LAGOS, Nigeria, Capital Markets in Africa: The key to unlocking Africa’s growth potential The continued downturn in global commodities prices has, according to the World Bank’s Africa’s Pulse April 2016 report, reduced Sub-Saharan Africa’s economic growth to 3% in 2015 from 4.5% in 2014. Despite this fall, Africa’s economic growth of 3% for 2015 is higher than the global average growth rate. It is undeniable that developing the continent’s road, rail, power and urban infrastructure would further improve the economic growth rate – closing the infrastructure funding gap (currently estimated at USD 30 million by the World Bank) would help make this possible.

Closing the gap
Development of access to power and transportation in Africa is crucial to the growth of the economy. The availability of electricity is, according to McKinsey & Company’s Powering Africa report, at an average grid access rate of 20% in 48 out of the 55 African countries – the impact of this being that countries with electrification rates of less than 80% of the population consistently suffer from reduced GDP per capita. Growth also relies on being able to bring commodities to market, which requires the development of road, rail, port and air infrastructure in Africa. Ghana, for example, is improving access to power by focusing on LNG, which goes hand in hand with the development of its port infrastructure and regulatory regime.

Private sector spending is crucial to improving infrastructure and close the funding gap identified by the World Bank. The international appetite for investments into Africa, however, needs to overcome initial hurdles for investors and commercial debt financiers, including political risk, legal and regulatory uncertainty, counterparty risk, corruption, currency risk and an under-developed local skilled workforce. These considerations are key to bankability analyses for project financings generally and are not unique to Africa – however, we set out below some key common themes to mitigate the perceived hurdles in the context of project financings in Africa generally.

Legislative and regulatory certainty
Equity and debt investors alike seek legal stability and prefer to invest into jurisdictions with legal systems that they are familiar with. At first, glance, understanding the different legal systems governing the 55 African countries is daunting. In recognition of this concern, key African governments have worked to establish legal frameworks that international investors are accustomed to:

  • the majority of Northern and Central African states have based their legal systems on the French civil code;
  • the Lusophone African countries have sought to base legislation governing their financial and regulatory sectors on existing Portuguese and Brazilian examples;
  • the English common law system forms the basis of legislation enacted in much of East and West Africa; and
  • 17 African states have now adopted the Organisation pour l’Harmonisation en Afrique du Droit des Affaires, created with the objective of fostering economic development in West and Central Africa with a view to improving the investment climate so as to attract funding in order to foster more growth in this market.

In addition to the above, the creation of institutional frameworks and the adoption of enabling legislation and framework legislation are essential to mitigate legislative and regulatory uncertainty.

The establishment of relevant agencies, governmental departments and authorities go side by side with the adoption of relevant legislation to create a regulatory framework for private sector involvement in the key infrastructure sectors. In the context of road infrastructure, enabling legislation may include the enactment of laws relating to procurement, concessions and PPPs. The International Bank for Reconstruction and Development / World Bank report “Africa’s Transport Infrastructure: Mainstreaming Maintenance and Management”, observes that countries in Africa with established road funds and specific road agencies have consistently better road funding and have been better at implementing road maintenance requirements than those which do not.

In the power sector, an example of the positive influence of enabling legislation and creation of appropriate institutional and regulatory frameworks can be seen in the success of the Renewable Energy Independent Power Producer Procurement Programme of South Africa. The authorities utilised a series of consultations with private sector counterparts to structure the programme, which includes clear procurement procedures, detailed documentation and negotiated exceptions to existing legislation (e.g. an exemption was obtained from the Public Preferential Procurement Framework Act in order to maximise economic development objectives), in each case facilitated by access to and utilisation of domestic and international advisers.

Counterparty risk
Creditworthiness and political reliability of governments and project counterparties such as state-owned or controlled off-takers are a common concern for investors and financiers. To mitigate such concerns, financing structures commonly include export credit agencies, multilateral agencies and development funding institutions as these institutions share their wealth of knowledge and experience to provide governments in developing countries assistance in establishing appropriate legislative and institutional frameworks, as well as (in certain circumstances) providing political risk or export credit insurances or guarantees.

