The constraint above the project
Project structures in African markets frequently assume sovereign support: a guarantee of a utility's payment obligation, a letter of comfort, or a contingent liability the government accepts. Where a government is operating under a debt sustainability framework, its ability to give that support is limited — and contingent liabilities are counted.
This is not a temporary condition in several markets. It is the environment projects are structured in.
What it changes
Guarantees become scarce and rationed. Where guarantee capacity exists it is allocated to priority projects, through a process with its own criteria and timetable. A project assuming a guarantee without confirming its place in that queue is assuming something it may not get.
Contingent liabilities are scrutinised. Availability payments, take-or-pay obligations, and termination compensation all create contingent exposure. Finance ministries increasingly assess these before agreeing to them, and may refuse structures that were routine previously.
On-lending is constrained. Borrowing by a government to on-lend to a state enterprise counts as sovereign debt. Structures relying on it face the same limits.
What is used instead
Multilateral guarantees. A guarantee from a development institution may still require a government counter-indemnity, which is itself a contingent liability — but it is often treated differently and may be available where a direct sovereign guarantee is not.
Political risk insurance. Commercial and multilateral insurance covering government action can substitute for a guarantee in part, without creating a sovereign obligation.
Liquidity rather than guarantee. A funded liquidity facility — cash or a letter of credit sized to several months of payments — addresses the payment risk that most often causes distress, without the sovereign accepting an open-ended obligation.
Ring-fenced revenue. Structures that capture a defined revenue stream at source, before it reaches the general budget, reduce reliance on appropriation. These require legal certainty about the priority of the arrangement.
Corporate rather than sovereign credit. Where the offtaker can be restructured into a creditworthy entity in its own right, the project's credit improves without sovereign support. This is slow but durable.
For sponsors
- Confirm guarantee availability through the finance ministry, not the sector ministry
- Understand how any structure you propose is counted as contingent liability
- Have a structure that works without a sovereign guarantee before you need one
- Consider whether liquidity support achieves what you actually need
- Expect the fiscal review to take time, and build it into the timetable
