Assessing the procurement risk of energy concession awards in francophone Africa

Posted in OHADA and francophone Oil and gas Power Renewables Northern Africa Western Africa Blog post

In francophone Africa, the conditions for granting concession agreements usually appears at the top of the list of lenders’ key due diligence issues. Based on our own experience, concerns have been raised on several occasions about the extent of compliance of the award of the concession agreements with the relevant local legislation.

In this article, we will look at how such risks can be mitigated and whether the concerns of the lenders can often be addressed in a way that does not impede the financing.

Open tenders versus direct contracting

For public procurement contracts, such as concession agreements in energy and infrastructure projects, local legislation usually distinguishes between open tenders and direct contracting.

In the context of an open tender, the contracting authority generally awards the contract after a competitive tender, without negotiation, to the bidder that (i) complies with the bid criteria and (ii) submits the lowest-price or the best bid in principle (being the bid which, by its technical value, best satisfies the buyer's need at a fair and reasonable price).  In open tender processes, any bidder can submit an offer. The open tender, which is the most commonly-used tender method, may include a prequalification phase, which should also be open to any bidder.

Direct contracting (by mutual private agreement, known as gré-a-gré) consists of direct negotiation with a candidate in order to award a contract. It is usually a non-competitive procurement method that is allowed only under certain conditions. However, the use of this procedure is typically limited, as the contracting authority must usually obtain prior authorization from government or from the relevant regulator. Such authorization is only available in limited scenarios and should be under conditions which allow the supervisory body to ensure that the requirements of local legislation continue to be met.

In several francophone African jurisdictions, these scenarios will be limited to matters such as the following:

  • when the needs of the public procurement can only be satisfied by a service requiring the use of exclusive rights held by one private contractor;
  • when the contract can only be entrusted to a specific service provider for specific reasons or for state security reasons;
  • when there is a case of extreme urgency (such as to ensure the continuity of a public service) or a force majeure (hardship) event which does not permit compliance with the deadlines provided for in the standard tender procedure.

Poor procedures can call into question the bankability of the project

Due to the need for the quick development of electrification in Francophone Africa, concessions for energy projects have usually been granted on the basis of direct contracting.

Direct contracting is a recurring problem in French speaking African countries because the local legislation often provides a vague and ambiguous framework for the use of such procedures, leaving room for interpretation and exploitation of “grey areas” and loopholes.

Usually, the awarding of a public contract through direct contracting avoids any form of procedure because the relevant laws do not provide for the process to be made public and or for a minimum level of competitive bidding.  The condition of urgency, which is recurrent in most jurisdictions, is often used in practice as the grounds for direct contracting, but this does not always provide the comfort necessary for the bankability of projects.  Therefore, there is a risk that the contract may be challenged and/or that the financing may not be granted.

As already noted, the integrity of the procurement process as well as the procedures and any delays in acquiring necessary approvals are amongst the key factors usually considered and thoroughly investigated by financial institutions when considering the bankability of a project.  Therefore, if the project does not strictly fall within the permitted scenarios for direct contracting or is subject to a procurement claim (by a third party or the administration itself), it can jeopardize the bankability of the entire project.  The lenders will often require that all essential and material consents and permits required to build and operate the project are granted to the project company at the outset of the project. In this context, they may not wish to finance the project if, for example, there is a risk that the contemplated concession award process may be challenged.

Risk assessment and mitigating solutions

The risk identified usually consists in:

  • a claim by a third party challenging the validity of the concession;
  • the withdrawal or cancellation of the concession by the State.

Laws generally require third parties to bring a challenge within specific time period (usually two months after the publication of the decision awarding the concession or approving the award of the concession i.e. the relevant decree).  In this context, the risk of recourse can be excluded at the end of such period. This solution can easily be addressed in the financing documentation, with the end of the recourse period being a condition precedent to the first drawing under the financing.

The withdrawal or cancellation of the concession by the State is a risk that is more difficult to assess. We conducted an analysis of the French case law on this matter.  Even though we cannot confirm that the same approach would be taken under local law in Francophone Africa, we believe that it provides an interesting benchmark insofar as the civil law systems which can be seen in operation in Africa are, for the most part, often inspired by the French legal system.

French case law is based on a balance between the compliance with the law/regulation and the general principle according to which the administration cannot avail itself of its own mistake to seek the cancellation of a contract.

In practice, if the court considers that the irregularity is so severe that it jeopardizes the fundamental principles of the law, the contract will be cancelled[1].  In the event of cancellation, an indemnity is usually paid to the private party (even though it was aware of the irregularity) the amount of which is determined on a case by case basis. However, it is not certain that such indemnity will always cover the amounts due by the private party to its lenders.

In this context, we stress that French case law usually considers that a lack of competition in the award of a contract is not in itself sufficiently serious to result in the cancellation of the contract[2]. As an example, despite the fact that the local municipality sought to "avoid the competition rules arising from the public procurement code", it was held that this irregularity "does not present a character of sufficient gravity to prohibit settling the dispute on the basis of the contract"[3].

This case law has been supplemented by a decision of 12 January 2011 of the French highest administrative law court (Conseil d’Etat)[4], which specified that "when the court is seized of a dispute relating to the performance of a contract, the parties may not invoke a breach of the rules governing the award of a contract, nor may the court raise it ex officio, for the purpose of setting aside the contract for the resolution of the dispute".  However, this principle has a limit because "by exception, the situation is different when, having regard both to the seriousness of the illegality and to the circumstances in which it was committed, the dispute cannot be resolved on the basis of the contract".

It follows from the above that a breach committed at the stage of the award of a concession will usually not be regarded as "serious" in itself (subject to other issues such as fraud) and should not entitle the State to withdraw or cancel the concession.

Even though this risk cannot be fully set aside, we believe that the above provides an interesting way forward. The risk of withdrawal or cancellation of the concession by the State should not accordingly be higher than the risk of expropriation for instance. Furthermore, political risk insurance could also be considered in order to provide an additional layer of comfort.

 

[1] Conseil d’Etat (CE), December 28, 2009, Municipality of Béziers, No. 304802.

[2] Conseil d’Etat (CE), May 23, 2011, Department of Guyana, No. 314715; Administrative court of appeal of Douai, January 20, 2020, No. 18DA00927.

[3] Administrative court of appeal of Nancy, April 2, 2015, No. 14NC01887.

[4] Conseil d’Etat (CE), January 12, 2011, Manoukian, No. 338551.

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