Bankability of Projects in Africa & Challenges

Africa needs capital to finance public and private sector projects and promises very high returns. There is no shortage of funds for deployment in Africa because there are multiple private equity firms, capital ventures, angel investors, banks, and financial institutions that are open to finance projects across various African countries either in equity, loans, or other structures. Most of these funds have established offices across African countries competing with local banks and financial institutions to finance projects across various sectors. Aside from the foregoing, there are sovereign funds and other State-owned investment arms of non-African governments that are equally interested in deploying funds in Africa for project development with the private and public sectors. However, on the ground, the reality is different, so many promising projects fail to kick-off due to a shortage of capital. On the one hand, there is plenty of interest and funds for financing projects in African countries, and on the other hand, there are projects in desperate need of such capital but are unable to secure funding and the contributing factor is the bankability of projects across the continent. Challenges in the bankability of projects in Africa are caused by various factors that affect both public and private sector project financing.

Government/Sovereign Guarantees: Most African governments have restricted or significantly reduced the issuance of such guarantees for public-owned projects. Historically government authorities or national off-takers pioneering the projects have breached their obligations under the negotiated project documents and this necessitated the Government to step in and provide bail-out support, by paying off the debts, interest/penalties, and curing the defaults. Taking into account the foreign exchange gaps i.e. services are sold in a local currency but payments are made in a foreign currency and other factors, government guarantees are becoming a significant burden to African Governments. Some countries, including Tanzania, have taken the initiative of outright rejecting the issuance of government guarantees for projects under public-private sector partnerships. This contributes to challenges of securing funds to finance public sector projects despite promising returns because funders want payment guarantees, recouping their investment, and ensuring that the national off-taker or government authority will honor its obligations and the Government will step in in case there is a default. Whilst there are valid reasons for curtailing the issuance of Government Guarantees, the public sector must identify alternative market innovative solutions to provide comfort, assurance, and security to funders in the place of government guarantees. Merely refraining from issuing government guarantees without proposing alternatives to what the government is willing to provide leads to the continued persistence of shortage of capital and stagnation of projects whilst there is willingness from funders to provide finance.

Lack of Reliable Records on Performance: This affects private to private sector funding where an investor/funder looking to invest in a private sector company fails to get reliable records on the track record and profitability of the target company. It is common for companies in the continent to prepare inaccurate or distorted returns or reports to avoid payment of taxes, including business activities that reward the company with considerable gains but remain undeclared and/or undocumented. This creates a gap between what the company is worth versus what is in the company’s books and its ability to provide confidence to funders that the investment will provide the anticipated returns. The external investor can only rely on the disclosures made by the company based on its internal documents and those filed with the relevant public authorities as part of reporting obligations. The investor requires confidence that the company is worth what it claims to be worth and that its returns are guaranteed, and above all, the company operates on an internationally acceptable standard without exposing the funder and the company from penalties and reputational downfall due to illegal trade practices. Private sector companies in the continent should adopt transparency and high compliance to attract the readily available and needed capital the domestic operations which will enable expansions within and outside of the respective African country.

Evolving Regulatory and Fiscal Laws: Whilst governments are entitled to retain and exercise sovereignty on all their domestic matters, it is important to balance between the exercise of sovereignty vs the foreign investments in their jurisdictions. Investors and funders need stability in the regulatory and fiscal laws to plan and foresee the expected returns. Due diligence on the laws, policies, fiscal laws, and incentives allows funders to identify risks, and prepare business plans and strategies to operate profitably, whilst bringing gains and contributing to the economies they operate in. Unforeseeable and constant changes in the policies, regulatory framework, and fiscal laws bring instability and threaten the continued sustainability of projects. Changes of laws and policies can be pushed by external factors e.g. development in the world market and practises but usually, these take time and it's not always that they necessitate immediate changes in the domestic laws and policies. Also, to mitigate the risks associated with such changes, stakeholder consultations by positively considering the issues and concerns raised, implementing valid recommendations, and allowing a grace period are critical in reaffirming the commitment to funders that the investment environment is stable and it’s a joint effort.

Sustainability and Profitability of Projects: Both the public and private sectors in the continent should realize that considerable efforts are incurred and significant resources are utilized to pull funds/capital entrusted to equity funds, capital ventures, DFIs, etc. which are deployed to fund projects across Africa. All these funders and all the efforts behind the scenes are geared towards gaining profits and the funders expect rewards and returns from their investments. Accordingly, equity funds, capital ventures, and DFIs must ensure that the projects they invest in are profitable and will be sustainable in the long term to gain the expected output while contributing to the development of the country in which the project is being implemented. Also, it is undisputed that there exist other competitive markets outside of Africa that promise higher returns, which are more attractive to funders and should not be ignored. It becomes inevitable to approach the funders’ interests from a commercial perspective and ensure that the conditions, terms, policies, regulatory and fiscal structures of the African country support the funders’ target to gain profit. African countries should not ‘sell-out’ at their cost, but at the same time, Africa should not expect funders to operate as if it is a charitable operation or view targeting to earn profits as ‘evil’. There must be a joint target with joint efforts to ensure that the project takes off and brings the desired results to both parties, with reciprocal support. ??

