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
· Contractual undertaking to support direct
ProjectCo support
· Also record commitment of ProjectCo

Indirect support, e.g. Guarantee

· Guarantee performance of
Mixture of both
counterparty under project document
(such as PPA)

Mixture of both Government

· Covers gaps in underlying project
indirect support
docs AND guarantees performance if
breach by offtaker of its obligations

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 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 Sovereign Concession Sovereign
PCOA
Comfort Guarantee Agreement / IA Balance Sheet
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 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 Guarantee and Guarantee of monthly and termination payment obligations. General
Concession Agreement government support obligations.

Malawi Government guarantee and Guarantee of monthly and termination payment obligations. General
implementation agreement 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.
Botswana Not yet established 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’s and 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
Right to terminate Option Debt & interest Initial Equity Equity Return

ProjectCo default Buyer Call   

Offtaker default Generator Put   

Political FM affecting Both Put   

ProjectCo

Political FM affecting Both Put   

Offtaker

Natural FM affecting Buyer? Put / Call  ? 

ProjectCo (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.
Any Questions?