Financing infrastructure in Africa – Be prepared!

Financing infrastructure in Africa – Be prepared!

The need for modern infrastructure in Africa is enormous. Financing is key, yet it remains one of the most important challenges. Understanding the local environment and regulations is crucial to turning this challenge into a success rather than a nightmare. Here we highlight certain elements that one must keep in mind when considering infrastructure finance in the region.

The 21st century has been labelled by many commentators as the African Century. The need for development is huge and the continent’s overall growth over the last few years has been impressive. Africa is growing, that is a certainty, but important challenges remain present and must be addressed.

Constructing essential infrastructure is necessary for Africa’s further development. Without such infrastructure, the economic fabric cannot develop on a sustainable basis. Especially Sub-Saharan Africa needs infrastructure to generate power, to transport goods, to move people and to connect to other countries and continents. According to the African Development Bank, Africa’s infrastructure requirements run to $130–170 billion a year.

In 2017, out of $81.6 billion invested in infrastructure in Africa, only $2.6 billion came from the private sector. Financing infrastructure projects in Africa is mostly considered by private lenders as highly-challenging or simply too risky. Whilst it is true that the path to arriving at a bankable project is more lengthy, more cumbersome and paved with pitfalls, it does not mean that financing is not at all possible. Many parties with funds to lend are ‘circling’ the African continent but are hesitant as they do not know if they will land on solid ground or in quick-sand. We address several points of attention relevant for infrastructure financing in Africa.

Recourse to an Export Credit Agency

A lender who is considering financing exports to an African country is mainly faced with the risk of non-payment by that particular country’s relevant public authority. The creditworthiness of various countries in the continent is at an all-time low due to an important increase in debt over the past few years that has not been balanced by further economic growth and worsened by much lower-than-expected oil revenues.

Export Credit Agencies, such as Credendo in Belgium, Coface in France, and Atradius in the Netherlands, do provide insurance cover when a private lender is reluctant to take on the risk of non-payment by a public authority or a buyer of exported installations. The amount of the premium varies from country to country and is subject to several factors, including the country’s creditworthiness and its political stability. The Export Credit Agency has much more leverage to obtain repayment, once its insurance is called upon, as it can use the diplomatic state-to-state channels to address the issue and obtain payment.

OHADA law and its security interests

Taking security is an essential aspect of any financing deal. A lender wishes to take security over valuable assets, often complemented by a first demand guarantee from a third party located in another continent. The OHADA (Organisation pour l’Harmonisation du Droit des Affaires en Afrique) Uniform Acts, which apply in a uniform way in 17 countries of Francophone Africa, govern all aspects of business law, including the law on security interests.

Taking security in OHADA countries is relatively straightforward. The OHADA law on security interests is very modern and reliable. The formalities for taking a security interest have been simplified and the lender can in most cases enforce its rights without any court intervention.

Importance of the approval process

It is very important to be well-aware of all aspects relevant for a large financing project. Some rules can significantly delay the actual financial closing and, if they are not taken into account, then it can prove to be very costly for the project’s financing. For example, the Republic of Congo requires that a loan to the State (or to one of its public bodies) is approved by a law adopted by the Congolese Parliament after having received a positive opinion from the Congolese Supreme Court, before it can enter into force. Furthermore, in several countries, the contemplated loan must also be considered in light of the annual finance law (stating which budget is available for certain sectors). A loan not complying with the relevant finance law may be challenged afterwards or may not be signed as it was not taken into account in the budgeting process.

Notifications and other approvals

In several countries, the granting of a loan to a public authority requires a prior information obligation to certain supranational authorities. This is the case for the countries that are members of the Bank of Central African States (BEAC). This institution must be notified of the contemplated loan to be granted to a Member State prior to the actual signing. For the countries that are under close IMF supervision, it is highly recommended to first obtain the IMF’s non-objection to the contemplated financing.

Foreign exchange – Direct Lending

Bringing funds into a country is one thing, being able to repatriate interest and the repayment of principal is often another matter. Rules on foreign exchange are known to be very strict in most countries.

There could also be constraints on direct lending by non-residents to residents. This is the case in the countries of the WAEMU (West African Economic and Monetary Union) where Regulation n° 2009/10/CM/WAEMU on the external financial relations of the Members States of WAEMU requires that loans contracted by residents from non-residents must be carried out through licensed intermediaries (i.e. local banks) in all cases where the borrowed monies are made available to a borrower established in a WAEMU country.

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