Effective Negotiations and Balance of Power: Before any investment in the public or private sectors, negotiations should precede the signature of project documents and deployment of funds for investment purposes. In instances where funds are deployed and investment commences before the negotiations are complete and/or project documents are signed, it is without a doubt that there is an impending dispute and fallout. Also, if during negotiations there is an imbalance of power (whether obvious or otherwise), caused by various factors including an incompetent negotiation team, inadequate or false advisory, corruption, or undue influence, long-term sustainability of the investment becomes impossible and the collapse of the project is inevitable. For example, the project financier, including the project proponent or developer, may deploy an unacceptable means to sway decision makers on the government’s or target’s side to reach a decision or agree to a term that ordinarily is not acceptable. In the long run, when there is a change of administration, such agreements tend to be scrutinized, challenged and a party seeks a way out. If it is a government authority, it may use its sovereignty by imposing restrictions, focused negative legislative changes targeting the project, privatization, and expropriation become the means of shifting the balance of power and the government regaining its lost control. The funder/investor may not have recourse within the country and files a claim in international dispute forums which if it awards the funders’ claim, the government is forced either to comply or risk being blacklisted by private and public funders and causing long-term project bankability issues. If history has taught us anything after seeing several African countries passing laws that try to regain the lost power in various investments, assets, and projects, is that there should be a balance of power from the onset i.e. during negotiations, entry into project documents in good faith, continued trust between the parties, transparency and ensuring that both sides gain the expected returns, and yes this includes profits by the funder/investor/project developer/proponent. Whilst the sanctity of contract must be respected, entry into such contract should not be shrouded in unacceptable conduct that leaves the affected party with no other option than to breach sanctity.

Solution: Risk Management

As a solution to elevate the bankability of projects in Africa, among others, risk management significantly eliminates real and perceived risks and raises the profile of any project in Africa making it attractive to foreign investment. Projects in Africa need funding and funders have capital but seek profitability and high returns hence, there are mutual benefits to be gained by both sides. Risk management involves in-depth due diligence on the project which includes the identification of risks and finding suitable solutions to reduce the materialization of the identified risks. It is advisable to secure expertise to advise on the various parts of the project and such experts should be well versed with the specific jurisdictional risks as opposed to grouping ‘Africa’ as a single jurisdiction whilst the risks and challenges vary from country to country and manner of targeting and providing for such risk is not uniform throughout the continent. Aside from due diligence and involvement of experienced and reputable experts, it is necessary to engage and implement a continued engagement with both public and private bodies and the affected communities to ensure a successful project. The involvement and contribution of public and private bodies, and the affected communities will significantly erase the perceived and indirect risks which may not be foreseen from the onset and establishes trust. It is not a secret that African governments and their communities harbor distrust towards foreign investments because historically, Africa has experienced exploitation of the continent’s natural resources without equivalent returns. Identification of suitable partners, particularly in the private sector is important, particularly ensuring the partner has a good understanding of the project, is experienced in the sector, and has invested or is open to significantly invest in the project as opposed to solely relying on the foreign finance. Whilst having a politically connected partner in a private sector project may have its charms and benefits, it can backfire significantly when such a partner uses the same influence to invoke an imbalance of power to the detriment of the financier and investor tarnishing the investment environment in the country, and hence reputation and confidence in the private partner is critical.

At Clyde & Co, we become part of projects and assist our clients in risk identification and due diligence, structuring, corporate governance, launching, procurement and contracting, and supporting ongoing requirements of projects including complying with regulatory requirements, reporting, navigating regulatory nuisances, ESG compliance, and interacting with government authorities for the clients, resolving disputes, and addressing other legal matters related to investment in the relevant jurisdictions. We have extensive experience in all sectors and in working with and for investors, financial institutions, government authorities, investment and asset managers, and a wide range of other players, including suppliers and contractors to such projects.

Disclaimer

The views expressed in this paper are those of the author only and should not be considered as an official interpretation, defamatory, or interference of any legislation, laws, or policies of any country including Tanzania. The contents of this paper should not under any circumstances be reproduced or used without the express written consent of the Author. It should not be considered as legal advice to any of its recipient(s) and should not be relied upon without obtaining further legal advice. We accept no liability for any loss occasioned or suffered due to the contents of this paper. The information contained herein is general and is not intended to address the circumstances of any particular deal. Although effort has been made to research and share the correct information, we do not provide any guarantee to such information.