An Introduction to Project Finance in South Africa - Part 1

Welcome to Part 1 of Project Finance in South Africa, a series in which I will explain the legalities surrounding financing projects in South Africa. In this installment, I will introduce the laws governing the projects, as well as the relevant regulatory requirements.

On the 30th of November 2021, the 8th Forum on China-Africa Cooperation (FOCAC) concluded, and a key highlight of the forum was China’s commitment to supporting Africa’s green and low-carbon energy transition.

When clean energy was discussed, included was a commitment from China to further increase investment in solar, wind and other renewables in Africa. The acceleration of Chinese support for solar and wind was mentioned in Xi Jinpin’s opening keynote and the Vision 2035 document, which was released at the forum.

China has been increasing its cooperation with African countries in recent years, so it’s important to get acquainted with the legalities surrounding project financing in Africa. Today, I will cover South Africa.

For more than 20 years, the basis for long-term financing of capital-intensive projects in South Africa has been project finance. Local and international commercial banks, as well as development finance institutions such as multilateral development banks, participate in South African project financing transactions.

Overview of projects in South Africa

South Africa has a long history of success in the public-private partnership (PPP), concessions, and independent power project (IPP) markets, having successfully undertaken:

• PPPs in the transport infrastructure, healthcare, prisons and biosciences sectors;
• Concessions in the port sectors and toll roads; and
• Renewable energy IPP projects.

Laws governing project finance in South Africa?

The project finance sector in South Africa is not only regulated by one single codified statute. Regarding a particular project, depending on which type of infrastructure is being financed or procured and also the respective sector, the requirements for approvals from authorities and processes differ.

?The Public Finance Management Act 1 of 1999 (PFMA), which governs the provincial and national tiers of government, and the Municipal Finance Management Act 56 of 2003, which governs the local or municipal tier of government are the two most noteworthy pieces of legislation that deal with PPPs in South Africa.?

Regulation 16 under Treasury Regulations of the PFMA sets out the requirements and processes required by the National Treasury for PPP arrangements. In general, if the project is procured or conducted by a government department or body, the PFMA applies to the project's expenditures and the security that the government offers (among other aspects).?

There is also sector specific legislation that may be applicable depending on the type of project being financed, such as the Electricity Regulation Act 4 of 2006 and the Mineral and Petroleum Resources Development Act 28 of 2002, for example.

At a symposium back in 2021, which aims to provide updates on Infrastructure South Africa (ISA)’s progress on securing funding for pipeline projects and bringing projects through to bankability, president Cyril Ramaphosa announced that the government intends to implement a two-fold legislative amendment programme within the following year. He further states that the necessity for these changes stems from a general fragmentation of South Africa's legislative and regulatory framework for infrastructure development and procurement.

Regulatory requirements

There are several factors to determine whether government approvals are required before financing a project. These factors may include the project's type and location, the project company and its financiers/lender, as well as the other parties involved in the transaction.

Commercial project finance transactions between private parties, may be subject to some potential licensing requirements, and general environmental approvals that may be necessary from authorities such as NERSA if energy projects are involved.

In relation to transactions in which one of the parties is a non-governmental entity or if the project is natural resources related, then approval from the relevant authorities will be required. Whether a particular transaction needs approval shall be evaluated on a case-by-case basis.

Conclusion

South Africa has a long history of success in the public-private partnership, concessions, and independent power project markets, having successfully undertaken PPPs in the transport infrastructure, healthcare, prisons and biosciences sectors; concessions in the port sectors and toll roads; and renewable energy IPP projects.

There are several laws that govern project financing in South Africa, as well as regulatory requirements such as the project's type and location, the project company and its financiers/lender, as well as the other parties involved in the transaction.

This concludes Part 1 of Project Finance in South Africa, a series in which I will explain the legalities surrounding financing projects in South Africa.

If these topics interest you, make sure to follow me as I will be releasing subsequent articles covering other topics on the matter.