There is consensus on infrastructure being the back bone of economic growth and development, particularly in developing countries such as Zimbabwe. Historically the role of the state was at the epicentre of financing large scale infrastructure projects. However, there has been a shift from public sector debt financing such projects, particularly where a country no longer has the capacity for large scale capital expenditure to the private sector playing a key role.
Project finance has therefore been used to meet this funding gap, transferring the financing burden to the private sector. Project finance is defined as the financing of large-scale infrastructure projects using long term debt against the cash flows generated by the project alone. The finance is highly geared, between 65% to 90% and dependent on a comprehensive evaluation of a project’s construction, operating and revenue risks and how these are allocated between the parties involved in the project through the contracts entered into by the Project Company.
Therefore, if an investor wishes to develop a project in Zimbabwe they would need to evaluate and allocate the risks involved in determining the viability of a project to the parties best suited to carry those risks. The current climate in Zimbabwe makes the risk of entering into long term projects of between 7-25 years challenging. The macro-economic risks, mainly inflation and currency exchange rate risks together with the political risks make it difficult for lenders who are only able to rely on the cash flows of the project to commit to projects in Zimbabwe. Political risks include investment risks such as currency convertibility and remittance, expropriation of the project by the state and civil disturbances on the back of an economy in flux. This is made particularly difficult in an environment where even risk mitigation measures such as a sovereign guarantee are perceived to be insignificant in a country with low foreign currency reserves.
Despite these risks, there are presently many power (particularly renewable energy), water and sanitation and road rehabilitation projects being undertaken in Zimbabwe using project finance. Such projects have addressed both perceived and real risks in various ways such as by entering into Currency Framework Agreements which ring fence an international loan in order to hedge the risk of exchange rate movements against the host currency. One client would only consider financing a project in Zimbabwe if the remittance risk from the onshore account to the offshore account was mitigated by ensuring all payments were handled offshore. In order to allay private sector lenders’ concerns, the project company can obtain guarantees or insurance for political risks or all risks (that is both commercial and political risk) from specialised institutions such as export credit agencies or private political risk insurers.
The risk mitigation measures would not be singular, and various techniques would be used. New packages of financial products are being offered by development finance institutions, substantially improving these project’s risk profiles and making them viable for private sector investment. In addition, the legal and regulatory framework of various sectors needs reform in order to bolster the environment to foster international private sector participation in largescale infrastructure projects. One such example is the enactment of the Joint Venture Act [Chapter 22:22] (‘the Joint Venture Act’) for the implementation of public private partnerships (‘PPPs’) in Zimbabwe, in which Manokore Attorneys drafted the Joint Venture Regulations and Manuals used to operationalise the Joint Venture Act.
Nyasha Chiweshe, Manokore Attorneys