Investing in African Energy—Weighing Risks and Rewards

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Foreign energy companies are investing in Africa as that continent builds out its power generation infrastructure. But there are risks to those investments, as some governments-Angola, Tanzania, and Libya among them-delay or fail to honor their contracted financial commitment to foreign firms.

The problem was highlighted in August when Shutts & Bowen, a Florida-based law group, successfully completed a year-long effort to recover $49 million for LS Energia, a power generation design and construction group headquartered in Plantation, Florida. The money owed was the result of an agreement between the Republic of Angola and LS Energia that began in 2013, when the Florida company agreed to provide power generation services to Angola.

"[LS Energia was] generating electricity at two power stations, and the invoices being generated [for the services] were being partly paid or ignored," Ed Patricoff, the lead litigator in the case and a partner at Shutts & Bowen, told POWER. "LS Energia had to shut off the power. They just couldn't afford to carry the receivable, and it didn't make good business sense to continue to do so."

Patricoff noted that for more than three years LS Energia did not receive the "vast majority of payments owed by the Angolan government" during the administration of former Angolan President Josi(C) Eduardo dos Santos. Dos Santos held office for 38 years, with his tenure marked by a long-running civil war and frequent accusations of financial corruption. Patricoff noted that his firm previously had collected $45 million from the Angolan government for Jacksonville, Florida-based APR Energy.

"Libya has a serious payment issue, along with Angola and Tanzania," Patricoff said. "Those are three countries where I've had to intercede on behalf of U.S. companies. APR Energy was owed $45 million two years ago, and we had to sue, and we collected the entire amount within 70 days. LS Energia was a more difficult but successful effort" it took about a year."

China is among the countries looking to expand investment in Africa. The African Energy Chamber, a group working to encourage foreign investment on the continent, in early September visited Beijing to meet with senior officials from the Chinese government, leaders of state-owned energy companies, and executives and entrepreneurs from the private sector. The chamber secured more than $1.4 billion in investment commitments in African energy projects, including thermal and renewable power generation.

1.NJ Ayuk, right, greets Chinese officials in Beijing in early September. Ayuk, executive chairman of the African Energy Chamber, helped secure more than $1.4 billion in investment commitments in African energy projects from China. Courtesy: African Energy Chamber

NJ Ayuk, executive chairman of the chamber (Figure 1), said in a statement, "China's economic transformation in the last few decades in nothing short of remarkable. What this country has accomplished is an inspiration for Africa, where nations still need to lift hundreds of millions out of poverty and provide us with sustained economic development for decades. China and Africa share very similar challenges, and the message China is sending us is that if they can do it, so can we. The biggest encouragement for us is that beyond their investment appetite for Africa, Chinese companies are clear about their intention to invest in the promotion of local content and the building of local manufacturing capacities."

But even Ayuk has acknowledged "mismanagement" of energy projects in the country-he noted those problems in his recent book, "Billions at Play: The Future of African Energy and Doing Deals." Of U.S.-Africa relations specifically, he has said that forming "positive relationships" is key, and that a "win-win" strategy is best, rather than continuing adversarial practices. Ayuk's comments echo those of others who have warned of the risks of non-payment from African governments over the past few years.

The World Resources Institute in early 2014 said steps needed to be taken to mitigate "risks of non-payment for investors," and said "innovative financial arrangements" were needed "to help reduce the level of risk perceived by investors." Africa Energy Indaba, a group dedicated to advancing energy projects on the continent, earlier this year said, "A major challenge the African energy sector continues to face is funding for energy projects," and it noted that "political and credit risk remain critical factors hindering potential investors from investing in the energy space of Africa." Those concerns, including security issues, have slowed foreign investments that could otherwise have accelerated energy infrastructure development.

"It's a problem, it's a big problem," Patricoff said. "We've had some fantastic experiences in some countries, like Botswana, smooth sailing. Some of the governments are responsible, some are easy to deal with, some are not. For example, Libya owed a power generation company $22 million that was eventually recovered with our help. We had a company with a tanker seized in Nigeria. Many of the countries in Africa present problems for U.S. companies. [The companies] have to be extra vigilant to guarantee payment, guarantee performance, and guarantee against wrongful takings of their property."

Patricoff said there is hope for change, at least in Angola, under the administration of President Joio Manuel Gonialves Lourenio, who took office in September 2017. "As a firm with prior experience in Angola, we hope that under President Lourenio's leadership, the government will begin honoring all of its financial obligations," said Patricoff. "While the payment to our client LS Energia is a positive step forward, Angola still has other substantial outstanding payments to other U.S. companies that have provided valuable services to the country."

Patricoff said recovering money owed to U.S. energy companies by African nations-where energy services are government-controlled-typically means U.S. officials must get involved. "We sued [Angola] in the U.S. in South Florida because LS Energia is based in South Florida," Patricoff said.

He also noted the case of Africa Growth Corp. (AFGC), a U.S. company that develops low- and moderate-income housing in sub-Saharan Africa. "We just recently filed a new lawsuit for a company called Africa Growth over a building that was literally taken at gunpoint by a general in the Angolan army. They have taken illegally, in defiance of an Angolan court order, our client's building." News reports in Angola said armed Angolan senior officials seized AFGC's properties in Luanda, the Angolan capital, and said the group's rental properties in the country, valued at $55 million, were taken by local government and military officials.

"The Angolan government does retain counsel, they defend, typically they try to argue there is no jurisdiction in the U.S., but in the [LS Energia and APR] cases they recognized the debt and eventually settled," Patricoff said. He said in the APR case, "They had a power plant that was seized by the Tanzanian government, and we worked with Congress and [then-] Secretary of State [Hillary] Clinton. The Trump administration is considering taking action against the government for seizing the [AFGC] building." He says companies should weigh the benefits of investment against the potential risks even as regimes change.

"We've worked on probably 30 power generation and fuel contracts, maybe 35, in Africa, most of which were ultimately signed, and a couple of which ultimately fell apart," Patricoff said. "Usually they fell apart because of lack of financial capacity from the group we were negotiating with." He said he would advise potential investors in Africa projects to be vigilant in their due diligence. "I would say prioritize payment security and guarantees, preferably letters of credit, asset guarantees, assurances from the appropriate government agencies that they're going to honor the contract. In Africa, just because one branch of government says they'll honor [a contract], doesn't mean another branch will honor it."

-Darrell Proctoris a POWER associate editor (@DarrellProctor1, @POWERmagazine).

The post Investing in African Energy-Weighing Risks and Rewards appeared first on POWER Magazine.