“Insurance is not a silver bullet. If the project is an ugly duckling it is hard to dress it up, even with a bit of insurance.” This statement was uttered by a panellist during a recent digital dialogue on the topic of insuring power projects in Africa: How insurance can help mitigate investment risk. Here’s what transpired.
Who also of that insurance is increasingly an important part of structuring investment deals in Africa’s power sector? There is indeed a growing appetite for political risk insurance (PRI) and credit and political risk insurance (CPRI) in the short- to medium-term to help mitigate risks in both captive or grid power projects.
ESI Africa recently hosted some of the finest insurance minds, who specialise in these kinds of deals, during a live webinar in partnership with sister publication Mining Review Africa. As usual, the questions from the audience went straight to the point.
What kind of political event can trigger breach of contract of a PRI? If the offtaker is not able to pay the special purpose vehicle (SPV)*, is it included in the PRI?
Oliver Wright, Director at BPL Global, responded:
Traditionally, for a pure PRI policy, the cover is usually structured as covering three or four sections. The first section covers expropriation, where the project is expropriated, nationalised or confiscated by the government.
Section two would typically cover the inability of the project to get its money out of the country, either by an inability to convert local currency to hard currency or to transfer it out of the country. And thirdly, the risk of the asset or project being damaged by war or civil war.
As an add-on, breach of contract can be covered. This cover is typically available where the offtaker is a government-owned utility. What we are increasingly seeing demand for, from clients, but also more appetite from the underwriting side, is to look at offtakers that are not government-owned, essentially private companies. For those types of risks, the underwriting criteria are much more stringent.
*Special Purpose Vehicle (SPV) – a company created by (but not owned by) an insurer or reinsurer for the sole purpose of issuing debt.
Is there some insurance available in the market if the offtaker on a standalone basis is not bankable?
Roddy Barnett, Head of Political Risk and Trade Credit Underwriting at Beazley Group, responded:
In some ways, we have the same process of analysing risk as the banks do. So I think we would struggle if the credit worthiness of the offtaker to the power project is not credit worthy in our eyes.
A type of cover that we came up with for two clients fairly recently is where for example an IPP with a sole offtaker, say a mining project, is at risk of a political force majeure type of event. The customer is the power producer, who ceases to operate for example if the government cancels the mining licence during a civil war. We can add that on to the more traditional covers that we offer for IPPs.
As an add-on, breach of contract can be covered.
Robert Futter, Director at Cresco Project Finance, added:
Firstly, insurance is not a silver bullet. If the project is an ugly duckling it is hard to dress it up, even with a bit of insurance. Secondly, we have seen the benefit of potentially using CPRI to extend the credit risk or the perception of credit risk over time.
So you might only have a short term view on the corporate’s credit worthiness, but if you are a captive power project you need maybe ten or 15 years. So we have seen on a few transactions the value of the insurance credit risk to extend the appetite of the funders for a longer period that might be seen on a standalone basis.
How is the insurance market developing products to consider possible churn finance or refinancing in these asset classes?
Neo Combarro, Partner at Lockton Companies LLP, responded:
The insurance market’s appetite has increased significantly and I see Africa as an important part of the general expansion by insurers – and the broadening of their scope of interest in offering different lines of insurance. The warranty indemnity insurance is something that we’re seeing becoming more commonplace and increasingly insisted on by lenders.
Warranty indemnity insurance is [now] more commonplace and increasingly insisted on by lenders.
Certainly, where there is a buyer coming onto a project partly completed, warranties are being given, indemnities are provided – that is something that lenders are looking to have de-risk rather than have potential recoverability risk from a vendor, or a fund that is looking to liquidate. So that has been an interesting area.
Has any IPP successfully claimed under a PRI cover in Africa over the past five to ten years and can you please provide examples?
Yes, we have certainly seen successful claims in the IPP space. Generally, our policies are bound by confidentiality so I can’t go into too much detail. We’ve seen eight claims in Ghana, in Libya and in the Congo. Those are the three countries that I can think of where we have successfully paid out claims. The Libyan example was obviously as a result of the descent into civil war during the Arab Spring.
We are considering a power project for an independent mining company in Mozambique. What would determine if such an offtaker is bankable?
To that specific example, I think it is fair to say there are several issues in Mozambique at the moment. So, on the one hand, you’ve got all the positive news of the LNG coming on-stream, but on the other hand – and I know from my own experience – we have clients who have got problems in Mozambique.
The criteria when it comes to assessing a credit risk, whether it is bankable and insurable, they will want to look at the financials of that entity to ensure that they are solvent, not loss making. If you add in the post code factor as well, even if the project has good financial credentials, the fact that they are based in a country where the underwriter may well already have existing problems, might make it tough to find an insurer willing to take a credit risk like that in Mozambique.
Are you seeing increasing use of insurance in typical financing in Africa in this sector?
I think the insurance market has always been there and it’s becoming a lot more innovative. In my view, mostly we are seeing the buyers of insurance, the host plants or the IPPs, getting more to grips with what available insurance options are out there. I also think the brokers are getting better at explaining quite a complex transaction to people who don’t always understand it.
People either oversimplify insurance or they overcomplicate it when they explain it to those outside the industry. And I think what we’re often finding is that the historical bilaterals, MIGA and all the others, are generally very rigid in their approaches. Whereas specifically with the transactions we are talking about, the really nongovernment related transactions, it’s very hard to fit these into a perfect box. ESI
Listen to the full recording at www.esi-africa.com/webinars to hear the panel respond to more questions such as whether the insurance industry could ever reach the stage where a greater level of information would be divulged.