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Currency is a hot topic in West and Central Africa, in both the Economic and Monetary Community of Central Africa (EMCCA, or CEMAC in French)1 and the West African Economic and Monetary Union (WAEMU)2 zones. Several currency and related reforms currently being implemented and contemplated could affect the structures and other key aspects of international project financings in West and Central Africa.
The member states of both the EMCCA and the WAEMU belong to the Organization for Harmonization of Business Law in Africa (OHADA)3, which has increasingly adopted a set of unified legislation, resulting in a reliable, more sophisticated legal framework for businesses involved in international project financings. The EMCCA has established a new foreign exchange regulation. In addition, WAEMU countries plan to replace the West African CFA franc, the common currency in use for the past 75 years4, with a new common currency called the Eco.
Here is how these reforms will affect international project finance transactions in West and Central Africa.
Currency and other reforms could affect key aspects of international project financings in West and Central Africa
OHADA'S UNIFIED BUSINESS FRAMEWORK ATTRACTS INVESTORS
Since OHADA's creation in 19935, investors throughout West and Central Africa have been able to rely on a modern, unified legal framework for their project finance transactions.
OHADA legislation is a civil law legal system that aims to provide a common business and legal framework across all 17 member states, while enhancing the legal certainty and predictability of international transactions in the region. One important law affecting international project financing, the 2010 "Uniform Act Organizing Securities," created a uniform, modern security law for OHADA nations. It allowed the possibility of appointing a security agent, acting in its own name, on behalf of lenders, and reinforced lenders' rights by enabling them to use new, efficient security enforcement mechanisms, such as out-of-court appropriation ("pacte commissoire").
Other new and revised laws for the OHADA region followed, including:
- Uniform Act related to general commercial law act, revised in December 2010
- Uniform Act related to commercial companies and economic interest groups, revised in January 2014 and effective May 2014
- Uniform Act organizing collective proceedings for clearing debts, revised in September 2015 and effective December 2015
- Uniform Act on the harmonization of accounting, adopted in January 2017 and effective January 2018
A new "Uniform Act on Mediation," adopted in 2017, provides an enhanced legal framework for all aspects of mediation in OHADA's 17 member states. This new alternative dispute resolution mechanism aims to achieve more rapid and easier enforcement of agreements in the OHADA zone.
Although the sophistication and reliability of OHADA's legal regime in certain specific business law areas offers a degree of comfort to investors in the region, other aspects of transactions remain subject to the national laws of the relevant countries. For example, the determination of tax registration fees remains the strict prerogative of individual nations. Thus, the amount of tax registration fees varies from one member state to another, even in the same cross-border transaction. This encourages forum shopping and contradicts OHADA's goals of harmonizing business regulations.
The fact that OHADA members belong to different regional organizations is also a key point to take into account when carrying out an international project finance transaction. Benin, Burkina Faso, Côte d'Ivoire, Guinea-Bissau, Mali, Niger, Senegal and Togo belong to the WAEMU, while Cameroon, Central African Republic, Chad, Republic of Congo, Equatorial Guinea and Gabon are members of the EMCCA. This leads to the application of different rules pertaining to economic law and foreign exchange controls (See Figure 1).
The current momentum towards currency reforms in the WAEMU and the EMCC may result in increased practice discrepancies within the OHADA zone, highlighting the need to analyze these reforms and assess their direct legal consequences on international project finance transactions.
member states in the Organization for Harmonization
of Business Law in Africa (OHADA)
EMCCA IMPLEMENTS A REVISED FOREIGN EXCHANGE REGULATION
In 2014, following a sudden drop in oil prices, EMCCA members began debating a new foreign exchange regulation. Facing worrisome low levels of currency reserves, the EMCCA member states finally enacted Regulation 02/18/CEMAC/UMAC/CM on foreign exchange control (the New FX Regulation) in December 2019. The main goal of the New FX Regulation is to address the lack of enforcement that hampered the former foreign exchange regulation6.
