Energy Act

All persons or entities seeking to obtain energy permits under the various provisions of the Act are required to fulfil certain requirements. Prior to making any application for a license, the person or entity intending to make an application is obligated to give fifteen days’ notice, by public advertisement, in at least two newspapers of nationwide circulation. The application is to be made in the prescribed form provided by the Authority. The Authority is obligated under section 98 of the Energy Act 2019 to consider the following factors before issuing any of the various licenses:a) Sufficient notice by public

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b) the need to protect the environment and to conserve the natural resources in accordance with the Environmental Management and Coordination Act;

c) land use or the location of the undertaking;

d) economic and financial benefits to the country or area of supply of the undertaking;

e) the economic and energy policies in place from time to time;

f) that the contractual rights, privileges, liabilities and obligations accrued to an existing licensee or any other person are not materially adversely affected;

g) the cost of the undertaking and financing arrangements;

h) the ability of the applicant to operate in a manner designed to protect the health and safety of its employees and users of the service for which the license is required and other members of the public who would be affected by the undertaking;

(i) the technical and financial capacity of the applicant

i) to render the service for which the license is required;

j) any adverse representations or objections made under section 120;

k) the applicant’s proposed tariff; and

l) any other matter that the Authority may consider likely to have a bearing on the undertaking.

The following are the various licenses under the Energy Act

2019 and the implications the various and specific licensing requirements will have on energy development, financing of energy sector operations and activity in Kenya.

Licensing of Electrical Energy Undertakings

Section 117 of the Act specifies that any person who wishes to carry out any energy undertaking must obtain the requisite licenses as provided for under the Act. This license applies to any person or entity that wishes to carry out the generation, exportation, importation, transmission, distribution and retail supply of electricity.

Retail Supply License

Section 2 of the Act defines a Retail Supply License as any document or instrument authorizing a person to supply electrical energy in the manner described in such document or instrument to any premises and such license shall also entitle the licensee to receive a bulk supply from another licensee. The retail supply license authorizes the licensee to receive bulk supply of electrical energy and to supply energy to any premises.

Distribution License

The distribution license is granted under section 119 of the Act. It authorizes a person to operate a distribution system for the purpose of enabling supply of electrical energy to consumers or to other licensees. The distribution license authorizes the licensee to plan, build, operate and maintain the distribution system necessary for the conveyance of electrical energy from generating stations or plants either directly or through the

Prior to making any application for an Energy

act license, the person or entity

intending to make an application is obligated to

give fifteen days’ notice, by public advertisement, in at least two newspapers

of nationwide circulation.

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transmission system for purposes of enabling supply to consumers as stated in the license.

Transmission License

In addition to permitting system operations to maintain and upgrade a transmission grid, the transmission license provided for under section 2 of the Act further confers authority to a licensee to transmit electrical energy from a source to any end point in the manner provided for in the license.

Generating License

A party that wishes to generate electrical energy must obtain a license from the Authority. The electrical energy generation license is sought and received subject to the limitations imposed by Section 112 of the Act.

Electrical Operators Licenses (Electrical Contractors)

Contractors who undertake electrical installation, maintenance or operational work must seek and obtain a license as provided under the Act. Section 150 of the Act provides that an electrical installation license means a license authorizing a person to carry out electrical installation work for, business, training, or teaching purposes either for gain or reward or for no charge at all.

The requirements for grant of the electrical energy license are well intended to protect the consumers of these services from rogue or unlicensed operatives. The provision is broad in scope including even electrical installation work that is carried out for no charge. The licensing provisions for electrical contractors will likely promote

the provision of a greater variety of electrical contractual services across all energy sector levels.

Geothermal Resource License

Under the applicable regime for regulation of geothermal resources, the Cabinet Secretary is authorized to grant a geothermal search license under section 79(1) of the Energy Act. Section 78 of the Act prohibits any person from searching for geothermal resources without a permit issued by the Authority. Notwithstanding anything to the contrary in any written law or instrument of title, the Act provides that no person shall sink a well, tap, take, use or apply geothermal resources for any industrial or commercial purpose unless he is granted authority or license under this Act.

The Cabinet Secretary on receiving an application for the extraction of geothermal resources in respect of any land, and in consultation with the Renewable Energy Resource Advisory Committee shall grant a license over part or the whole of a geothermal resources area under certain terms. The maximum term for which such a license is granted is 30 years.

The requirements for grant of the geothermal resource license are sufficiently varied to attract new entrants into the geothermal resources development area and challenge established operators. For instance, section 78 provides that the Authority may revoke a license granted to a geothermal resources prospector or developer if the authorized person has not commenced a search of geothermal resources for a continuous period of five years.

Additionally, the Act has a

sound provision for determining public interest issues in the grant or renewal of licenses. Consequently, these provisions should facilitate development of capacity and infrastructure for a competitive geothermal energy sector in Kenya.

Coal Electrical Energy License

The grant of coal energy related licenses is governed by sections 94 and 95 of the Act. Coal electrical energy generation and related operations are licensed under clause 94 (2) which provides that any person who wishes to undertake electricity generation using coal must have a valid license issued by the Authority.

Coal Transportation License

Any person who wishes to transport coal for energy production must have a valid permit in respect of each vehicle used to transport the Coal. Coal transportation operations are licensed under clause 94 (2) which provides that transportation of coal for energy production using a vehicle must have a valid permit in respect of that vehicle issued by the Authority

The provisions for coal licensing in the Act provide a window of opportunity for the utilization of coal as an energy source. Nevertheless, there is need to develop further capabilities to deal with environmental issues such as emission of Sulphur Dioxide in the atmosphere attributed to the combustion of coal. The long-term environmental effect emanating from coal would be climate change leading unpredictable weather patterns. It is therefore critical to consider these adverse

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environmental concerns linked to coal prior to licensing.

Common User Facility

A person licensed to operate a common user facility is mandated by the express terms of Section 111 of the Act to provide non-discriminatory open access to its facility for use by any person on payment of a ‘reasonable charge’ as may be prescribed in regulations made under the Act.

Construction Permit

Section 107 of the Energy Act provides for the conditions subject to which applications for construction permits are determined. The provision of requirements for construction permits are geared towards protection of consumers of energy sector services. The terms under which permits are to be issued under the Act will promote sustainable use of energy resources and infrastructural development at national and devolved levels.

Role of the County Governments Under the Energy Act

The Energy Act empanels county governments and their strategic partners to develop sub-national energy policies in line with the specific characteristics, resource endowments and energy needs of each county. The Act cascades certain elements of energy planning from the national government to the county level, a novel development that requires county governments to devise how they can best contribute to the national and international goals set for clean energy uptake.

The Act also mandates county governments to engage with stakeholders in the energy sector as well as utilize their competencies to fight climate change mitigation. The county energy policies are crucial to effective energy governance in Kenya since counties have a big impact on the investment climate for clean and alternative energy within and beyond the counties. Individual counties are also best suited to provide tailor-made solutions for county specific challenges.

The Fifth Schedule to the Act and Section 222 of the Energy Act categorize county governments’ responsibilities over energy resources or operations into three (3) broad areas: a) County energy planning;

b) County energy regulation; and

c) County operations and development

County Energy Planning

Under the Act, county governments have the responsibility to regulate and license retail petroleum service stations and to undertake physical planning relating to energy resource areas within the county such as dams, solar and wind farms, municipal waste dumpsites, agricultural and animal waste, ocean energy, woodlots and plantations for production bio-energy feedstock.

Paragraph 2 of the Fifth Schedule to the Energy Act stipulates that county governments are responsible for providing rights of land and way for

Contractors who undertake electrical installation, maintenance or operational work must seek and obtain a license as provided under the Act. Section 150 of the Act provides that an electrical installation license means a license authorizing a person to carry out electrical installation work for, business, training, or teaching purposes either for gain or reward or for no charge at all.

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energy infrastructure. County governments are further charged with the preparation of county energy plans, incorporating petroleum, renewable energy and electricity master plans.

County governments are also responsible for the promotion of energy demand by planning for industrial parks and other energy intensive activities, and to coordinate, prepare and implement disaster management plans.

County Energy Regulation

The Fifth Schedule subsequently provides that devolved governments shall have responsibility for regulation and licensing and supply of retail coal products for domestic use; regulation and licensing of charcoal production, transportation and distribution, provision of designated parking for petroleum tankers; biomass production, transport and distribution and biogas systems. Lastly, county governments are responsible for customized sub-national codes for energy efficiency and conservation in buildings to local conditions.

County Operations and Development

The Act specifically allocates responsibility for county energy operations and development to county governments, which involves competence over the following activities: a) Electricity and gas reticulation.

b) Provision of adequate street lighting.

c) Provision of designated parking for petroleum tankers.

d) Collection and collation of energy data.

Impact of the Act on Energy Project Developers

The Energy Act aimed to modernize the legal framework for Kenya’s energy sector, as it introduced a raft of amendments to Kenya’s ageing energy legislative framework with the view of keeping abreast with the evolving global energy landscape. Additionally, as Kenya is in the final stages of making its first crude oil sales under the Early Oil Pilot Scheme (“EOPS”), it is expected that the recent enactment of the Energy Act will reinvigorate investors to participate in Kenya’s nascent

oil and energy industry due to increased certainty with respect to Kenya’s legislative regime.

The Energy Act 2019 initiates calls for an integrated national energy plan every three years. A progressive energy plan that considers all viable energy supply options to ensure delivery of reliable energy services at least cost, and which is guided by appropriate technology. The progressive nature is due to the fast changing technologies in the Energy Sector.

The Act also includes coal (a high carbon fuel) as one of the energy resources to be taken in account in energy planning. This serves to preserve the current mega coal projects including the Lamu Coal Power Plant and Kitui Coal which can now not be wished away as they now have backing in law. The enactment serves to spur investor confidence particularly for those involved in coal projects within Kenya.

In the past legislative regime, energy generation planning in Kenya had not been adequately clear. It was often clouded by influence from investor lobby groups, and this tended to

The Act also includes coal (a high carbon fuel) as one of the energy resources to be taken in account in energy

planning. This serves to preserve the current mega coal projects including the

Lamu Coal Power Plant.

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make energy planning less objective. The new law now requires inclusive consultation with the relevant stakeholders in developing and reviewing of energy plans. It also requires that inputs from county energy plans are taken into account.

Implementation of electricity generation projects is essentially a long lead time process which spans no less than five years from approval to commissioning. This makes it necessary to take longer term views during energy planning, while ensuring that we do not lag behind technological developments which is advantageous to project developers.

The New Act will enable stakeholders deal with the problem of Over-estimation of national electricity demands as energy planning will be inclusive under the new Act incorporating counties. This has in the past has been an expensive mistake which has resulted in surplus carried power production capacity which has to be paid for by consumers. Whereas electricity supply should always lead demands- so as to provide a secure supply buffer- this must not be excessive.

