2017 Project Finance Report: Tanzania
Nicholas Zervos, Geoffrey Gasper and Edmund Temu, VELMA Law
Section 1: National update
1.1 What are the main project finance trends and developments (for example, increased use of project bonds) recently seen in your jurisdiction?
Specific legislation to encourage and enable investment in projects involving both the public and private sectors was passed in 2010 (Public-Private Partnership – PPP – Act) and regulations were further amended in 2015. Revised PPP legislation has been drafted but by November 2016 there has been no progress with regards to its enactment. General procurement laws and regulations no longer apply directly to PPP projects following changes in 2014. Both solicited and unsolicited PPP proposals are envisaged but in each case competition is now clearly required.
Local content requirements are an increasing area of development and are set out in detail in recent legislation for oil and gas. The government tends to prefer public ownership of assets, so limited recourse projects are being developed alongside on-balance-sheet government projects. A draft bill of new legislation has recently been circulated for comment, seeking to clearly permit under existing legislation the ability of the government to give guarantees of contractual obligations of public entities. However, the draft does not yet clearly enable this, so it is hoped the final Act will be appropriately amended.
Section 2: ECAs and Multilaterals
2.1 What role have export credit agencies, multilateral agencies and international financial institutions played in supporting project finance transactions in your jurisdiction? Please include an overview of the main institutions domiciled in your jurisdiction.
There are many international agencies operating in Tanzania, including export credit agencies (among them the African Export-Import Bank, Nordic Development Fund and OPEC Fund for International Development), multilateral finance institutions (for example the International Finance Corporation and African Development Bank), and other finance agencies (including KfW, USAID, Canadian CIDA and Swedish SIDA). Most projects in Tanzania require and benefit from support from such agencies and it is unlikely that a project will be developed without support from such agencies at some stage, ranging from finance for an initial inception feasibility study, to funding for project capital costs to supplement commercial bank finance.
Section 3: Public private partnerships
3.1 Is there a public private partnership act or similar statute authorising PPPs and are both greenfield and brownfield projects permitted?
PPPs are authorised under the Public Private Partnership Act 2010 (PPP Act) and the regulations of 2015.
Under the Act, sectors that have been expressly identified for implementation in partnership with the private sector include agriculture, industry and manufacturing, exploration and mining, energy, ICT, health and education, trading and marketing, natural resources and tourism.
The PPP laws do not differentiate between greenfield and brownfield projects but the provision of assets by the government can include existing assets of the relevant contracting authority or new assets to be acquired for the purpose of entering into a PPP agreement.
3.2 May a concessionaire grant a security interest in the project to its lenders and, if so, is consent of the government or contracting authority required?
A concessionaire may grant a security interest over the project assets to its lenders. Consent of the relevant government department or contracting authority will be required where a security interest is granted over a concession agreement or licence. Generally, the rights, obligations and controlling interests of a concessionaire in a PPP project cannot be transferred or assigned to a third party without prior written consent of the relevant contracting authority.
In the mining sector, under the Mining Development Agreement (MDA) with the government in relation to the special mining licence for large-scale mining, the investor is permitted to grant banks all security over its assets for loans incurred in pursuit of the development of the project.
In the petroleum sector, under the production sharing agreement (PSA) the contractor may not transfer its rights or obligations under the PSA to any third party without the prior written consent of the Minister for Energy and Minerals.
In the power sector, transmission, generation and distribution licences granted to a concessionaire may not be assigned or transferred to another party without the approval of the regulator.
In the telecoms sector, a concessionaire may not transfer, pledge or otherwise dispose of its licence without the prior written consent of the Tanzania Communications Regulatory Authority.
In addition, prior written approval of the Tanzania Investment Centre is also required, if the concessionaire creates a mortgage over any derivative title that it has over project land.
Section 4: Foreign investment and ownership restrictions
4.1 What restrictions, fees and taxes exist on foreign investment in or ownership of a project?
Generally, there is no restriction of foreign ownership or management of companies established in Tanzania. However, there are restrictions on foreign investment in certain sectors, such as mining, telecommunications and shipping, which require some local ownership.
