DEG – Deutsche Investitions- und Entwicklungsgesellschaft mbH What do foreign DFIs look at when investing in Nigeria – and how could Nigerian Lawyers get.
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DEG – Deutsche Investitions- undEntwicklungsgesellschaft mbH
What do foreign DFI’s look at when investing in Nigeria – and how could Nigerian Lawyers get prepared to give them the right answers?
Breakout Session of the SBL Conference – Banking, Finance and Insolvencyin Lagos, Nigeria, June 18th, 2013
Purpose
Raise awareness/guidance for Nigerian lawyers dealing with
international Developments Finance Institutions (DFI)
Explain the growing role of DFIs and to highlight potential areas
of collaboration
Address aspects and legal areas that matter for DFIs
Get common sense between the Nigerian local counsel and its
legal counterpart of a DFI
Content
Some aspects and figures concerning DFIs and their investment
activities
What are characteristic’s of a DFI
What are their products
Key figures about European DFIs
Aspects relevant for DFIs as investor
Some typical covenants/clauses in DFIs legal documents
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DFI’s – Some Aspects
are specialized financial institution and bridge the gap between commercial
investments and State development aid
are mostly unlisted entities
are usually majority owned by national governments and come in two types
(bilateral and multilateral (also known as IFIs)
have a strong credit-worthiness as they source their capital from national or
international development funds or benefit from government guarantees
can thus raise large amounts of funds on the international capital markets
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DFIs
DFI’s – Some Aspects
mobilize private capital (from i.e. commercial banks, investment funds etc.)
and often act in co-operation with governments and other organizations
typically invest in either public or private-sector projects (sometimes both)
[Note: The private sector provides an estimated 90% of jobs in developing
economies]
finance rather high-risk projects
have a long-term approach to investments (less pressure to deliver short term
results, better positioned to invest in countries that have high traditional risk
ratings)
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DFIs
DFI’s – Some Aspects
the need to be additional (going where other investors don‘t)
catalytic (paving the way for other investors to follow) and
sustainable (making sure that investments have long-term viability)
DFIs often catalyze significant amounts of investment from private investors
who may not otherwise have invested in the country or in the project
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DFIs investments are mostly guided by three principles:
DFI’s – Some Aspects
provide funds, either as
equity or quasi equity
loans (including all types of mezzanine loans) or
guarantees
promote responsible corporate governance and uphold social and
environmental standards in their investments
generate both positive development impact and good financial returns in a
majority of their projects
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DFIs
DFI’s - Some Figures
in 2011: €23.7 bln € invested in 4.421 projects
in 2010: €21.7 bln in 4.088 projects
in 2009: €18.5 bln in 3.971 projects
Across low and middle income countries, Africa being the
largest region with approximately 27% of the portfolio (there is
an increasing focus on Africa)
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Combined Investment Portfolio of only the European DFI’s
DFIs - EDFI Association
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● 15 members, office in Brussels
● Total portfolio 2011:
EUR 23.7 billion (4.421 projects)
● New commitments 2011:
EUR 4.8 billion
● Goals:
Joint financing (larger amount
of finance, risk sharing,
efficiency gains)
Harmonization: e.g. measuring
developmental impacts,
environmental and social
standards
Cooperation with the European
Commission and its institutions
Joint venture and marketing
DFI’s – Some Aspects
an initiative among 12 EDFI members and the European Investment Bank (EIB)
a limited liability company organised and existing under the laws of Luxembourg
implemented pursuant to the Framework Agreement for Financial Co-operation
and Exchange of Services in the ACP countries signed by EIB, members of
EDFI, AfD and KfW in January 2003
operation is regulated by a Master Investment Agreement, which delegates full
authority for investment decisions to an Investment Committee (composed of
representatives from the institutions, which have committed funds to EFP)
a Promoting Partner – any one of the EDFI members being shareholders –
present funding proposals for projects located in the ACP states to the
Investment Committee
European Financing Partnership (EFP)
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DFI’s – Some Aspects
Once approved, the Investment Committee delegates authority to Promoting Partner to
undertake due diligence, establish the legal contracts and monitor the project company on
behalf of EFP
Investee company signs a legal contract with the Promoting Partner only and will thus
communicate and report only to the Promoting Partner (which in turn is responsible for the
monitoring and communication to EFP and the underlying partners funding the operations
authorized Financial instruments are:
Senior and mezzanine loans with a maximum maturity (interest rate, disbursement,
repayment period, duration of grace period, type of currency, etc. will be structured
according to project characteristics)
Equity, Quasi-Equity and
Medium to long-term guarantees with a maximum maturity and with an option and
right to accelerate (guarantee fee, call and disbursement mechanisms, etc.) are
structured according to project characteristics.
