DealMakers AFRICA Q3 2019
Key considerations in the assessment of project bankability in Africa
by Kieran Whyte, Bridgett Majola, and Kira Whyte
In recent years, there has been a global increase in the utilisation of Public Private Partnerships (PPP) in order to ensure the successful implementation of a number of infrastructure projects. However, a critical question remains around how to ensure the bankability of such projects and the role played by the various multilaterals, such as development banks, in acting as facilitators to attract private investment. In order to ensure the bankability of infrastructure projects, consideration should be given to social, economic, financial, technical, environmental and administrative factors, as well as the certainty of the legislative and regulatory environment in which the projects are to be implemented. Further, in the power and infrastructure sector, there is a general acknowledgement of the various interdependent risks and issues that need to be considered and appropriately allocated to ensure the sustainability and bankability of projects in these sectors.
Key factors to consider
One of the key factors that should be considered when looking at the bankability of a project is the assessment of the right location for the project and ensuring that the necessary unrestricted ownership and/or access to the land is secured. Equally important is understanding the political environment in the project’s location. This involves assessing the strategic importance of the project to the relevant host government. It is critical that the host government is invested in and committed to the project, and to fulfilling their obligations under their guarantees. There must be political will to completely support the project through the full project development and lifecycle. The institutional capacity within government should also be determined, as restrained capacity will result in delays and obstacles. The integrity of the procurement process, as well as the procedures, and any delays in acquiring land and necessary approvals should also be thoroughly investigated. In addition, clarity should also be sought on the availability and convertibility of funds, as well as evidence of unsustainable risk allocation, low operational performance, strained financial structures and inaccurate value-for-money inquiries.
When assessing the political environment, the evaluation and selection of the right stakeholders to assist with effective engagement of local communities is imperative. There may also be a security risk for the project as well as potential political risks if the affected communities do not (for the life of the project and not just the development phase) receive sustained economic benefits and the appropriate social benefits. As such, stakeholder opposition should be clarified and noted upfront and, to the extent applicable, mitigated.
Understanding the regulatory and policy regime is also essential when assessing a project’s potential. In South Africa, for example, there is a strong regulatory regime which is aimed at facilitating and encouraging the use of PPPs for the promotion of investment in infrastructure projects. These include the Public Finance Management Act, and Treasury Regulation 16, the Municipal Finance Management Act, the Municipal Systems Act, the Municipal PPP Regulations, the Municipal Supply Chain Management Regulations, the Municipal Service Delivery and PPP Guidelines and the BBBEE Code of Good Practice. Uncertain legal frameworks and policies directly affect project bankability and reduce the interest of investors and stakeholders.
Project preparation and financial management is also an essential part of the bankability of a project. In this regard, the Development Bank of Southern Africa, the African Development Bank as well as other development finance institutions have established certain infrastructure and project preparation facilities. Regional bodies, such as the Economic Community of West African States and the Southern African Development Community, also have a role to play in developing and financing infrastructure and providing project preparation facilities to assist and facilitate cross-border infrastructure projects.
In all jurisdictions where projects are carried out, it is also important to understand how security is given and enforced, and if there are any applicable mandatory local content requirements. For example, the Nigerian Oil and Gas Industry Act requires that Nigerian citizens hold 51% of the equity shares in any company in the Oil and Gas sector taking place in Nigeria. Also, slow and delayed tender processes and/or bid rounds may cause further challenges, and could result in opportunistic regulation, termination and demands for re-negotiation.
When managing the bankability of projects in Africa, the best risk management approaches include conducting thorough due diligence, as well as ensuring that the relevant transaction documentation has effective dispute resolution clauses. Further, when selecting stakeholders or partners for a particular project, one must ensure that the local partner is able to manage domestic issues as well as navigate complex financing structures. In this regard, it is important to spend some time testing that the partner has sufficient and in-depth sector knowledge, as well as experience.
Effective and continued community engagement is also central in ensuring successful projects. This would include assessing the access to land, and relocation issues that often affect local communities, and investigating the potential need to fund inter alia housing for any relocated communities, as well as to fund economic opportunities for such communities. (These have to be funded by the developers, the actual project companies or the Development Funding Institutions supporting such projects). In some instances, the establishment of training programmes and possible transfer of technology arrangements should be considered. Importantly, funds flow must be managed to ensure that those communities who are affected by the project receive a sustainable economic benefit from the project.
In the African context, the ideal risk sharing protocol ensures that risk is allocated to the party who is in the most appropriate position to deal with it. For example, a private investor would not be best positioned to mitigate risks that arise from macro-economic problems, i.e. any fluctuations in exchange rates and resulting from inflation etc. Further, public stakeholders should not have to bear any risks owing to the poor performance of a PPP project.
Political risks also need to be mitigated by inter alia bilateral investment treaties, change of law provisions and/or Multilateral Investment Guarantees that protect investments against non-commercial risks in developing countries. Multilateral Investment Guarantees offer political risk insurance and credit enhancement guarantees. Post-completion monitoring and management protocols should also be established and committed to, and appropriate transaction delivery models should be adopted, taking into account the numerous variances. In this regard, it is important to remember that Africa is not one country, it consists of 54 independent countries all with their own vastly different legal and regulatory frameworks.
Governments in Africa are often wary of foreign investors, so it is therefore imperative for the relevant host governments to be on board with the project before commencement, to ensure that there is sufficient political will and support. It is critical that the relevant host government has a vested interest in the development and implementation of the project, to ensure that it remains committed to the project through its entire lifecycle and to their contractual undertakings such as making payments under a power purchase agreement. This will help to mitigate the risks of, for example, the project being terminated, the terms of the contract changing, local content laws being amended during the development of the project, or the expropriation or nationalisation of the project's assets. Stability, project sustainability and certainty in respect of all facets of a project are crucial – uncertainty will impact the bankability and the commercial terms of the transaction.
Kieran Whyte is Partner and Head of the Energy, Mining & Infrastructure Practice, Bridgett Majola is a Senior Associate, and Kira Whyte an Associate, Banking & Finance Practice, Baker McKenzie, Johannesburg.