In recent years, Kenya has seen a significant increase in infrastructure-related investments, the majority of which focus on transportation and energy. This, coupled with Kenya’s potential for scalable renewable energy projects, positions the country for an instrumental role in the African energy market.
For many of these projects, issues relating to land have proved to be particularly challenging. Land is an integral part of any infrastructure project. The importance of land rights to the bankability of a project cannot be overstated, especially because a good number of the associated risks continue throughout the life of the project.
It is therefore unsurprising that investors are wary when it comes to the land-related aspects of a project. This article seeks to analyze some of the pertinent land issues that affect investors in energy infrastructure projects in Kenya.
Land Control Board consent
The Land Control Act (LCA) makes it mandatory for parties to obtain Land Control Board (LCB) consent for transactions involving, among others, the sale, transfer, lease, charge and subdivision of agricultural land, which includes land not within a municipality or township. Given the land-intensive nature of energy infrastructure projects, most project sites are located in rural areas, invariably meaning the land is agricultural.
The LCB is charged with ascertaining that certain conditions are met before granting consent, and it considers, among other things, the effect of the proposed transaction on the economic development of the land. More importantly, the LCB is required to refuse consent where the application is made by a non-citizen or a private company with any non-citizen shareholder. This poses a significant challenge, given the capital intensive nature of infrastructure projects, which in most instances call for some level of foreign investment. Fortuitously, the Land Control Act provides for an exemption from the requirement to obtain LCB consent where presidential exemption has been obtained. However, in a number of cases, project developers have to find innovative ways to navigate the LCB consent requirement, including through the creation of project companies that are initially wholly owned by Kenyan citizens pending approval for change of use of project land to non-agricultural purposes. Another option has been incorporating or converting project companies to public companies, which curiously are not as limited in terms of ownership of agricultural land. In comparison, countries like South Africa require government consent only when it comes to subdividing agricultural property, rather than in the event of acquisition by a foreigner.
To support investors, the recently enacted Energy Act 2019 requires national and county governments to facilitate acquisition of land for energy infrastructure development. The Energy Act does not, however, elaborate on what form such facilitation would take. One of the suggestions floated by industry stakeholders is that the government could facilitate land acquisition by exempting energy, and indeed all infrastructure projects, from the requirement to obtain LCB consent.
Ownership of land by non-Kenyan citizens
In Kenya, freehold title over land cannot be held by a non-Kenyan. The law only allows foreigners to hold leasehold interest of a maximum of 99 years. This restriction is common on the continent, and countries such as Uganda and Ghana have similar requirements. This is in contrast to countries such as South Africa and Egypt, where foreigners can hold freehold interest over property without limitation.
The silver lining in Kenya is that the maximum duration of the leasehold interest (99 years) is longer than the expected lifespan of energy projects, which are usually around 20 to 25 years.
As with other countries, inadequate or inconsistent community consultation can be fatal to a project, especially if community members hold a subjective or inflated estimation of what they are entitled to.
It is not unusual for disputes to arise in cases where the community is concerned about what it considers to be poor compensation for land, the effects of projects on the community and the perception of meager benefits from the project. The importance of “social license” was most recently demonstrated in the Kinangop Wind Power Project, which was affected by land and community disputes, thereby underpinning the importance of a proper and continuous community management plan.
Project developers must therefore consult effectively with communities in order to recognize legitimate land rights, assess the impact of the project on local land rights and livelihoods and establish conditions for a productive relationship with the community. There are many success stories, such as the Kipeto Wind Farm, that have successfully negotiated compensation and leasing of land with over 100 landowners by dedicating time and resources to community engagement.
Rights of way and easements
In addition to acquiring land rights over the main site where the plant will be developed, developers must also consider easements and other similar land rights to cater for the transmission and distribution networks for the power the proposed plant is to generate. This often involves negotiations with and compensation of multiple landowners.
This challenge is not exclusive to the private sector and is also a hurdle for government agencies such as Kenya Electricity Transmission Company. In July 2019, for example, the Business Daily newspaper reported that the Company was experiencing delays in completing power lines worth KES38.7 billion (USD387 million) due to, among other issues, way-leaves acquisition.
In cognizance of this issue, the Energy Act has included provisions aimed at easing the process of acquiring rights of way and easements for energy projects.
Authenticity of title documents
Having a decentralized and somewhat manual land registry system has meant that the validity of title documents can at times not be authoritatively verified. Fortunately, however, significant land reforms designed to counter this problem are being prepared. The move to digitize the land registry records will be particularly helpful in this regard.
Land acquisition challenges can be a disincentive for investors in infrastructure development in Kenya. Positive moves in the country are already underway to address the concerns set out above.
Although land-related project challenges can be found throughout Africa, Kenya finds itself in a unique situation due to the prevalence of relatively small parcels of land that either are privately owned or constitute community land.
In neighboring Tanzania, all land is vested in the government to hold on behalf of its citizens. Foreign companies can obtain a right of occupancy from the government, provided that they have a Certificate of Incentives issued by the Tanzania Investment Centre. Uganda, on the other hand, has similar land ownership structures to those of Kenya, but the Uganda Investment Authority has a one-stop-shop for investors, which includes an embedded land registry function that assists in the verification of land ownership. Taking this into account, there are some practices that Kenya can borrow from its neighbors in order to reduce the current land acquisition difficulties in the energy sector.
By Beatrice Nyabira (Partner), Judy Muigai (Director) and Jane Nduati (Associate), IKM Advocates, DLA Piper Africa member firm in Kenya