Impact of the Act on off-grids and micro-grids and other renewables

Turning to technology, it seems like in another five years-time solar will have become an accepted “base-load” grid supplier. This will be made possible by the ongoing advances in battery storage technology which is currently heading for 100 megawatt capacities. It will be possible and economical for daytime solar generation to be stored for grid injection during peak demands a concept that has been introduced in the Energy

Act. According to section 162 of the Act, net metering would enable consumers who own electric power generators in particular solar power generators to enter into net metering system agreements with distribution licensees. It is also important to note that in a decade’s time there will a huge drive towards renewable owing to electrification of passenger cars and many other gadgets hence the clamor for clean energy. In light of the new Energy Act, these developments will definitely incentivize the licensing regime for off-grid and micro-grid renewable energy sources power plants and lead to a conducive legal environment for off-grid and micro-grid developers through the promotion of clean energy.

Impact of the Act on Consumers

The Act obligates the Government of Kenya to provide affordable energy services to all persons in Kenya; where the Cabinet Secretary shall develop and implement a fair, transparent and equitable strategy to ensure that all households in Kenya are connected to supply electricity by 2030. The CS is further obliged to develop a conducive environment for the promotion of investments in energy infrastructure development to include formulation of guidelines in collaboration with relevant county agencies on the development of energy projects and to publicize the guidelines among the potential investors.

Turning to technology, it seems like in another five years-time solar will have become an accepted “base-load” grid supplier. It will be possible and economical for daytime solar generation to be stored for grid injection during peak demands a concept that has been introduced in the Energy Act.

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The Energy and Petroleum Authority is mandated to set review and approve contracts, tariffs and charges for common user upstream petroleum facilities. This ensures that the connection of electricity supply to consumers is at a fair rate. Basically, these are mainly to protect the interests of the consumer, investor and other stakeholders.

The Energy Act goes further to protect its consumers by creating a ‘renewable energy feed-in-tariff system with the objectives of catalyzing the generation of electricity through renewable energy sources. The tariff system encourages local distributed generation thereby reducing demand on the network and technical losses associated with transmission and distribution of electricity over long distances.

The Act provides that an electrical energy consumer

intending to generate electrical energy for own use of capacity not exceeding one megawatt shall not require any authorization. The Energy and Petroleum Regulatory Authority is obligated in consultation with the CS to review the electricity market in order to enhance and improve efficiency, reliability and improve the quality of services by all licensees to their consumers. The Transmission licensee has the duty to provide non-discriminatory open access on payment of fair and reasonable transmission or wheeling charges. Additionally, the licensee shall provide non-discriminatory open access to its distribution system for use by of an eligible consumer upon payment of use of system charges.

A person who wishes to carry out electrical installation work must be licensed as an electrical contractor by the Authority.

Consequently, a consumer who permits a person who is not duly authorized as an electrical worker or contractor to carry out electrical installation work in his premises commits an offence and on conviction, is liable to a fine not exceeding fifty thousand (Kshs.50, 000.00) shillings or to a term of imprisonment not exceeding three (3) months or both such fine and imprisonment.

With regard to Metering of supply to a consumer, the amount of electrical energy supplied to the consumer or the number of hours during which the supply is given, or the maximum demand taken by the consumer shall be ascertained by meters of a type approved by the Kenya Bureau of Standards. This is to ensure the highest level of reliance in recording the electrical energy supply. In order to effect the aforesaid requirement, the retailer is obligated to supply and fix

The Act obligates the Government of Kenya to provide affordable energy services to all persons in Kenya; where the Cabinet Secretary shall develop and implement a fair, transparent and equitable strategy to ensure that all households in Kenya are connected to supply electricity by 2030.

The Energy and Petroleum

Regulatory Authority is obligated in

consultation with the CS to review

the electricity market in order to enhance and

improve efficiency, reliability and

improve the quality of services by all licensees to their

consumers.

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meters upon the premises of the consumer. The licensee shall therefore be liable to pay appropriate compensation to a person due to failure, poor quality or irregularity of electricity supply.

A consumer is also restricted from tampering with seal or any meter, otherwise they will have committed an offence and shall, on conviction, be liable to a fine not exceeding fifty thousand (Kshs.50, 000.00) shillings or to imprisonment for a term not exceeding two years, or both.

Where a consumer who is supplied with electrical energy has provided a meter for the purpose of ascertaining the quantity of electrical energy supplied and the licensee changes the method for charging for electrical energy, the licensee shall either pay to that person the reasonable expenses which the person may have incurred

in providing a new meter. The consumer shall at all times, at their expense, keep all meters belonging to the consumer in proper order.

The licensee shall not connect or disconnect any meter to be used for ascertaining the quantity of electrical energy supplied unless he has obtained the written consent of that person. Subsequently, the licensee shall not make any alteration, adjustment or readjustment in any meter being used for ascertaining the quantity of electrical energy supplied, unless the licensee has given to the consumer not less than forty-eight (48) hours written notice of the intention to do so.

Provided a consumer reported any suspected defect in the meter, and the licensee did not within thirty (30) days examine the meter, the licensee is not to

be entitled to recover from the consumer any charges for more than thirty (30) days from the date the meter was found to be defective, not unless the defect is through the interference by the Consumer. In case of any dispute as to recalculation of electrical energy consumed by a consumer, it shall be referred to the Authority for determination.

The licensee is only allowed to reduce, discontinue or refuse to supply electrical energy to any consumer if the consumer has failed to pay charges for consumption of electrical energy.

In the event a consumer wishes to own an electric power generator of a capacity not exceeding one megawatt, where the generation facility is located in the area of supply of the distribution licensee or retailer, they may apply to enter into a

A consumer is also restricted from tampering with

seal or any meter, otherwise they will have committed an offence and shall, on conviction, be liable to a fine not

exceeding fifty thousand

(Kshs.50, 000.00) shillings or to

imprisonment for a term not exceeding two years, or both.

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net-metering system agreement to operate a net-metering system with a distribution licensee or retailer.

The Act ensures that the consumer is neither unfairly charged nor over-charged, through creation of a tariff structure where the terms for the supply of electrical energy to consumers shall be in accordance with principles prescribed by the Authority. Nevertheless, the Authority shall review the retail tariff every three (3) years.

The Authority is also now mandated under the Act to issue an Energy Saving Certificate to a consumer whose energy consumption is less than or more than the prescribed norms and standards. In addition, the fifth schedule of the Energy Act gives the National Government the responsibility to protect the

consumers, investor and other stakeholder interests.

KO Associates Energy Capability

KO Associates is a leading African Law firm and a member firm of Citadel Law Africa with well-established expertise and focus on energy projects. The team at KO Associates has the right blend of legal and sectoral expertise as well as a proven record in advising project developers, financiers, public institutions, corporations, multinationals and listed firms that operate in Kenya and Africa. Our client focus, innovativeness and flexibility are key features that differentiate from the rest. Understanding, anticipating and satisfying the client’s individual legal need is for us, a priority. Our lawyers win praise for their technical ability as well as their

commercial approach and can provide a comprehensive service including advising on project structures, conducting legal due diligence, risk allocation and reviewing the “bankability” of project agreements and financing agreements.

Some of the major Energy Projects wherein we have acted as legal advisors include:

• Investment due diligence for a pension scheme on a proposed USD 20 million equity investment in the project company for a 1050MW power plant project. The firm reviewed the project company corporate governance arrangements, project agreements including the Power Purchase Agreement, EPC Contract, O&M Contract, Government Letter of Support, the Environmental Impact Assessment Report and Land Rights Acquisition Agreements.

Our client focus, innovativeness and flexibility

are key features that differentiate

from the rest. Understanding, anticipating and

satisfying the client’s individual

legal need is for us, a priority.

The team at KO Associates has the right blend of legal and sectoral expertise as well as a proven record in advising project developers, financiers, public institutions, corporations, multinationals and listed firms that operate in Kenya and Africa.

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• Advised Magadi Solar Company, an independent power producer to provide access to productive, affordable, and reliable solar electricity in Oletepesi, Kajiado County. The scope of our advice is on, but not limited to project development legal advisory, permitting and licensing process, project documentation and project finance work in the development of solar powered micro-grids for generation, distribution, and supply of 40MW renewable electricity.

• Project Advisory to Powerhive Inc in Developing Series of Micro-Grid Power Systems, Kenya (2014-2015) — The Project Developer, Powehive was in the process of developing Solar Power Micro- Grids in the two Counties of Kisii and Nyamira on a Pilot basis to be known as “Project Cloverfield”. The Project aimed at supplying electric power to residents, businesses and institutions which were not supplied through the national grid. The portfolio of solar-powered microgrids was aimed at providing electricity to over 200 villages in rural western Kenya, serving at

least 20,000 local residents. The firm provided Project development legal advisory, permitting process, Project documentation, and Project finance work; advised on local law requirements and considerations as well as regulatory aspects applicable to the Project and, where necessary, proposing appropriate mechanism to ensure compliance with applicable laws.

• Licensing and Structuring of Energia Power, Kenya 2011—The Firm assisted Energia Power Limited prepare an application for Energy Generation License and assisted during the preliminary negotiations for Power Purchase Agreement under the Government of Kenya Feed-in-Tariffs Programme for Alternative Energy Sources. The firm also advised on structuring the transaction.

• Advising Swala Energy Kenya Limited in its 25% equity interest farm out in its hydrocarbon exploration license to another local energy investor.

• Development of Annotated Power Purchase Agreements

(PPAs), Africa 2014—The Firm was involved in the development of annotated PPAs for six Power Africa countries (Kenya, Tanzania, Liberia, Ghana, Nigeria and Ethiopia) under the US Power Africa Program and other Project Documentation including Transmission Contracts. Specifically, the firm undertook the following activities:

a) Review and analysis of the Kenya Energy Sector policy and legal framework;

b) Proving working brief on the legal requirements for effective Power Purchase Agreements in Kenya;

c) Attending annotation workshops in Washington and Dar es salaam to provide Kenyan perspective on Power Purchase Agreements.

Disclaimer

“The contents of this alert are intended to be of general use only and should not be relied on without seeking specific legal advice from the contacts below.”

Contributor

CRISPINE ODHIAMBO Managing Partner

[email protected]

Contributor

ALEX ODUOL Associate

[email protected]

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VISION 2030’S AGENDA TOWARDS AN INDUSTRIALIZED KENYA.Implementation of Special Economic Zones.The Government of Kenya has designated funds and resources for trade as a key factor towards achieving the Big 4 Agenda and eventually the realization of Vision 2030.


It has been established and defined through the Special Economic Zones Act 2015, which provides for zones

located within the country’s national borders, which points to increase trade balance, employment, investment, increase foreign exchange earnings and enhance global competitiveness.

All licensed SEZ enterprises, developers and operators in Kenya shall be shielded from taxes and similar regulatory hurdles that directly or indirectly impede trade. They will be granted exemption from all taxes and duties payable under all the domestic tax legislations including the EAC Community Customs Management Act. The enterprises and its shareholders shall enjoy certain rights such as profit and capital repatriation, the full protection of its property rights against all risks of nationalization, expropriation, industrialization and intellectual property.

Implementation:

Presently, a number of Zones have been earmarked for development. Subsequently, the SEZ Act, 2015 mandates the establishment of the SEZ Authority as the regulator of the said Zones. It is responsible for designing, approving, establishing, developing, operating, promoting and regulating an SEZ. The Authority also issues licenses and implements Government policies.