We have advised multilateral agencies, export credit agencies and development funding institutions in relation to many energy and infrastructure projects in Africa: including Proparco, FMO and DEG, whose knowledge and experience was critically important to the success of the Bujagali Hydropower Project in Uganda; the World Bank in relation to the partial risk guarantee backed refinancing of Kenya Power; and UK Export Finance in relation to the Offshore Cape Three Points project in Ghana involving the development of oil and production facilities in the offshore Sankofa and Gye Nyame gas fields and the Sankofa East oil field.

A further example is the International Finance Corporation’s Scaling Solar project which offers, amongst other things, fully developed templates of bankable project documents and credit enhancement products, all of which improves investor confidence in the relevant project.

Security structures
The lenders to a project commonly insist on receiving a comprehensive security package from the borrower, other obligors and over the project assets and revenue streams. Whilst advising sponsors and financiers in relation to projects in Africa, we have encountered some common security structuring issues.

In developing bankable security structures in projects that involve borrowing entities controlled or owned (wholly or partially) by a World Bank borrower state, lenders and project counterparties will need to be mindful of the restrictions imposed by the World Bank Negative Pledge. Such structures may include closely controlled bank accounts of borrower entities and (where a conventional security package is unavailable) granting defensive security to the extent permitted by exceptions under the World Bank Negative Pledge.

Lenders may also consider whether to establish intermediate holding companies in a different jurisdiction to that of the borrower entity to ensure ease of enforcement of the share pledge over the borrower entity. This structure may also be adopted in financially troubled projects, with an intermediate holding company and a new share pledge as part of a restructuring of the transaction.

In certain jurisdictions, the amount of stamp duty payable in relation to security documents can be disproportionate to the value of the security. The parties may agree to perfect the security interest to cover a percentage of the total debt obligation and postpone the perfection of the total amount until the occurrence of a trigger event such as a potential event of default, where this is the case the lenders may require a stamp duty reserve amount to be held in an offshore account secured in favour of the finance parties. This is quite frequently a heavily negotiated point.

Exchange control regulations
Exchange control restrictions are not uncommon in Africa. South Africa, Mozambique and Ethiopia are just a few of the African countries which have exchange control requirements in place; some of these are more restrictive than others. Examples of restrictions include forbidding the opening of offshore bank accounts by entities incorporated in certain jurisdictions, requiring specific central bank permissions in order to transfer payments offshore and requiring any amounts being held in offshore bank accounts to be repatriated every three months.

The financiers, investors and their professional advisers will analyse such exchange control restrictions in order to structure a transaction acceptable to all counterparties. Mitigating the risks for financiers may involve including specific covenants in the finance documentation obliging the borrowers to maintain any relevant permits, or making payments into escrow accounts in the event restrictions are imposed on transferability of funds and the inclusion of a mechanism acknowledging the preferred creditor status of certain institutions. Where possible, corporate structures may be organised with a view to avoiding the incorporation of borrower entities in jurisdictions with exchange control restrictions: an example of this is the Moma mine transaction (with Absa, the African Development Bank, the Emerging Africa Infrastructure Fund, the European Investment Bank, FMO and KfW as lenders to the project since 2004 including through a lengthy restructuring process), where the borrower entities are Mozambican branches of companies registered in Mauritius, which has a comparatively relaxed exchange control environment.

Surmounting the hurdles
Many of the legal or commercial issues discussed above are not unique to Africa and they are not insurmountable, but as with other developing economies and legal systems, quite complex legal and financial tailoring may be required before key hurdles can be cleared.

Contributors Profile
Clive Ransome is a partner in the Global Project, Energy and Infrastructure Finance Group of Milbank, Tweed, Hadley & McCloy LLP. He has also worked extensively in the Far East, having been based in Hong Kong for six years, and whilst at his previous firm was based in Paris for two years. Clive focuses on energy financing, projects, project finance, export credit and banking law.

Seyda Duman is a Senior Associate in the London office of Milbank, Tweed, Hadley & McCloy LLP. Seyda has extensive experience advising commercial banks, export credit agencies, other multilateral finance institutions and project sponsors, on a variety of cross-border project financings in various industries and sectors with a particular focus on major energy and infrastructure projects

This article featured in the INTO AFRICA August editionwhich focused on Infrastructure Finance in Africa.

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