The Battle for Project Faraday

       Introduction and Background

“I also ask why is it that some projects have difficulties taking off, even when financing is available? Believe me I have many examples of such projects, which suffer everything but finance.”

Dr. Donald Kaberuka, Former President, African Development Bank - Speech at the Annual Conference of Speakers of African Parliaments: “African Economic Integration - Time to Raise the Bar” August 2012

It was mid-morning on Thursday 31st March 2011 and all the relevant parties in the unfolding saga were present in the main conference room of the Ministry of Energy in Ghana (MoE), in an attempt to find a solution to the impasse regarding Project Faraday, an independent power project (IPP)[1]. The agenda was simple but difficult nonetheless; to discuss how this watershed IPP which began with a lot of promise to contribute to addressing Ghana’s power challenges but now on the brink of collapse could be salvaged. The Minister of Energy and his two deputies, ruling party heavyweights connected to the transaction through their affiliations with the local financial institutions (lenders) in the project, the project equity group comprising the local sponsors on one hand and their foreign counterparts on the other, and selected relevant parties, all settled into the conference room, primed for a long and gruelling meeting.  

Project Faraday was a 126MW IPP developed initially by a respected local engineering firm with help later coming from its foreign partners. By the time of the meeting, financial close had virtually been achieved with all the US$130 million funding required for the project being available and the proof of funds already shown by all financing parties involved. However, a feud erupted between the local sponsoring group and their foreign partners regarding the way forward for satisfying the last condition precedent (CP) for full financial close to be reached; i.e. the MoE would not sign the certificate confirming that all conditions precedent  necessary to have the power purchase agreement (PPA) become fully effective until/unless Parliament ratified the PPA. Unable to find a mutually satisfactory approach to address this issue to clear the last CP hurdle, the project whose development started five years earlier in 2006, faced existential challenges. 

Context

The foreign project sponsor was initially approached by the project’s originator and local sponsor in 2007, the latter having been referred to the former by a couple of European development finance institutions (DFIs) who were interested in providing debt to the project. Initially, the local sponsor only sought the participation of the foreign sponsor as a passive equity partner and requested the foreign sponsor to participate in the tender process for selecting the O&M contractor for the project. The foreign partner obliged, put in a bid, and was selected as the preferred bidder to become the O&M contractor.

 However, towards the end of 2008, with its development capital now drained and the line of sight to financial close not clearly visible, the local sponsors and their financial adviser approached the foreign sponsors to also consider participating in the further development of Project Faraday.  In June 2009, a joint development agreement (JDA) was signed between the local and foreign sponsors to that effect, thereby granting co-developer rights to the foreign sponsor, who from this point onward undertook to bear the third-party development costs related to Project Faraday. The ownership structure in the JDA was local sponsors 60% and foreign sponsors 40%.

For those close to the story of Project Faraday, the ensuing battle for control between the local and foreign sponsors was neither a surprise nor was the MoE meeting expected to be a silver bullet to address the impasse in a mutually satisfactory manner. After all, as soon as the JDA was signed, clashes emanating from cultural differences and approach to addressing issues broke out.  The foreign sponsors who now had the capacity to bankroll the remainder of the development activities,  inserted and asserted themselves in the project development discussions and arrogated to themselves the right to become the face of the project, an approach the local sponsors believed was culturally insensitive and unnecessarily aggressive and which could end up being counterproductive.

 By December 2010, the project was facing foreclosure from local banks for defaulting on a bridge loan facility advanced to it on the basis that financial close would be achieved by a certain date. Following a couple of forbearance and standstill agreements to give Project Faraday a reprieve but with financial close still not in sight to enable it meet its obligation, the local sponsors who by now had irreconcilable differences with their foreign partners wrote to the latter requesting them to step aside for them to assume control and seek to redeem the situation to the extent possible and in their capacity as the obligor for the bridge facility. They were not going to fold their arms for their development effort spanning five years to go waste and particularly so when they were the obligor for the bridge loan.

 However, the local sponsors were faced with difficult decisions regarding the next steps. Although they controlled the local terrain within which the project was being developed, they were short on cash without the backing of the foreign sponsors but whose uncompromising approach, on the other hand, had put the project in a compromised situation locally. The local sponsor was adamant that once back in the driving seat, the project could be salvaged. But then there was the issue of dealing with the foreclosure, parliamentary approval, and the compromised project return expectation due to the cost and time overruns.

 Why was the requirement for Parliamentary ratification of the PPA missed until the last minute and for it to create going concern challenges for the project? Could the project be closed from a purely project finance perspective without that and without the foreign partners? Could they find a white night who could bring an entirely different approach? Was there a deal that could be cut within the local financial consortium without recourse to foreign capital and foreign partners? What should their advisors tell them?   

[1] This case was prepared by Ernest K Nyarko, Executive Chairman of Infranomics Africa; Ernest Nana Kofi Nyarko of Johns Hopkins University, and Business Development Principal at Infranomics Africa; Our cases are developed with the sole purpose of sharing our unmatched insights and also giving back.  They are not meant to serve as endorsements, sources of primary data, or legal advice/opinion. Copyright © 2020 Infranomics Africa and Ernest K. Nyarko. Without express permission, no part of this material may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means.