European Financing Partnership (EFP)
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DFI’s – Some Aspects
a collaborative, co-financing platform amongst 8 key DFI’s (AfDB, DBSA,
DEG, EIB, FMO, IDC, IFC and Proparco)
focused on private sector financing in Africa
intended is the harmonization between these DFI financing projects
in 2009 they collaboratively financed projects such as Main One Cable in
Nigeria; Helios Towers in Nigeria and various private equity funds
Projects to be submitted for co-financing through the AFP are expected to
comply with each co-financing partner’s legal and policy requirements
African Financing Partnership (AFP) for private sector projects in Africa
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Aspects relevant for DFIs as investor
Retention of local legal counsel
to understand the legal and regulatory environmentto act as a guide and advisor throughout the due diligence / investment processimportant is experience in working with DFIs and “speaking the same language”
Reputation and risk (Key area for DFIs, not only of the target company, but also of key officers, directors and owners)
prior to formal due diligence conducted locally, by someone with access to local sources and the cultural ability to
interpret data found (in media reports, public records, through business associates) avoidance of corruption and unethical business practice is on DFIs top priority list for
due diligencetransparency is key! is the country's’ government taken the fight against corruption seriously, and
enforcement against such crimes as tax evasion and money laundering? corruption as an “very important” obstacle to private sector development
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Aspects relevant for DFI’s as investor Avoidance of corrupt practices
Aspects relevant for DFI’s as investor
Political risks
not only politically unstable countries, but also where normal democratic procedures may bring about a change of government and thus a possible negative change in policy, for example, on tax, regulatory constraints and tariffs, etc.
recent political and civil unrest in the Middle East highlights the political riskunquestionable nexus between business and politics (What is the
probability of a disruption of operations due to political forces or events? What position has the ruling party taken with regard to foreign ownership or investment?)
Investment Protection
Bilateral Investment Protection Treaty between the country of the investor and Nigeria?
If not: Protection guaranteed by other means? By constitution?
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Due Diligence Matters
Aspects relevant for DFI’s as investor
Legal and regulatory environment
impact by regulatory trends, anticipated changes in the law or enforcement of existing laws on a target’s business
target in compliance with lawsHow well can the target weather the storm of evolving regulations? Are local laws pro-business or pro-labor? How are disputes commonly resolved?
Recognition and enforcement of foreign judgments
Is it possible to submit a loan agreement to foreign law? Will rulings by a foreign court be recognized and enforced in Nigeria? How does the investor enforce his “executive title”?Time of court proceedings, costs Recommendations with regard to local/foreign jurisdiction versus arbitration
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Due Diligence Matters
Aspects relevant for DFI’s as investor
Tax Matters
Taxes (income tax, import or export duties) which effect foreign investmentsDoes the host government require to withhold taxes on interest payments
to lenders? If so, what is the tax rate?What exemptions from taxation are available?
Section 11 of the Nigerian Companies Income Tax Act allows an tax exemption for foreign loans depending on the respective repayment and grace periods
Are there restrictions or limitations on provisions to “gross-up” loan repayments to offset the effects of taxes or on provisions otherwise designed to neutralize the effects of such taxes?