Recent 2016 legislation requires large scale Special Mining Licence (SML, being a mine project more than $100 million) holders to issue shares to the public and list on the Dar es Salaam Stock Exchange within one year of the SML, and to have a minimum 30% local shareholding. It is not clear how this interacts with any government free carried interest which will be required under the MDA for the SML.
Restrictions to 60% foreign investor equity participation in Tanzanian companies listed on the Dar stock exchange were lifted in September 2014; however, foreign investor participation in government securities is still subject to conditions.
Foreign ownership of title to land is not permitted unless the foreign-owned company has a certificate of incentives from the Tanzania Investment Centre, which has approved the project for investment purposes.
4.2 Can a government authority block or unwind a transaction involving foreign investors after it has closed for strategic, national security or other reasons?
All title to land is usually held subject to the President's right to revoke the title for "good cause and in the public interest". Land also can be compulsorily acquired by the President if the land is required for public purposes, which includes developments of a port or harbour or mining for minerals or oil. The President can by order in the Gazette deem any work to be for public purpose.
Generally, for strategic, national security or other reasons, a government authority can block or unwind a transaction involving foreign investors after it has closed, subject to payment of compensation.
Under the Tanzania Investment Act there is express protection against expropriation without "fair adequate and prompt compensation", with a right of access to a court or arbitration to determine the compensation.
Under the standard MDA, there is express provision for no nationalisation or compulsory acquisition without compensation "in an amount and manner that is prompt, adequate and effective".
Generally, under the PPP legislation there is a requirement to fairly compensate the investor in the event that it suffers loss due to unforeseen events beyond its control or if the contracting authority is in default under the PPP agreement. However, note there is an equivalent requirement for the investor to compensate the contracting authority for loss suffered if the project is terminated due to the failure of the investor to meet its obligations.
Section 5: Foreign exchange, remittances and repatriation
5.1 What, if any, are the restrictions, controls, fees and taxes on remittances of investment returns or payments of principal, interest or premiums on loans or bonds to parties in other jurisdictions?
Generally, there are no major restrictions on remittances of investment returns or loan payments to parties in other jurisdictions, but there are certain foreign currency exchange restrictions for payments in Tanzanian shillings to or for the credit of a person resident outside Tanzania.
Withholding tax applies on dividend payments and to interest, except the government may agree to an exemption on withholding tax on interest paid to a registered financial institution or on interest paid to a non-resident bank by a strategic investor.
Payments relating to repatriation of capital and income to foreign shareholders in respect of direct investments are allowed. However, financial institutions making payments are required to demand audited accounts and tax clearance certification from the Tanzania Revenue Authority confirming up to date payment of taxes.
Foreign exchange laws require that interest rates in loan agreements reflect the prevailing market conditions for the relevant currency of borrowing and that the repayment period is tied to the ability of the project to generate enough funds to service the loans in a progressive manner. The loan agreements should not include conditions requiring opening of foreign currency accounts with banks not registered in Tanzania, unless Bank of Tanzania consent has been obtained.
5.2 Can project companies establish and maintain onshore foreign currency accounts and/or offshore accounts in other jurisdictions?
Generally, there is no restriction on a project company to establish and maintain an onshore foreign currency account in Tanzania, since any person may hold any amount of foreign currency and may open and maintain a foreign currency account with a bank which is an authorised dealer in Tanzania.
However, a company can only establish an offshore foreign currency account in another jurisdiction with approval from the Bank of Tanzania. The Bank monitors offshore foreign currency accounts to ensure that they are not used to facilitate unauthorised outward capital transfers.
Section 6: Insurance
6.1 Are there any restrictions, controls, fees or taxes on insurance policies over project assets provided or guaranteed by foreign insurance companies?
Insurance policies generally are required to be placed with Tanzanian insurers. Where a class of insurance policy cannot be provided by local insurers, it can be provided instead by foreign insurance companies, provided thatprior approval of the commissioner of insurance is obtained. Types of insurance provided by Tanzanian insurers over project assets include insurance over ships, aircraft, goods in transit, fire, damage to property, legal expenses, accidents, credit surety-ship and motor vehicle insurance.
