Mitigation of political risks in infrastructural project finance in African countries

• Jurisdiction: South Africa
• Author: Gbede, O.
• Published date: 01 April 2021
• Date: 01 April 2021
• DOI: https://doi.org/10.47348/JCCL/V6/i2a9
• Pages: 233-250
• Citation: (2020) 6(2) JCCL&P 233

https://doi.org/10.47348/JCCL/V6/i2a9

233

MITIGATION OF POLITICAL RISKS

IN INFRASTRUCTURAL PROJECT

FINANCE IN AFRICAN COUNTRIES

OLUSEGUN GBEDE*

Lecturer, School of Business & Law, University of East London, United

Kingdom

PETER KAYODE ONIEMOLA†

Legal practitioner and Lecturer in the Department of Commercial and

Industrial Law, University of Ibadan, Nigeria

ABSTRACT

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

234

(2020) 6(2) JOURNAL OF CORPORATE AND COMMERCIAL LAW & PRACTICE

https://doi.org/10.47348/JCCL/V6/i2a9

I INTRODUCTION

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://

uk.practicallaw.com/uk/8–506–0320#, accessed 8 January 2021.

10 Ibid.

© Juta and Company (Pty) Ltd