Parks Tafa, Rizwan Desai and Neill Armstrong of Collins Newman & Co assess the conditions and framework for project financings in Botswana
1. NATIONAL UPDATE
1.1 What are the main project finance trends and developments (for example, increased use of project bonds) recently seen in your jurisdiction?
Project finance in Botswana is mainly associated with the development of commercial properties, power plants, infrastructure and the mining industry. Major construction projects in Botswana include the Morupule B Power Plant, the Academic Hospital at the University of Botswana, the Kazungula Bridge project, roads and infrastructure, the new central business district and, the Mmamabula Power Plant.
1.2 What role have export credit agencies, multilateral agencies and international financial institutions played in supporting project finance transactions in your jurisdiction? Please include an overview of the main institutions domiciled in your jurisdiction.
Export credit agencies, multilateral agencies and international financial institutions assist in financing the export of the goods and services into Botswana. The main institution domiciled in Botswana is the Stanbic Bank, which is a member of the Standard Bank Group in South Africa.
2.1 What types of security are usually seen in project finance transactions in your jurisdiction, and are there any notable exclusions, including assets which cannot be secured?
a) Mortgage bonds (immovable property)
b) Deed of hypothecation (movables)
c) Notarial bonds (movables)
d) Pledge (shares)
e) Letters of credit
g) Cession (or assignment of receivables)
2.2 Would the law of your jurisdiction enforce arrangements whereby debt is subordinated by way of a contractual agreement (including in bankruptcy or insolvency proceedings)?
The courts in Botswana will give effect to some arrangements whereby debts are subordinated by way of a contractual agreement.
Where the insolvent estate has entered into an arrangement akin to the one described above before insolvency, the agreement becomes enforceable as against the estate or by the estate. In case of a claim against the insolvent estate the question of preference will have to be determined before a claim can be paid.
3. PERFECTION, PRIORITY AND ENFORCEMENT
3.1 How is a security interest in each type of security perfected and how is its priority established?
a) Mortgage bonds
They are perfected by registration at the deeds registry office in accordance with the provisions of the Deeds Registry Act. Registration amounts to granting a real right in the security interest to the holder.
b) Notarial bonds
According to section 2 of the Deeds Registry Act, a notarial bond hypothecates movable property specially or generally. There are two types of notarial bonds, namely a general notarial bond and a special notarial bond.
A special notarial bond specifies and describes the movables being hypothecated, and confers a statutory preference above the claims of concurrent creditors for specified movable assets. It is perfected by registration at the deeds office.
A general notarial bond does not confer such preference, neither does it confer upon the creditor real rights in the movable assets of the debtor. It merely confers a preferential right over other concurrent creditors for the free residue in an insolvent estate during insolvency.
This form of security is created and perfected by delivery of the movable asset by the pledgor to the pledgee (lender or creditor), with the common intention that it constitutes security for an obligation owed to the latter.
Actual physical delivery of the asset or documentation evidencing title is generally required. An agreement to create a pledge confers only personal or contractual rights. It is delivery of the asset that constitutes a real right in the asset pledged. This real right, less than ownership, entitles the creditor to be repaid from the proceeds of realising the asset.
With regard to shares, delivery of a blank share transfer form signed by the debtor together with the share certificate will suffice.
d) Deed of hypothecation
A deed of hypothecation in terms of the Hypothecation Act is perfected by registration at the deeds registry office.
The property thereby hypothecated will be deemed to be pledged in favour of the authorised creditor as fully and effectually as if it had been pledged by delivery to that creditor and were retained in the creditor's possession.
Registration therefore effects a real right of security, a statutory pledge, in favour of the hypothecator. This security is only available to an authorised creditor prescribed under the Hypothecation Act.
e) Letters of credit
A security interest held by a secured party with control of the letter of credit right has priority to the extent of its control over a conflicting security interest held by a secured party that does not have control.
A security interest in a letter of credit right may be perfected only by control.
