Energy and infrastructure project bankability in Africa: making the right choices

by DLA Piper

DLA Piper

During Africa Week, and in association with FTI Consulting Inc., and along with many friends and associates, we explored the myriad of factors influencing investment decisions in energy and infrastructure project success in Africa. What makes a project viable and successful? How do investors assess options? What do project developers need to do (and avoid) to attract funding? What are the risks?

Despite inherent challenges, the African continent offers investors and developers of energy and infrastructure projects a multiplicity of opportunities. Access to power and infrastructure are critical enablers for economic growth and development across the continent, improving quality of life for its people and providing opportunities for both African and international businesses.

Energy and infrastructure projects in Africa are often part of much wider government plans and so are inherently subject to risks. Most projects run for five to 20 years and have major social economind political implications; they last a long time and outlast different political cycles. As a result, project participants must be realistic in anticipating that adverse publicity may occur at some point in the project lifecycle. If the project is fundamentally viable, then it is more than likely able to defend itself, making challenges surmountable.

What are the factors influencing risk?

Being aware of the risks and managing them carefully can result in a successful project for all parties, even in frontier markets, post-conflict countries and fragile states. Choosing the right location, understanding political environment and regulatory regime, choosing the right partners and effective community engagement all play a huge role in influencing the chances of success.

How are risks assessed and managed?

First and foremost, undertaking an in depth risk assessment of the domestic market is essential in selecting the best jurisdiction for a project. Of course, thorough due diligence on the project is also essential. Confidence can be gained from ensuring the project is of strategic importance to the host government, even though investors and developers need to be simultaneously cognisant that many projects are inherently politicised and with that comes risks that are often unavoidable. It is commonplace for governments to hold a stake in the project, for example, and it is important they remain committed to their respective contractual obligations, e.g. in respect of payments due to be made under a PPA.

Identifying an appropriate government support mechanism is crucial to ensure that future governments remain steadfast to their contractual commitments. Should the government not do so, there are particular challenges associated with disputes involving host governments. Assessing, and taking steps to mitigate the impact of those challenges is an important part of that in-depth risk assessment and pre-investment planning, be it through structuring an investment to benefit from treaty protection, including specific protections such as stabilisation clauses, and negotiating an effective dispute resolution clause which enhances the prospects of recovery.

When it comes to selecting project partners, one of the key considerations is to ensure that a local partner is able to manage both domestic issues and navigate complex financing structures. Testing partner depth of sector knowledge and experience is also essential.

Finally, effective community engagement should be considered critical to ensure project success. Land and relocation issues often come into play when local communities are affected, particularly in relation to the need to fund housing and economic opportunities which can - up to a point - be provided by project companies, developers and DFIs. Project investors are increasingly becoming more adept at monitoring the flow of cash to ensure it is received by those impacted - and that it is appropriately used. Indeed failure to effectively engage with local communities can pose significant security and political issues, underlining the importance of fully understanding the local environment in which you are working. And, it is important to point out, that community engagement should not be limited to the development stage of the project, but in fact its entire lifespan to manage the ongoing impact of the project on the local people.

Our thanks go out to our panel participating in this: Pamela Wadi, Director, FTI; Emilio Cattaneo, Executive Director, The Emerging Africa Infrastructure Fund and Elenos Karaindros, General Manager: Strategy & M&A, Mytilineos. Dimitri Papaefstratiou, Partner & London Head of Energy and Infrastructure Projects at DLA Piper chaired and James Carter, Partner, International Energy Disputes at DLA Piper contributed.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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