Yves Baratte is a partner based in Simmons & Simmons’ Paris office. Yves advises international corporate clients, governments and financial investors on complex power, water, mining and infrastructure projects, particularly those in Africa. Yves is currently advising on such projects in countries including Djibouti, Mauritania, Senegal, Algeria, Morocco and the Democratic Republic of Congo (DRC). Yves has advised on the consortium bidding for the Inga 3 hydro power project in the DRC, one of Africa’s largest projects, and was ranked among the three most active lawyers working in Francophone Africa by Jeune Afrique magazine, 2018.
Paul Bugingo is a partner based in Simmons & Simmons’ Dubai office and co-head of the firm’s Africa practice. He has spent the past 20 years advising governments, utilities and private companies on energy and infrastructure projects across Africa including in Kenya, Uganda, Rwanda, South Sudan, South Africa, Djibouti, Ghana, Somaliland, Lesotho and Swaziland. He is currently advising the government of Kenya on commercialising its oil reserves and the government of Somaliland on the development of the port of Berbera and related infrastructure.
Atrayee Basu is an associate in Simmons & Simmons’ London office and advises on project finance transactions worldwide with a focus on Africa. Atrayee has significant international experience in organisations such as the Ministry of Infrastructure in Rwanda and Standard Chartered Bank
“Activity levels in the oil and gas projects space are still depressed, with slow
progress being made in the development of many projects.”
GTDT: What have been the trends over the past year or so in terms of deal activity in the project finance sector in your jurisdiction?
Yves Baratte: 2017 was a fairly busy year for projects in all sectors in Africa. It was a good year for power projects with the renewables sector taking the lead in many jurisdictions, aided by falling technology prices and support from development finance institutions (DFIs) and governments committed to green energy. The most commonly used technology was solar PV, as evidenced by the number of solar projects that reached financial close in 2017, including in Egypt and Zambia.
Atrayee Basu: Global commodities prices rebounded in 2017, according to the World Bank’s Commodity Markets Outlook report issued in October 2017, prices for energy commodities increased by 28 per cent and the metals index jumped by 22 per cent. This was reflected in greater deal activity in the mining sector on both the development and financing sides, although we are still far from the levels seen a decade ago. Activity levels in the oil and gas projects space are still depressed, with slow progress being made in the development of many projects subject to a few high-profile exceptions. We did, however, see good levels of activity on the M&A side of the oil and gas sector, with some players (especially the majors historically present in Africa) selling assets, and smaller players or new entrants reinforcing their positions.
Paul Bugingo: We’ve also seen a strong level of activity in the energy and infrastructure sector, especially in eastern Africa, with a number of port, rail and free trade zone related projects moving forward, with increasing investments coming from China, the Middle East and Europe.
GTDT: In terms of project finance transactions, which industry sectors have been the most active and what have been the most significant deals to close in your jurisdiction?
AB: The biggest solar project of the year in Africa was Scatec Solar’s 300MW portfolio of solar plants in the Benban complex in Upper Egypt, which will be the largest solar installation in Africa on full completion, with a planned capacity of 1.8GW. This project benefited from the European Bank for Reconstruction and Development’s (EBRD) US$500 million framework for renewable energy in Egypt, which is expected to finance a total of 16 projects delivering 750MW of capacity. It also received financing from a number of other DFIs including the Green Climate Fund, the Islamic Development Bank, the Islamic Corporation for the Development of the Private Sector and FMO bank. This project is just one of a string of solar projects of varying sizes that closed in Egypt last year.
PB: We can expect to see more solar projects in Egypt in the coming years flowing from the Egyptian Electricity Transmission Company’s recently issued tender for 600MW of PV capacity. This trend can be seen across the continent, with tenders launched last year for solar capacity in several countries, Zambia being a good example. Zambia’s Industrial Development Corporation, in conjunction with the International Finance Corporation (IFC), launched a 500MW tender for round two of its Scaling Solar initiative last year. This second round follows the success of the first round of auctions held in May 2016, which yielded some of the lowest tariffs in the world and as a result of which 180MW of solar energy will be developed. Tunisia and Algeria also announced major solar programmes last year, although there are some doubts about how realistic the very ambitious Algerian programme is as it focuses on large-scale projects with very onerous requirements in terms of local content.
