Saturday, July 13, 2024

Gov’t unshackles grip on guarantees for foreign investors


By Muluken Yewondwossen
The tight stretch of hard currency forces government to become lenient on its stringent stance of giving guarantees to foreign financers.
As it stands, government is now seeking to expand its degree of flexibility regarding the foreign currency repatriation assurance that was only assigned to public private partnership (PPP) projects.
In the past, the government was reluctant to giving a guarantee to foreign financers excluding the public sector. But quite recently it has now decided to give an assurance for selected PPP projects on the consideration of their benefit.
In its latest law, the government has given a green light for more private sector investments to share the risk regarding the repatriation of foreign currency, which has become extremely short, visibly affecting the country economy including key sectors.
In a new directive that became effective as of September 8, 2023, the National Bank of Ethiopia (NBE), disclosed that it would give convertibility guarantee for FDI’s mega mining project.
Based on the NBE foreign currency guideline, the government was stated as to not give convertibility guarantee and based on the country law there wasn’t any similar assurance for the private sector investment either.
However, PPP projects that had reached their final stages to start operations were starting to face delays due to unexpected demands from financers, this then led government to change its mind and be considerate of convertibility guarantees.
One of the major reasons for companies and financers to demand for assurance was linked to hard currency shortages of the country faces, in addition to the northern Ethiopia conflict.
Officials from PPP Directorate General, which is under the Ministry of Finance (MoF), said that due to the reality on the ground, government had to give life to PPP projects, hence the degree of flexibility on the upcoming projects.
After undertaking massive studies and legal document developments through the Ministry of Finance (MoF), the government in 2018 enacted the PPP proclamation 1076/2018 which formalized private sector involvement through public projects for both parties mutual benefit.
Unfortunately, to date not a single project has come to fruition despite few projects coming close in the past few years.
One of the challenges to adopting the initiative has notably been with the foreign currency risk that the country faced in addition to a bad rep with the western partners, who sided against the government in connection to the northern Ethiopia conflict that erupted late 2020.
Companies, which had reached agreements with the government to engage in the energy development under the PPP framework pushed for convertibility guarantees at the pinnacle of the conflict which have since dialed down following a peace deal in November last year in South Africa.
The government cognizant of this gave some vital but selected projects to be supported by a convertibility guarantee.
Ahmed Shide, Minister of MoF, recently told parliament that the NBE board in whom he serves as member, has approved the currency convertibility guarantee for companies which invest on the PPP arrangement.
Experts in PPP Directorate General disclosed that the decision was passed to give a guarantee for projects that have big values for the country.
“The decision taken by the NBE board is a big step for PPP and has boosted the confidence of interested parties who want to invest on PPP arrangement,” they said.
On the ‘off-shore account opening and operations for strategic foreign direct investment (FDI) projects directive no. FXD/86/2023’ NBE has added mining sectors besides strategic PPP energy projects.
Experts said that this green light is because government has high demand to expand valuable mining projects, which are key sources of foreign currency.
Late July, Harry Anagnostaras-Adams, Executive Chairman of KEFI, a company which owns Tulu Kapi Gold Mines, a company working to develop gold mines at the western Ethiopia in eastern Wellega, said that there will be a new decision that his company is expectant of from the government’s side in September.
He also opined that the government may allow the company to open an offshore account, which experts stated as an alternative source of finance and an easier way for transactions, besides lower interest rate if accessed on credit.
On his nine month report in May Ahmed told parliament that on the implantation of PPP, companies are demanding some sort of arrangements in issues like foreign accounts in related to the project, “They are demanding freedom on financial transactions, particularly for their projects.”
He elaborated demands in connection with the foreign currency issues have been one of the concerns that were raised by PPP developers.
Based on that in May’s reporting, Ahmed explained that the NBE board had given a decision to provide support for the PPP investments “and strategic investments on the guarantee of repatriating their profits.”
“As per the decision to give convertibility and transferability guarantee, minor preconditions like debt equity ratio will be demanded for provision of the guarantee for companies who demand investment in PPP,” he said at the time.