Kenya has the highest Gross Domestic Product (GDP) in East Africa and its gateway in Mombasa is meeting the country’s economic growth. Therefore, many companies have chosen Kenya for their East African headquarters. Mombasa was chosen to implement

the Vision 2030 SEZ for its strategic location of potential for further development. It is highly competitive in terms of its logistics and facilities with regard to the port, highways and airports. Due to the nearby landlocked countries, it makes Mombasa an attractive investment location.

The Government of Kenya correspondingly revealed a grand industrialization roadmap that desires to make Mombasa a food processing center targeting export markets. This desire is in the process of implementation through the creation of a local hub at Mombasa’s Dongo Kundu Special Economic Zone where construction of a Free Port/Free Trade Zone Port and road is underway. It will have an Industrial zone, a Residential zone, and an LNG Power plant and development of universities and research centers. A Free Trade Zone (FTZ) is a class of special economic zone, where goods may be landed, stored, handled, manufactured or reconfigured and re-exported under specific custom regulation and is not subject to customs duty.

Since September 2018, the Kenya Ports Authority (KPA), with the support of the Japan International Cooperation Agency (JICA) has been undertaking an environment impact assessment of port infrastructure of Mombasa Special Economic Zone in Dongo Kundu, Likoni constituency. The special zones will process both locally sourced and imported raw materials for re-export. This will not only improve the country’s current account, but also create jobs that would aid in reducing the high unemployment rates.

On the other hand, Lamu County is among the counties

that are declared conducive for designation of SEZs being an ideal Freight Logistic hub and industrial hub driving the country’s vision 2030 Economic Vision of a sustained economic growth. Lamu contains the LAPSSET Corridor transport and infrastructure developments such as crude and product oil pipelines; standard gauge railways; highways; international airports; resort cities; and the port which is currently under construction.

Success stories

African countries have sought to replicate the success of East Asia by implementing SEZs. The SEZ has made crucial contributions to China’s economic success. It has contributed significantly to national GDP, employment, exports and attraction of foreign investment. Since 2007, SEZ in China has contributed to about

Kenya has the highest Gross

Domestic Product (GDP) in East Africa

and its gateway in Mombasa is meeting

the country’s economic growth. Therefore, many companies have chosen Kenya for their East African

headquarters.

20

in excess of 30 million jobs. The success of China’s SEZs and industrial clusters was through an experimental approach; a strong commitment; and the active, pragmatic facilitation of the state.

Top leadership adhered to the importance of strong commitment; preferential policies and broad institutional autonomy; staunch support and proactive participation

of governments, especially in the areas of public goods and externalities; public-private partnerships; foreign direct investment and investment from the Chinese diaspora; clear goals and vigorous benchmarking, monitoring, and competition; business value chains and social networks; as well as continuous technology learning and upgrading.

Several SEZs have been established across Bangladesh. Mandated by the Bangladesh Economic Zones Act, 2010, the Bangladesh Economic Zones Authority was officially instituted in 2002. Bangladesh government has taken an initiative to introduce a hundred SEZ throughout the country. Since March 2016, thirty seven government SEZs have acquired land, and are under development.

Currently eight non-government SEZs are operational and under construction.

Egypt has successfully implemented SEZ through North West Suez Special Economic Zone (SSEZ) located at the Red Sea, 45 km south of Suez. By 2013, Egypt had nine FZs and thirteen Investment Zones.

Ethiopia has a SEZ named Oriental in Dukem near Addis that produces electrical machinery, construction materials, steel and metallurgy. However, the Zone is wholly owned by China.

Conclusion

The above notwithstanding, Kenya should be cautious in her handling of SEZs. Particularly, we should be willing to learn from the teething problems experienced in other jurisdictions that operate SEZs.

Mombasa is highly competitive in terms of its logistics and facilities with regard to the port, highways and airports.

60%

30M

Percentage of exportChina has contributed

inexcess jobs which have been generated by China


Contributor

SAFIYA KARUA | Lawyer

[email protected]

An infrastructure project is more prone to risks which may affect its implementation and make it completely unviable despite having a sound basis and being uneconomically viable. There may be high risks involved which include the rigid regulatory and legislative issues surrounding labour, transportation and institutional governance and challenges.

Kenya should amend her laws to provide for and accommodate the smooth transition of SEZ. The legal framework should provide for an adequate basis for private participation in the infrastructure sector. During the Environmental and Social impact assessment, a preliminary study should be undertaken regarding the environment impact of the project and the possible

All licensed SEZ enterprises, developers and operators in Kenya shall be shielded from taxes and similar regulatory

hurdles that directly or indirectly impede trade.

displacement and compensation of people.

The Project Vehicle and the SEZ Authority being the entities vested with the right to implement the projects; should have discussions on how some of the main risks affecting project infrastructure should be generally managed.

22

A MESSAGE TO CONTRACTORSThe Construction Legal Framework. The construction industry in Kenya has recently been experiencing problems ranging from collapsing houses to poor construction standards. These problems have been prevalent despite the fact that Kenya has a robust industry regulatory framework.


This article underscores the importance of the construction industry and outlines the existing

regulatory framework in Kenya. It aims to briefly inform players in the construction industry in Kenya of the existing laws which they are called upon to observe in order uplift quality standards.

In Kenya, there are two common contracting methods in the construction industry; i. Traditional construction

contracts where design work and construction are separated and,

ii. Integrated Contracts also known as Single source contracts, where design and Construction works are combined.

The latter places both design and construction obligations upon the contractor.

Construction activities involve project conception, design and planning, project procurement, project finance, project implementation and operation and maintenance. Each one of these activities is critical in achieving an end product that is of good quality. The quality and quantity of a construction activity affects many other sectors of the economy and even the ultimate wellbeing of society.

Today, the construction industry is subject to a diverse range of statutes formulated by various government bodies and agencies. The main objective of statutory regulation is to protect and preserve public interest and the interest of the various players in the industry. In addition to regulations specific to construction services, several

measures applicable to all sectors of the economy are also relevant for the construction industry.Statutory regulation is effected through approvals, setting standards and accreditation mechanisms, inspections, audits, licensing, and introduction of penalties, introducing incentives etc.

There are numerous parties who are involved in the construction industry in Kenya, either directly or indirectly. Some of these parties are not necessarily professionals like the clients, manual laborers or suppliers while others are professionals like engineers, architects, quantity Surveyors, environmentalists or environment expert, land surveyors, social scientist, funding agencies, material suppliers, procurement experts and lawyers. The main players in the construction industry are discussed below.

1) Clients/Employer

The client is the project proponent; he normally initiates the project and provides the design team with a project brief based on his needs and budget. In certain circumstances the client is the owner of the project but in other cases especially involving an incorporated body the client may be the company itself and the owners could be the shareholders.

The client determines other players to be involved in the project and the conditions applicable from planning stage to completion and even operation. To succeed in his construction tasks, the client should have basic knowledge in areas of technology, architecture, economics, social sciences and law. If he lacks the knowledge,

then it is important that he incorporates experts who would advise him on various issues.

The main roles attributed to the client include;a. Defining the project and

obtaining the necessary permits and ensuring that the resources are available.

b. Determining and engaging the construction players like the consultants and contractors for design and construction.

c. Ensure that contractual terms and conditions are observed, and proper documentation is done.

d. Client must maintain a good relationship and fulfill any expectation by the project owner, customers, the community and the construction industry. The client must understand the business concept of the owner regarding its core business and significant financial requirements. All value-generating processes start with the customer’s requirements and different types of customers have different ways of expressing their requirements. The client should identify these requirements and provide solutions. Since the lifetime of a construction project is normally long, the perspective of future customers must also be taken into consideration bearing in mind the flexibility for technological developments and alternative uses in the future. Most community desires are expressed in an established regulatory framework like laws, standards, rules etc.

24

2) Engineers

The professional status and the actual practice of professional engineering in Kenya is defined by the Engineers Registration Act, Cap 530 Laws of Kenya.Section 3 of the Act establishes the Engineers Registration Board which is responsible for regulating the activities and conduct of registered engineers. The Board maintains a register in which every qualified engineer is listed. Only registered or licensed engineers are permitted to use the title „registered engineer„engineer or practice as such. Engineers in Kenya have formed the Institution of Engineers of Kenya, a society which co-operates with national and international institutions in development and application of the engineering profession.Further, consulting engineers have formed the Association of Consulting Engineers of Kenya (ACEK). ACEK was formed in 1968 with the aim of promoting the advancement of the professionalism of consulting engineers. Their scope involves all engineering roles and providing facilities for Government, Public Bodies, and Associations.

A construction project engineer has his duties specified under the consultancy agreement. The primary responsibility is to produce a complete, accurate, biddable and buildable set of plans for all the structures in a project.

3) Architects and Quantity Surveyors

In Kenya the Architects and Quantity Surveyors Act Cap 525 Laws of Kenya provide for the registration and governance of architects and quantity surveyors.

The Act establishes the Board of Registration of Architects and Quantity Surveyors whose main duty is to register Architects and Quantity Surveyors and make by-laws that govern various issues. The Act restrict the use of the words or phrases, “architect", "architecture", "architectural", "quantity surveyor" or "quantity surveying” unless the user is registered as an architect or quantity surveyor. Architectural Association of Kenya is a professional body for architects in Kenya charged with the responsibility of representing member’s interests.

The quantity surveyor provides financial advice on construction and contract management. The Institute of Quantity Surveyors of Kenya (IQSK) is an organization specifically charged with promoting and safeguarding the interests of the Kenyan Quantity Surveyor. The primary objective of IQSK is to promote the advancement of the practice of Quantity Surveying and its application in Kenya.

4) Property Developers

Property Developers buy land, finance real estate deals, build or have builders build projects, create, imagine, control and orchestrate the process of development from the beginning to end. Typically, developers purchase a tract of land, determine the marketing of the property, develop the building program and design, obtain the necessary public approval and financing, build the structure, and lease, manage, and ultimately sell it.

Developers work with many different counterparts along each step of this process, including architects, city planners, engineers, surveyors, inspectors, contractors, leasing agents etc.In Kenya, property developers formed the Kenya Property Developers Association (KPDA) in 2006 as the representative body of the residential, commercial and industrial property development sector in Kenya. The association work in proactive partnership with policy-makers, financiers and citizens to:

• Provide efficient and progressive solutions to the shortage of affordable housing in the country.

• Promote home ownership for all Kenyans.

• Help resolve pressing challenges such as building deterioration, fire safety, environmental degradation and the proliferation of informal housing.

• Ensure that the property development sector develops rapidly but in an organized, efficient, economical and ethical manner.

Engineers in Kenya have formed

the Institution of Engineers of Kenya, a society

which co-operates with national

and international institutions in

development and application of

the engineering profession.


5) Insurance Companies

Insurance plays a major role in construction risk management. It may be defined as the equitable financial contribution of many for the benefit of an individual who has suffered loss. Various parties involved in the construction will wish to manage risks through various ways. In so far as insurance is concerned, parties aim to obtain the broadest insurance coverage at the lowest cost while ensuring minimum risks during the construction work.

Construction insurance consists of all contracts of indemnity within the activities of the construction project and industry where insurance is chosen as the medium through which risks and liabilities are shifted. Construction involves several activities that fall in different professions, employment of various technologies and construction materials. A construction insurer is therefore expected to understand the various activities to be able to analyze and risk that is being transferred.

