Investors across industries are highly sensitive to social and political environments when investing in any country, and want to be reassured that their investments are safe. Upholding the sanctity of contracts is one-way countries send out the right signal to investors.
Nigeria and The Democratic Republic of Congo have been in the news recently for doing the opposite; they breached contract terms, which have raised their risk profiles.
For Nigeria, a commercial court in the United Kingdom has given reason to a claim by engineering company Process and Industrial Developments Ltd (P&ID), which demands over USD$9 billion from the Nigerian government over a failed gas deal.
The decision follows a 2017 arbitration award and turns it into a legal judgement, which could allow P&ID to seize Nigeria’s international commercial assets. Nigeria plans to appeal and apply for a stay of execution.
In March, an international court ordered the Democratic Republic of Congo to pay South African DIG Oil Ltd $617 million for failing to honour two oil contracts.
The gravity of these situations become more apparent when one considers that the loss is incurred because the country’s leaders failed to comply with a contract that could have brought a considerable amount of wealth for the country for many years to come, in both royalties and taxes, as well as help develop its oil industry.
These cases represent an important cautionary tale for African governments everywhere. Very few things matter more in the struggle to attract investment and build a favourable business environment that will push the economy forward than the absolute sanctity of the contracts signed.
“You want to make sure that when you invest in a project, the returns are such that associated risks are mitigated. If you are in any environment where there is any doubt about whether those returns may materialise, then you begin to question whether you should make an investment at all,” Oliver Andrews, chief investment officer at the Africa Finance Corporation said.
“When you operate in an unpredictable environment in terms of the sanctity of contract, there is a cost associated with that risk profile.”
Senegal and Equatorial Guinea took a different approach to contract sanctity that Nigeria can emulate.
Senegal’s government under President Macky Sall avoided this kind of litigation when it was confronted with the issue of the Timis Corporation and its ownership of acreage that included the Tortue field, which is estimated to contain more than 15 trillion cubic feet of discovered gas resources. If President Macky Sall had proceeded with terminating a valid contract for the acreage, the Timis Corporation would have engaged in arbitration and would have probably gotten a favourable judgment against Senegal.
Even with criticism from civil society groups, Equatorial Guinea has honoured contracts with the US oil companies that many oil analysts believe are unfavourable to the state. This principle has kept Equatorial Guinea’s oil industry stable and US firms continue to invest in new projects like the EGLNG backfilling project with Noble, Atlas Oranto, Glencore Marathon and the state.
African leaders and African nations cannot afford this sort of mistakes anymore. If on the one hand, contracts must be respected, protected and followed through, the people in charge of evaluating and signing those contracts must have the project’s feasibility as the dominant reasoning behind any decision.