Withholding tax applies on insurance premium payments to non-residents.
6.2 Is reinsurance in the international market commonly seen on project finance transactions in your jurisdiction and are cut-through clauses permitted?
Reinsurance is not commonly seen in project finance transactions in this jurisdiction, although there are certain mandatory reinsurance cessions in insurance legislation.
Section 7: Choice of law and jurisdiction
7.1 Is a submission to a foreign jurisdiction and a waiver of immunity effective and enforceable?
The submission by parties to a foreign jurisdiction will be effective and enforceable if submission is non-exclusive. Recognition of a foreign jurisdiction may be refused where a dispute relates to a matter that is exclusively governed by Tanzanian law
As regards sovereign immunity, where the government of Tanzania is a party to a contract, it is deemed to have waived its immunity, and will be subject to all liabilities that arise in the contract, as if it were a private person. Any claim arising under the contract can be enforced against the government. However, enforcement is restricted to payment by the treasury department of amounts due and no other form of execution or attachment may be used to enforce payment.
7.2 Is English or New York law recognised as a valid choice of law in your jurisdiction?
Generally, parties have a right in a contract to choose which law will govern the contract. If the contract is silent then Lex loci contractus will determine that the governing law will be the law of the place where the contract was made.
7.3 Would courts recognise a foreign arbitral tribunal award or court judgment? If so, what are the conditions applicable to such recognition?
Tanzania law will recognise a foreign court judgment where there is a reciprocal enforcement of judgments agreement in place with that foreign country. In order for a foreign judgment to be recognised in Tanzania, the judgment must be filed, by way of an application to the High Court. The court will then recognise the foreign judgment, unless the judgment is challenged on the basis of jurisdiction, illegality or would be contrary to public policy.
Further, Tanzania has ratified the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. Therefore, a foreign arbitral award is enforceable in Tanzania using the mechanism provided under the New York Convention.
Generally, according to the Arbitration Act, a foreign arbitration award is enforceable in the High Court of Tanzania. It is treated as binding for all purposes on the persons between whom it was made, and may be relied on by any of those persons by way of defence, set–off or otherwise, in any legal proceedings.
For a foreign arbitral award to be enforceable it must fulfil certain specified conditions, such as: having been made under a valid arbitration agreement, in conformity with the law, become final in the country in which it was made and may have been lawfully referred to arbitration under Tanzanian law.
A foreign arbitration award cannot generally be enforceable if the High Court is satisfied that, for instance, the award has been annulled in the country in which it was made or does not deal with the relevant questions, or goes beyond the scope of the agreement.
Section 8: Security
8.1 What types of security are usually seen in project finance transactions in your jurisdiction, and are there any notable exclusions, including assets which cannot be secured?
Collateral available in Tanzania includes mortgages over land, fixed charges over assets (including cash at bank), share charges and pledges, assignment by way of security, (including the benefit of contracts and receivables) liens and floating charges (together with security interests) and guarantees.
There are certain classes of assets which cannot be attached, which should be checked depending on the facts of the project security package (for instance land or buildings belonging to an agriculturalist and immediately appurtenant land).
8.2 Would the law of your jurisdiction enforce arrangements whereby debt is subordinated by way of a contractual agreement (including in bankruptcy or insolvency proceedings)?
Generally, inter-creditor agreements are commonly used by local banks in Tanzania to subordinate debts and to adjust the ranking of secured creditors by way of contractual agreement. The enforceability and operation of these inter-creditor agreements have not to our knowledge been challenged in the courts in Tanzania.
In the case of a company insolvency, preferential debts will be paid as a priority. Preferential debts include specified taxes, specified government rents and specified wages or salaries.
Tanzanian law recognises that any arrangement entered into between a company about to be, or in the course of being, wound up and its creditors will be binding on the company if sanctioned by the shareholders and creditors, subject to the right of appeal to the court by any aggrieved creditor for the court to amend, vary or confirm the arrangement as it thinks just.
