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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.

Rose-Anna Burnett is a managing associate in Simmons & Simmons’ award-winning energy and infrastructure practice, based in the London office. She has a broad finance background with a focus on non-recourse lending, advising infrastructure funds, financial institutions and project sponsors operating in the social infrastructure, renewables, telecoms and M&A sectors in respect of project structuring and development to support multi-sourced project financings, refinancing and debt restructurings and on the acquisition and disposal of project financed energy and natural resource assets.

Recent work highlights include acting as lead associate advising the arrangers of two project financings of onshore wind farms in round 4.5 of South Africa’s renewable energy independent power producer programme.

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.

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: While African project finance remains a challenging market for reasons well-documented, the growing demand for infrastructure to address the development needs of the region remains real and opportunities for less risk-averse investors continue in abundance in all sectors in Africa notwithstanding the difficult economic environment the continent continues to face. The pace of development of projects is still too slow but the past 12 months saw a buoyant energy sector in line with the rest of the world, with the growing prominence of clean energy generation in many jurisdictions, underpinned by increasingly climate-conscious trends globally and aided by the continued efforts of supportive development finance institutions (DFIs) and governments committed to reducing their dependence on coal- and oil-based energy sources. The areas of infrastructure and transport also fared well.

Rose-Anna Burnett: As predicted, commodity prices rose during the period, with the World Bank reporting in its October 2018 Commodity Markets Outlook report that prices for energy commodities in the third quarter of 2018, led by oil and natural gas, were more than 40 per cent higher when compared with the same period in 2017 (with energy prices expected to average 33 per cent higher in 2018 compared to 2017). According to the same report, metals prices declined by 10 per cent in the third quarter of 2018, albeit they were forecast to have gained 5 per cent in 2018 as a whole. This triggered rising regulatory pressure in the resource sector with noteworthy changes to mining regulations enacted in the Democratic Republic of Congo, Zambia or Tanzania to increase localisation and try and extract higher revenues. These changes are part of a trend of policy changes by governments in the region aimed at giving the respective governments greater control over the sector that were often not well received by the industry and will likely have a negative impact on the overall investment environment going forward.

However, while domestic activity was not consistent with the increase in mining deals globally, we did see continued interest in the region, particularly in relation to commodities associated with battery technology and electric vehicles. Activity levels in the oil and gas projects space, which remains an upstream-focused industry, fared better than in 2017 due to the oil price picking up during 2018, however the development of downstream projects has continued to be very slow and difficult. Levels of activity on the M&A side seem to have declined across Africa, particularly slowing in South Africa, with political uncertainty cited as the main cause coupled with strict anti-bribery and corruption rules in key investor countries.

Paul Bugingo: There has been increased investment focus on East Africa (particularly in Ethiopia, Kenya, Uganda and Tanzania but also in smaller markets like Rwanda, Djibouti and Somaliland). This has occurred despite uncertain political climates in some of these countries. Positive political developments between Ethiopia and Eritrea will undoubtedly lead to increased investment in the region. Of particular interest has been the diversity of investors including from the Persian Gulf, France, Russia, Turkey and parts of eastern Europe. The target areas have been in oil and gas, power, infrastructure (roads, rail, ports and aviation). China continues to be a major investor across the continent, particularly in infrastructure notwithstanding the increasing debt burden on many countries. China committed to eight new African development initiatives worth up to US$60 billion as part of a raft of measures introduced in 2018 to build on Sino–Africa ties.

“In contrast to renewables, 2018 was a slow year for oil and gas projects in Africa and was marked by the ongoing postponement of final investment decisions in relation to a number of Africa’s big oil projects.”

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?

RB: As touched on above, 2018 heralded a rush of renewable energy activity with notable transactions to reach financial close including Lekela’s 150MW Taïba wind project in Senegal, Alten Africa’s financing of one of Sub-Saharan Africa’s largest solar photovoltaic (PV) plants with an installed capacity sufficient to meet 3 per cent of Namibia’s energy needs and the financing of the Akuo Kita solar farm in Mali, which with a capacity of 50MW is reported to be the largest solar installation in West Africa. This project is the Emerging Africa Infrastructure Fund’s first mandated lead arranger role in the financing of a project in a French-speaking African jurisdiction. The number of solar projects put out to tender during 2018, including from first-time solar tenderers Algeria, Burkina Faso and Swaziland, indicates that this trend in heightened solar activity looks set to continue across the continent. Examples in Sub-Saharan Africa include Tanzania Electric Supply Company Ltd’s invitation for bids for the development of up to 150MW of solar PV capacity by 2020 in six different regions; and the solar programmes of Botswana Power Corporation and the Zambian Ministry of Energy (12 solar PV power projects and 100MW of installation respectively).

