Personal Finance

What foreigners should know before investing in counties

Entrepreneurs want to be assured that their investment will not be threatened by changes in law. photo | fotosearch
Entrepreneurs want to be assured that their investment will not be threatened by changes in law. photo | fotosearch 

A lot of counties are undertaking ambitious projects. Many have hosted investment forums which have attracted foreign entrepreneurs.

This article highlights some of the legal issues that a foreign investor should take into account when entering into project deals with county governments.

Kenya has a devolved system of government where a county project can be guided by national laws, county laws or both.

Therefore the issue of applicable laws is one of the first things an investor should consider.

An investor should ask if the project is a national or county government venture.

Most projects which deal with natural resources, for example oil exploration, are national and therefore the proper contracting party is the national government.

Others like provision of housing and sanitation are county ventures hence county governments are the right contracting parties.

An investor needs to know whether regulatory approvals and licences have been granted because a project might not proceed without them.

In the event approvals have not been given then the county should undertake to provide them. However, not all projects require approvals.

Due diligence should be done on applicable laws. The type of due diligence required is project specific. Where the venture involves land land laws are applicable.

After conducting the due diligence an investor moves the contracting stage.

I will limit myself to highlighting risk reduction clauses that an investor should consider when signing a contract with county officials.

Entrepreneurs should understand that despite there being a contract, changes in county laws and regime (for example where a new governor is elected) and administrative action can expose them to risks.

The investor should insist on inclusion of a renegotiation clause to minimise such risks.

Such a clause comes in handy in case of changes in county laws, when an investor’s position is compromised, for example through introduction of new levies. In such a case, the parties should renegotiate terms.

An entrepreneur also needs a stabilisation clause. Such a clause has been used in oil projects to protect investors from changes in the political environment.

Under such clauses the county government promises not to effect any changes in laws that would be detrimental to the investor as long as the investment subsists.

It may look like an unfair clause, what with an investor holding a county at ransom by limiting its legislative powers.

However, in the long run such clauses are effective in attracting entrepreneurs.

Investors want to be assured that their investment will not be threatened by changes in law.