Section 9: Perfection, priority and enforcement
9.1 How is a security interest in each type of collateral perfected and how is its priority established?
Generally, a security interest is perfected by registration at the Business Licensing Regulatory Authority (Brela) within 42 days of the date of its creation, otherwise it will be void on the insolvency of the company against the liquidator or administrator, or any creditor of the company.
Mortgages must also be registered at the relevant land registry and some documents should also be registered at the registry of documents.
The priority of security interests is generally determined by the date of the document and the priority of mortgages is generally determined by the date of registration at the relevant land registry, in each case provided it is registered in time and there is not an agreement otherwise.
9.2 Are any fees, taxes or other charges payable to perfect a security interest and, if so, are there lawful techniques to minimise or defer them?
Nominal registration fees are payable for the registration of a security interest at Brela the land registry or the registry of documents. Security interests are also liable to nominal stamp duty.
9.3 May a corporate entity, in the capacity of agent or trustee, hold security on behalf of the project lenders as the secured party?
Yes, a corporate entity can act as a security agent or trustee on behalf of the project lenders and this has been done in Tanzania. However, the enforceability and operation of such an arrangement has not to our knowledge been challenged in the courts in Tanzania.
Section 10: Bankruptcy proceedings and enforcement
10.1 How does a bankruptcy proceeding in respect of the project company affect the ability of a project lender to enforce its rights as a secured party over the collateral/security?
Winding up proceedings will affect a lender's right to enforce any security interest. Any attachment or execution against a company's assets after the commencement of winding up proceedings by the court will be void. Any disposal of the company's property, including things in action, any transfer of shares or any alteration in the status of the shareholders of the company without the court's consent will also be void.
10.2 Outside the context of a bankruptcy proceeding, what steps should a project lender take to enforce its rights as a secured party over the collateral/security?
A project lender may take enforcement steps, such as dealing with any assets charged to the lender, by giving reasonable notice of the sale to the borrower, or completing the blank share transfer forms and proceeding with the transfer where shares have been charged.
The lender can similarly take possession of any land it has a security interest over after service of a notice of default on the borrower and either lease the land or sell it 30 days after the date of the notice.
10.3 What processes, other than court proceedings, are available to seize the assets of the project company in an enforcement? For instance, is contractual enforcement (such as receivership) recognised?
A receiver may be appointed without court proceedings, subject to the terms of appointment set out in the relevant security interest. An administrative receiver appointed under the security interest also has the power to seize and dispose of any property subject to that interest.
About the author
Founder partner, VELMA Law
Dar es Salaam, Tanzania
T: +255 752 66 77 66
Nicholas Zervos is a partner at VELMA Law and a senior commercial transactional lawyer with expertise in international corporate matters and project and structured finance, particularly in East Africa, the UK and central and eastern Europe.
Zervos has lived and worked as a lawyer in Dar es Salaam since November 2006. Before then he was a senior partner with a major firm in London (and Hong Kong), advising sponsors and banks on commercial and financing agreements for infrastructure projects in developed and emerging markets. His areas of specialism include commercial law, project finance, finance and corporate law. He has a law degree from the University of Nottingham, and is admitted to the English, Tanzanian and Hong Kong bars.
Zervos is a member of the Law Society of Tanganyika and the Law Society of England and Wales.
About the author
Junior associate lawyer, VELMA Law
Dar es Salaam, Tanzania
T: +255 765 87 26 74
Geoffrey Gasper is a junior associate lawyer at VELMA Law in Dar es Salaam, with expertise in corporate, commercial, banking, energy and PPP law.
Gasper has a degree from Tumaini Makumira University, Arusha, Tanzania and has previously worked with an international corporate and investment bank on regulatory compliance, corporate and commercial matters, facility agreements and security documentations.
About the author
Junior associate lawyer, VELMA Law
Dar es Salaam, Tanzania
T: +255 657 159 311
Edmund Temu is a junior associate lawyer at VELMA Law in Dar es Salaam with expertise in corporate/commercial, banking, energy, intellectual property and public private partnership law.
Temu has a degree from Cardiff University, United Kingdom and has experience advising both domestic and international clients across his engaged areas and conducting research and due diligence.