Project Finance in the OHADA zone: ten things to know - Part 2
In Part 1, we examined issues arising under the OHADA Uniform Acts in order to anticipate “bankability” concerns for a project in the OHADA zone. In this Part 2, we will examine issues covered by regional and national legislation and rules outside of OHADA but applying in the same geographical zone.
5. Other applicable harmonized regulations
Two economic and monetary zones were created in 1994 in the wake of OHADA, implementing, through a central regional bank, a common monetary policy:
- UEMOA (West Africa Economic and Monetary Union), consisting of Benin, Burkina Faso, Guinea-Bissau, Ivory Coast, Mali, Niger, Senegal and Togo; and
- CEMAC (Central Africa Economic and Monetary Community), consisting of Cameroon, Central African Republic, Chad, Congo, Equatorial Guinea and Gabon,
therefore covering the entire OHADA zone except for the Comoros, Guinea and Democratic Republic of Congo.
The member States of UEMOA and CEMAC, the Comoros and France further constitute the “zone franc” within which a fixed parity between the CFA franc and the Euro applies and which affects the rules issued by the monetary unions.
Under the treaties creating UEMOA and CEMAC, the respective member States decided to enter into a uniform legislative framework with respect to commercial, custom and monetary matters, including banking activities. UEMOA and CEMAC therefore provide for minimum framework regulations for member States, with each State having the ability to adapt the regulation locally. Therefore, the local legislation of each Member State should also be considered when developing a project.
6. UEMOA/CEMAC regulations – banking monopoly
UEMOA and CEMAC regulations provide for a banking monopoly pursuant to which no entity may carry out banking activities on a habitual basis (which includes lending) unless it has been approved and listed as a banking institution. There is however an exception to this for international or multilateral financial institutions and for foreign institutions investing by way of aid or cooperation (institutions publiques étrangères d’aide ou de coopération) which activities in the relevant jurisdiction have been authorized by treaties, international agreements or conventions to which the relevant member State is a party. Most of the international and development finance institutions such as, e.g. FMO, DEG, Proparco or AfDB, which are involved in the financing of power or infrastructure projects strategic for the development of the relevant countries, should, subject to local law transposition, be covered by the exception. This should be confirmed for each specific transaction.
7. UEMOA/CEMAC regulations – offshore account trends
UEMOA and CEMAC have each also promulgated exchange control regulations. In its relation with non-UEMOA/CEMAC member States, such regulation distinguishes between the “zone franc” and other countries. It also distinguishes between “residents”, being entities whose principal place of business is located within UEMOA/CEMAC and “foreigners”, i.e. all entities in countries which are not UEMOA/CEMAC member States. However “zone franc” residents are assimilated to “residents” except for certain transactions including the export and repatriation of their revenues. The following points are particularly relevant:
- a UEMOA “resident” can open an account in foreign currency either in its own country or abroad for its transactions subject to a prior authorization from the Ministry of Finance following assent (avis conforme) of the BCEAO (Central Bank of the West African States);
- a CEMAC “resident” is not allowed to hold a foreign currency account in the CEMAC area except with the authorization of the minister in charge of finance and the BEAC (Bank of Central African States);
- the proceeds of loans made available to a resident project company by foreign lenders and involving foreign currencies must be paid into an onshore account bank authorized to act as a certified intermediary (intermédiaire agréé); the list of certified intermediaries for each country is held by the BCEAO or BEAC as applicable;
- “residents” are required to transfer to the certified intermediary bank all the revenues in a foreign currency received abroad or paid by a foreigner within one month, meaning that “residents” are required to repatriate into the UEMOA or CEMAC zone all amounts originally deposited into offshore bank accounts.
Up to the present time, project finance transactions involving foreign institutions typically require account structuring involving offshore accounts and debt service reserves, and therefore appropriate authorizations have accordingly been sought. However, obtaining such authorizations has proven to be more and more difficult in a number of jurisdictions, because the regional central banks have become more reluctant to agree to such account structuring in order not to jeopardize the stability of the monetary zone.
8. CIMA regulation – insurance and reinsurance markets
The member States of UEMOA and CEMAC also set up the Inter-African Conference on Insurance Markets (CIMA) in 1992, issuing regulations for the insurance market.
According to the CIMA regulations:
- insurance and/or reinsurance activities are regulated activities, which may be carried out only by entities having obtained an authorization for such purposes; this means that an insurance or reinsurance company having no authorization to carry out insurance business in the CIMA countries may not cover a risk located in a CIMA country;
- it is prohibited for more than 50% of a risk located or deemed to be located in a CIMA country to be transferred to an “offshore” reinsurance company (being an international reinsurance company not authorized in the CIMA countries); this means that “offshore reinsurance” is not permitted in a proportion exceeding 50% of any insurance contract concluded in a CIMA country.
In light of the above constraints and lenders’ requirements as to insurer and reinsurer rating (not always available or sufficient on the local market) and reinsurance assignments, the insurance and reinsurance provisions have recently proven difficult and lengthy to negotiate on the international and local insurance and reinsurance market and should be reviewed carefully well in advance of an expected financial closing.
National and local regulations
9. Land rights
Securing land is key for any project. Where projects are effected in a rural zone or other areas which are not registered, the relevant local procedure will have to be closely considered and completed in order to ensure proper registration of the land, and then allow applicable land title to be delivered and a mortgage to be granted. This may be a lengthy process requiring, e.g., registration and purging of customary rights, associated compensation, obtaining a decree of declassification, land demarcation, registration with the competent land registry, etc. before a procedure for the transfer of the land ownership or for obtaining a long term land lease from the State can be expected. Such laws, regulations or other administrative or unwritten procedures are specific to each country and should be investigated sufficiently upstream in the development process.
10. Industry specific legal framework
Basically, all industry-specific regulations (energy, mining, oil and gas, renewables, etc.) fall outside of the OHADA legal framework and the applicable legislation definitely varies from one country to another with variable levels of maturity depending on the industry sector and associated political context, e.g. where the relevant country’s policy stands as regards use or enhancement of renewable sources of energy (which may be quite recent in most countries), or tax incentives for investors.
Focusing on the legal framework applicable to concessions, for example, the following points are particularly relevant and may call into question the bankability of a project in light of lenders’ expectations to be repaid from the proceeds of the termination indemnity provided for in the concession agreement:
- a public call for tender may be required for a concession to be validly awarded; if this requirement has not been complied with, the concession could thereafter be challenged unless the applicable laws and regulations provide for exemptions, typically when projects are of priority and of national importance, contribute to the satisfaction of national demand in the relevant industry sector, are highly creative of jobs or of added value, or contribute to the development of deprived or landlocked areas; sponsors should be careful to ensure the project could not be challenged later on this ground;
- in some countries, the concession agreement provides that a termination may be obtained only through judicial process; this creates uncertainties for lenders as to when and how they would be repaid especially during the period in which the project is not generating revenues; this is therefore something which should be waived to the extent possible under applicable laws.