Managing political risk



Lawyers at Norton Rose Fulbright have a deep understanding of many of the available tools for managing political risk for projects in Africa. We have worked on a number of transactions with direct forms of political risk coverage including International Development Association (IDA) and Multilateral Investment Guarantee Agency (MIGA) policies. In addition, we have extensive experience working on African transactions involving multilateral banks and export-credit agencies which are often thought to provide a form of soft political risk cover based on the influence that they are able to exert.

World Bank Group and IDA Partial Risk Guarantees

Partial Risk Guarantees (PRGs) from the World Bank Group (either the International Bank for Reconstruction and Development (IBRD) or IDA) are able to cover project lenders and equity investors against risk of a government (or government-owned entity) failing to perform its contractual obligations with respect to a project. IDA PRGs are available for all countries eligible for IDA credits. The scope of political risks, including size of the risk covered, is negotiated on a deal-by-deal basis and may include: currency inconvertibility/ non-transferability, political force majeure, government and state-owned entity (e.g. utilities) payment obligations and regulatory risk. IDA PRGs will frequently be implemented with the use of letters of credit posted by commercial banks where the beneficiary is able to draw on such LCs for covered events and if the government entity fails to re-pay such draws within the contractually specified period, the LC issuing bank is entitled to make a claim on an IDA guarantee. World Bank Group PRGs may also be set up with direct payment from the guarantor to the project lenders or owner.

MIGA guarantees

The Multilateral Investment Guarantee Agency (MIGA), also a member of the World Bank Group, provides political risk insurance guarantees for cross-border investments. MIGA policies can cover debt as well as equity investments. MIGA guarantees may cover currency inconvertibility and repatriation risk, expropriation, certain forms of political force majeure and breach of contract by government parties. MIGA guarantees are available for a minimum of three years and up to a maximum of 15 years (with 20 years possible in exceptional cases).

Multilateral banks and export-credit agencies

Although loans from such entities do not provide explicit political risk cover (and political risk is not an excuse for non-performance by the borrower), involvement of multilateral banks and export-credit agencies are thought to carry a form of soft political risk cover. In the event that there is a default on a loan facility caused by a political event, the effort that such entities might bring to bear, either as part of the global multilateral institution community or as a sovereign state entity is thought to help reduce the likelihood of such defaults in the first place and to provide a level of influence at senior government levels that could help resolve and/or restructure such defaults.

Frequent issues arising from PRGs

We are experienced with many forms of PRG instruments and are well-positioned to help project participants understand their impact on project development and financing. Listed below are a few of the issues that we have frequently assisted clients with PRGs.

  • Analysis of available coverages and exclusions to quantify the scope of the residual (i.e. uncovered) risk.
  • Review of the grounds for suspension and early termination of PRGs, both in terms of obligations to be complied with by the policy beneficiary (e.g. fee payments, environmental and social requirements for the underlying project and anti-corruption measures) as well as the state actors.
  • To the extent that a letter of credit is to be used as an intermediary instrument between the PRG insurer and the beneficiary, it is important to understand the changing appetite of commercial banks for these types of instruments (particularly, in respect of amount and tenor), despite the fact that such instruments are backed by a PRG guarantee. We believe this risk is becoming increasingly relevant as the tenor of project loans has been increasing, while commercial banks’ appetite for the issuance of long term letters of credit has been decreasing.

Our experience with PRG products in Africa

  • Representation of International Finance Corporation on the Freetown power project, comprising the development, financing, construction and operation of a heavy fuel oil fired 50MW independent power project in Freetown, Sierra Leone. The project is being developed by CEC Africa Sierra Leone Generator Limited as a special purpose private company established by CEC Africa Investment Ltd and TCQ Power Ltd.
  • Representation of a group of multilateral and commercial lenders in connection with the financing of a 87MW power project in Kenya, including a MIGA political risk policy covering the commercial lender and an IDA PRG covering the political risk faced by the project.
  • Representation of a group of multilateral lenders in connection with the financing of a 67.5MW power project in Senegal – project included an IDA PRG.
  • Representation of a group of multilateral lenders in connection with the secured financing of the privatization of a cross-border railway in Kenya and Uganda – project included an IDA PRG.
  • Representation of ContourGlobal in connection with a methane extraction and production facility with an associated 25MW power plant on Laki Kivu at Kibuye, Rawanda financed by Emerging Africa Infrastructure Fund, FMO and the African Development Bank – project included a MIGA guarantee.
  • Representation of Stanbic and ICBC in relation to a 83MW power project development by Triumph in Athi River, Kenya – project included a MIGA guarantee and an IDA PRG.
  • Representation of ENI in relation to its US$6 billion investment in the OCTP Gas project in Ghana – the project includes the largest single IDA PRG to be issued to date.
  • Representation of IFC in connection with the development of IDA PRG forms to be utilized in connection with IFC’s Scaling Solar initiative.