The type of insurance required for construction industry may be classified as property, liability and in international construction, marine insurance. Property insurance provides for the protection of works and any material, equipment and machinery connected with it. It is contracted through an insurance policy known as Contractor’s All Risk Insurance policy. The policy excludes a number of risks and imposes a number of conditions that must be met. In general, however, unless a risk is specifically excluded from the policy, it is considered to be included in the all risks cover.Liability insurance provide

protection to the insured against specifically legal liabilities to which he may become exposed as a result of activities culminating in bodily injury or property damage. The legal liabilities may be towards employees, in which case Employers Liability Insurance would apply, or towards third parties who are not party to the insurance contract, in which case Public Liability Insurance would apply. In the case of the design professional, legal liabilities incurred in the course of his professional work is covered under Professional Indemnity Insurance.

In Kenya, The insurance market is represented in three laws which involve handling and placement of insurance (like brokers and agents), the acceptance and underwriting of contract of insurance (like insurance companies) and re-insurance (re-insurance companies).

6) Estate Agents

The Estate Agent Act regulates the professional of estate agents conduct of persons who deal

with the selling, purchasing or letting of land and buildings. Section 3 of the Act establishes the Estate Agent Registration Board which is responsible for registration of estate agents and of ensuring that the competence and conduct of practicing estate agents are of a standard sufficiently high to ensure the protection of the public. Any person who is registered by the Board and who wishes to practice must obtain a license from the Board.

7) Project Financiers

Project finance is finance for a particular project, such as a mine, toll road, railway, pipeline, power station, ship, hospital or prison, which is repaid from the cash-flow of that project. Project finance is different from traditional forms of finance because the financier principally looks to the assets and revenue of the project in order to secure and service the loan. In contrast to an ordinary borrowing situation, in a project financing the financier usually has little or no recourse to the non-project assets of the borrower or the

Insurance plays a major role in construction risk management. It may be defined as the equitable financial contribution of many for the benefit of an individual who has suffered loss.

26

sponsors of the project.Financing high-profile infrastructure projects not only requires lenders to commit for long maturity periods but also make them exposed to the risks of political interference by governments. Kenya has a relatively stable government and the government has been offering political guarantees to financiers.

Employment Requirements in the Construction Industry

Stakeholders in the construction industry are bound by employment laws the same way players in other industries are bound. Labor regulation in Kenya is grounded in the Constitution of Kenya.

Article 41 of the Constitution recognizes various rights of workers and employers. Some of the rights include:• a right to fair remuneration, • fair labour practices, • right to form, join or participate

in union activities etc.

In 2007, Kenya enacted five new labour laws which include:

a) The Employment Act no 11 of 2007,

b) The Labour Institutions Act No 12 of 2007,

c) The Work Injuries Act No 13 of 2007,

d) The Labour Relations Act No 14 of 2007 and

e) The Occupational Health and Safety Act no. 15 of 2007.

Besides the five labour laws, there are also labour related laws like the National Social Security Fund Act Cap 258 laws of Kenya, National Hospital Insurance Fund Act no 9 of 1998.

The Employment Act declares and defines the fundamental rights of employees. The Act prohibits forced labour, discrimination and sexual harassment at work place. It provides for the protection of wages, rights and duties concerning employment. In employing foreigners, the

contract of service should be a prescribed form signed by both parties and attested by a labour officer.

Before attestation the labour officer should satisfy himself that the consent of the foreign employee is obtained and that there is no fraud, coercion or undue influence, mistake of fact and misrepresentation which might induce the employee to enter into the contract.

Labour Relations Act provide for the registration, regulation, management and democratization of trade unions and employers organizations or federations. It also promotes sound labour relations through the protection and promotion of freedom of association, the encouragement of effective collective bargaining and promotion of orderly and expeditions dispute settlement, conducive to social justice and economic development.

The Estate Agent Act regulates the professional of estate agents conduct of persons who deal with the selling, purchasing or letting of land and buildings.


Employees Safety

Safety is an ongoing concern at a construction site because construction by its own nature is inherently dangerous with a high degree of hazard and risk. Construction accidents add up the cost of construction since relevant insurance policies have to be taken out to protect the contractor against certain direct expenses.

Besides, insurance construction accidents may increase medical costs, time lost from work by the injured party and delays, cost of replacement of the injured staff, loss of efficiency in the team where the injured party was working for, administrative costs

associated with investigation and reports, bad publicity etc.

To address safety issues Parliament enacted the Occupational Safety and Health Act (OSHA) No 15 of 2007. This Act provides for the safety, health and welfare of workers and all persons lawfully present at workplaces.

The construction industry has a lot of physical and health risks ranging from physical injuries, poisonous substances deaths etc. To mitigate against these risks the requires stakeholders to observe minimum safety and health standards. Work Injuries Benefits Act provides for compensation to employees for

Contributor

LEWIS GICHEHA | Associate

[email protected]

work related injuries and diseases contracted in the course of their employment. Labour Institutions Act establishes labour institutions, to provide for their functions, powers and duties.

Conclusion

The construction industry plays a major role in social economic development of any society. To ensure sustainable development of the industry and assure quality standards the area must be well regulated. This Article has outlined some of the laws that are applicable to the construction industry in Kenya. Players in the construction industry are required to abide by the provisions of the outlined regulatory framework.

Work Injuries Benefits Act provides for

compensation to employees for work related injuries and diseases contracted

in the course of their employment.

28

KPLC MORATORIUM ON POWER PURCHASE AGREEMENTS: What’s Next for Energy Projects

In January 2019, Kenya Power and Lighting Company (KPLC) froze the signing of new Power Purchase Agreements (PPAs) indefinitely. KPLC cited the basis of this decision as excess energy capacity in the national grid and financial constraints in the monopoly power distribution firm.


According to KPLC’s Chairman Mahboub Maalim Mohamed, the freeze on new PPAs was

implemented pending a sector review intended to establish the country’s additional demand for energy. Official statistics indicate that Kenya’s total installed energy capacity increased slightly to 2,339.9 MW in 2017 from 2,327.0 MW in 2016. These figures are against a peak demand of 1,802 MW, with the balance being reserved power meant for emergency situations such as plant repairs shutdowns. Earlier on in 2013, the Government had come up with an ambitious plan to install an additional 5,000 MW to the national grid by 2017. This power was largely to be drawn from renewable energy sources such as geothermal, solar and wind farms with a target to connect all homes to power by 2020. In a span of one year, wind generated electricity has grown from a negligible under 2% of the overall energy mix to between 14-17% of total installed national capacity during the day and up to 30% during off-peak hours at night. Geothermal electricity now contributes 45% of the overall energy mix in Kenya with hydropower being second at 29.8%.

Currently, KPLC has 23 PPA applications under consideration with a total generation capacity of 2,240.5 megawatts (MW). These applications include the High Grand Falls hydro project which is to produce approximately 750 MW. The decision of KPLC comes at a time when mega energy infrastructure valued at billions of shillings could be left in limbo until KPLC lifts the freeze on PPAs. The power distribution

firm argues that there is excess power capacity generation in Kenya compared to the energy demand on the National Grid countrywide. KPLC’s new strategy is to thoroughly conduct due diligence on energy projects in line with the power demand in the market. This is attributed to the financial burden imposed on the firm as a result of being obligated to still pay for the oversupply of power in the national grid. Furthermore, KPLC’s ability to meet its power deals obligations continues to come into question due to its recent financial struggles.

In December 2018, KenGen which accounts for almost 75% of the power purchased by KPLC saw its investors raise concerns about how the spiraling debt of Kenya Power which was at Kshs. 21.8 billion as at the end of the financial year will be settled. KenGen shareholders at the Annual General Meeting demanded for an assurance from

their board on how KPLC debt would be cleared. KPLC paid off KenGen a total of Kshs. 18 billion after closure of its annual financial report leaving a balance of an estimated 3.3 billion.

Nevertheless, several billings have since raised the amount to Kshs. 15.5 billion as at January 2019. In the financial year ended June 2018, KPLC posted a 63.7% decline in net profit to Kshs. 1.92 billion due to higher costs. The firm’s revenues rose by 4.23% to Kshs. 125.8 billion in 2018 due to increased customer base. However, increased power purchase and higher finance costs affected its finances. Power purchase costs, excluding fuel and foreign exchange, increased by Kshs. 2.59 billion to Kshs. 52.79 billion. According to the CS in charge of energy, three thermal power plants with a combined energy capacity of 190 MW are to go offline owing to the increased share of cheap wind power in the grid. The net effect is that

Earlier on in 2013, the Government had come up with an ambitious plan to install an additional 5,000 MW to the national grid by 2017.

30

taxpayers would be required to raise Kshs. 9 billion to pay off the owners to disconnect the plants

from the national grid or allow them to run down their contracts set to expire within five years. Iberafrica Power Plant's 56 MW’s PPA is set to end in October next year, Tsavo Power’s (74 MW) will end in September 2021, while Kipevu Diesel’s (60MW) contract runs up to July 2023. The 310 MW Turkana Wind Farm, which was switched on in October 2018 is currently injecting up to 240 MW in the grid.

KPLC has been left in a financial tight spot after it breached the terms attached to Kshs. 59.6 billion worth of its loans. As a result, the power distribution firm is seeking to secure fresh short-term loans to refinance its existing short-term debts on a longer tenor to ease the strain on its coffers.

Considering KPLC’s financial woes and the moratorium placed

on PPAs, we continue to grapple with certain questions that is; what happens to the mega energy infrastructure projects where investors have committed billions of shillings? The future of wind and solar power projects particularly remains uncertain.

This is because Government is inclined not to have a huge portion of the energy generation mix from such sources due to their unstable nature hence priority is given to the two sources that is hydro and geothermal. The move to freeze PPAs will have a negative impact on consumers due to overdependence on expensive sources of power as opposed to wind and solar power sources that are cheaper. The most expensive source of power in Kenya that is thermal used to account for nearly half of the national grid capacity now it

The most expensive source of power in Kenya

that is thermal used to account for nearly half of the national grid capacity now it

only contributes a meagre 10%.

Lake Turkana Wind Power Project which was initiated in 2008 has taken about 11 years prior to the commencement of power generation on the plant which started late last year.


only contributes a meagre 10%. In contrast to thermal, wind power is at 8.53 cents per kwh while thermal goes up to 28 cents based on global oil prices. It is therefore crucial not to upset the current wind and solar energy infrastructure projects in the market considering their significant impact to the economy in terms of creating opportunity for electricity tariff cuts.

New power projects take at least five years to commercial realization and supply power to the grid and therefore the PPAs freeze is going to have a huge blow on such projects which are on the verge of preparation and have secured financial obligations. For instance, the Lake Turkana Wind Power Project which was initiated in 2008 has taken about 11 years prior to the commencement of power generation on the plant which started late last year. This is an indication that the average period a new power project takes in order to materialize and become operational is five years. Power projects consume time and have dire cost implications prior to their implementation. One may argue that such a period is so long so as to warrant power delivery lagging in the economy

if the freeze on PPAs is still meted out against wind and solar power projects.