This form of security is perfected by the guarantor executing a guarantee setting out the conditions under which they will be required to take over the borrower's repayment obligations upon default.
A cession is the most common form of security issued in relation to incorporeals, such as shares and financial instruments, which are perfected by the furnishing of notice by the creditor to the debtor and delivery of the documents.
A cession is perfected upon the execution of a valid cession agreement between the creditor and debtor, and the delivery of documents of title, such as share certificates and share transfer forms in blank form.
3.2 Are any fees, taxes or other charges payable to perfect a security interest and, if so, are there lawful techniques to minimise or defer them?
There are fees payable in respect of registration of a security at the deeds registry office. These fees are found in part II of the Deeds Registry (Conveyancers and Notaries Public) (Fees and Charges) Regulations. The regulations prohibit any techniques to minimise or defer them. There is no stamp duty in Botswana. No fees, taxes or duties apply to other forms of security.
3.3 May a corporate entity, in the capacity of agent or trustee, hold security on behalf of the project lenders as the secured party?
The Deeds Registry Act prohibits the passing of a mortgage bond in favour of a trustee, or the holding of a mortgage bond in favour of any agent on behalf of a principal.
However the Companies Act, which came into effect after the Deeds Registry Act, specifically permits the issue of debentures and the provision of security for prepayment of debentures by way of mortgage bond and the holding of that security by a trustee for debenture holders.
The definition of 'debenture' in the Companies Act includes inter alia a written acknowledgement of indebtedness issued by a company in respect of a loan made or to be made to it, and is wide enough to cover profit finance facility agreements.
On the basis that later legislation can be interpreted to amend earlier legislation, use of the provision of the Companies Act may allow a corporate entity trustee to hold security.
This does not permit a corporate entity agent to hold security.
The so-called 'parallel debt structure' is used regularly in Botswana. Through a parallel debt structure, a special purpose vehicle (SPV) borrows funds and on-lends them to the project company, against loan agreements and indemnity or guarantee in respect of any claim by the financers secured by mortgage bond, rights to the proceeds of which are in turn ceded in securitatem debiti by the SPV to the financers.
This creates a direct cause of debt, and appears to avoid issues of agency. This structure has not been tested in the courts of Botswana.
4. FOREIGN INVESTMENT AND OWNERSHIP RESTRICTIONS
4.1 What restrictions, fees and taxes exist on foreign investment in or ownership of a project?
No such restrictions, fees or taxes exist. Foreign and domestic investors are treated the same under the laws of Botswana.
4.2 Can a government authority block or unwind a transaction involving foreign investors after it has closed, for strategic national security or other reasons?
No. The Republic of Botswana, as a state that vigorously adheres to the rule of law and upholds both the sanctity and freedom of contract, does not enable its governmental agencies or authorities to interfere in lawfully concluded commercial transactions.
5. DOCUMENTATION FORMALITIES AND GOVERNMENT APPROVALS
5.1 Is a submission to a foreign jurisdiction and a waiver of immunity effective and enforceable?
Yes. Botswana adheres to the principles of freedom of contract that parties be held to their contracts (pacta sunt servanda). A submission to a foreign jurisdiction is effective, provided that this is done freely and voluntarily.
A waiver of immunity is effective and enforceable.
5.2 Is English or New York law recognised as a valid choice of law in your jurisdiction?
Yes. The principle of freedom of contract is well entrenched in Botswana law. Parties to contracts are therefore at liberty to designate any law as applicable to their contract. In this regard the choice of English and/or New York law is recognised as valid and binding where it is clear that the parties intended such a law to govern their contractual relationship.
Generally Botswana courts will recognise a choice of foreign law. However our courts will not give effect to any chosen law if that law is against public policy.
5.3 Would courts recognise a foreign arbitral tribunal award or court judgment? If so, what are the conditions applicable to such recognition?
