Understanding Government Support Agreements in Infrastructure Projects
Government support agreements play a crucial role in infrastructure projects by outlining various forms of support provided by the government to ProjectCo. These agreements help allocate risks appropriately, ensure credit enhancement, and provide direct or indirect support. However, hindrances such as IMF limits and legislative restrictions can impact the provision of government support. Different types of support, including letters of comfort, sovereign guarantees, and concession agreements, are used to share risk between the government and developers. Examples and evidence back up the types of support discussed in the context of regional government support in Kenya.
Download Presentation
Please find below an Image/Link to download the presentation.
The content on the website is provided AS IS for your information and personal use only. It may not be sold, licensed, or shared on other websites without obtaining consent from the author. Download presentation by click this link. If you encounter any issues during the download, it is possible that the publisher has removed the file from their server.
E N D
Presentation Transcript
GOVERNMENT SUPPORT OPTIONS Laura Kiwelu Norton Rose Fulbright
What is a government support agreement? A government support agreement is an agreement between the Government (typically acting through the Ministry of Finance and Ministry of Energy) and ProjectCo (and potentially the Sponsors). It may be any of, or a combination of: Implementation agreement Concession agreement Put and call option agreement Sovereign guarantee Letter of support Letter of comfort
How is Government support provided? Direct support, e.g. Implementation Agreement Government direct support Contractual undertaking to support ProjectCo Also record commitment of ProjectCo Indirect support, e.g. Guarantee Guarantee performance of counterparty under project document (such as PPA) Mixture of both Mixture of both Covers gaps in underlying project docs AND guarantees performance if breach by offtaker of its obligations Government indirect support 3
Why should the Government provide support? Some risks are more appropriately allocated to Government (e.g. land, sector restructuring, forex, change in law, change in tax, expropriation). Ensures the Government is on notice and aware of the investment. Credit enhancement. Direct recourse to Government for Funders.
Hindrances to the provision of Government support IMF limits and the need to maintain sustainable public debt levels in order for Governments to continue to borrow from external institutions, and to continue to comply with existing borrowing facilities the treatment of contingent liabilities. Legislative or regulatory restrictions (consider exact scope of these though); e.g. Malawi, Ghana and in Tanzania. Mis-fit with policy concerns about setting precedents or treating some IPPs more favourably than other IPPs.
Types of Government support Letter of Comfort Sovereign Guarantee Concession Agreement / IA Sovereign Balance Sheet PCOA [Examples/ evidence to back up statement] [Examples/ evidence to back up statement] [Examples/ evidence to back up statement] [Examples/ evidence to back up statement] Government s share of risk allocation Developer share of risk allocation 6
Regional Government support Kenya Letter of Support Government support following a consultation period in respect of political events and FM affecting Kenya Power. Rwanda Government Concession Agreement Guarantee and Guarantee of monthly and termination payment obligations. General government support obligations. Malawi Government implementation agreement guarantee and Guarantee of monthly and termination payment obligations. General government support obligations. Zambia Implementation agreement IA contains general government support obligations, and put and call option mechanics post termination. Political risk is allocated to Govt. Zimbabwe Government guarantee? Particular guarantees to be provided by RBZ. Nigeria PCOA PCOA structure is triggered upon termination. Ghana PCOA The PCOA replaces the previous Government Consent and Support Agreement. Uganda Implementation agreement IA contains general government support obligations, and put and call option mechanics post termination. Political risk is allocated to Govt. Not yet established Botswana Not yet established
Government or sovereign guarantee A guarantee is a secondary obligation which depends on the existence of a primary obligation. A sovereign guarantee is generally uncapped and will be backed up by an indemnity and an undertaking to pay. The Government will guarantee that if the Offtaker does not pay (i) unpaid amounts, or (ii) any termination compensation following termination of the PPA, then it will pay such amounts within a reasonable time period of ProjectCo s demand. A sovereign guarantee is a contingent liability on the Government s balance sheet. Therefore the Government should weigh up the cost of providing the guarantee and taking on the contingent liability against the economic stimulus benefits of the project. Funders should also consider the merit of a government guarantee particularly the credit quality of the host government whether there are sovereign debt ceiling constraints, and whether the guarantee would be capable of being enforced
Implementation agreement Also known as a concession agreement core is the grant of the right to ProjectCo to develop the project. Primary support obligations from Government on issues such as land, access, permitting, relief from import (and export and re-import) restrictions, immigration issues and assurances regarding sector restructuring and non- discrimination. ProjectCo will also have reciprocal obligations to the Government, such as on local content, limitations on change of control, decommissioning and compliance with law. Certain of these obligations may be duplicative of the PPA Sweep-up of risks where items are not fully covered in the PPA, such as political events, force majeure, change in law, change in tax, convertibility and repatriation and expropriation.
Letters of support and letters of comfort Main regional example is Kenya. GoK letter of support covers political events (including a natural force majeure event affecting Kenya Power). Coverage for revenue relief and termination compensation. The GoK letter of support is not a letter of comfort it is legally binding a binding letter of comfort (PPP Act). GoK letter of support states on its face that it is not a guarantee (as defined by the Kenyan constitution, and therefore does not require National Assembly approval).
Put and call option agreements A PCOA turns a PPA termination into a commercial transaction and therefore seeks to avoid any underwriting of the project and contingent liability connotations. The PCOA establishes a process for buy-out of the Plant: ProjectCo put option = ProjectCo sand Sponsors option to require Government to purchase the Plant or the shares in ProjectCo Govt call option = Government s option to require ProjectCo or the Sponsors (as applicable) to sell the Plant or the shares in ProjectCo. Option must be exercised within 60-90 days or it will lapse. PPA must set out a clear procedure for the buy-out so as to ensure bankability and reduce the possibility of dispute.
Termination compensation Option Debt & interest Initial Equity Equity Return Right to terminate ProjectCo default Call Buyer Offtaker default Put Generator Political FM affecting ProjectCo Put Both Political FM affecting Offtaker Put Both Natural FM affecting ProjectCo Put / Call ? Buyer? (net of insurance proceeds?) Natural FM affecting Buyer Put Buyer (net of insurance proceeds?)
General comments Interface with the PPA (and other project documents, such as land lease agreement(s) and connection agreement) must be fully considered. Defined terms should be aligned with PPA. Arbitration provisions would usually be aligned and permit consolidation of arbitration. Waiver of sovereign immunity. Direct agreement and assignment by way of security permitted.
In summary There are many different types of government support. It is possible to negotiate a form of credit enhancement from Government which meets Funders concerns but does not represent a guarantee of the entire cost of the IPP. However, this depends on Funders and in some situations they may not accept anything less than a full sovereign guarantee.
