Congo’s PPP Law Boosts Infrastructure Investment

Edwin Li

Beijing Dacheng Law Offices, LLP

(Dentons’ Preferred Law Firm in China)

During the 2024 Summit of the Forum on China-Africa Cooperation, which took place in Beijing from September 4 to 6, 2024, the Republic of Congo (Congo) was appointed as the co-chair of FOCAC for the period from 2024 to 2027. [i]

Situated in central Africa, Congo is a member state of various regional organizations including the Economic Community of Central African States (Communaute Economique des Etats DE l ‘Afrique Central, CEEAC), the Central African Economic and Monetary Community (Communaute Economique et Monetaire DE l ‘Afrique Central, CEMAC), the Organization of Petroleum Exporting Countries (OPEC), and the Organization pour l’Harmonisation en Afrique du Droit des Affaires (OHADA).

While the government of Congo has made efforts to diversify its economy and reduce its reliance on oil revenues, the latest data indicates that economic growth in Congo-Brazzaville continues to be primarily driven by the local oil and gas industry. [ii]The global outbreak of COVID has further impacted the Congolese government’s debt and domestic economic investment. In response to these challenges, the government enacted Law No. 88-2022 on Public-Private Partnership (“PPP”) Contracts on January 13, 2023 (“PPP Law”). This legislation aims to attract both domestic and international investors, including those involving Chinese investors, by providing a transparent, fair, and predictable legal framework for PPP projects. With sovereign debt crisis posing significant challenges to traditional debt arrangements (G2G, sovereign or quasi-sovereign debt), the PPP Law is expected to stimulate foreign investment in various sectors such as infrastructure, healthcare, energy, forestry, fishing, and agriculture in Congo-Brazzaville through PPP initiatives. This article offers an overview of the regulatory mechanisms and practical recommendations for PPP projects in Congo-Brazzaville for the benefit of Chinese investors.

I. PPP regulatory authority

 In accordance with the regulatory framework for Public-Private Partnerships (PPP) as established by the PPP Law, the PPP regulatory body in Congo comprises five inter-ministerial bodies: namely, the National PPP Committee, the PPP Technical Committee, the PPP Permanent Secretariat, the PPP Contract Award Committee and the PPP Supervision and Evaluation Committee[iii] (collectively referred to as the “PPP Regulatory Bodies”). Furthermore, in addition to these five bodies, during the process of fulfilling PPP contracts, other relevant government agencies or organizations are also involved in supervision and inspection. These may include entities such as the Court of Auditors and Budgetary Discipline, the High Authority against Corruption, independent auditors and any other competent authorities related to public finances according to current laws and regulations. The Ministry of International Cooperation and PPP (“PPP Ministry”) as an independent permanent government ministry that plays a pivotal role in this regard. It is worth noting that this is due to its hosting of the PPP Permanent Secretariat within its organizational structure.

The Congolese government has issued separate decrees regarding the aforementioned PPP Regulatory Bodies, elucidating their functions and powers, composition and operational mechanisms. These decrees establish a legal framework for the regulation and specific implementation of PPP.

II. The conditions that PPP projects need to meet

As is widely acknowledged, not all projects are suitable for implementation in the PPP mode. The PPP Law outlines the essential conditions that a PPP project must satisfy. Specifically, the relevant PPP project should align with the predetermined requirements of the public entity and undergo thorough evaluation, including a comparative analysis with alternative implementation modes to justify its adoption of the PPP model. This assessment should center on various factors such as the project’s complexity, total cost over its contractual lifespan, assumption of associated risks, level of service provision, user satisfaction and sustainability, as well as financial arrangements and funding mechanisms. In terms of sustainability and financing arrangements, it appears that there is greater alignment with international standards than our Chinese PPP regulations. While specific evaluation criteria and methods have yet to be promulgated, these standards outlined in the PPP Law are relatively universal and internationally recognized; thus Chinese investors should make preliminary assessments based on them when selecting projects to participate.

III. The PPP private investors

In terms of the participation of private investors in PPP projects, the PPP Law specifies a negative list of private entities that are not eligible to bid for PPP projects. This includes entities:

• not complying with current regulations for establishing and operating in Congo;
• prohibited from engaging in public utilities or participating in public procurement both domestically and internationally;
• having conflicts of interest with involving public officials or their representatives, members of technical committee or members of the PPP Contract Award Committee;
• undergoing reorganization or liquidation at their headquarters or principal place of business.

It is important to note that while an international private investor may not have any existing entity or operations in Congo prior to winning a bid, they must establish a local entity as a project company(“SPV”) under Congolese law (actually OHADA law) after winning the bid. This SPV will be solely dedicated to carrying out the PPP project.