Botswana courts do recognise foreign arbitral awards and foreign judgments. The Enforcement and Recognition of Arbitral Awards Act (chapter 06:02) is instructive. Any arbitral award made after the coming into effect of this act in any country which is a party to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, will be binding and may be enforced in Botswana.
The provisions of the act are, however, only applicable to awards arising out of legal relationships, whether contractual or not, considered as commercial under the laws of Botswana.
The conditions for recognition set out in the act include the following:
An arbitral award will only be enforced if a similar award made in Botswana would be enforceable in that country;
Any party wishing to have an arbitral award recognised may make an application for such recognition and enforcement and produce a duly authenticated original award or a duly certified copy thereof; and,
The original submission agreement or a duly certified copy thereof.
Recognition may be refused where a court is satisfied that:
the parties to the submission agreement were under some incapacity under the law applicable to them;
the party against whom the award is invoked was not given proper notice of the appointment of the arbitrator or of the arbitration proceedings;
the award deals with a difference not contemplated by, or not falling within the terms of the submission agreement;
the composition of the arbitral authority or the arbitral proceedings procedure was not in accordance with agreement between the parties; or,
the award has not yet become binding on the parties.
The recognition of foreign judgments is governed by the Judgments (International Enforcement) Act (chapter 11-04), which provides that any person wishing to have a foreign judgment in his favour recognised may make an application to the High Court for registration and recognition. Such an application must as a rule be made within six years after the date of pronouncement by a foreign court. It is also a requirement that the person making the application give notice to the judgment debtor of his application.
The courts in our jurisdiction may set aside the registration of a judgment if:
the judgment is not a judgment to which the act applies or the judgment was registered in contravention of the act;
the original court had no jurisdiction in the case;
the judgment debtor (the defendant in the proceedings in the original court) did not (notwithstanding that the process may have been duly served on him in accordance with the relevant law) receive notice of the proceedings in sufficient time to enable him to defend the proceedings and did not appear;
the judgment was obtained by fraud;
the enforcement of the judgment would be contrary to public policy in Botswana; or,
the rights under the judgment are not vested in the person applying for registration. For purposes of execution, once registered, the judgment will be of force and effect.
6. BANKRUPTCY PROCEEDINGS AND ENFORCEMENT
6.1 How does a bankruptcy proceeding in respect of the project company affect the ability of a project lender to enforce its rights as a secured party over the collateral/security?
The project lender can enforce its rights against the project company during bankruptcy proceedings. Secured creditors, such as the holders of mortgage bonds or deeds of hypothecation, pledges and cessions are entitled to be paid their claims out of the proceeds, the realisation of the sale of the asset that is the subject of the security. Where secured creditors have security over the same asset, the creditor granted security earlier in time has a higher-ranking claim in respect of that asset.
6.2 Outside the context of a bankruptcy proceeding, what steps should a project lender take to enforce its rights as a secured party over the security?
With regards to a deed of hypothecation, the Hypothecation Act provides an abridged, swift and expeditious route for the judicial enforcement of a deed of hypothecation and against the security mortgaged by it. Upon default, an authorised creditor may file with a clerk of a competent court or the registrar a statement on oath confirming the breach, accompanied by a copy of the relevant hypothec as well as a notification of the hypothecator. The effect of filing the statement will be as if a civil judgment had been lawfully issued by the court authorising the issue of a writ of execution for seizure and sale of hypothecated assets.
With regards to mortgage bonds and notarial bonds, upon default, the bondholder may approach the court for a judgment on its claim and seek an order declaring the property specially executable and for purposes of mortgage bonds declaring it especially executable.
Regarding shares, the procedure is the same, and the court should allow you to sell the shares. If the pledge is carefully worded so as to exclude court process, the shares can be sold without going to court.
The same applies for cessions. The Court should be approached to enforce the collection of the debt.
6.3 What processes, other than court proceedings, are available to seize the assets of the project company in an enforcement? For instance, is contractual enforcement (such as receivership) recognised?
No processes exist to seize the assets of the debtor without intervention of the court. Botswana law does not sanction so-called self help (the concept of receivership is not recognised). A court order is required in order to seize the assets of the debtor.