YB: Good examples of the uptick in the mining sector can be seen in Guinea where several bauxite projects were financed last year and several more projects are making significant progress. New players have entered this space, for instance, we acted for the Africa Finance Corporation (AFC) when it made a move into mining in Guinea last year by providing equity and convertible debt to Alufer Mining’s Bel Air bauxite project alongside Resource Capital Funds (RCF) and Orion Mine Finance (both major mining-focused US private equity firms). Illustrating recent trends in Africa, these investments will soon be dwarfed by the reported US$2.8 billion investment by the Chinese company TBEA Co Ltd in a new bauxite mine, an alumina refinery and an aluminium smelter in Guinea. However, there are still lessons to be learnt from long-delayed large-scale projects such as the Simandou iron ore project (which includes a 650km railway and a deepwater port), also in Guinea, which has been mired in disputes and allegations of corruption for years and is not helped by the still depressed iron ore prices. Last year the IFC decided to sell its stake after a decade of involvement and developer Rio Tinto is reportedly selling its stake to Chinalco.
PB: While the list of oil and gas projects that closed in 2017 may not have been very long, the biggest project that closed in Africa in 2017 was the US$8 billion Coral South floating liquefied natural gas (FLNG) project in Mozambique, Africa’s first such facility. It will also be the first ultra-deepwater FLNG facility in the world, at more than 2,000 metres deep. The sponsor group was led by Eni, the debt financing was provided by a syndicate of European, Chinese, Korean and African lenders and Chinese, Korean and European export credit agencies provided support. As global demands shifts towards low-carbon energy, big gas finds will continue to be attractive to sponsors and lenders and we can expect to see more such projects. An area of increased interest for oil and gas developers is the northern Atlantic coast of Africa, including Morocco, Mauritania and Senegal, the latter two sharing some very promising reserves.
AB: Capping off a big year for Mozambique, the multi-billion dollar Nacala Corridor Railway and Port Project closed late last year and is the largest-ever project financing of infrastructure in sub-Saharan Africa. This project consists of the construction of a 912km railway line to transport coal from Vale’s and Mitsui’s mine in Moatize, Mozambique across Malawi to a new coal port in Nacala-à-Velha on the east coast of Mozambique. The lenders were a mix of commercial banks, development funds and export-credit agencies (including Japan Bank for International Cooperation, Nippon Export and Investment Insurance, Export Credit Insurance Corporation of South Africa and African Development Bank).
GTDT: Which project sponsors have been most active in driving activity? Which banks have been most active in providing debt finance?
YB: It is difficult to identify a typical sponsor for African projects considering the variety of projects and industries concerned and because the sponsor landscape is changing much more rapidly than for lenders. In the power sector, more than ever we see a combination of major international energy companies (especially from Europe and Asia), smaller power developers and infrastructure funds, with a number of new entrants such as power developers or funds. Things are a little bit more established in the oil and gas sector, where again we see a combination of players, mainly majors and already well-established and diversified medium-size oil companies.
PB: The most active lenders across the continent remain DFIs, which are still crucial to financing many projects in Africa, especially innovative projects or projects in challenging jurisdictions. We are increasingly seeing them come in alongside private equity funds and other non-bank institutions on both the debt and equity sides of projects. While most DFIs and funds active in Africa today originated outside Africa, such as Meridiam Infrastructure Africa Fund on the funds side, the rise of home-grown players continues with DFIs such as the AFC increasing their activity levels and diversifying their investments and, on the funds side, African Infrastructure Investment Managers and Black Rhino, which have already been active for a number of years, continuing to grow their businesses. Funds structuring, fundraising, co-investment arrangements and management buyouts are of increasing importance to the energy and infrastructure sector in Africa. We recently expanded our Africa funds and private equity practice, with Cindy Valentine joining us as a partner based in London and South Africa, who has an in-depth understanding of fundraising in African markets.
AB: Banks are still key players in the project finance market in Africa; however, they continue to be constrained in their ability to provide long-term debt. By way of contrast, non-banks have money to spend, are hungry for higher returns and, in the case of pension funds, are looking for long tenors and reliable revenue streams. Addressing the barriers to investment by non-banks in order to crowd in such private sector funding has been a trend over the past year, with innovative solutions appearing in the market. Domestic sources of financing such as pension funds could substantially boost energy and infrastructure spending in their home countries, for instance Nigeria’s pensions sector alone holds 5.8 trillion naira (approximately US$20 billion) and even a small portion of these funds could make a big difference to the energy and infrastructure sector in Nigeria. A good example of a product designed to encourage investment by domestic pension funds and non-bank institutions is Infrastructure Credit Guarantee Company Limited’s local currency guarantees to credit enhance bonds issued by project companies in Nigeria with the intention that these bonds will then be taken up by local pension funds and other domestic institutions that would otherwise not have invested in this sector.
“Banks are still key players in the project finance market in Africa; however, they continue to be constrained in their ability to provide long-term debt.”
