Mitigation of political risks in infrastructural project finance in African countries

JurisdictionSouth Africa
AuthorGbede, O.
Published date01 April 2021
Date01 April 2021
Citation(2020) 6(2) JCCL&P 233
Lecturer, School of Business & Law, University of East London, United
Legal practitioner and Lecturer in the Department of Commercial and
Industrial Law, University of Ibadan, Nigeria
Political risks have adversely affected project financing in African
countries. There are instances of risks in the state hosting project
that may negatively affect the bankability of the project. They
include nationalisation of assets, spontaneous changes in laws and
regulations by the government, wars, and terrorism etc. Investors
require assurance to participate in project finance. Guarantee by the
government on the stability of the polity is required. The government
may also give assurances through legal measures, stabilisation clauses
and guarantees to the effect that the regulatory environment of the
project will be stable. This article examines infrastructural project
finance in relation to political risks, with specific emphasis on
African countries. Therefore, beyond assurance from the government,
political risk mitigation instruments developed internationally can be
employed. This article also elaborates the emergence of instruments/
mechanisms that have been developed internationally to mitigate
political risks. These instruments include partial risk guarantees
offered by international financial institutions, political insurance
guarantees and export credit guarantees. It calls for the utilisation
of these instruments and recommends that countries should tailor
their regulatory regime to accommodate them. It contends that with
the existence of these guarantees; the government has a role to play
in creating a favourable legal regime and framework that will admit
their utilisation within the legal system.
Keywords: African countries; project financing; bankability of project;
regulatory environment; risk guarantees.
*LLB LLM (East London) (Energy & Natural Resources Law).
LLB (Ilorin) BL (Nigeria) LLM (Ibadan) PhD (Aberdeen).
(2020) 6(2) JCCL&P 233
© Juta and Company (Pty) Ltd
Most African countries have infrastructural deficits. To accelerate
infrastructural development in Africa both the use of traditional and
innovative means of financing will be required.1 The contraction
of infrastructural development requires huge capital-intensive
investments.2 Usually the task of the development of infrastructural
projects is considered to be the responsibility of the government. The
huge expanse of capital required for infrastructural projects means
funding for the projects will have to be sourced.3 Infrastructural
project financing is taken to be one of the options for obtaining
financing for the projects.4 Public-private partnerships have been
utilised by the government for infrastructural projects such as schools,
hospital, prisons, roads, toll bridges, water and electricity supply.5
The practice is to engage the private sector by creating a climate that
will give room for private participation in infrastructural projects.6
This is borne out of the fact that projects having high economic and
social impacts usually do not result in high returns for the private
sector.7 It therefore becomes important that the risks be distributed
between the private and the public sectors.8 Project financing has
been used, pulling different lenders together.9
Political risk can have a negative impact on the cash flow of the
project even when the project has already come to fruition. This may
place the project participants in a precarious situation whereby they
are unable to recoup their principal as well as the interest that should
have accrued to them. This is because project finance is structured on
a non-resource or limited recourse, the lenders place their reliance
mainly on the cash flow from the project.10 There is a growing concern
of the political risks in Africa. There are further complications as most
1 Z Brixiova, E Mutambatsere, C Ambert & D Etienne ‘Closing Africa’s infrastructure
gap: Innovative financing and risks’ (2011) 2(1) Africa Economic Brief 2.
2 BH Weight ‘New Influences’ in TH Donaldson (ed), Project Lending (1992) 24.
3 Brixiova et al op cit note 1 at 2.
4 Ibid.
5 D Burand ‘Globalizing social finance: How social impact bonds and social impact
performance guarantees can scale development’ (2013) 9 New York University
Journal of Law and Business 447.
6 W Verdouw Sharing Risk and Revenues from PPPs: Perspectives from Current Practice
in the Road Sector (International Institute for Sustainable Development Discussion
Paper, August 2015) 4.
7 CC Lorenzen, ME Barrientos & S Babbar ‘Toll Road Concessions: The Chilean
Experience’ (PFG Discussion Paper Series No 124, World Bank (2001) 19.
8 Ibid. See also BON Nwete ‘The equator principles: How far will it affect project
financing’ (2005) 2 International Business Law Journal 173–174.
9 JC Bueno ‘Project Financing and Infrastructure Development’, available at http://–506–0320#, accessed 8 January 2021.
10 Ibid.
© Juta and Company (Pty) Ltd

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