Gonyi Ajawin, Nairobi-based counsel for Berkeley Energy, urges renewable energy sector participants in Sub-Saharan Africa to work closer together to unlock potential
The continued growth of the renewable sector in emerging markets requires traditional project financing to evolve to meet the different energy demands and the market's changing composition.
When people talk about project finance in Africa they tended to look at the oil and gas and infrastructure sectors, but now there is a lot of demand for renewable energy. We will see more of this demand than previously, and by some estimates, the installed cumulative capacity of renewable energy in Sub-Saharan Africa is to go up by over 70% from 35GW to about 60GW in the next five years. One of the biggest infrastructure projects in the region right now is the Grand Ethiopian Renaissance Dam, located in the headwaters of the Blue Nile, which is a $4 billion project aiming to produce 6,000MW on completion, making Africa's largest hydroelectric power plant. However, whilst there is a growing demand and some huge projections, what hasn't yet matched that growth – creating some difficulties – is the legal and regulatory framework and the one-size-fits-all approach adopted by some of the key participants in the market.
African renewable market transactions entail risks that necessitate the early involvement from lawyers right off the bat from the term sheet stage and continued involvement in the lifecycle of renewable energy projects. The post-origination work should include a project bankability diagnostic from a legal perspective, charting the path to financial close (and project completion), highlighting (based on market experience) potential barriers to securing a power purchase agreement (PPA) and advising on market specific instruments to mitigate risks such as political risk, offtaker risk, currency fluctuation, interest rate increases and curtailment. Lawyers will have to closely engage with lenders, sponsors and regulators and liaise with the regulatory bodies and ministries at different levels and, whether in terms of renewable licences or application for licences, securing the necessary permits for projects.
Increasingly, there is a need for extensive lawyer involvement with lenders and sponsors by engaging with them on land ownership, environmental and social issues and local community engagement (including establishing community development trusts), which are increasingly factors that determine the success or failure of renewable projects in Sub-Saharan Africa.
International law firms must provide bespoke solutions
Whilst many international law firms have 'Africa experience' in the context of infrastructure, mining and oil and gas, there are very few international law firms with market-specific experience offering the bespoke solutions that sponsors and lenders need to execute Sub-Saharan Africa renewable energy projects. Some international law firms take a cookie-cutter approach to dealing with issues which are unique to Sub-Saharan African countries. There is no standard suite of documents that be pulled off the shelf and applied to successfully mitigate risk on Sub-Saharan Africa renewable energy transactions. The one-size-fits-all approach and the approach some lawyers take when dealing with local counsel and sponsors on the ground and governments creates a lot of difficulty and hinders the successful completion of the project.
Market participants need to appreciate the subtleties of the different legal regimes on the African continent. Africa is not a country, it is a very unique continent where every country has a unique legal and regulatory framework. For instance, a lot of time and money is wasted on starting off with what is a typical market standard document, but at the end of the transaction the aforementioned document has been stripped back to a point where it bears no resemblance to what the parties started with. There is a requirement for international law firms to understand the local commercial and legal realities in which their clients operate.
Governments can encourage project financing by signing up to certain treaties to facilitate dispute resolution and enforcement of judgments
Lenders and sponsors can mitigate transaction execution risk by selecting external counsel with an understanding of the local market. International law firms can no longer rely on sending pitch documents from Paris, London, New York or Dubai and closing projects remotely without ever setting foot on the African continent. International law firms need to engage with the participants at every step to see the challenges first-hand and understand the local issues that are unique to each particular jurisdiction. By doing this they can ensure a smooth running of the transaction and avoid painfully negotiating utterly irrelevant points which are not in their client's interest.
The selection of local counsel with a great understanding of international project finance requirements and involving them in the early stages is also critical. For example, whilst project documents in some transactions might be English law-governed, most transactions will include local jurisdiction-based security documents in connection with the local security that require quality local lawyers. It can be difficult to find this quality as the participants will be fighting for a limited number of local lawyers with an understanding of the wider context of the transaction as opposed to simply reviewing the security documents in isolation. Additionally, the local lawyers need to be able to navigate their way around the various regulatory bodies and government institution. Pairing local counsel with the right international law firm experience in dealing with local lawyers is incredibly important in overcoming the various obstacles. Experienced international law firms will typically have their own list of preferred counsel with whom they have worked with on previous transactions.
Engaging external advisers with an understanding of environmental and social issues is also a critical area often overlooked by some participants. Participants need to have a great understanding of the local community, land ownership issues and the necessity of investing in education, health and social initiatives to benefit the community. Historically, some investors in the energy sector have often used CSR as something for corporate brochures or investor reports, but in fact CSR has a significant impact on the economics of a project. It is incredibly important to have a grip on it and it involves engaging with the government and local stakeholders.
Regulatory and procedural road blocks
Most African countries and regulators need to continue engaging with key market participants by taking initiatives to facilitate investment in the renewable energy sector and close the energy gap.
Whilst Africa arguably has the best potential for renewable energy resources anywhere in the world, unlocking its full potential very much depends on creating the necessary legal and regulatory framework to realise that potential. Some countries need to adopt progressive initiatives, such as those implemented by Rwanda. Rwanda recently signed a $48.9 million financing agreement with the World Bank and has actively taken initiatives to facilitate the increase of electricity access through off-grid technologies and facilitate private sector participation in renewable off-grid electrification.
A critical area for improvement that would facilitate greater investment are the speed and response times for issuing of permits, licence granting and regulatory approvals. It is also critical for governments to engage players in the renewable energy sector in the early stages of formulating renewable energy policy and legislation in order to leverage industry experience. In addition to cutting the 'regulatory long grass', governments can encourage project financing by signing up to certain treaties to facilitate dispute resolution and enforcement of judgments and by passing legislation to recognise risk-hedging instruments. The lack of political will and a conducive legal and regulatory framework often pushes up the cost of renewable energy transactions resulting, unfairly, in an 'Africa premium'.
A collaborative effort by all the participants in the renewable sector is necessary to close the African energy gap and address climate change issues. The African continent needs to tap into the new financing instruments and capitalise on the involvement of new non-traditional participants in the market. For instance, the involvement by private equity funds in the region's renewable energy space and their collaboration with traditional investors such as development finance institutions provides new exciting opportunities for the African continent.
|About the author|
Gonyi Ajawin is responsible for all legal and compliance matters for the Africa Renewable Energy Fund and is an integral member of the investment team working on the structuring and negotiation of equity and debt financing. Ajawin trained and qualified as a lawyer in the structured finance team of Mayer Brown International (working in both the London and Hong Kong offices) before joining the energy, infrastructure and project finance team at Fasken Martineau as a senior associate.
Ajawin has completed client secondments to Lehman Brothers Europe, UniCredit Bank and the East African Development Bank. Among his previous experiences, he has advised clients on a broad range of international capital markets transactions, securitisations (and other complex structured offerings) and project finance matters (with a particular focus on emerging markets). Ajawin also has extensive experience advising European, Middle Eastern, and African sovereigns, corporates, and financial institution issuers and their bankers on a broad range of securities products, global offerings, commercial paper programs, Eurobond offerings, and private placements (including dealing with key regulatory authorities in various jurisdictions).
Ajawin has a bachelor of laws degree from the University of Bristol and a postgraduate diploma in law from the Oxford Institute of Legal Practice. He is based in Nairobi.
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