GTDT: What are the biggest challenges that your clients face when implementing projects in your jurisdiction?
YB: Although it was a good year for African projects overall, most projects were still slow to come to financial close.
AB: One of the biggest bankability challenges facing African power projects continues to be off-taker credit risk, which keeps holding up many projects, including major ones such as Inga 3, the 5-10GW first phase of the mammoth Grand Inga hydropower project on the Congo River. However, we are increasingly seeing creative solutions to address this issue. An example is the Regional Liquidity Support Facility (RLSF), which was set up in 2017 by the German development bank KfW and African Trade Insurance Agency to support the development of renewable energy independent power producers (IPPs) in sub-Saharan Africa. The short-term liquidity risk from delayed payments by off-takers is mitigated by a commercial bank issuing letters of credit to approved IPPs with the backing of the RLSF in an amount sufficient to enable the IPP to continue to operate for at least six months in the event of an off-taker payment default.
YB: In Africa, sponsors and lenders as ever need to be aware that timetables for projects must allow for delays caused by lengthy permitting processes, approval processes and negotiations with governments. Appointing local and international counsel familiar with the jurisdictions involved is a good first step towards reducing delays. However, even with the best advice and preparation, negotiations with governments have the potential to substantially delay projects, for example, we have been advising on a power project in West Africa where financial close has been delayed by almost a year due to a delay in obtaining approval for the project company to hold offshore bank accounts, a key lender requirement. Delays can also be caused by requests for direct agreements and government guarantees. We anticipate that these instances will occur less frequently as more governments become comfortable with project finance structures and develop policies that support project financings in their jurisdictions.
PB: Another challenge both sponsors and lenders face regularly is the uncertainty caused by the rapidly evolving nature of the legislative frameworks in a number of African jurisdictions. We see this in the Democratic Republic of Congo (DRC), where over the past five years mining investors have been living under the threat of a new mining code with quite extreme new terms being passed that could, for instance, affect the level of contributions owed to the government from mining projects. We have, however, also seen positive examples of governments intervening to clear blockages in the deal pipeline. Backlogged South African renewable energy independent power producer procurement projects, collectively accounting for 2,306MW of capacity, which have faced uncertainty for over two years, have recently been given the go-ahead by the government.
“In the power sector, particularly the renewables sector, many African countries are realising that they need to put into place clearer and more straightforward legal environments.”
GTDT: Are there any proposed legal or regulatory changes that may give rise to new opportunities in project development and finance? Do you believe these changes will open the market up to a broader range of participants?
PB: In the power sector, particularly the renewables sector, many African countries are realising that they need to put into place clearer and more straightforward legal environments if they want projects to move forward more quickly. Some countries have chosen to do this by joining international initiatives like the World Bank Group’s Scaling Solar programme, which aims to create viable markets for solar power across Africa by supporting governments with limited capacity to develop such projects. The Scaling Solar programme helps to put into place an auction framework using forms of project documentation that are standardised across the region with limited room for negotiation. Projects are tendered quickly and cheaply as a result and solar generation can be achieved within two years of engaging Scaling Solar advisers. Madagascar, Zambia, Senegal and Ethiopia are actively engaged with Scaling Solar and as the popularity of this programme grows, this list is likely to increase over the next year.
YB: The absence of a clear and stable regulatory framework can significantly derail investment, for instance, regulatory changes (or threats of such changes) in the DRC, which we discussed earlier, are clearly slowing down investment in the mining sector there and are almost preventing the use of any form of sophisticated project financing. In contrast, the fruits of a conducive regulatory environment can be seen quickly. The government of Rwanda passed its first public–private partnership (PPP) laws in 2015 (which it updated in 2016) and last year closed one of sub-Saharan Africa’s largest ever water PPP deals, the Kigali bulk water PPP, located in Kanzenze in the south-eastern part of Kigali, which will deliver around 40,000m3 per day of treated groundwater extracted from the Nyabarongo river. The project sponsor was Metito and lenders were a mix of DFIs including the African Development Bank and Emerging Africa Infrastructure Fund.
AB: We are increasingly seeing well thought-out PPP programmes being put into place by governments across the continent, particularly in East Africa, as a result of the World Bank Group and the African Development Bank, among others, promoting PPP as a way for governments to fund large-scale projects. This rise in the use of PPPs in Africa has come at a time when there are also more critical voices being heard, including the IMF. The IMF warned in a working paper released in late 2016 that large fiscal costs and fiscal risk have arisen from PPPs in both developing and advanced countries and that government bias and possible manipulation of PPPs add an important layer to project risks. It will remain to be seen whether this dampens the enthusiasm for PPPs in Africa over the next year both in terms of countries enacting PPP legislation and rolling out programmes, as well as whether we see any new PPP deals in the market. Given the budgetary constraints facing African governments and the levels of private investment and expertise needed in their countries, we anticipate that PPP may well continue to be a sought-after form of financing for projects in Africa.
