The conditions for the granting of concession agreements in francophone Africa usually appears at the top of the list of the key due diligence issues reviewed by lenders. Indeed, in our experience, on several occasions, concerns have been raised regarding compliance of the award of the concession agreements with the relevant local legislation.
Based on our experience, we believe that such risks can be mitigated and that the concerns of the lenders can often be addressed and may not impede the financing.
Open tender versus direct contracting
For public procurement contracts, such as concession agreements in energy and infrastructure projects, local legislation usually distinguishes between open tender and direct contracting.
In the context of an open tender (open to companies), the contracting authority often awards the contract after competitive tender, without negotiation, to the bidder that (i) complies with the bid criteria and (ii) submits the lowest-price or the best bid in principle (bid which, by its technical value, best satisfies the buyer's need at a fair and reasonable price). In open tender processes, any tenderer can submit an offer. The open tender, which is the most often used tender method, may include a prequalification phase, which officially should be open to any company.
Direct contracting (by mutual private agreement, known as gré-a-gré) consists of direct negotiation with the candidate in order to award a contract. It is usually a non-competitive procurement method that is allowed only under certain conditions. However, the use of this procedure is limited insofar as the contracting authority must often obtain prior authorization from the local government authority or opinion of the supervisory body. Such authorization can only be given in limited scenarios and purport to enable the supervisory body to ensure that the conditions set out in the local legislation are met.
In several local legislations in francophone Africa, this type of contract is generally permitted only in few circumstances, such as:
- When the needs of the public procurement can only be satisfied by a service requiring the use of exclusive rights held by one private contractor;
- When the contract can only be entrusted to a specific service provider for specific reasons and also for State security reasons;
- When there is a case of extreme urgency (such as to ensure the continuity of a public service) or a force majeure (hardship) event which does not permit compliance with the deadlines provided for in the offer's tender procedure.
A procedure likely to call into question the bankability of the project
Due to the need for the quick development of electrification in Francophone Africa, concessions for energy projects are usually granted on the basis of direct contracting.
Direct contracting is a recurring problem in French-speaking African countries because the local legislation often provides a vague and ambiguous framework for the use of such procedures, leaving room for interpretation and exploitation of “grey areas” and loopholes.
Usually, the awarding of a public contract through direct contracting avoids any form of procedure because the relevant texts do not provide for any obligation of publicity and minimum competitive bidding. The condition of urgency, which is recurrent in most local legislations, is often used in practice but does not always provide the comfort necessary for the bankability of projects. Therefore, there is a risk that the contract may be challenged and/or the financing not granted.
This is problematic given that the integrity of the procurement process as well as the procedures and any delays in acquiring necessary approvals are amongst the key factors usually considered and thoroughly investigated by financial institutions when considering the bankability of a project. Therefore, if the project does not fall within the scenario of the direct contracting process or is subject to a claim (by a third party or the administration itself), it can jeopardize the bankability of the entire project. The lenders will often require that all essential and material consents and permits required to build and operate the project are granted to the project company at the outset of the project. In this context, they may not wish to finance the project if, for example, there is a risk that the contemplated concession award process may be challenged.
Risk assessment and mitigating solutions
The risk identified usually consists in:
- The recourse of a third party challenging the validity of the concession;
- The withdrawal or cancellation of the concession by the State.
The recourse of a third party is usually limited to a specific time period to bring an action (usually two months after the publication of the decision awarding the concession or approving the award of the concession i.e. the relevant decree). In this context, the risk of recourse can be excluded at the end of such period. This solution can easily be addressed in the financing documentation, the end of the recourse period being a condition precedent to the first drawing under the financing.
The withdrawal or cancellation of the concession by the State is a risk that is more difficult to assess. We conducted an analysis of the French case law on this matter. Even though we cannot confirm that the same approach would be taken under local law in Francophone Africa, we believe that it provides an interesting benchmark insofar as the civil law systems which can be seen in operation in Africa are, for the most part, often inspired by the French legal system.
French case law is based on a balance between the compliance with the law/regulation and the general principle according to which the administration cannot avail itself of its own mistake to seek the cancellation of a contract.
In practice, if the court considers that the irregularity is so severe that it jeopardizes the fundamental principles of the law, the contract will be cancelled1. In the event of cancellation, an indemnity is usually paid to the private party (even though it was aware of the irregularity) the amount of which is determined on a case by case basis. However, it is not certain that such indemnity will always cover the amounts due by the private party to lenders.
In this context, we underline that French case law usually considers that the lack of competition in the attribution of a contract is not (in itself) sufficiently serious to result in the cancellation of such contract2. As an example, despite the fact that the local municipality sought to "avoid the competition rules arising from the public procurement code", it was held that this irregularity "does not present a character of sufficient gravity to prohibit settling the dispute on the basis of the contract"3.
This case law has been supplemented by a decision of January 12, 2011 of the French highest administrative law court (Conseil d’Etat)4, which specified that "when the court is seized of a dispute relating to the performance of a contract, the parties may not invoke a breach of the rules governing the award of a contract, nor may the court raise it ex officio, for the purpose of setting aside the contract for the resolution of the dispute". However, this principle has a limit because "by exception, the situation is different when, having regard both to the seriousness of the illegality and to the circumstances in which it was committed, the dispute cannot be resolved on the basis of the contract".
It follows from the above that a breach committed at the stage of the award procedure of a concession will usually not be regarded as "serious" in itself (subject to other issues such as fraud) and should not entitle the State to withdraw or cancel the concession.
Even though this risk cannot be fully set aside, we believe that the above provides interesting ways forward. The risks of withdrawal or cancellation of the concession by the State should not accordingly be higher than the risk of expropriation for instance. As the case may be, political risk insurance could also be considered in order to provide an additional layer of comfort.