It is prudent that the Government now embarks on a policy framework that would enable the tweaking of PPA clauses in consideration of the demand levels in the market. Such a policy would allow developers to negotiate and enter into demand driven PPAs with KPLC rather than relying on standardized and outdated PPA frameworks. Demand driven PPAs will grant developers time to plan for their projects. Unmeasured and random PPAs can lead to negative consequences in terms of transferring the costs to the consumer. However, an indefinite freeze may prove to have high cost implications when demand for power in the grid peaks up.

Stakeholders and policy makers need to address fundamental questions with regard to the freeze on PPAs. Key amongst the questions is whether with the oversupply in electricity, we should wait for demand to grow organically or encourage the growth of consumer demand. If we are to answer this question in terms of the economics of demand and supply then definitely the government needs to incentivize growth of consumer demand in the market. This can only be done through reduced costs on power consumption which would reduce the cost of doing business particularly for the industries.

In conclusion, our take on the freeze on the indefinite freeze on PPAs by KPLC is that despite the oversupply of power in the market, the freeze is premature and unwarranted. There is tremendous potential for Kenya to produce affordable power in the market. Wind and solar have proven to be the viable alternatives and therefore investments in the renewable energy sector should be spurred rather than discouraged on the premise of oversupply in the market which may be altered by increased energy demand levels in the future.

Contributor

ALEX ODUOL ONYANGO | Associate

[email protected]

Amount of money worth of loans that has left KPLC in a

financialtight spot.

KSh 59.6BILLION

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INSIDER TRADING CONCERNS IN MERGERS AND ACQUISITIONSFebruary 2019 began with an explosive headline that shook the corporate industry in Kenya; apparent insider trading in the Kenol Kobil merger. This information came hot on the heels of the confirmed CBA/NIC merger and one week later, another top CEO was heavily fined for insider trading by the CMA.


Mergers are generally meant to strengthen liquidity profile, improve economies

of scale, grow and diversify a company. In the age of the digital migration, digital leadership and creating better synergies has enticed already large and established companies to merge. Ultimately, the new merged company will have grown two-fold and diversified its portfolio.

Legal and regulatory concerns in mergers and acquisitions have been addressed by requiring Regulatory Approval from bodies such as the Competition Authority, CBK and the CMA on matters including Corporate Governance issues; Shareholder Approval on issues of the new Share structure and dividend payout; and finally, Stakeholder Approval from Creditors, Employees and other persons having an interest in both companies. The three-fold approval ensures that all legal requirements are met and any fraudulent transactions in the mergers are nipped in the bud. Unfortunately, this always is

not the case. Selling shares in a company during a merger comes at a profit, much to the benefit of shareholders and investors in the merged company. Unfortunately, there are always investors looking to make an unusually large profit on the merger based on insider information sidelining innocent purchasers of shares. Insider trading sees an investor profit by buying shares ahead of the market based on knowledge of events that would drive the price up or dumping shares to avoid losses due to prior knowledge of negative information. This is often done by using privileged information currently unavailable to the public to their unjust enrichment. The artificial demand for shares results in higher price of the shares.

Economists still have divided opinions on whether insider trading is purely bad. One argument in favor of insider trading is that it allows for all information to be reflected in a security's price and not just public information. This makes the markets more efficient. As insiders and others with

nonpublic information buy or sell the shares of a company, for example, the direction in price conveys information to other investors.

Current investors can buy or sell on the price movements and prospective investors can do the same. Prospective investors could buy at better prices and current ones could sell at better prices.Another argument in favor of insider trading is that barring the practice only delays what will eventually happen: A security's price will rise or fall based on material information. If an insider has good news about a company but is barred from buying its stock, for example, then those who sell in the time between when the insider knows the information and when it becomes public are prevented from seeing a price increase.

Barring investors from readily receiving information or getting that information indirectly through price movements can condemn them to buy or sell a stock that they otherwise would not have traded if the information

Selling shares in a company

during a merger comes

at a profit, much to the

benefit of shareholders and investors in the merged

company.

34

had been available earlier.Even though debate continues to rage among professionals and academics in the financial community as to whether insider trading is good or bad for financial markets, its negative effects continue to outweigh whatever good may come from it hence the need for statute making it an illegal activity in Kenya.

In a bid to protect the interests of innocent investors, regulators have managed to put in place stringent reporting requirements and policies in a bid to curb insider trading.

Overall, illegal insider trading ensures that there is no fair play involved and there is no fair demand and supply of stocks, all detrimental to the functioning of a healthy capital market. It weakens the faith of investors in the investing system and an unchecked insider trading could keep off people from investing capital and this could potentially harm the economy as a whole. In conducting its review of share transactions in ongoing mergers and acquisitions the Capital Markets Authority (CMA) places heavy regard to the maintenance of the integrity of the market and

CMA has heavily fined companies involved in insider trading especially during mergers and acquisitions and the current prosecution of the former Kenol Kobil CEO will cement its firm stance against insider trading.

protection of investors’ interests. Previously, the CMA has heavily fined companies involved in insider trading especially during mergers and acquisitions and the current prosecution of the former Kenol Kobil CEO will cement its firm stance against insider trading. The regulator’s unprecedented use of mobile forensic electronic data gathering for legal evidence use that is often deployed in pursuit of fraudulent transaction probes will mark a turning point in the prosecution of insider trading in mergers and acquisitions.

Contributor

ALEX KUBO | Senior Associate

[email protected]


Our lawyers win praise for their technical ability as well as their commercial approach and can provide a comprehensive service, including advising on project structures, conducting legal due diligence, risk allocation and reviewing the “bankability” of project agreements and financing arrangements.

KO Associates

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STRUCTURING OF CORPORATE SOCIAL RESPONSIBILITY. Programmes to Achieve Sustainable Social Impact InvestmentSocial Impact Investment refers to investments that are made with the intention of generating positive and measurable social and environmental impact alongside a financial return.


Corporate Social Responsibility on the other hand refers to the obligation that juristic

persons have to the welfare and general wellbeing of the society where their operations are based.For the last decade, Kenya has attracted billions of shillings in social impact investments. As at 2015, it was estimated that the Country had attracted nearly half of the 930 Billion that had been channeled to the East African Region. This figure has continued to grow and as at 2018, it was estimated that social impact investors had so far invested USD 680 Million in Kenya. This momentum is expected to continue due to the young, enterprising and ambitious population and the good rates of return in the Country.

Although there has been a lot of impact investment in the Country, most of the investors have been international investors who have either invested directly into target enterprises by obtaining an equity stake in the enterprises or offered grants. Investments by these international investors have primarily been allocated to the large expat founded enterprises. Focus has also been on certain sectors namely renewable energy, financial services, healthcare, agriculture, ecotourism, consumer goods and environmental services.Social impact investments have undoubtedly improved the lives of many in Kenya. They have inter alia created job opportunities, enabled Kenyans in remote areas have access to financial services at the comfort of their homes and increased access to electricity. Although these are remarkable achievements, the question that

lingers is what is being done internally?

Corporate entities in Kenya (both public and private), like in many other jurisdictions are required to put in place measures aimed at ensuring good corporate governance. One key governance parameter that is used to assess good corporate governance is Corporate Social Responsibility (CSR). So crucial is this governance tenet that it is a requirement under Mwongozo, the Code of Governance for State Corporations. The Mwongozo requires Boards of State Corporations to ensure that a policy on good corporate citizenship is in place, that the policy is implemented, a sustainable and appropriate budget is allocated for CSR and that the organization respects and promotes a sustainable environment.

CSR, like social impact investment, requires companies to not only make economic returns but also make positive social and environmental contributions. Taking into account the returns that are associated with good corporate governance and the risks that accrue if the inverse is true, some companies have heavily invested in empowering their CSR Wings. This has led to notable investments in education, youth empowerment, environmental

conservation, water conservation, promotion of art and culture, provision of disaster management services among others. The notable investments have been championed by among others, Safaricom Plc through the Safaricom Foundation and M-PESA Foundation, Kenya Commercial Bank (KCB) through its 50 Billion-shilling 2jiajiri Programme and Equity Bank through its Wings to Fly Initiative.

Indeed, the above-mentioned investments account for what is being done internally. However, is it enough? Taking into account the number of corporate entities that exist in Kenya, the above mentioned investments are just but a tiny drop in the ocean. This is not to say that save for the investments mentioned above and the named corporate entities no other social impact investments are done through CSR wings. Without a doubt, many entities undertake as part of their annual activities at least one CSR activity. However, the impact of these activities is limited as they are ever changing and temporary making it difficult to measure their impact.

CSR activities provide a platform through which social impact investments are undertaken. If properly structured, they provide the much-needed capital to address some of the pressing

CSR, like social impact investment, requires

companies to not only make economic returns but also make positive

social and environmental contributions.

38

societal challenges and play a key role towards realization of Vision 2030 and Sustainable Development Goals. However, for there to be a social impact investment, it is not enough to merely undertake an investment. The effect of the investment must be felt and the results must be measured. In the case of annual one-off investments, the impact will be felt albeit for a short period of time. Unfortunately, this seems to be the course taken by most corporate entities in Kenya.

The above gap provides an opportunity for corporate entities in Kenya to contribute to the amelioration of social and environmental challenges. The diverse locations of these entities beyond the Country’s capital, the various sectors of operations which inform different areas of investment, the financial muscle and the commitment to ensure good corporate governance beyond State Corporations presents an opportunity for these entities to not only participate in the current areas of focus but to also expand social impact investments beyond renewable energy, financial services, healthcare, agriculture, tourism, consumer goods and environmental services at the National as well as the County level.

The realization of the Vision 2030 and Sustainable Development Goals highlights the need for a paradigm shift characterized by establishment of CSR departments (for those Companies that do not have), establishment of leadership structures for purposes of driving the CSR agenda, preparation of policy guidelines to guide the smooth operation of the department, identification of projects for investments (this can have a blend of short term projects as well as long term projects), undertaking of actual investments and measuring impacts. Alternatively, companies can establish foundations. The establishment of the above structures pegged with the perpetual nature of companies will provide an enabling environment for continued investments allowing for assessment of the impact.

Most of the investors in the country have been

international investors who

have either invested directly

into target enterprises by obtaining an

equity stake in the enterprises

or offered grants.

Amount of money that was estimated to have been invested in Kenya by investors for social impact.

930Billion

$680Millionthat had been channeled to the East African Region.

As at 2015, it was estimated that the Country had attracted nearly half of

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40

KRA: SETTING THE STANDARDS IN TAX COLLECTIONTechnology appears to be taking center-stage in almost every aspect of the economy. The latest such aspect to be affected is tax collection. In a bid to widen the tax base, ease the paying of taxes and simplify trading across borders, the Kenya Revenue Authority (KRA) has over the past year engaged in an ambitious plan to deploy technology in tax collection.


The Authority’s target is to increase the number of active taxpayers to almost double the

current number, from 3.94 million to 7 million by 2021. The focus of KRA in its seventh three-year strategic planning period (2018/19 – 2020/21), will be on key priorities of the country’s development agenda as spelt out in the Kenya Vision 2030, the Third Medium Term Plan (MTP 2018-2022), the Budget Policy Statement 2018 and the Big Four Agenda. The plan also takes into account the country’s commitments under the Sustainable Development Goals (SDGs) especially relating to revenue mobilization and a customer centered public organization.

