Aug 31, 2021

The role of the host government

When countries such as South Africa announce the intention to partner with private parties and invite bids to undertake projects such as the Redstone Concentrated Solar Thermal Power (CSP) plant, they as the host government are expected to play a significant role in the project finance transaction and to address the interests of members of the public in their country who will typically be the end-users or beneficiaries of a project.

Public sector interests pursued by the host government in such a solicitation would include undertaking the highway project at favourable or minimised costs on account of the competitive bidding, transferring some of the risks to private sector players, attracting new sources of funding, getting an efficient and high quality highway project, and having technology and skills transfer to its citizens. 

The host government will also issue and be a party to the concession agreement or the licence granted to construct, maintain and operate the infrastructure asset. There will be obligations of the government under such concession or licence such as providing the site for the project, completing enabling infrastructure, cooperating to obtain leases, easements and rights of way as well as passing any laws that may be needed to undertake the project. 

The host government also needs to issue all the licences, permits and authorisations required for a project to take place.

On the continent, one of the key roles that host governments take on is that of providing government guarantees to enhance the bankability of the project. Such guarantees may be necessary for credit enhancement depending on the macro-economic and political factors that subsist within a country (Hoffman, 2007).

The government is also often an owner of the project and this is one of its most important roles. It is possible that the government may even seek to have a stake in the project company (Hoffman, 2007) although this is not common for highway projects and is more likely for project finance transactions such as those in the mining, oil and gas sectors. It will also be the owner of the project at the end of the project term when Project Co. transfers the highway back to the government once the concession has expired o been terminated.

Assessing the host government

Several issues are critical in assessing a host government, its circumstances and the local laws affecting the proposed project as this is relevant in determining the probability of the success of a project. 

One of the most important factors is determining whether there exists political goodwill in relation to the project. It is important for existing leadership to be strong and to be fully committed to the project, including, for example, establishing it as a priority for the country, to mitigate the risk of competing interests leading to project abandonment and failure.

Another factor in assessing the host government is whether other relevant agencies, ministries which may have a role to play in a project are fully in support of the government’s decision to undertake the project. They must be convinced that the project is both viable and beneficial for the country and their respective sectors. They must also be willing to commit to the project’s development and implementation, including the entire process of announcing the project, selecting a private party partner, negotiating project agreements and finally implementing the project. If possible, the support of potential successor governments should also be analysed considering the long-term nature of project financed infrastructure.

Ideally, there should be a strong project champion within the host government to see the project through to its successful end. The champion must be both committed and have clout, with the ability to take responsibility for the development and implementation of the project. 

It is typically important that the geopolitics of host country indicate some stability, including in relation to such issues as having good security, the absence of labour or civil unrest, embargoes, war, terrorism or boycotts of a widespread and political nature. All these could make it impossible for the project to proceed, or increase the probability of delays and cost overruns all of which would pose significant risk to the development of the project. 

There must be clear rule of law in the host country and it should be ascertainable that local laws are reliable and can offer the rights and protections required for the participants and developers of the project. This is especially important because the concession agreement or license agreement is likely to be governed by local law, while financing agreements will often be governed by the law of England and Wales or the law of New York depending on the funding parties. This means that matters such as changes in law are especially critical to the investment. The risk posed by unreliable local law is significant enough that, if it cannot be sufficiently mitigated for instance through political risk insurance, it could make the transaction non-viable for investors. 

Private party proponents also ought to investigate the risk of revocation or non-renewal of permits within the context of the host country and the project. A project cannot validly proceed without permits and their absence or non-renewal thus jeopardises the project at a fundamental level. This is especially true if not all the permits and authorisations will be granted at the commencement of the project meaning that there is a risk that the initial support offered by the government may not continue during these pivotal points on the project’s development.

There must be clear and comprehensive regulation of the industry or sector within which the project falls, as stated by Dewar in his book International Project Finance Law and Practice. This ensures that the obligations imposed on the project company have clarity and certainty of outcome. Changes to the requirements imposed on the project company on account of changing industrial regulation would have an adverse impact on the project.

Finally, as assessment of the host country should include an assessment of its corporate governance regime. The project company is usually incorporated under the laws of the host country and as such, its governance will be based on the local corporate governance requirements and rules. This is especially important given the project company’s singular purpose and the fact that investors are counting on it to deliver repayments and returns. 

(An earlier version of this article was first submitted to the University of London as part of the requirements for the award of a Masters in Law)