Regarding debt to equity ratio the new directive that was signed by Mamo E. Mihretu, Governor of NBE, on its article 5.1 said that it may not exceed 80:20 of the foreign capital while on 5.2 article; it added that the board may give special approval in a case by case basis if the case was found to be acceptable.
In the FXD/82/2022 external loan and supplier’s credit directive that was issued in September last year, the ratio was 60:40 of the registered capital in business license.
“We hope that it will accelerate the PPP,” the Minister was said, adding, “In the future, we believe that the foreign currency issue will not be a concern but in the short term, we have decided to give the guarantee.”
The latest directive that become effective on September 8 stated that the directive is issued due to the need of creating a preferential and flexible environment in certain limited cases for the opening of offshore accounts, for currency convertibility guarantees, and for modified debt to equity ratios in the case of strategic foreign investments.
It added that it had been found necessary by NBE to set separate legal procedures pertaining to these subject matters with a view to support the attainment of the aforementioned strategic objectives.
The directive indicated that a PPP projects in the power generation and infrastructure sector had been largely capital investment needs. Large mining projects with a substantial export earning potential were also stated as eligible to open an offshore account to deposit the proceeds from their equity and loan financing sources.
The directive now gives the same privilege for any other strategic FDI project deemed eligible to qualify for such treatment by the NBE executive management, considering among others their special significance and contribution in terms of size, job creation, import substitute, foreign exchange inflows, technology transfer, or sector specific impact.
It added that the eligible payments that can be covered from the offshore account are external debt service, including any debt service reserve account. It added that insurance, contractor, and other warranty claims in foreign exchange, and capital or investment expenses besides maintenance and operation expenses.
Regarding foreign currency convertibility guarantee, the directive article six sub article one stated that the guarantee shall only apply to strategic PPP energy and mining sector projects for loan repayment and dividend repatriation, and only after the project owner has exhausted all means to purchase foreign exchange from banks.
Aman and Partners LLB, a law firm based in Addis Ababa, commented that the enacted directive allow certain strategic investment projects preferential treatment to open offshore accounts, to provide convertibility guarantees and to benefit from an increased debt-to-equity ratio.
“The offshore accounts are destined for settling limited but necessary payments. The Directive further allows an increased debt-to-equity ratio of 80:20 with a caveat that the board of the NBE could even consider special approval for a higher ratio,” the law firm said on its comment sent to Capital, “Also, the regime for the highly anticipated foreign currency convertibility guarantee has been introduced only for loan repayment and dividend repatriations for ‘strategic PPP projects in the energy and mining sector’ although such convertibility guarantee will apply to the extent such repayments/repatriation do not take precedence over servicing of the nation’s sovereign debt and following proof that the investor has exhausted all means to purchase foreign exchange from banks.”
“While we aim to revisit in detail the practical application of this reform, it is not clear whether domestic investors are being intentionally excluded despite their potential to invest in strategic projects,” read the comments.
“In addition, the extent to which the convertibility guarantee will promote investment is dependent on its practicality as the nation’s priority to service sovereign loans could result in de-prioritization of private investor’s request for exercising their convertibility guarantee rights,” it added.
In the past budget year, four PPP projects were targeted to be floated and so far on a special condition through the government to government (G2G) approach, two energy projects are under negotiations.
According to Ahmed, AMEA Power of Dubai, UAE is under discussions with the government to make moves on a significant energy project.
The negotiation is focused on the Aysha Wind Farm I project in Somali region to generate 300MW, and as Ahmed describes, “The one to one negotiations have been completed to about 90 percent and the only pending issues to be put to bed are tariffs which will soon be finalized.”
Similarly on another G2G approach with MASDAR, an Abu Dhabi based state company, discussions are underway to generate 500MW of solar energy in projects situated in Somali and Afar regions.
The government said that reforms will attract investments on energy particularly geothermal, solar and wind that will go a long way to help our energy mix.
In the 2022/23 budget year, parliament also amended the PPP proclamation on the aim to award projects through a direct negotiation manner besides the open bidding process. As experts in the PPP Directorate General express, the move has also increased the interest of potential investors.

Read more