At the 4th Annual Tax Summit held in October 2018 themed “Accelerating Socio-economic Transformation in Kenya: Tax Base Expansion to Enable the Big Four Agenda” delegates consisting of government officials, experts from the academy and regional revenue authorities’ representatives explored “New Frontiers for Revenue Administration and Technology as an enabler” and “Combating tax crimes through digitization.” There were several takeaways from the meeting:a) KRA will open an Application

Programming Interface (API) for collecting tax – to integrate with other third-party systems.

b) KRA will create strategic partnership with structured ICT sector players such as the ICT Committee of KEPSA to take advantage of the young innovators in developing innovative solutions for tax base expansion.

c) KRA will enter into structured collaboration frameworks with the industry representative bodies to facilitate sharing of market intelligence.

d) KRA will collaborate with the Central Bank of Kenya (CBK) to facilitate taxation of digital transactions. The CBK also will recognize utilization of emerging technologies, such as crypto currencies, in financial transactions to enable their taxation.

e) KRA ought to adopt block chain technology and strong data analytics capabilities to enhance tax administration.

Advent of New Technologies

Undoubtedly, new technologies including Block chain, Big Data Analytics and Artificial Intelligence are increasingly

modelling and shaping business processes. Consequently, issues such as security of data systems and traceability of business transactions have been steadily rising and the KRA has embraced the same by heavily investing in a plethora of IT systems so as to remain relevant in supporting the Government’s resource mobilization agenda. Some of its most prominent systems include:

i. iTax

iTax is a secure web-based system that provides an automated solution for efficient administration of domestic taxes. The login process is simple, requiring only your email, a password and your ID number to get started or your KRA PIN for those already registered on the system. It enables individuals to apply for a PIN, file returns, apply for a tax compliance certificate and check their status all on the internet, with real-time monitoring of accounts. Some the most significant benefits that iTax offers is ease of filing returns, automated records, and convenient monitoring of your tax compliance status.

ii. Data Warehouse and Business Intelligence (DWBI) Solution

This technology will allow access to individual and companies’ mobile money transaction records and will be able to suggest incomes of those using mobile money to pay bills and make purchases. DWBI will also be able to mine data of active till numbers, monitor individual transactions and enable KRA to tax such income which, as of the second quarter of 2017/2018 financial year, passed the Sh1 trillion mark according to data provided by the Communications Authority of Kenya (CAK).

KRA will create strategic

partnership with structured ICT sector players

such as the ICT Committee of KEPSA to take

advantage of the young innovators in developing innovative

solutions for tax base expansion.

42

The KRA is also planning to mine stock exchange and property purchase records for any inconsistencies that might point towards tax evasion. This technology is expected to heavily facilitate the collection of revenue from persons perceived to evade the tax system and will go a long way in boosting income for the government.

iii. Integrated Customs Management System (iCMS)The Integrated Customs Management Systems (iCMS) is a system that runs on the technological platform which seamlessly connects with KRA’s internal systems and external stakeholders’ systems to achieve faster cargo clearance.The iCMS replaced the Simba system with key innovations that include automated valuation benchmarking (which enables customs to use in-built values to interrogate suspicious declarations), automated release

of green-channel cargo, importer validation and declaration, and integration with iTax.

ICMIS offers such the elimination of cargo undervaluation, cuts down on clearance time which enhances business efficiency, validates declarations done by clearing agents before their submission to customs and enables avoidance of physical contact between image analysts and cargo owners thus curtailing corruption which was rampant.

iv. Regional Electronic Cargo Tracking Systems (RECTS)The Regional Electronic Cargo Tracking System (RECTS), which is the successor of the out-phased Electronic Cargo Tracking System (ECTS), is a system that enables real time tracking of cargo in transit from the port of Mombasa to its final destination throughout East Africa. This is done through an online digital platform. It has drastically

improved tax collection, enhanced enforcement of cargo handling regulations and maintained Kenya as a preferred trade route for cargo in East Africa.

The KRA is also planning to mine stock exchange and property purchase records for any inconsistencies that might point towards tax evasion.

The Integrated Customs Management Systems (iCMS) is a system that runs on the technological platform which seamlessly connects with KRA’s internal systems and external stakeholders’ systems to achieve faster cargo clearance.


EFFECT OF THE APPLICATION OF TECHNOLOGY BY KRA

1. Tax Integration - The use of the aforementioned technologies catapulted Kenya on the global scene, with KRA being ranked 'Highly Commended Winner, Best in Class Treasury Solution in Africa' award, in the Treasury Today's Adam Smith Awards 2016. KRA won in the Africa Category mainly for facilitating a tax payment gateway for more than 37 local commercial banks on its platforms.

2. Ease of doing business - Kenya also ranks highly among African countries in the world bank 2019 index for ease of doing business. It came in at number 61 beating South Africa, Egypt and Nigeria, which are at 82,120 and 146 respectively. In Ease of Paying taxes Kenya is ranked 91st.

3. Implementation of government agenda – improved collection of revenue enables the Kenyan government to facilitate its Big 4 agenda among other such duties and obligations.

4. Support to Small and Medium sized Enterprises (SMEs) – With SMEs accounting for about 30% of new jobs annually, research shows that they contribute significantly to

the economic development of Kenya. The 2017 National Economic Survey report released by the Central Bank of Kenya revealed that small-scale traders account for about 98% of all businesses in Kenya, contributing to around 3% of the country’s GDP.

However, SMEs are threatened by importation of substandard and fake goods by dubious business persons as these products tend to be cheaper than locally produced products. These also negatively affect genuine importers. Due to the above negative effects of counterfeit products and its restraint of revenue due to the government, KRA came up with RECTS to curb rampant dumping of goods, destined for neighboring countries, into the local market, which causes unfair competition to genuine local traders/SMEs.

KRA has also partnered with KEBS since 2015 to implement a program dubbed Pre-export Verification of Conformity to Standards (PVoC) which ensures that goods are inspected in the country of origin before shipment. All the above measures have gone a long way in ensuring fair competition for SMEs and providing an enabling environment.

5. Small Businesses to start Paying Presumptive Tax from January 2019 – with the technology in place, SMEs and businesses posting an annual turnover of less that Ksh5 million will be brought into the fold of Kenya’s tax base through the implementation of the presumptive tax capped at 15% of the business permit fee or trade license.

CONCLUSION

It is evident from the foregoing that technology has a pivotal role in the collection of revenue and consequently the country’s development agenda as spelt out in the Kenya Vision 2030, the Third Medium Term Plan (MTP 2018-2022), the Budget Policy Statement 2018, the Big Four Agenda and Kenya’s commitments under the Sustainable Development Goals (SDGs).

The effect of the use of technologies such as iTax, Data Warehouse and Business Intelligence (DWBI) Solution, Integrated Customs Management System (iCMS) and Regional Electronic Cargo Tracking Systems (RECTS) among others is obvious. For instance, according to the Treasury’s budget policy statement 2019,

SMEs are threatened by importation of substandard and fake goods by dubious business persons as these products tend to be cheaper than locally produced products. These

also negatively affect genuine importers.

44

revenue collected by KRA in the five months to November 2018 grew by 13.5 percent compared to the same period in the FY 2017/18. This growth is only set to go higher. Also, ease of doing business in Kenya in terms of paying taxes has been rated at position 61 globally. This is a significant effect on the economy of the country. Finally, as Small and Medium Enterprises are assisted in fair competition and brought into the tax bracket, the government is able to acquire more revenue and implement its various agenda. Overall the use of technology has and will continue to improve Kenya in a wholistic manner, if well utilized, for years to come.

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46

THE AFRICAN CONTINENTAL FREE TRADE AREA: KENYA’S SILVER LINING?The advent of the African Continental Free Trade Agreement (AfCFTA) is set to breathe a new life into Africa’s trade industry. Covering a market of 1.2 billion people, the move is set to bring together both the Tripartite and Non-Tripartite Regional Economic Communities.


It is envisioned that this will help promote intra- African trade by leveraging African countries as a source of cheap and easy access of to raw materials and substitute this with initial trade traditions of importing materials or finished goods from developed countries.

It is expected that the resultant effect of such a move will be to increase economies of scale while building regional value chains because ultimately, AfCFTA aims to support trade liberalization and to secure its own its own share of global economic growth.

While this move will no doubt revolutionize trade and go down in history as the largest Free Trade Agreement, it is important

to consider the challenges that may arise as a result of this arrangement, and particularly, the ramifications that this may have for Kenya. Although liberalization of trade may bring with it potential benefits, Kenya may also suffer a blow from the same. For instance, while Kenya is now among the top 5 exporters of agricultural products in the continent, having recently overtaken South Africa as the continent’s largest supplier of avocados, an economic survey conducted in 2018 revealed that Kenya’s food imports had reached an all-time-high of 100 billion Kenyan Shillings, with the neighboring Uganda being responsible for 70.36% of the maize imported by Kenya. Interestingly, earlier this year,

there were reports about lack of market and poor prices on of maize. This is evidence of the fact that the producers of such agricultural products are operating in an environment that does not allow them to compete favorably. The situation is further compounded by recent reviews that pointed out Kenya’s dwindling fortune in the East African region, with regards to exports, despite the allowance for free movement of goods within the EAC Member States as a result of the EAC Common Market Protocol.

Further, as a country that enjoys preferential market access in the European Union and has the United States as the fourth largest export market, agricultural

Kenya's President Uhuru Kenyatta signs trade agreements during the 10th Extraordinary Session of the African Union Heads of State and Government Summit in Kigali on March 20, 2018.

While this move will no doubt revolutionize trade and go

down in history as the largest

Free Trade Agreement, it

is important to consider the

challenges that may arise as a result of this

arrangement, and particularly, the

ramifications that this may have for

Kenya.

48

liberalization may make the country lose its preferential market access to the European Union and the United States if appropriate steps are not taken.

Remedial Strategies

The decrease in export market opportunities despite the liberalization of trade, and the corresponding increase in importation of food products demonstrate a need to act in order to mitigate the negative impacts of liberalization on the economy. This is because the liberalization may be related to import surges which ultimately affect livelihoods, as is the case of maize above.

Given that agriculture is the mainstay of Kenya’s economy and also one of the pillars of the Big 4 Agenda; food security, it is imperative that the country tread cautiously and ensure that there are mechanisms in place that would ensure that the country gains more from liberalization than it stands to lose. For instance, Kenya may want to adopt low levels of liberalization

on what it considers to be key products. This can be done by seeking accommodation through special products.

What are Special Products?

Special Products are an option that is only available for developing countries which exempts certain products from tariff cuts or reduces the level at which its tariff is cut. It is a different treatment standard for products based on three criteria; food security, livelihood security and rural development.

Essentially, where liberalization of trade affects key products from a country and undermines these three national goals, (food security, livelihood security and rural development), then an exception will be created as to tariff cuts to allow the State in question pursue its own development goals. Special products are therefore identified under the market access pillar to not only introduce protection but to also create an enabling environment for longer running development.

It follows that Kenya should move to protect its key agricultural products by categorizing them as Special Products if at all food security as a pillar under the Big 4 Agenda, is to be realized and sustained.