However, other contractual mechanisms, such as step–in contractual clauses, may provide some degree of recourse to lenders and borrowers. Step-in rights are rights given to lenders in project finance arrangements, which enable the project lender to take the place of the project company's position in the contract, thereby seizing control of the project where the project company is not performing.
7. FOREIGN EXCHANGE, REMITTANCES AND REPATRIATION
7.1 What, if any, are the restrictions, controls, fees and taxes on remittances of investment returns or payments of principal, interest or premiums on loans or bonds to parties in other jurisdictions?
There are no foreign exchange controls in Botswana – hence the free repatriation of profits, dividends and capital.
7.2 Can project companies establish and maintain onshore foreign currency accounts and/or offshore accounts in other jurisdictions?
Yes. Onshore and offshore foreign currency accounts are permitted in by Botswana law.
8. PUBLIC-PRIVATE PARTNERSHIPS
8.1 Is there a public-private partnership (PPP) act or similar statute authorising PPPs, and are both greenfield and brownfield PPP projects permitted?
There is no legislative instrument authorising PPPs, but both greenfield and brownfield projects are permitted depending upon the acquisition of the requisite ministerial or governmental authorisation.
The Electricity Supply Amendment Act 2007 provides for the issuance of licences to: (a) use, work or operate or permit to be used, worked or operated any plant, apparatus or works designed for the supply or use of electricity; or,
(b) supply to, or for the use of any other person, electricity from any plant, apparatus or works designed for the supply or use of electricity.
8.2 May a concessionaire grant security interest in the project to its lenders and, if so, is consent of the government or contracting authority required?
Yes. A concessionaire may grant security interest in the project to its lenders. The prior consent of the government or regulatory authority will be necessary.
9.1 Are there any restrictions, controls, fees or taxes on insurance policies over project assets provided or guaranteed by foreign insurance companies?
The insurance industry is regulated by an Insurance Industry Act and its regulations.
According to section 105 of the act, any general insurance business policy effected by a Botswana resident or Botswana resident company other than an insurer licensed under the act with any non-resident insurer must be effected through the offices of a Botswana licensed broker.
9.2 Is reinsurance in the international market commonly seen on project finance transactions in your jurisdiction and are cut-through clauses permitted?
Yes. The doctrine of freedom of contract being well observed in our law and entrenched in our jurisdiction, cut-through clauses are permitted.
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Collins Newman & Co
About the author
Parks Tafa is the managing partner at Collins Newman & Co and has been with the firm and in private practice for nearly 25 years. He is one of the leading lawyers in Botswana, with considerable experience as a business-transactional lawyer, having been involved in many large transactions and acted in several ground-breaking matters for prominent clients both in Botswana and from elsewhere. Tafa is consistently ranked by Chambers Global, PLC Which Lawyer and IFLR 1000 as a leader in his field.
Collins Newman & Co
About the author
Rizwan Desai is a senior partner at Collins Newman & Co, having joined the firm in 2000. He specialises in and has developed the firm's practice relating to high-end corporate and structured finance transactions, capital markets, banking, financial services, private equity and securities. He also contributes to the firm's general corporate and commercial practice involving mergers, acquisitions and joint ventures. Desai is consistently ranked by Chambers Global, PLC Which Lawyer and IFLR 1000 as a leader in his field.
Collins Newman & Co
About the author
Armstrong joined Collins Newman & Co in 2013, bringing with him over 30 years' experience as a corporate commercial lawyer in Botswana. He specialises in the provision of expertise, advice and managerial skills for projects involving corporate structuring and restructuring, capital raising, corporate governance, risk management, compliance, acquisitions, mergers, takeovers and tax. Armstrong also has extensive experience in the fields of financial services, corporate, commercial and business law, and regulatory regimes in Botswana. He is consistently listed as one of the top-ranked corporate lawyers in Botswana by Chambers and Partners.