YB: In terms of the mining sector, the Republic of Guinea has been very busy with a number of new bauxite concessions signed including 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 and the first production of Alufer Mining. The rest of West Africa has remained active with gold projects including Canada’s IAMGOLD Corp reported to be planning an application for a mining concession in relation to a potential US$254 million investment in the Boto gold exploration project in Senegal following the release of a robust feasibility study. The DRC has had a more difficult year despite the higher copper and cobalt prices, with political uncertainties and the fight of the mining industry against the new mining law passed in March 2018.

PB: In contrast to renewables, 2018 was a slow year for oil and gas projects in Africa and was marked by the ongoing postponement of final investment decisions in relation to a number of Africa’s big oil projects, including the US$20 billion Ugandan Albert Basin project and the offshore SNE field in Senegal. Following the production cuts announced by the Organization of the Petroleum Exporting Countries (OPEC) and its non-OPEC member allies last year, it is hoped that these projects will finally reach financial close in 2019. In addition to an uplift in the continent’s traditional oil and gas activity forecast for 2019, Africa’s project pipeline in 2019 is set to be dominated by liquefied natural gas (LNG) projects, with hopes resting on the Tortue LNG project in Senegal and Mauritania’s MSGBC basin, which has shown some good progress this year, and Mozambique’s onshore LNG project. Studies suggest that approximately US$194 billion will be invested in 93 oil and gas projects across Africa between 2018 and 2025.

GTDT: Which project sponsors have been most active in driving activity? Which banks have been most active in providing debt finance?

YB: The sponsor landscape in Africa has continued to evolve. The power sector in particular has a range of players, including major international energy companies like EDF, Enel or Engie, smaller power developers (some of them becoming gradually bigger and genuine competitors for the traditional players) or infrastructure funds, whose role has kept increasing. In the oil and gas sector, the variety of sponsors is mostly made up of major international companies and medium-sized oil companies, although it was interesting to see Assala Energy, backed by Carlyle, acquiring the onshore assets of Shell in Gabon at the end of 2017. It is also frequent to see international sponsors working with local sponsors in the region to develop a project, like Engie with Moroccan power developer Nareva.

PB: While commercial banks’ appetite for African infrastructure is returning, DFIs continue to play a critical role in funding projects in Africa and acting as early investors for almost 50 per cent of Africa’s private equity firms. Multilateral DFIs (such as the African Development Bank and Trade Development Bank) remain dominant but funding by bilateral DFIs (such as Overseas Private Investment Corporation, French Development Agency or KfW) and export credit agencies (ECAs) continues to grow as shown by the close of the Nachtigal hydropower power in Cameroon just before Christmas. There has also been increased funding by Chinese DFIs, with China Development Bank becoming the second largest bilateral DFI in Africa. Regional and international DFIs and ECAs are placing greater emphasis on finding creative solutions to long-term issues in project financing and the average tenor of DFI and ECA debt is increasing year on year. For example, African Export-Import Bank has created an African fund that supports export development to attract private equity and a project preparation facility that addresses issues with project development. The African Development Bank has invested in blended finance funds, such as the Facility of Energy Inclusion and the Facility for Agriculture Finance, to reduce the risk profile of project financing, and scale up investment, in Africa.

RB: While banks continue to play an important part in providing project finance in Africa, they are restricted in their ability to provide the long-term commitments that investments in energy and infrastructure typically demand. Banks in the region are generally small, less flexible in their lending practices and lack sufficient capital to provide lending for high-value deals, although the situation is improving led by Nigerian or Moroccan banks. Basel III rules also make it more difficult for banks to free up the capital required for infrastructure lending. By contrast, non-banks have access to more capital and are more willing to be flexible and take on risk to achieve higher returns. They are also increasingly more flexible in their willingness to interact in partnerships for larger projects. Therefore, while there has been some progress in collaborative efforts, seen in the US$4.7 billion multi-sourced project financing from five ECAs and 16 banks for the Coral South FLNG project in Mozambique, continued and increased tie-ups between DFIs, banks and other market players are needed to really drive activity forward in the coming years.

GTDT: What are the biggest challenges that your clients face when implementing projects in your jurisdiction?