The decrease in export market opportunities

despite the liberalization of trade, and the corresponding

increase in importation of food products demonstrate a need to act in

order to mitigate the negative impacts of

liberalization on the economy.

Contributor

ALVIN ATTALO | Associate

[email protected]


Given that agriculture is the mainstay of Kenya’s economy and also one of the pillars of the Big 4 Agenda; food security, it is imperative that the country tread cautiously and ensure that there are mechanisms in place that would ensure that the country gains more from liberalization than it stands to lose.

50

LEGAL ALERT AN ANALYSIS OF THE NEWLY ENACTEDPETROLEUM ACT 2019On 28th March 2019 the President signed into law the Petroleum Act 2019 repealing the old Petroleum (Exploration and Production) Act, Cap 308 Laws of Kenya which came into force in 1984. The Petroleum Act 2019 was enacted to consolidate into one statute the laws relating to petroleum operations. Prior to its enactment, the upstream petroleum industry was regulated by the repealed Petroleum (Exploration and Production) Act while midstream and downstream operations were regulated by the now repealed Energy Act 2006.


Based on our previous legal alert you will note that the Energy Act 2006 was recently repealed by the Energy Act, 2019 which was drafted in concert with the Petroleum Act 2019. Amongst key changes, the Energy Act 2019 established the Energy and Petroleum Regulatory Authority (EPRA) which has now replaced the defunct Energy Regulatory Commission (ERC).

The above-mentioned Acts of Parliament serve the integral purpose of bringing Kenya’s energy sector legislative framework to be in conformity with current industry standards and practices. The intention of these legislative developments is to provide an enabling environment that would spur both international and local investment in the sector.

Institutional Framework Under the Petroleum Act, 2019

The Petroleum Act 2019 provides that petroleum operations in Kenya will be regulated by the Cabinet Secretary – Ministry of Petroleum and Mining (CS) and EPRA. Section 8 of the Act prohibits any person or entity from conducting petroleum operations without obtaining approval from the CS or EPRA.

The CS is mandated to develop and publish a national policy on petroleum operations which is required to be reviewed at least once in every five years. The CS is also required under section 6 of the Act to develop and publish a National Petroleum Strategic Plan that will serve as a guide for implementation of the National Petroleum Policy.

Section 12 of the Act establishes the National Upstream Petroleum

Advisory Committee (‘Advisory Committee) whose primary function includes advising the CS on upstream petroleum operations and petroleum agreements to be entered into between the Contractors and the CS. The Advisory Committee consists of representatives from relevant Government Ministries and Departments as well as representatives from the Upstream Petroleum Regulatory Authority and the Council of Governors.

Constitution of Petroleum Blocks

Section 14 of the Act vests all petroleum resources in strata lying within Kenya and its continental shelf in the National

Government of Kenya to hold in trust for the people of Kenya. The Cabinet Secretary upon consultation with the Advisory Committee is empowered to by notice in the Kenya Gazette divide Kenya and its continental shelf into numbered areas which shall be defined by specific geographical co-ordinates and each area described as blocks. The Cabinet is also allowed to reserve any number of blocks for exploration by the National Government.

Upstream Petroleum Operations Licensing

In accordance with section 16 of the Petroleum Act 2019, any person who wishes to engage in upstream petroleum activities shall be required to do the following: a) apply to the Cabinet Secretary

for a petroleum agreement; or b) apply to EPRA for a non-

exclusive exploration permit.

The above applications are required to be accompanied with requisite information that is to be specified in regulations enacted under the Act. Section 22 of the Act provides that any person who wishes to carry out a non-exclusive exploration survey shall apply to EPRA for a non-exclusive exploration permit in the prescribed form and accompanied by the prescribed fee. EPRA is mandated under the Act to issue a non-exclusive exploration permit for a geographically delineated area. EPRA is also permitted under the Act to issue non-exclusive exploration permits to different persons in respect of different non-exclusive exploration activities in the same geographically delineated area. A non-exclusive permit stipulates

Section 22 of the Act provides

that any person who wishes

to carry out a non-exclusive

exploration survey shall

apply to EPRA for a non-exclusive

exploration permit in the

prescribed form and

accompanied by the prescribed

fee.

52

details on the following: a) the date of issue of the permit;b) the area to which the permit

relates;c) the type of non-exclusive

exploration activity for which the permit is issued;

d) the conditions under which the permit is issued; and

e) confidentiality requirements. Any person who is granted a non-exclusive exploration permit in accordance with the Act is obligated to provide EPRA with copies and samples of all the data collected by that person. Section 23 of the Petroleum Act 2019 further obligates EPRA to inform each County Government affected by the non-exclusive exploration activities of the nature and status of such non-exclusive exploration activities

Operational Permits

A Contractor who seeks to undertake upstream petroleum operations in Kenya is obligated under section 24 of the Petroleum Act 2019 to obtain and apply for an operational permit from EPRA. The operational permit applies to the following contractor activities including: a) Drilling a well;b) Developing and producing

petroleum;c) Construction of petroleum

gathering systems in the field;d) Building a crude oil storage

facility;e) Plugging or abandoning an

individual well;f) Operating an underground

injection control well; g) Converting an individual well

to an underground injection

control well;h) Decommissioning or

abandoning an upstream petroleum facility;

i) Developing, building, constructing or operating a gas processing facility; or

j) Remediating and reclaiming upon the abandonment of a well or facility.

The Act requires contractors to apply to EPRA for an operational permit foreach well. It should also be noted that section 24(8) of the Act places an obligation on EPRA in collaboration with the contractor and relevant stakeholders to grant the local communities in a place where upstream petroleum operations are to be permitted adequate opportunity to participate in the reviewing and awarding

President Uhuru Kenyatta signs the Petroleum Bill into law the Petroleum Act 2019


of permits in accordance with the Petroleum Act 2019. EPRA is mandated to conduct public participation through such means as may be necessary to ensure that the citizens within the respective county and the relevant stakeholders are informed of any decision under the Act which affects them and have sufficient notice of at least 21 working days of any decisions to be made or permits to be issued which may affect them. Local communities are empowered under the Act to have an opportunity to obtain information with respect to any permit issued and to submit their concerns or any information that they may have with respect to the issue under consideration.

Production Permit

Section 32 of the Act requires a contractor to apply to EPRA for a production permit in order to undertake petroleum production activities. The application is required to be accompanied with a report on the petroleum reservoir, the field development plan approved by the CS and the environmental impact assessment study report of the upstream petroleum operations and other relevant information requested by EPRA.

Midstream and Downstream

Operations Licensing

In accordance with section 73 of the Act any person seeking to engage in Midstream and Downstream petroleum activities is required to make an application for a license, permit or certificate to the licensing Authority which is EPRA and other relevant bodies.

The Licensing authority may within thirty days grant a license, permit or certificate accordingly either without conditions or with conditions as the licensing authority may deem fit. The Licensing Authority may also reject the application for grant of the certificate, license or permit in which case the authority shall give to the applicant the reasons for refusal in writing within seven days if such refusal.

Section 74 of the Act requires that the following petroleum businesses do obtain a license from the Authority which includes business that;a) Undertake refining,

importation, export, bulk storage or transportation of petroleum crude or products must have a valid license issued by the Authority.

b) Sell petroleum in bulk to another person for the purpose of export or for retail sale in Kenya must have a valid license issued by the Authority.

c) Use a vehicle for the purpose of transporting petroleum in bulk shall have a valid petroleum permit in respect of that vehicle issued by the Authority.

d) Drive a vehicle, or engage a driver, for the purpose of transporting petroleum in bulk by tanker shall ensure that such driver is certified for that purpose by the Authority.

Factors to Consider in granting or rejecting an application for a license or permita) The impact of the undertaking

on the social, cultural or recreational life of the community;

b) The need to protect the environment and to conserve the natural resources in accordance with the environmental laws, maritime

laws and international maritime treaties ratified by Kenya and other guidelines developed by the Authority;

c) The Occupational Safety and Health Act or other safety and health standards recommended by the Authority in consultation with the relevant statutory body;

d) Compliance with this Act and the relevant Kenyan Standard and in the absence of such standard, any international standard recommended by the Authority in consultation with the Kenya Bureau of Standards;

e) Land use or the location of the undertaking;

f) Economic and financial benefits to the country or area of supply of the undertaking;

g) the ability of the applicant to operate in a manner designed to protect the health and safety of users of the service for which the license or permit is required and other members of the public who would be affected by the undertaking;

h) the technical and financial capacity of the applicant to render the service for which the license or permit is required; and

i) Where applicable the proposed tariff offered

Form and Condition of a License or Permit

In accordance with section 76 of the Act, A license or permit shall be in such form as the licensing authority may determine and shall; a) Set out a requirement that the

licensee shall comply with all applicable environmental, health and safety laws;

b) Set out a stipulation that the licensee is subject to liability under tort and the contract laws

54

c) Set out a requirement that all necessary fees associated with the license or permit shall be paid on a timely basis.

Additionally, the license or permit may contain the following particulars or conditions where applicable; a) The provisions for tariffs

or charges for the pipeline transport, common user import handling facilities or jetties and storage;

b) The duration of the license or permit;

c) The maximum capacity, whether of import handling, storage, or transport;

d) The market area segments;e) Any other matter connected

with the carrying on of the undertaking;

Negotiation, Award and Execution of Petroleum Agreements

The Petroleum Act 2019 grants the CS power to negotiate,

award and execute a petroleum agreement on behalf of the National Government, in the form prescribed in the Schedule to the Act. Section 18 of the Act also prescribes the processes which must be used when negotiating with a contractor in relation to a petroleum agreement. There appears to be two main approaches:a) The CS is permitted to enter

into a petroleum agreement after the conclusion of bidding rounds carried out in accordance with the Act; and

b) Direct negotiations with a sole contractor are permitted on the recommendation of the Advisory Committee only if certain conditions are met (including no bids having been received during the bidding round, bids received not satisfying minimum criteria or where there is insufficient data in relation to a block).

Furthermore, Section 19 of the Petroleum Act 2019 indicates

certain specific express rights and obligations to be provided in every petroleum agreement. These rights and obligations apply to the contractor and they obligate the contractor to:a) perform certain minimum

work and incur certain minimum expenditure during the course of exploration operations;

b) present to the Cabinet Secretary a field development plan in respect of any commercial field and promptly take all steps that are reasonable to develop that field for production;

c) present to the Cabinet Secretary a work programme and budget for each year of operation;

d) keep accurate books of accounts and records of upstream petroleum operations and submit quarterly expenditure reports and annual audited financial statements to the Cabinet Secretary;

e) conduct upstream petroleum operations in accordance with requisite professional and technical skills;

f) adopt measures necessary for the conservation of petroleum and other resources as well as protect the environment;

g) give preference to the use of locally available raw materials, products, equipment, manpower, services and continuously transfer technology and build local capacity;

h) indemnify the Government against all claims made by third parties, in respect of any injury, damage or loss caused by, or resulting from, the conduct of any operations carried out by the contractor or subcontractors pursuant to the provisions of any petroleum agreement;

The Petroleum Act 2019 grants the CS power to negotiate, award

and execute a petroleum agreement

on behalf of the National Government, in the form

prescribed in the Schedule to the

Act.

