GOVERNMENT SUPPORT OPTIONS - PowerPoint Presentation

1. GOVERNMENT SUPPORT OPTIONSLaura KiweluNorton Rose Fulbright

2. 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

3. How is Government support provided? Direct support, e.g. Implementation AgreementContractual undertaking to support ProjectCoAlso record commitment of ProjectCoIndirect support, e.g. GuaranteeGuarantee performance of counterparty under project document (such as PPA)Mixture of bothCovers gaps in underlying project docs AND guarantees performance if breach by offtaker of its obligationsGovernment directsupportGovernment indirect supportMixture of both3

4. 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.

5. Hindrances to the provision of Government supportIMF 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.

6. Types of Government support 6[Examples/ evidence to back up statement]Letter of Comfort[Examples/ evidence to back up statement]PCOA[Examples/ evidence to back up statement]Concession Agreement / IA[Examples/ evidence to back up statement]Sovereign GuaranteeSovereign Balance SheetDeveloper share of risk allocation Increasing scope and enforceability of sovereign obligationsGovernment’s share of risk allocation

7. Regional Government supportKenyaLetter of SupportGovernment support following a consultation period in respect of political events and FM affecting Kenya Power.Rwanda Government Guarantee and Concession AgreementGuarantee of monthly and termination payment obligations. General government support obligations.MalawiGovernment guarantee and implementation agreementGuarantee of monthly and termination payment obligations. General government support obligations.ZambiaImplementation agreement IA contains general government support obligations, and put and call option mechanics post termination. Political risk is allocated to Govt.ZimbabweGovernment guarantee?Particular guarantees to be provided by RBZ.NigeriaPCOA PCOA structure is triggered upon termination.GhanaPCOAThe PCOA replaces the previous Government Consent and Support Agreement.UgandaImplementation agreementIA contains general government support obligations, and put and call option mechanics post termination. Political risk is allocated to Govt.BotswanaNot yet establishedNot yet established

8. Government or sovereign guaranteeA 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

9. Implementation agreementAlso 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 PPASweep-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.

10. Letters of support and letters of comfortMain 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).

11. Put and call option agreementsA 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’s and Sponsors’ option to require Government to purchase the Plant or the shares in ProjectCoGovt 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.

12. Termination compensationRight to terminateOptionDebt & interestInitial EquityEquity ReturnProjectCo defaultBuyerCallOfftaker defaultGeneratorPutPolitical FM affecting ProjectCoBothPutPolitical FM affecting OfftakerBothPutNatural FM affecting ProjectCoBuyer?Put / Call?(net of insurance proceeds?)Natural FM affecting BuyerBuyerPut(net of insurance proceeds?)

13. General commentsInterface 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.

14. In summary…

15. Any Questions?