The New FX Regulation entered into force, the Bank of Central African States (the BEAC) issued implementation instructions, and then financial intermediaries and economic operators were granted a six-month implementation period through December 2019 to achieve compliance with the New FX Regulation. The New FX Regulation did not provide for any grandfathering, which forced companies that had previously entered into transactions in the EMCCA region to conduct due diligence and regularization processes for previous transactions to ensure that they complied with the New FX Regulation.
Three sets of rules in the New FX Regulation are particularly relevant when carrying out an international project finance transaction.
Offshore bank accounts (Article 41 et seq. of the New FX Regulation)
The New FX Regulation expressly constrains residents from opening offshore bank accounts (the former foreign exchange regulation was silent on this point). Prior authorization of the BEAC is required to open offshore bank accounts. This authorization is granted at the BEAC's discretion, upon request by the applicant, and must be renewed every two years. In the absence or at the expiration of such authorization, the account must be closed and the credited funds must be repatriated to an onshore bank account.
One characteristic of project finance transactions is that they are generally conducted on a non-recourse basis. In practice, this means that lending banks can only rely on locally generated revenues—sometimes denominated in local currency—from the project to reimburse their loans.
To mitigate the risks inherent to these transactions (in particular, foreign exchange, transferability, enforcement and moratorium risks), lending banks usually require the project company to open and maintain offshore bank accounts in an overseas financial center, such as London or Paris. The funds deposited in these offshore bank accounts then are converted into pounds, euros or US dollars on a regular basis, and the lending banks maintain security interests on these offshore bank accounts in order to secure their loans.
In practice, the New FX Regulation turns the BEAC's policies regarding granting authorizations into one of the key parameters in gauging the bankability of an international project finance transaction.
Onshore foreign currency bank accounts (Article 43 et seq. of the New FX Regulation)
Opening an onshore foreign currency bank account is now also subject to the prior authorization of the BEAC (under the former foreign exchange regulation, this authorization was granted by the Ministry of Finance of the relevant country).
The authorization is granted at the BEAC's discretion, upon request by applicants, and must be renewed every two years. In the absence or at the expiration of such authorization, the account must be closed, and the funds credited in the account will probably be transferred to the BEAC in exchange for Central African CFA francs (XAF).
Export proceeds received abroad (Article 53 et seq. of the New FX Regulation)
The New FX Regulation requires exporting companies to repatriate their export proceeds within 150 days from the export date. Intermediation fees and other transaction-related fees may be deducted from the amount to be repatriated, up to a maximum of 10 percent of the total export proceeds for each repatriation.
From a foreign investor's point of view, the New FX Regulation's provisions appear stringent and cumbersome. Under this new paradigm, whether project financings will proceed smoothly and successfully will largely depend on how much pragmatism the BEAC is ready to demonstrate.
WAEMU REPLACES THE WEST AFRICAN CFA FRANC (XOF) WITH THE ECO
In June 2019, the Economic Community of West African States (ECOWAS) decided to create a new monetary union, supporting a single currency called the Eco, composed of current WAEMU member states and Nigeria, Ghana, Gambia, Liberia, Guinea, Cape Verde and Sierra Leone. To that end, the WAEMU countries and France also entered into the CFA francs cooperation reform agreement in December 2019 (the 2019 Cooperation Reform Agreement).
The Eco monetary union is intended to be implemented gradually, starting in 2020, to allow countries to achieve compliance with several convergence criteria, including limits on budget deficits, inflation and debt-to-gross domestic product ratios.
For the WAEMU countries, introducing the Eco also means the end of the CFA franc (XOF), which has become increasingly controversial in recent decades. Among the criticisms levied is that the CFA franc is an outdated remnant of the French colonial influence. In practice, this change implies the modification of several CFA franc-linked financial arrangements that WAEMU countries have in place with France.
