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Issues and considerations in project finance—Part 11

2018-10-28 10:01:02

By Paul Kibuuka @isidoralaw

The International Monetary Fund’s upgraded growth forecast for the sub-Saharan African region of 3.8 percent in 2019, compared with a 3.7 percent prediction in April, reflects improved prospects for the region—which includes Tanzania and 45 other countries.

Although finding bankable projects is a challenge, the infrastructure spend in sub-Saharan Africa is anticipated to reach $180 billion per year by 2025.

But Brexit uncertainty, U.S. protectionist tariffs and China’s economic slowdown could lead to loss of business confidence. As China and the UK are sub-Saharan Africa’s largest trading partners, there could be a knock-on effect on the region’s development, emanating from overall decline in project finance lending.

Also, consider that U.S. President Donald Trump is not a fan of foreign aid assistance and that, for Tanzania, Moody’s assigned the country a “B1” sovereign credit rating with negative outlook this year, but which the government rejected.

A credit rating is used by lenders and investors to gauge the credit worthiness of a country; hence, it has an epic impact on Tanzania’s borrowing costs.

However, despite these challenges, Tanzania has seen big increases to its infrastructure commitments under President Dr John Magufuli. A prominent example of infrastructure projects undertaken includes the magnificent Tazara Flyover. Public-private partnership (PPP) regulations envisage both solicited and unsolicited PPP project proposals, though the government has leaned towards public ownership of projects.

It also remains to be seen whether the export credit agencies, multilateral financial institutions, regional development banks, and international development agencies that are active in Tanzania will fully draw in commercial banks to finance long-term megaprojects.

All these issues, coupled with the major concerns and considerations of banks and other lenders in project finance transactions, may increase the probability of projects not reaching financial close.

Some of those concerns include the credit worthiness of project finance parties and their ability to deliver and perform in accordance with project documents; the existence of a suitable arms-length relationship between the main project parties and the special-purpose vehicle/SPV or project company; the independence of project parties from political influence; and the legal capacity of project parties to enter into contracts with the SPV held off-balance sheet.  

Lenders to a project finance transaction seek security in the form of mortgages, fixed and floating charges, pledges, and assignments from the SPV to secure their lending.

They also require third party security, such as, guarantees and/or support from the SPV’s sponsors and other interested parties.

 The Government Loans, Guarantees and Grants Act, Cap 134, as amended by the Written Laws (Miscellaneous Amendments) (No.4) Act, 2016, permits the ability of the government to give guarantees of contractual obligations of public entities.

If lenders are unsuccessful in obtaining a government guarantee, then they may succeed with a comfort letter. However, in the context of Kleinwort Benson Limited v. Malaysian Mining Corporation BHD (MMC BHD) [1989] 1 WLR 379, lenders wishing to rely on comfort letters in court proceedings will have to prove, inter alia, that the promise in the comfort letter is such that it can give grounds for a breach. The bank in that case lost on this ground. 

Lenders must also consider the Civil Procedure Code Cap 33 that prevents certain assets from attachment; the Companies Act 2002 that gives preference to certain categories of creditors; the Natural Wealth and Resources (Permanent Sovereignty) Act 2017 that requires all disputes between the government and investors to be settled in Tanzania; and the Natural Wealth and Resources (Review and Re-Negotiation of Unconscionable Terms) Act 2017 that allows the government to revoke contracts if they have “unconscionable terms”.

As a result of these laws, lenders may find challenges and difficulties in structuring an overall security package for a project finance transaction in Tanzania.

Once security interests are created, project lenders must then take steps to ‘perfect’ those interests, including obtaining the requisite governmental consent (see, Kibuuka, Paul. “Documenting, perfecting banks’ security interests—Part 3.” The Citizen. September 1, 2018).

The lack of physical presence of overseas lenders in Tanzania to enforce their security interests over project assets located in Tanzania is another key consideration that presents a problem, but which can be sidestepped if lenders appoint a central bank of Tanzania licensed bank or financial institution to act as a security trustee or agent in Tanzania.

Ultimately, when structuring an overall security package for a project finance transaction in Tanzania, lenders must consider recent trends and the extant local legal and procedural challenges and engage technical advisers to ensure proper risk allocation between the parties in valid, binding and enforceable project documents.

Paul Kibuuka is the managing partner of Isidora & Company Advocates, a corporate, commercial and financial law firm. This article was published in The Citizen on Saturday, 27 October 2018

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