Before the COVID-19 epidemic and COVID-19 mitigation initiatives, the International Monetary Fund (IMF) increased the growth forecast for the Sub-Saharan African area, including Tanzania and 45 other countries, to 3.8 percent in 2019, up from 3.7 percent in April.
Despite the difficulty in locating bankable projects, infrastructure spending in Sub-Saharan Africa is expected to exceed US$180 billion per year by 2025. However, corporate confidence may be eroded due to Brexit, protectionist tariffs in the United States, and China’s economic slowdown. Because China and the United Kingdom are two of Sub-Saharan Africa’s main trading partners, a drop in project finance funding could ripple effect on the region’s development.
Tanzania’s infrastructure obligations have increased dramatically in recent years despite these obstacles. The Tazara Flyover is a well-known example of infrastructure work completed. Regulations for public-private partnerships (PPPs) allow for solicited and unsolicited PPP project bids, though the government prefers public ownership of projects.
It’s also unclear whether Tanzania’s export credit agencies, multilateral financial institutions, regional development banks, and foreign development agencies would be able to engage commercial banks in long-term megaproject financing fully. Together with banks’ and other lenders’ key concerns and considerations in project finance transactions, all of these factors may raise the likelihood of projects failing to reach financial close. Among the issues that have been raised are:
- project finance partners’ creditworthiness and ability to produce and perform in line with the project terms;
- the major project partners and the special-purpose vehicle/SPV or project firm have an appropriate arms-length relationship;
- the project parties’ independence from political influence;
- the project parties’ legal capacity to enter into contracts with the off-balance sheet SPV.
To protect their lending, project finance lenders seek security from the SPV in the guise of fixed and floating charges, pledges, mortgages and assignments. Third-party security, such as guarantees and/or assistance from the SPV’s sponsors and other interested parties, is also required. The government can guarantee public entities’ contractual commitments under the Government Loans, Guarantees, and Grants Act, Cap 134, as amended by the Written Laws (Miscellaneous Amendments) (No.4) Act 2016.
If lenders cannot acquire a government guarantee, they may be able to obtain a comfort letter instead.
Lenders must additionally take into account the following laws:
- the Civil Procedure Code, Cap 33 (forbids the attachment of certain assets)
- the Companies Act, 2002 (Certain types of creditors are given priority)
- the Natural Wealth and Resources Act 2017 (Tanzania must be the seat of arbitration for resolving state-investor conflicts)
- the Natural Wealth and Resources Act 2017 (The government can invalidate contracts with “unconscionable terms” under the Review and Re-Negotiation of Unconscionable Terms Act).
- the Arbitration Act, 2021(repeals and replaces the law of 1931)
Lenders may have problems and difficulties structuring an entire security package for a project finance transaction in Tanzania due to these restrictions.
Finally, lenders should always consider recent trends and existing local legal and procedural challenges when constructing an overall security package for a project finance transaction in Tanzania. They must also engage technical advisers to ensure proper risk allocation between the parties is captured in valid, binding, and enforceable project documents.
Shikana Group’s purpose is to ensure that our clients prosper, and we achieve this by offering unmatched, insightful, and relevant legal expertise and investment advisory services.