Despite economic slowdown, investors expect more M&A activities in Nigeria’s energy sector- Velusami

Arun Velusami is a Partner in the Infrastructure, Energy, Resources, and Projects team at Hogan Lovells, a global law firm. He has advised governments, developers, and lenders in various energy projects with a special focus on power projects in Africa. In this interview with DIPO OLADEHINDE, he discussed the current situation of the energy sector in Africa, its prospects, and its roadmap for stakeholders.

You have garnered over 20 years of experience here in Africa, particularly in the energy and infrastructure space. How do you think the COVID-19 pandemic affected projects in the region? Are there new projects in the pipeline or has the focus been on scaling existing projects?

The past 18 months have been unique in the sense that the pandemic affected the economy generally. Prior to the pandemic, there were some projects actively taking place on the continent. That means, even if there is an economic slowdown in one African country, some other countries would still have a boost in their economy for projects to go on.

I think the biggest issue particularly for foreign investors is that they have not been able to travel to Africa with the frequency needed to push projects forward, which requires you to liaise with the government and relevant regulatory authorities to favourably negotiate agreements, as well as ensure that the inflection points are in relation to the negotiations. Hence, there are limits to the negotiations you can do virtually.

The other thing is that a lot of these projects, especially major energy infrastructure projects, do involve the government but the government’s priority since the past year has been in relation to public health issues. In that case, starting a new procurement process for major infrastructure or pushing forward existing processes inevitably gets slowed down.

The simple answer to your question is that projects are progressing but at a much slower pace. And I think it is also fair to say that there are few new projects being initiated by the government, though they are more focussed on public health issues.

Do you think there is any country that has weathered the storm well as some countries are expected to see strong growth this year? Are you seeing an increase in activity and why do you think this is important for investors?

A lot of African economies are based on natural resources and the price of natural resources. So, there are some countries I think that would be able to capitalise on increased prices for certain natural resources, such as copper. I think copper was at a record price not too long ago. So obviously, that is going to translate into increased tax revenue. So, there are several countries that are not able to spend their way out of the economic consequences of the pandemic.

I am struggling to single out any country that I think has really been unaffected by the pandemic. I think they have all been affected to a lesser or greater extent. It is not to say that the economies will not rebound this year, and next year, but I do think that boils down to your first question – when will people be able to physically travel to start pushing projects forward? And secondly, if the country has natural resources, what price are those natural resources fetching in the market? Are we in a boom cycle or are we in a slowdown?

Nigeria’s economy was struggling before COVID-19 as a result of the low oil prices and then the double whammy of the pandemic. How has this affected the project pipeline there, and do you think that the Dangote refinery is going to be enough of a game-changer for the country?

Even before the pandemic, I think there had been a significant slowdown in Nigeria. Probably about six or seven years ago, Nigeria’s economy, energy, and infrastructure sectors were doing well. There were a lot of government-sponsored projects in the pipeline. But when the price of oil was depressed, there was a significant slowdown in project development and Nigeria has not really come out of that slowdown.

I am seeing more Mergers and Acquisition (M&A) activities in Nigeria and you cannot discount the fact that Nigeria is a major economy on the continent. I think some foreign investors are seeing the current slowdown in Nigeria as an opportunity to acquire assets and possibly at a better price.

In terms of Greenfield Projects, the one major Independent Power Project (IPP) that we closed was the Zero Power Project. But there have not been any major privately funded and privately financed projects since then. There was also a renewable energy program, but that seems to have largely stalled. We are also hoping that there will be some new developments, simply because Nigeria does need an energy mix of both thermal and renewable energy projects. I think the Nigerian government is also seeking to upgrade its road infrastructure.

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So, as I understand it, there is a road procurement process currently ongoing, but the pandemic and the effects of the pandemic would really compound what had already been quite a prolonged slowdown in Nigeria.

So, whether Dangote’s refinery will be a game-changer – I think it remains to be seen. Clearly, having its own refining capacity is going to, hopefully, prevent a significant amount of foreign exchange from leaving the country for the purpose of importing refined products. If the revenue stays within the country, then there could be some positive benefits from that. But having said that the Dangote refinery was an internationally financed project, there will still need for forex outflow to service the debt.

Having worked on projects for over 20 years, what kind of regulatory environment do you think is enabling enough to make these projects flourish?

I think the key thing that investors look out for is: “Does the government support projects and what kind of support does the government provide?”

Now that there has been a shift from the provision of sovereign guarantees, there are other instruments with which the government can provide support. Instead of guaranteeing payments of the utility, the government could simply guarantee a termination payment, ultimately if the utility is not defaulting. So, rather than going to the government after one or two months of non-payment, lenders and the developers can only go when all other avenues have been exhausted with the utility and there is a termination event.

Now, in terms of all the support, foreign exchange (FX) is obviously a major issue in several countries. In Mozambique, foreign exchange has been an issue as the people invest and international lenders provide debt. If the revenue stream is in local currency, they will want to know if they will be able to convert that revenue stream. A similar issue has been looked at in West Africa and East Africa.

I am currently working on a project in Ethiopia and foreign exchange is one of the considerations. If the payment stream is in local currency and there isn’t enough foreign currency to convert on a monthly basis, what security or what support can the government give to be able to secure the necessary foreign currency to service debt and pay investors? These issues are ongoing and I do not think that the pandemic has particularly exacerbated it.

There has always been a structural issue as to the availability of foreign currency and there are certain products that are available through the World Bank insurance policies that can be used to mitigate some of these risks. But ultimately, the risk can’t be passed away entirely from the government. The government will need to stand behind its projects.

I want to get your view on the general infrastructure space and what is happening there. Insights reveal that the sector is declining generally, and this largely has been as a result of the lesser activity coming from China. Do you think other global players are making significant inroads into the West African region?

Absolutely. I think the U.S. has seen a key foreign policy aimed at stepping up and essentially compete with China in terms of providing funding for infrastructure projects in West Africa, and that is achieved through several ways. There are various grant funding for early-stage development of projects that are available from the government including the United States Agency for International Development (USAID), Development Finance Corporation (DFC) – which is a U.S. Government Development Finance Institution (DFI) that is meant to promote U.S. investments in projects in sub-Saharan Africa. The European DFIs have always been in Africa, and we are seeing them increasingly active across the continent. I think these lenders tend to work together. With increased lending from DFC, you also see many of the European DFIs and European investment banks all being in the same debt syndicate.

So, I think the amount of debt available for well-structured projects provided by Western governments is certainly not reduced. Whether it is sufficient to bridge the gap with China investing less remains to be seen. But the nature of Chinese investment is in many ways quite different from that provided by European and American investors and lenders, simply because a lot of the European and the American projects tend to be private sector-led, privately conceived, and privately funded whether through a procurement process or otherwise.

Whereas a lot of the Chinese projects are concluded on a bilateral, almost government-to-government basis. So, it will be interesting to see transitions in the modalities for funding these projects. I think there could also be a different focus in terms of projects traditionally.

One of the priority sectors was new power generation capacity and new power plants. But increasingly, we are seeing more focus on transmission and generation because without having this infrastructure in place, new generation capacity on the grid is not really going to achieve what the country needs. Similarly, there’s also a greater emphasis on road and rail infrastructure as part of the move to industrialising some of these countries.

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