DEG – Deutsche Investitions- und Entwicklungsgesellschaft mbH

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1 DEG – Deutsche Investitions- und Entwicklungsgesellschaft 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 Insolvency in Lagos, Nigeria, June 18th, 2013

2 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

3 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

4 DFI’s – Some Aspects DFIs
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

5 DFI’s – Some Aspects DFIs
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)

6 DFI’s – Some Aspects DFIs investments are mostly guided by three principles: 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

7 DFI’s – Some Aspects DFIs 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

8 DFI’s - Some Figures in 2011: €23.7 bln € invested in 4.421 projects
Combined Investment Portfolio of only the European DFI’s in 2011: €23.7 bln € invested in projects in 2010: €21.7 bln in projects in 2009: €18.5 bln in 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)

9 DFIs - EDFI Association
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 Stand: Oktober 2009

10 DFI’s – Some Aspects European Financing Partnership (EFP)
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

11 DFI’s – Some Aspects European Financing Partnership (EFP)
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.

12 DFI’s – Some Aspects African Financing Partnership (AFP) for private sector projects in Africa 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

13 Aspects relevant for DFIs as investor
Retention of local legal counsel to understand the legal and regulatory environment to act as a guide and advisor throughout the due diligence / investment process important 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 diligence transparency 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

14 Aspects relevant for DFI’s as investor
Avoidance of corrupt practices

15 Aspects relevant for DFI’s as investor
Due Diligence Matters 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 risk unquestionable 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?

16 Aspects relevant for DFI’s as investor
Due Diligence Matters 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 laws How 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

17 Aspects relevant for DFI’s as investor
Due Diligence Matters Tax Matters Taxes (income tax, import or export duties) which effect foreign investments Does 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?

18 Aspects relevant for DFI’s as investor
Due Diligence Matters 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 liability sometimes lengthy bureaucratic process for environmental approvals Labor/Employment matters (identification of key employees and retention risks) frequently unique to each country often review of any and all employment contracts or severance agreements union status and agreements pending or anticipated labor or employment litigation documents regarding employee benefits, work rules, compensation, and related terms and conditions of employment.

19 Aspects relevant for DFI’s as investor
Due Diligence Matters 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 protection sometime the local laws provide that innovations are automatically owned by a licensee, not the licensor as is more typically the contractual norm

20 Aspects relevant for DFI’s as investor
Due Diligence Matters Real Estate (locate the deeds and analyze them closely) deed and title status preexisting liens/other encumbrances depend on the complexity of the property law title search vary from country to country in some countries, direct ownership of land is not permitted, so it is essential to understand exactly what rights the target has Lease may include change of control or other restrictive language Buildings also may not meet certain building codes, may fall outside of the boundaries of owned or leased property, or may otherwise pose a risk

21 Aspects relevant for DFI’s as investor
Due Diligence Matters Conclusion Find the “skeletons in the closet” (also senior management of the target entity might be unaware of their existence) reputation and transparency is key corrupt practices poor accounting [“creative”] and controls environmental and social noncompliance current or potential litigation safety problems disgruntled employees or customers poor maintenance and aging equipment product quality issues problems with technology and intellectual property

22 Some typical covenants/clauses
DFI Finance Agreements often address the following issues 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

23 Some typical covenants/clauses
DFI Finance Agreements often address the following issues 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

24 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

25 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 / – 0 Telefax: +49 (0) 2 21 / – 13 61 Internet: