The governments of Uganda and Tanzania agreed in April this year to build a cross-border pipeline.

As Uganda is a landlocked country, a pipeline is required to facilitate the delivery of the crude oil to export markets. Discussions to establish the legal, fiscal and financial framework under which the project will be developed are understood to be underway.

Since this announcement, there has been a heightened anticipation of the economic benefits that will arise from this project, which needs to be moderated with a measure of reality, as not all proposed pipeline projects take off.

Cross-border pipelines present challenges that other ventures do not. They run long distances, and the Uganda and Tanzania pipeline will cover over 1,400 kilometres, crossing both countries, which have different legal and tax regimes.

Political and economic consideration inherent to pipeline projects loom large, compared with other ventures, combining to create an intricate terrain that must be navigated for a viable and bankable project structure.

As this proposed pipeline project will be private-sector led, the project sponsors and lenders will be keen to commit their capital to a venture that is commercially viable, from which their investment can be recouped.

A pipeline legal framework influences the taxation regime, which can impact the cost of the construction and operations. High construction and operational costs arising from the tax policy have the potential to render pipeline projects uneconomic.

The governments of Uganda and Tanzania will enter into an inter-governmental agreement (IGA) and a host government agreement (HGA) separately with the project sponsors, which will constitute the pipeline’s legal framework. These agreements will deal with land right issues, harmonisation of the legal and tax structures, physical security, government and investor obligations and other relevant project implementation issues.

A form of debt financing known as project financing will most likely to be used to fund the building of this pipeline. The global pool of capital available for project financing is finite and competed for by both the developed and developing world. A company to build and operate the pipeline will be formed and will repay the lenders from the project returns.

At the point of deciding whether to go ahead with the project, lenders will be keen on a stable legal framework and a predictable tax environment. Lenders will be wary that future legal and tax changes could impact the ability of the project company to repay its loans. It is, therefore, expected that the IGA and HGA will include robust stabilisation clauses and dispute resolution measures.

Stabilisation clauses preclude host countries from amending legislation that touches the project or can trigger a renegotiation of the investment agreement to restore the previous fiscal balance.

The project agreements should also clearly determine the pipeline tax base in both Uganda and Tanzania.

Multiple layers of taxation or uncertainty around how income tax applies to each country’s portion of the pipeline can create tax inefficiencies stemming from the inability to utilise tax credits on the tax suffered in each of the jurisdiction, which can affect the returns and hence the project viability.

Both Uganda and Tanzania have general measures within their laws to alleviate double taxation but these may need to reviewed to ensure that they do not result in any tax leakages that may affect the venture returns.

The tax exemptions and incentives provided in the project agreements may not be honoured by the government bodies in Uganda and Tanzania unless the same are reflected in local tax legislation or the agreements are ratified by both countries. Investors will be keen that the exemptions and incentives in these agreements have the force of law.

Some infrastructural projects currently being undertaken in Uganda and Tanzania have benefited from this measure and it is hoped the same will be extended to the proposed pipeline project.

The construction and operational costs incurred will be significant. Given the long lead time between construction and operations, VAT incurred during construction will be significant, unless eliminated.

Uganda recently revised its VAT regime to eliminate VAT incurred during the investment phase of pipeline construction, and the same should be done by Tanzania.

Significant input VAT will also be incurred at the operational phase, creating repayment claims that will be handled by the tax authorities in both countries. Unless this issue is appropriately handled, it has the potential to escalate the investment costs, potentially rendering the venture uneconomic. These issues must be satisfactorily addressed by the project agreements.

The imposition of import taxes and associated levies on goods imported in relation to the pipeline construction and operation can increase the overall costs and affect the project viability.

There is no special regime envisioned under the import legislation applicable to both countries that exempts equipment and inputs imported during the pipeline construction stage from taxes.

The position adopted by other countries and for some of the ongoing infrastructure projects in Uganda and Tanzania has been to exempt such ventures from the requirement to pay import duties so as to keep the building costs low and viable.

Transit fees to allow the pipeline through another’s territory is always a controversial subject. Issues around transit fees are the major source of conflict between countries and disruption of the throughput when operations begin.

The two governments should agree on mutually beneficial transit fees that will allow the project to remain viable in the current environment of low crude oil prices.

The euphoria surrounding the pipeline should be converted into tangible action, with the respective governments creating a favourable tax and fiscal environment.

Both Uganda and Tanzania have the benefit of picking up valuable lessons from recently built cross-border pipelines such as the Chad-Cameroon pipeline and the Baku-Tblisi-Ceyhan line to put together a viable and bankable project structure.

Denis Kakembo is a senior tax manager at Deloitte East Africa.