Free convertibility and fixed parity maintained
The 2019 Cooperation Reform Agreement aims to replace a 1973 cooperation agreement between the WAEMU countries and France (the 1973 Cooperation Agreement) and later be complemented by a guarantee agreement (containing implementation technical provisions) to be entered into between the WAEMU countries and France.
Pursuant to the 1973 Cooperation Agreement and a 1973 operation account agreement between the WAEMU countries and France (subsequently amended in 2005 and 2014), the Central Bank of West African States (CBWAS) had to deposit 50 percent of its foreign exchange reserves into an account opened with the French Treasury (Trésor Français). In return, France ensured free convertibility of CFA francs (XOF) into French francs and later euros. This allowed CBWAS to benefit from unlimited advances by the French Treasury, provided that CBWAS complied with certain ratio requirements.
Following the signing of the 2019 Cooperation Reform Agreement, this account will be closed, and the funds will be repatriated to the CBWAS, which will be entitled to invest the foreign exchange reserves as it sees fit.
France will remain the guarantor of the Eco in the WAEMU countries, but free convertibility will instead be guaranteed through a credit line granted by France. The countries will also maintain a fixed rate of exchange between the Eco and the euro (EUR 1 = Eco 655.96).
France currently has representatives appointed to the CBWAS Board of Directors, the CBWAS Banking Commission and the CBWAS Monetary Policy Committee, in accordance with the provisions of the 1973 Cooperation Agreement, the CBWAS statutes and the WAEMU Banking Commission Agreement. According to different official French statements and the 2019 Cooperation Reform Agreement, after the reform, France may retain the right to appoint an independent member to the CBWAS Monetary Policy Committee in order to monitor reserves held by the CBWAS. A representative would be reintroduced if the reserves level falls below a certain threshold. However, as a general rule, France will no longer have representatives in the other governance bodies.
In May 2020, the French Council of Ministers (Conseil des Ministres) adopted a bill authorizing the approval of the 2019 Cooperation Reform Agreement. Next, the bill must be submitted to a vote by the French Parliament, then promulgated by the French President of the Republic before it enters into force. The 2019 Cooperation Reform Agreement has the merit of ending the CFA franc currency, while ensuring a smooth transition to the Eco.
However, with seven other countries that are not members of the WAEMU (Nigeria, Ghana, Gambia, Liberia, Guinea, Cape Verde and Sierra Leone) expected to join this monetary union, the 2019 Cooperation Reform Agreement can only be considered a temporary solution.
It remains unclear whether free convertibility and fixed parity—which are major variables in the context of international project finance transactions—will be maintained after the other ECOWAS members accede to the Eco monetary union.
1 EMCCA (Communauté Économique et Monétaire de l'Afrique Centrale in French) is a customs and currency union among Cameroon, Central African Republic, Chad, Republic of Congo, Equatorial Guinea and Gabon that currently uses Central African CFA francs (XAF) as common currency. The Bank of the Central African States (BEAC), acts as the central bank for this currency union.
2 WAEMU (Union Economique et Monétaire Ouest-Africaine) is a customs and currency union among Benin, Burkina Faso, Côte d'Ivoire, Guinea-Bissau, Mali, Niger, Senegal and Togo that currently uses West African CFA francs (XOF) as common currency. The Central Bank of West African States (BCEAO), acts as the central bank for this currency union.
3 OHADA is composed of 17 West and Central African countries (Benin, Burkina Faso, Cameroon, the Central African Republic, Chad, Comoros, Côte d'Ivoire, the Democratic Republic of the Congo, Equatorial Guinea, Gabon, Guinea, Guinea-Bissau, Mali, Niger, Senegal and Togo), which have adopted a common system of corporate and business uniform acts and implementing institutions. The uniform acts passed by OHADA are deemed exclusively business-related and are directly applicable in each of the 17 member states.
4 Except Guinea-Bissau, which entered the CFA franc monetary system in 1997.
5 Treaty of Port Louis (Mauritius).
6 Regulation no. 02/00/CEMAC/UMAC/CM dated 29 April 2000.
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