Chinese enterprises that have been sanctioned by international organizations or countries, or are included in relevant blacklists, are prohibited from participating in PPP projects in Congo-Brazzaville. This restriction also extends to the entire corporate group and all its subsidiaries.

Furthermore, Chinese companies must ensure that they maintain positive business relationships with pertinent public entities and PPP Regulatory Bodies, as well as their members, in order to avoid the risk of potential contract termination following a successful bid. It is imperative for them to adhere to the oversight and scrutiny conducted by authorities such as the High Authority against Corruption.

In an effort to safeguard the interests of Congo national private investors, a decree issued in 2024 stipulates that projects with a total value not exceeding five hundred million Central-Africa francs (CFAF or XAF, approximately 6 million yuan) are reserved exclusively for companies under Congolese national control. These companies or enterprise groups must be predominantly owned by citizens of Congo-Brazzaville and have their headquarters situated within Congolese territory. While Chinese enterprises, particularly state-owned ones, may not typically express interest in projects below this threshold based on financial considerations alone, it is worth noting that priority will be given to bidders who allocate a portion of the PPP contract to firms incorporated in Congo-Brazzaville and majority-owned by its citizens. Consequently, Chinese investors should expect local participation requirements outlined within tender documents.

IV. The PPP contract

1. The main contents of a PPP contract

Numerous provisions within the PPP Law delineate the pertinent stipulations and contents that are requisite in the PPP contract, thereby formalizing the contractual relationship between the two parties through the medium of written agreement. Upon approval by parliament and publication in official gazettes, it ascends to legal status, serving as a binding framework for both parties involved in the PPP contract as well as relevant regulatory authorities and government departments. The principal components of the PPP contract should encompass the following elements: 

Designation of the contracting party	Duration and date of execution of the contract
Subject matter of the contract	Performance targets assigned to private investors
Terms of financing	Quality, safety and sustainability requirements
Contractual balancing mechanisms for contingencies and force majeure	Private investors to ensure that the project, equipment, or intangible assets for public services and meet the requirements of the public service obligations
Locally provided goods and services;	Government departments of a part or the whole of the contract or debt transfer control;
Conditions to ensure continuity of public services in the event of a subcontractor’s default;	Rules applicable to the occupation of publicly owned property;
Assignment of the subject matter of the contract;	Consequences of termination (whether intended or not) of the contract;
Prevention and method of dispute resolution and the conditions of the resort to arbitration;	Return arrangements for social capital;
Allocation of risk among the parties;	Personnel;
PPP contract balancing mechanism in the event of unforeseen circumstances or force majeure;	Terms and mechanisms for monitoring and controlling the execution of contracts;
Penalties for non-compliance with the terms of the contract and interest arrears for late payment of remuneration;	Reference to Congolese standards (if any);
Subcontracting conditions;	Conditions for equity transfer and change by private investors;
The regime of property;	Security and Guarantees
Insurance that private investors must purchase;	Circumstances of termination;
Transfer of skills and technology;	And financial, tax, customs and foreign exchange systems.

2. Subcontracting

Chinese investors may still have the utmost concern regarding EPC contracts, as the primary objective for PPP projects largely revolves around securing EPC contracts for project design, procurement, and construction. However, when it comes to post-project completion operation and management, some Chinese investors may lack expertise in this area and have no capability to develop a bankable financial model. Consequently, they often opt to collaborate with entities from Europe or other developed countries with extensive experience in operation and management through forming a consortium.

According to Article 37 of the PPP Law, subcontracting of PPP projects is subject to regulation. All subcontracts must be reported to the government prior to execution; however, it remains ambiguous whether government approval or consent is mandatory. Furthermore, private investors may not subcontract all project work. The subcontracting themselves are bound by relevant laws and regulations governing subcontracting activities. Notably advantageous for EPC contractors in China is the requirement for private investors to assume liability towards public entities for the performance of EPC subcontractors under subcontracts. This might vary upon specific project structure and terms outlined in EPC contracts.

For Chinese EPC contractors without a presence in Congo, compliance with local filing or registration procedures pursuant to OHADA law and local legislation of Congo is imperative alongside meeting stipulated requirements within PPP project bidding documents and/or contracts. Additionally, registration of pertinent entities may be necessary where applicable.

3. Tax, customs and foreign exchange regime

PPP contracts incorporate specific tax and customs regulations based on the returns to private investors and the risks assumed by the parties. To a certain extent, provisions for tax exemptions or other preferential arrangements can be included in the PPP contract, thereby exerting a larger positive influence on the overall project financial model and investment returns. This will attract more investors to participate in PPP project bidding and investment.