YB: Although the project funding landscape has developed and diversified in the past few years, there is still a sizeable infrastructure deficit in Africa and the traditional barriers to closing investment deals in the region persist. The World Bank has estimated that US$93 billion is required per year in Africa to cover this gap. The African Development Bank has also reported that in the past two decades, low quality infrastructure has decreased growth in the region by a cumulative 25 per cent. It is therefore clear that significant steps still need to be taken to attract the funding required to meet demands in Africa.

RB: Off-taker credit risk continues to present a real bankability challenge in African power projects, particularly as total investment in the renewable sector needs to increase to US$32 billion per year by 2030 for projects to be considered cost-effective. Innovative risk facilities that have at their fore the aggregation of off-taker credit risk, such as Africa Greenco and the Regional Liquidity Support Facility have been created in order to address this and reduce risk perception to attract investors to the region. The substantial delays caused to lenders and sponsors by regulatory approvals and processes could be reduced by greater knowledge of the procedure and timescales involved in project implementation. For this to be effective, a two-way effort is needed. On the lender and sponsor side, appointing local and international counsel with expertise in the region will allow clients to better prepare for delays resulting from procedural requirements and negotiations with government. On the government side, further engagement with lenders and sponsors will increase transparency and understanding of the timetables and documentation required for the implementation of projects in the region. We anticipate less delays as host governments develop policies to support project financings in order to attract investors and bridge the funding gap in the region. In the infrastructure sector there has already been increased government engagement with the private sector, shown in the recent establishment of PPP regulations and units in more than 13 Sub-Saharan African countries.

PB: The involvement of governments and state-owned entities in project financing is crucial for progressing project development in many African jurisdictions. For instance, to reach successful financial close on a project financing for a large-scale African oil and gas project, the involvement of the government of the respective jurisdiction, sponsors, lenders and their advisers are all required to effectively identify, allocate and mitigate the complex risks created by these projects. Rapid and unpredictable changes to the legislative framework and lack of government engagement with the private sector in the region therefore impede the effective implementation of projects. In the DRC, legislative changes have been imposed by a new mining code, raising issues for investors including increased royalties to be paid by investors in existing mining projects and increased free carry state shareholding. There have been recent efforts in the region to improve governance procedures and transparency to increase the bankability of projects. However, there is the question over the impact that the more flexible due diligence requirements of Chinese DFIs and ECAs, who provide substantial investment in the region, may have on any incentive for African jurisdictions to substantially strengthen their governance mechanisms in this respect. The mining sector in Tanzania and in particular the policy and regulatory changes over the past year or so have created uncertainty in the eyes of potential investors.

“Many African countries are taking steps to put in place more straight-forward 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?

YB: The absence of a clear and stable regulatory framework has long been cited as one of the key deterrents to investment and many African countries are coming to terms with this and taking steps to put in place more straightforward legal environments. Investors will welcome any reform efforts that focus on adopting global best practices and look to improve the ease of doing business in Africa. Last year saw countries across the continent including Rwanda, Djibouti and Egypt taking note of this and pursing multiple small- and medium-sized enterprise-friendly measures and we expect to see the introduction of more investment driven policies following the raft of presidential elections scheduled to take place in, among others, South Africa, Nigeria, Senegal, Algeria, Tunisia, Namibia and Mauritania during 2019. The results of these elections will necessarily determine the trajectory of the economic policies of the various affected countries.

RB: PPP programmes are becoming better understood as a procurement method and are being announced by governments across the continent, particularly in East Africa, but the number of projects, based on PPP law, that have actually reached financial close whether during the last 12 months or otherwise remains very small. Furthermore, those PPP legal frameworks that are being implemented in parts of Africa remain some way off international standards. That being said, what is clear is that the PPP model is being widely embraced across certain regions of Africa, under various forms, and members of the Simmons’ Africa team are regularly asked to share PPP lessons learnt as part of teach-ins to various African government teams.

PB: Recent announcements by the government of Ethiopia to privatise a number of state-owned assets (including Ethiopia Telecom and Ethiopian Airlines) will attract an increased number of international investors. Proposed changes to the foreign investment laws have also been announced, which will be welcomed by investors.

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?

