Mozambique with its huge mineral deposits has been the center of attention, especially for foreign investors who have an interest in investing in the African continent for the exploration and exploitation of natural gas. The largest private multinational investors, as well as commercial banks have funded the biggest natural gas projects situated in Mozambique. However, in the past three years and four months, Mozambique and particularly, the Cabo Delgado Province, has experienced ongoing insurgency, which is said to be a conflict between the Islamist militants who have been attempting to form an Islamic state in the Province and the Mozambican security forces. It is unfortunate that the civilians have been caught in the cross fire and have been the main targets of attacks by Islamist militants. This conflict has claimed well over 2 000 lives and more than 500 000 people have been forced to flee from their homes. While there are discussions between the Government of Mozambique and the European Union on strengthening the country’s security, the natural gas projects have been affected by what is viewed as terrorism or war and civil disturbance.

One may ask, where do the political unrests and disturbances of the natural gas projects leave investors and lenders who have vested interests?

Before investors and lenders make a financial decision on funding such projects, extensive due diligence must be conducted. Project risk analysis is the most crucial exercise done by lenders and investors when considering whether to provide financing, especially for projects of this nature (oil and gas related). The financing process involves significant levels of scrutiny by the lenders and investors into the project risks and impact on cash flows (as well as projected returns). Typically, and depending on the jurisdiction where the project is situated, a due diligence in country risk will also be considered and this includes the credit rating of the country, its stability and certainty of the local laws and policies and the political risk exposure, which relates to the political and economic environment within which the project is situated and operated (ie, expropriation, war and civil disturbance, terrorism and sabotage). It is crucial for lenders and investors to understand the legislative framework of the country that is hosting the project, importantly, whether the local laws recognise and protect foreign investors from political risks.

Of course, in mitigating these risks and in order to make the project more attractive for investors and lenders to fund, the project sponsors (being the developers and equity injectors of the project) would have to demonstrate the measures put in place in order to mitigate, among other risks, political risks. In this instance (the Cabo Delgado insurgency), sponsors have tried to strengthen security but this is not the only measure that gives lenders comfort.

Some of the other comforts that are offered to lenders and investors as a means of mitigating political risk exposure is political risk insurance (PRI) and commercial risk covers, which are normally provided by export credit agencies (ECAs). Most jurisdictions have a government sponsored ECAs to support or back the export of capital goods and services. The commercial banks ordinarily structure cost-effective financing packaging against ECA covers. The insurgency can be viewed as a politically related issue (civil disturbance or terrorism), which consequently may suspend the operation of the project. The suspension of the project due to a political event is one of the triggers under the ECA or PRI policy of insurance (the Policy), which is classified as a ‘cause of loss event’ and allows the lenders or the insured to claim under the Policy. The premium towards this PRI cover is often financed by the sponsors/borrowers for the benefit of the lenders. Although the lenders may have this PRI cover as an added cushion to their security package, often sponsors/borrowers will negotiate triggers under the loan agreements and policy document to allow the salvaging of the project before lenders can call a claim under the policy and/or accelerate the debt in terms of the loan agreements, basically ‘bringing the house down’. For example, if the political risk event has occurred but the lender’s debt is still being serviced by the borrower; and the loan provisions have not been breached by the borrower; or the project is still operating (even if it is not at full capacity), it will be difficult for lenders to justify a claim. However, it is not as easy as it may sound. Over and above the steps that need to be followed in terms of the underlying agreements and depending on the type of risk that is covered, certain risks do not trigger immediate payment under the Policy. There are waiting periods that allow the ECAs to fully assess the claim and cause of loss, and also obtain internal board approvals before paying out a claim. Such waiting periods differ and may range between 90 to 120 days or more depending on the payment processes governing each ECA, the size of the claim and other factors (see www.ecic.co.za, accessed 13-3-2021). As such, lenders will not be able to claim as and when they please. It is important for the lender to fully appreciate the processes of the ECA and the perils covered by that Policy from the onset.

Rachel Jiyana LLB (University of Zululand) LLM (Project Finance: Oil and Gas) (University of Reading, UK) is Managing Director at Rachel Jiyana Inc in Johannesburg.

This article was first published in De Rebus in 2021 (April) DR 7.