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Due Diligence Matters
Aspects relevant for DFI’s as investor
Environmental laws and regulations, Social Laws
key for DFIs (identification of material environmental conditions, risks and constraints)
target companies may not always be aware of the full potential for liabilitysometimes lengthy bureaucratic process for environmental approvals
Labor/Employment matters (identification of key employees and retention risks)
frequently unique to each countryoften review of any and all employment contracts or severance agreementsunion status and agreementspending or anticipated labor or employment litigationdocuments regarding employee benefits, work rules, compensation, and
related terms and conditions of employment.
Due Diligence Matters
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Aspects relevant for DFI’s as investor
Financial Matters – Status of books and records (accounting and tax; if countries lack sound accounting and bookkeeping standards, efforts must be made to convert local records into GAAP or IFRS and how about “creative accounting”?)
Intellectual Property (What does the target have rights to?)
some legal and economic environment offers little or no protectionsometime the local laws provide that innovations are automatically
owned by a licensee, not the licensor as is more typically the contractual norm
Due Diligence Matters
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Aspects relevant for DFI’s as investor
Real Estate (locate the deeds and analyze them closely)
deed and title statuspreexisting liens/other encumbrances depend on the complexity of the
property lawtitle search vary from country to countryin some countries, direct ownership of land is not permitted, so it is
essential to understand exactly what rights the target hasLease may include change of control or other restrictive languageBuildings also may not meet certain building codes, may fall outside of the
boundaries of owned or leased property, or may otherwise pose a risk
Due Diligence Matters
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Aspects relevant for DFI’s as investor
Conclusion
Find the “skeletons in the closet” (also senior management of the target entity might be unaware of their existence)
reputation and transparency is keycorrupt practicespoor accounting [“creative”] and controlsenvironmental and social noncompliancecurrent or potential litigationsafety problemsdisgruntled employees or customerspoor maintenance and aging equipmentproduct quality issuesproblems with technology and intellectual property
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Due Diligence Matters
Some typical covenants/clauses
information and investigation covenants [i.e. the right of the investor to visit a target company and the sites, installations and works comprising the projects and to conduct such checks as it may wish]
covenants and representations as to environmental & social requirements’
covenants to provide appropriate environmental and social reports
anti-money laundering and anti-corruption covenants and representations
covenants that the target company establishes and/or implements fair and transparent procurement procedures in order to ensure an appropriate selection of works, goods and services of an appropriate quality, at competitive prices, on terms negotiated on an arms length basis and in a timely manner
covenants to establish and maintain Corporate Governance Principles
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DFI Finance Agreements often address the following issues
Some typical covenants/clauses
Exclusion of certain activities (such as production or trade in any product or activity deemed illegal under Nigerian laws or regulations or international conventions and agreements, or subject to international phase outs bans, such as hazardous pharmaceuticals, pesticides/herbicides, chemicals or production or trade in weapons and munitions etc.)
Change of control clauses
Legal and beneficial ownership clauses
Compliance with laws and no improper illegal payments
Termination events
such other clauses that a customarily for international finance transactions
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DFI Finance Agreements often address the following issues
Finally: Corporate Governance matters
Because it improves investee companies’ performance and helps develop capital markets
Because sound Corporate Governance reduces risk, adds value to investments, and avoids reputational risks for investors
Strong links between Good Corporate Governance and sustainable economic development
Improving Corporate Governance practices has become an important element of the development mission of DFIs
31 Financial Institutions signed in 2007 the “Approach Statement on Corporate Governance” and created a Working Group
The Working Group has since developed the Corporate Governance Development Framework (“Framework”), a common methodology for assessing corporate governance in investee companies
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Get in touch!Markus Gabbert
General Counsel / Senior Director
Legal / Compliance
DEG – Deutsche Investitions- und
Entwicklungsgesellschaft mbH
Kämmergasse 22
50676 Köln
Germany
Phone: +49 (0) 2 21 / 49 86 – 0
Telefax: +49 (0) 2 21 / 49 86 – 13 61
Internet: www.deginvest.de
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