Energy CS Keter


i) provide such information, data, reports and samples concerning upstream petroleum operations as the Cabinet Secretary or Authority may require; and

j) conduct all upstream petroleum operations in accordance with the best petroleum industry practice.

The Model Production Sharing Contract

As indicated above, the Petroleum Act includes a Model Production Sharing Contract (“Model PSC”) to be used by the CS when entering into a petroleum agreement.

The Model PSC includes extensive obligations with respect to the relevant block, and accurately reflects its international character by applying ‘investor friendly’ dispute resolution mechanisms such as UNCITRAL arbitration. The Model PSC contains a profit-sharing mechanism between the Government and the Contractors

and provides for taxation of profits under the petroleum agreement.

Annexed to the Model PSC are three appendices, which:a) define the area to which the

PSC relates (Appendix A);b) establish the methods and

rules of accounting for the upstream petroleum operations under the PSC (Appendix B); and

c) contain a sample Participation Agreement outlining the general terms and conditions under which the Government would participate in the upstream petroleum operations (Appendix C).

Transfer of Interest in Petroleum AgreementsSection 26 of the Petroleum Act 2019 obligates contractors not to transfer their interest in petroleum agreements to other entities unless written approval is obtained from the CS. The CS may permit the transfer upon the following conditions being met by the contractor:

a) the Contractor has made an application to the CS for transfer of their interest in the petroleum agreement in the prescribed form;

b) the Contractor has complied with the Petroleum Act 2019, the terms and conditions of the Petroleum Agreement and any other written law;

c) the Person to whom the interest in the petroleum agreement is being transferred has the financial and technical capacity to meet the contractor’s obligations under the terms and conditions of the Act and the Petroleum Agreement; and

d) the taxes payable with respect to the transaction have been assessed.

The CS is required not to unreasonably withhold permission of the transfer of interest in the petroleum agreement by the contractor to another person unless there is reason to believe that the transfer of that interest shall be against public interest or safety.

Report of Discovery of

Petroleum

Section 27 of the Petroleum Act makes it mandatory for all contractors to notify the CS within forty eighty hours of any discovery of petroleum. The CS is the only person authorized under the Act to notify the public of the discovery of petroleum or any other resource by a contractor and may authorize a contractor or any other person to notify the public of the discovery. A contractor who notifies the public of the discovery without approval of the CS commits a criminal offence and on conviction is liable to a penalty of not less than twenty million Kenyan shillings.

Section 31 of the Act mandates the CS to within 30 days of the approval of the field development plan to submit the production sharing contract accompanied by the field development plan to parliament for ratification in accordance with article 71 of the Constitution of Kenya 2010.

56

Parliament Ratification

In accordance with section 30 of the Petroleum Act 2019, where a commercial field is established such field shall be developed by the Contractor within such time as may be prescribed in the Act and the Petroleum Agreement. A Contractor is required to prepare a field development plan for a commercial field which shall make proposals for the development and production from the field. The field development plan shall be submitted to EPRA for review in accordance with the Petroleum Agreement. EPRA shall then advise the CS prior to approval of the field development plan.

Section 31 of the Act mandates the CS to within 30 days of the approval of the field development plan to submit the production sharing contract accompanied by the field development plan to parliament for ratification in accordance with article 71 of the Constitution of Kenya 2010. Parliament shall within sixty

(60) days after receipt of the Production Sharing Contract and the field development plan;a) ratify the production sharing

contract and the field development plan; or

b) refuse to ratify the production sharing contract and the field development plan and refer the documents back to the CS for reconsideration stating the reasons for refusal.

The CS upon refusal of ratification by parliament is allowed under the Act to resubmit the Production Sharing Contract for approval by parliament. If Parliament fails to decide within ninety (90) days, the Production Sharing Contract and Field Development Plan are deemed to have been ratified. In carrying out this ratification mandate parliament is obligated under the Act to conduct public participation.

Local Content Requirements

In line with the new Energy Act, the Petroleum Act 2019 also imposes local content

requirements on petroleum operations at Section 50. This provision is aimed at ensuring petroleum operations carried out in Kenya add value to the economy by creating jobs and requiring the procurement of locally available goods and services.It is important to note that there is a proviso to this provision which requires that the cost of such local content shall be at the prevailing market rate. This is aimed at encouraging the procurement of local content, while ensuring that projects remain fiscally viable.

Establishment of the Training Fund

Section 52(1) of the Act establishes a training fund for the purposes of training Kenyan locals in Upstream Petroleum Operations. All the money raised by contractors as training contribution shall be paid into the fund and shall be solely utilized for training purposes. The training contribution amount to be made by each contractor is to be specified in the Petroleum Agreements.

Payments and Sharing of Revenues

Section 53 of the Act mandates the contractor to comply with financial and fiscal obligations in the implementation of the petroleum agreements. Thus, the contractor shall pay the national government all the taxes, relevant fees, and levies in such a manner as prescribed by the Act.

Taxes, profits and royalties from upstream petroleum operations shall be collected in accordance with the relevant tax laws and accounts provided to the

A Contractor is required to prepare a field development plan for a commercial field which shall make proposals for the development and production from the field.


National Government agency responsible for collection of taxes. Failure to make the required payments shall result in payment of fines and penalties as shall be provided for in the production sharing contracts or other petroleum agreements.

The holder of a petroleum agreement shall pay annual fees as may be prescribed, the fee categories may include; Surface Fees, Training Fees and any other fee amounts prescribed. Additionally, the profits derived from upstream petroleum operations shall be shared between the contractor and the National Government in accordance with the petroleum agreement. The national government’s share of petroleum revenues before the imposition of taxes shall be deposited into a dedicated petroleum fund and managed in accordance with the Public Finance Management Act, 2012, and any other relevant law.The Act also provides uniquely that the national government’s share of the profits derived from upstream petroleum operations shall be apportioned between the national government, the county government and the local community; the county government’s share shall be equivalent to 20% of the national government’s share.

Moreover, the Act has effectively inculcated the principle of derivation which is to the effect that the local community’s share shall be equivalent to five percent of the national government share and shall be payable to a trust fund managed by a board of trustees established by the county government in consultation with the local community.

Impact on existing projects

The Act effectively preserves any and all contractual rights, privileges, liabilities and obligations existing pursuant to the repealed Petroleum (Exploration and Production) Act. This creates a favorable investment climate as this preservation offers consistency and reliability to investors who have already committed to the market.

Impact on Local Communities

One of the most important developments in the new Act for the community is revenue sharing. The Act provides for apportionment of five percent of the government`s share of profits to the local community. The Act defines a local community as the people living in a sub-county within which a petroleum resource is located and are affected by the exploitation of that petroleum resource. The local community revenue is payable into a trust fund which is managed by a Board of trustees that is established by the county government in consultation with the local community.

The Act further impacts local communities by having extensive provisions on environment, health and safety. Part VIII of the Act obligates contractors to uphold environment, health, safety and maritime laws as well as best petroleum industry practices in their operations. This ensures that local communities are protected from the potentially harmful effects that may arise from petroleum operations.

Local content requirements of the new Act also have a potential impact on the local communities. Part VI stipulates that any person

carrying out any undertaking or works under the Act should prioritize services and goods provided and manufactured in Kenya. Section 52 also provides for the establishment of a training fund to train Kenyan nationals in upstream petroleum operations. These local content provisions if properly implemented, could uplift the living standards of local communities through creation of employment opportunities, provision of services and human capacity building through trainings of the communities. It is worth noting that there is a Local content Bill pending in the senate that extensively seeks to increase local value capture along the value chain of Petroleum exploration and would be even more impactful on local communities once it is passed.

Impact on upstream and downstream operators

Upstream petroleum operations are defined as operations related to the exploration, development, production, storage and transportation of petroleum to the agreed delivery point while downstream operations are all operations related to the distribution of petroleum to end users. The Act has far reaching impacts on both operators as outlined below.

• All upstream operators are obligated to apply to the cabinet secretary for a petroleum agreement as well as a non-exclusive exploration permit from the Energy Regulatory commission before engaging in any operations. Failure to comply attracts a penal sanction of imprisonment not exceeding ten years, a fine not exceeding ten million shillings or to both.

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• The Act requires contractors to indemnify the government against claims made by third parties for any loss or damage as a result of the actions of the contractor or sub-contractor pursuant to a petroleum agreement.

• Contractors are mandated to provide security to the government, as a guarantee that the contractor shall carry out its minimum work and expenditure obligations under the petroleum agreement. The cabinet secretary is empowered to suspend or terminate a petroleum agreement and recall the security, if the contractor defaults in these minimum work and expenditure obligations.

• The Act places a forty-eight-hour requirement on any contractor that discovers the existence of petroleum or any other natural resources, to notify the Cabinet secretary of the discovery. The cabinet secretary is the only person authorized to disclose this to the public, unless he/she authorizes the contractor to do so. Disclosure by the contractor to the public without such prior authorization is criminalized and attracts a fine not exceeding twenty million shillings.

• Contractors are required to comply with local content and training requirements under the Act. They are obligated to prioritize local services and goods manufactured in Kenya. The Act has established a training fund to be used for local human capacity development through trainings. The petroleum agreements entered into

by contractors will specify the contribution that the contractors shall be required to make to the fund.

• Section 55 of the Act introduced a mandatory signature bonus that a contractor shall pay to the national government prior to the awarding of the petroleum agreement. This will likely be subject to negotiations as there is no prescribed rate for setting the value of the bonus. Moreover, the contractor shall have to pay annual fees as set out in the petroleum agreement.

• The Act also places environmental, health and safety obligations on contractors as they are required to comply with all applicable environmental, health and safety laws. Contractors are additionally obligated to put in place emergency preparedness measures to forestall any accidents and emergencies during petroleum operations. This obligation will thus require the operators to devote resources to ensure that they are environmentally compliant in all aspects of their activities.

• Lastly Act stipulates that all disputes pursuant a petroleum agreement shall be settled through alternative dispute resolution in the first instance as provided in the Petroleum agreement.

If the dispute relates to an upstream regulated function, the Energy Regulatory Commission is empowered to entertain the dispute in the first instance and is appealable to the Energy and Petroleum tribunal.contractors will specify the contribution that the contractors shall be required to make to the fund.

• Section 55 of the Act introduced a mandatory signature bonus that a contractor shall pay to the national government prior to the awarding of the petroleum agreement. This will likely be subject to negotiations as there is no prescribed rate for setting the value of the bonus. Moreover, the contractor shall have to pay annual fees as set out in the petroleum agreement.

• The Act also places environmental, health and safety obligations on contractors as they are required to comply with all applicable environmental, health and safety laws. Contractors are additionally obligated to put in place emergency preparedness measures to forestall any accidents and emergencies during petroleum operations. This obligation will thus require the operators to devote resources to ensure that they are environmentally compliant in all aspects of their activities.

• Lastly Act stipulates that all disputes pursuant a petroleum agreement shall be settled through alternative dispute resolution in the first instance as provided in the Petroleum agreement.

If the dispute relates to an upstream regulated function, the Energy Regulatory Commission is empowered to entertain the dispute in the first instance and is appealable to the Energy and Petroleum tribunal.


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