Africa has long been hailed as the continent for economic growth. But, in many ways, Africa can still be unpredictable and is oftentimes challenging. For those seeking to invest in potential infrastructure projects on the continent, knowledge of the targeted legal and commercial landscape is one of the most important risk-mitigating tools available. Combining local knowhow and on the ground expertise to international resources, can be key to implementing a successful project in this exciting market.
Before becoming involved in any infrastructure project, prospective bidders should obtain a clear understanding of the legal and regulatory environment in which they will be required to operate and the hurdles they need to overcome. This includes understanding issues such as public procurement requirements, exchange control, foreign investment restrictions, local content requirements, tax regimes, employment and immigration controls, and understanding exactly what costs may arise in relation to the project (including the costs of any licences, concession fees, tariffs, stamp duties, notarisation dues, customs dues, tax, advisory costs, security, the costs of possibly having to establish a local company, etc). All these issues need to be considered before committing to a particular project.
Completeness of public records is often a concern in emerging markets and comprehensive records may be missing or difficult to access. For example, determining who holds title to land or assets may be difficult to establish. Even if this can be determined, country specific rules regarding the ownership and transfer of land or assets or the giving of security over land or assets may affect the manner in which finance can be obtained.
Local content laws and requirements are increasingly becoming part of the legal landscape in African infrastructure deals. Participation in infrastructure projects in Africa therefore requires knowledge of the local market and potential partners to assist in meeting these requirements. An understanding of the political landscape will be of particular importance in this context.
Companies should also take into account the need to comply with all the requirements of Expressions of Interest and Requests for Proposals when bidding for a project. Since these documents are not always clear, the need for proper understanding and participation in the clarification process is essential to ensure that the bid is not disqualified.
Timing is also a key consideration. Projects in emerging markets can take significantly longer to procure and construct than would be the case in many other parts of the world. This is a reality which overseas companies should be prepared for.
Whilst Africa will continue to provide infrastructure development opportunities as its economies develop, there are some key mechanisms for mitigating the risks associated with participating in these projects.
Offshore holding companies should be considered as a structuring element of any African investment. The structure of any investment and subsequent cash flows should be carefully analysed to maximise returns on any project; as should the exchange control regulations associated with offshore companies and supplies. Currency and interest rate hedging is also an essential consideration (particularly where there may be volatile local currencies involved). Choice of law and jurisdiction provisions are another key tool for de-risking African projects. Such provisions allow companies to mitigate local law risk, which the legal system may not be sufficiently developed or dispute resolution processes sufficiently independent to deal with large infrastructure projects and the financing structures that accompany them. Arbitration and English courts are often accepted as first prize.
Arbitration under the rules of one of the established arbitration bodies is an excellent way of obtaining high quality outcomes. Parties entering into African projects involving Chinese counterparties may wish to consider the newly-established China-Africa Joint Arbitration Centre (CAJAC) – an arbitral body with a specific focus on resolving disputes arising out of Sino-African transactions.
Political and commercial risks can be mitigated through the use of Export Credit Agencies, although the cost of any premiums will need to be factored into the project costs. Credit enhancement, either in the form of Development Finance Institutions involvement or through governmental or multi-lateral support, should also be explored where possible.
The legal and regulatory challenges presented by African projects are as varied as the opportunities. Successfully navigating them requires a comprehensive understanding of the legal environment and the commercial risk factors in each country concerned. For this there is no substitute for first-hand in country expertise combined with international expertise.