RB: The type of funds investing in Africa have become increasingly diverse, including a broad range of regional and international players. In 2018, the South African private equity fund, Agile Capital, created a third fund of 1 billion rand and is actively seeking new investment opportunities. Funds from less-traditional locations have also been keen to invest in Africa, such as the Abu Dhabi-based alternative asset manager, Gulf Capital, who announced in 2018 that it plans to invest US$350 million in private equity in Egypt in the next two years. Project participants have been creative in the way they mitigate risk in the region, forming alternative investment vehicles to attract investors. The Emerging Africa Infrastructure Fund (EAIF), for example, which invests in infrastructure in Sub-Saharan Africa, blends public and private capital and is funded by the governments of the United Kingdom, the Netherlands, Switzerland and Sweden. With its key objective to make available capital to support Africa’s infrastructure projects, last year saw EAIF funds applied towards projects in the agribusiness and gas storage sectors.

YB: Funds in the region have notably increased their emphasis on environmental, social and governance (ESG) criteria, likely as a direct response to the role and influence of DFIs in this space. This focus on ESG will not only mitigate risk in the long-term but is likely to attract investors who are cautious about investing in Africa due to the high actual and perceived risk of providing project finance in the region.

PB: China remains an influential investor in African projects with high-profile pledges of substantial investment over the next three years. As we discussed above, the United States has also stepped up its funding commitments in the region in light of deepening Sino–African relations. Despite some criticisms of Chinese engagement rooted in job displacement and Chinese negotiation tactics, African governments appear, in the main, to view China’s role in Africa positively. As mentioned earlier, the increased investment by French companies (eg, Vinci, Accor, Thales and Total) in East Africa has been noticeable. Project participants from the Persian Gulf have also increased (eg, DP World).

GTDT: What are the major changes in activity levels or new trends you anticipate over the next year or so?

YB: There are currently no major disrupters on the horizon and we anticipate continued growth in project financing in the industry sectors key to Africa. One of the sectors that will likely see an increase in activity is in the infrastructure sector with government investment and infrastructure development in partnership with US and Chinese firms jockeying for influence and opportunities across the continent.

PB: DFI support is likely to continue to increase over time as these organisations look to decarbonise their investments, for example, in the second half of 2018 it was announced that the International Finance Corporation had partnered with Gaia Energy, a Morocco-headquartered renewable energy developer, to fund a joint platform for the development of wind power and other renewable energy projects, with an initial pipeline of 22 projects across nine countries in North, West and East Africa of more than 3GW. The platform will be implemented by IFC InfraVentures, a US$150 million global infrastructure development fund, and will receive support from the €114 million Finland-IFC Blended Finance for Climate Program, which was developed to drive private sector financing for climate change solutions with a particular focus on innovative projects in emerging markets.

RB: In terms of new trends, we predicted last year that we would start to see the gradual deployment of energy storage as the requisite technology becomes more accessible and prices continue to fall. Eskom’s announcement of its distributable battery storage programme, committing to small-scale solar projects with energy storage included totalling 1,400MWh in conjunction with the African Development Bank Group, is certainly encouraging in this respect. As is the fact that innovative start-ups in the off-grid energy space, like Kenya-based company M-Kopa, which supplies home solar energy kits, are stepping into the gap in the market stemming from Africa’s continuing problem with rural electrification. Still very much in its infancy in Africa but one that is hugely topical at the moment in Europe is the growing market interest in developers looking to use corporate power purchase agreements. While still extremely rare, market sentiment in respect of these alternative solutions, certainly in South Africa, is encouraging but unsurprising given the recent, well-documented Round 4 Renewable Energy Independent Power Procurement Programme grid connection delays.

The Inside Track

What three things should a client consider when choosing counsel for a complex project financing?

Clients need to look for counsel with the relevant sector expertise and strong understanding and experience of developing projects in Africa, ideally in the country where the project is located. Clients should also look for a balance of international and local counsel on each project.

What are the most important factors for a client to consider and address to successfully implement a project in your country?

The choice of co-investors, lenders and advisers is critical to a successful project in Africa as well as the understanding of the environment and the ability to focus on what really matters. Where the client is an international company, working with local partners in Africa is extremely important and in particular selecting the right partner.

What was the most noteworthy deal that you have worked on recently and what features were of key interest?

In the renewables sector, power purchase agreements were entered into between South Africa’s electricity public utility (Eskom) and 27 projects in Round 4 of the Renewable Energy Independent Power Procurement Programme, marking an end to several years of standstill in the programme and enabling the Simmons’ team to close the financing of the 140MW Kangnas Wind Farm (Northern Cape) and the 110MW Perdekraal East Wind Farm (Western Cape), which is being funded by limited recourse debt and majority funded by a range of South African pension and asset management funds.

Yves Baratte, Rose-Anna Burnett and Paul Bugingo
Simmons & Simmons LLP
Paris, London and Dubai

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