GTDT: What trends have you been seeing in terms of range of project participants? What factors have influenced negotiations on commercial terms and risk allocation? Are there any particularly innovative features?
AB: We’ve seen an increase in investment from funds from around the world in African projects. We have seen funds created to invest specifically in African infrastructure, some of which are being raised in less traditional locations, for example, the Saudi Arabia-based Islamic Corporation for the Development of the Private Sector has announced that it is aiming to raise US$ 1 billion for a new sharia-compliant fund that will focus on infrastructure projects across Africa. We’ve also seen funds merging their assets to create portfolio companies that would be able to attract financing for new assets quickly by using their own balance sheets, through tapping capital markets, for instance, rather than through project financing. AFC and Harith completed their mega merger late last year, creating a new operating company called Anergi Holdings, which holds over 1,575MW combined gross operational and under-construction capacity, and supplies power to over 30 million people. The total value of the portfolio is US$3.3 billion and includes landmark projects such as Kpone IPP in Ghana, Azura Edo in Nigeria and Lake Turkana Wind Power in Kenya.
YB: This trend also applies to the mining sector where funds from Europe and the United States represent a significant share of equity and debt investments. Investment from funds is particularly important for the mining sector where a more limited number of international banks, including Société Générale, BNP Paribas, RBC and ING, remain really active. We often see funds investing together or with other financial institutions to share the risks; however, these joint investments can raise some practical difficulties, particularly where none of the funds has a clear majority position. Funds, and other financial institutions, are also very open to alternative financing solutions such as royalty streams, which have become quite popular in the mining industry, especially where classic financing solutions are more difficult to obtain.
PB: Chinese sponsors are increasingly active in Africa despite the news that the Chinese government may restrict outbound investment by Chinese companies. Chinese state-owned companies are particularly active in Africa on the back of the One Road One Belt initiative, which aims to connect China to the world. Africa is a key stop on the road from China to Europe and Africa has been clearly identified as a key area for investment. On the lending side, African sponsors are increasingly turning to Chinese lenders, such as the China Development Bank, especially for large-scale infrastructure projects that are otherwise very difficult to fund.
GTDT: What are the major changes in activity levels or new trends you anticipate over the next year or so?
YB: We don’t expect to see major disruptions to activity levels over the coming year and anticipate continued growth in project financing in the industry sectors key to Africa. One of the sectors on which we expect to see an increased focus is large-scale agricultural projects.
PB: DFI support is likely to increase over time as these organisations look to decarbonise their investments, for example, the EBRD is aiming to increase its volume of green financing from an average of 24 per cent of its annual business investment in the 10 years up to 2016 to 40 per cent by 2020.
AB: In terms of new trends, we are likely to see more small-scale solar projects with energy storage included as technology prices continue to fall. We’re already seeing pilot projects that combine solar PV with energy storage, for example, BayWa r.e.’s 86kW pilot project in Chisamba province in Zambia, which was developed to supply a farm with energy for irrigation. As energy storage technology becomes more accessible we can expect to see it used on a large scale when governments include energy storage when they roll out household off-grid solar PV systems as part of their rural electrification strategies.
The Inside Track
What three things should a client consider when choosing counsel for a complex
Clients should look for counsel with experience of working on projects in the relevant sector and in the relevant African jurisdiction, and have a good awareness of applicable government processes. Given the likely presence of DFIs, your chosen counsel should also have experience of working with DFIs active in Africa.
What are the most important factors for a client to consider and address to successfully implement a project in your jurisdiction?
The most successful sponsors are those who know Africa, have the ability to work with the right group of co-investors and lenders, know where to make compromises, and know where to put their efforts during negotiations to move projects forward quickly.
What was the most noteworthy deal that you have worked on recently and what features were of key interest?
We advised RCF and AFC in connection with their investments in Alufer Mining’s Bel Air bauxite project. As discussed previously, this project illustrates many of the current trends in the African mining sector, including the spectacular development of bauxite projects in Guinea, the rise of African financial institutions and the increasing presence of funds in mining projects as key providers of equity and debt.
We are also acting for the government of Kenya in connection with the Lokichar-Lamu crude oil pipeline, which is one of two key pipelines in the region and is progressing well.
Yves Baratte, Paul Bugingo and Atrayee Basu
Simmons & Simmons LLP
Paris, Dubai and London