In the construction of infrastructure for PPP projects, there may be a need to import raw materials or export finished products. In order to fulfill PPP contract requirements and avoid lengthy regulatory processes such as import and export customs declarations and clearances, arrangements related to customs procedures can be incorporated into the PPP contract or annexed thereto separately. Simplifying customs procedures is crucial for ensuring timely completion of PPP projects, maintaining smooth project operations, and securing cash flow for private investors and lenders. However, it should be noted that certain preferential customs tariff and tax exemptions are not within the authority of the Congolese government due to CEMAC country regulations.

According to PPP Law, if preferential arrangements regarding tax and customs in the PPP contract differ from current laws and regulations, they shall take priority after the contract comes into effect (generally referring to publication in an official gazette). Furthermore, any new tax and customs laws enacted by Congo’s government after the PPP contract takes effect do not apply to projects, SPV and private investors under said contract. The inclusion of this stability clause greatly enhances investor confidence while improving expected returns.

In terms of the foreign exchange regime, we do not currently perceive the PPP Law as offering more favorable arrangements for foreign investors. Given the existing foreign exchange administration regime of CEMAC Central Bank (BEAC), Chinese investors must meticulously analyze and devise their investment structure, and conduct bidding and quotation of PPP projects with full consideration of foreign exchange and exchange rate risks. This includes taking into account restrictions and procedures pertaining to the establishment of foreign exchange accounts in Congo or the CEMAC region, as well as outside the CEMAC region. Such factors will impact the structure of project finance and timely loan repayment.

The PPP Law also encompasses provisions regarding the transfer, modification, risk allocation, compensation mechanism, and termination of PPP contracts, which will not be discussed in this paper due to space constraints.

V. Financing

We firmly believe that PPP should not be perceived merely as a project model, but rather as a financing model. The projects under this PPP financing model can take the form of BT, BOT, BOOT, and other variations. Several years ago in China, the lack of clarity or deliberate avoidance of recognizing the financing nature of PPP led to the current local government debt crisis.

The PPP Law explicitly outlines the financing mechanism for PPP contracts to prevent public and private entities from transferring debt to the government for any purpose. Parties involved in a PPP contract may agree on various ways to finance the project:

• Financing by one or more private investors
• Financing by one or more third-party organizations

However, it is important to note that under the second mode of financing, the PPP Law clearly states that private investors bear financial risks and that the government will not assume this part of the financing risk.

Furthermore, the PPP Law allows public entities, one or more private investors and/or third parties to jointly engage in financing activities within existing laws and regulations. This implies restrictions on public entity participation in financing. In this regard, it is crucial for Ministry of Finance to play a significant role because any public funding would impact annual budgeting and financial legislation.

Another noteworthy aspect outlined in Article 52 of the PPP Law pertains to refinancing through transfer of creditor’s rights during initial financing (whether by a private investor or third party), which requires written consent from public entities. This provision ensures smooth progress for PPP projects while also providing leverage for governments to enjoy potential benefits from refinancing opportunities, especially in the circle of US dollars rate cut.

Hence, in addition to the foreign exchange risk factors delineated in the preceding section of this article, it is imperative for the Chinese investor to engage in more comprehensive negotiations with the public entity within the framework of the PPP contract pertaining to financing and refinancing. This includes but is not limited to determining the timing of such transfer or refinancing, establishing specific conditions, outlining unreasonable refusal protocols, and delineating the distribution of any associated benefits.

VI. Conclusion

Prior to the enactment of the PPP Law, there have been successful projects in Congo-Brazzaville that bear resemblance to the PPP model. However, these projects lack the fundamental financing attributes of a real PPP, as they have been financed or guaranteed by the government of Congo-Brazzaville. These projects more closely resemble concession.

Some notable projects already in progress include:

• In 2009, AERCO[iv] (Egis Group and SEGAP Holdings) was granted a 25-year concession contract for Brazzaville Maya Maya Airport, Pointe Noire Agostinho Neto International Airport and Oyo Ollombo Airport. This contract came into effect on April 1, 2011. Among them, Maya Maya Airport is funded by a low-interest loan of USD180 million from the Export-Import Bank of China and the EPC was implemented by China Weihai International Economic and Technical Cooperation Co., Ltd (“WIETC”).
• Leveraging its extensive operational expertise and business network in Congo-Brazzaville, Egis Group collaborated with China State Construction Engineering Corporation Ltd. (“CSCEC”) and the Government of Congo to establish Congolaise des Routes (LCR) as the project company for National Highway No. 1 in Congo. On December 3, 2018, they signed a concession contract with an operation period of 30 years. The Highway No.1 project is also financed by the Export-Import Bank of China and was completed and opened to traffic by CSCEC in 2016. However, the exclusive operational rights were not immediately acquired by China State Construction upon completion, until the involvement of Egis.

After the promulgation of the PPP Law, the government of Congo entered into several concession contracts in accordance with this law. These include:

• The Concession Contract for the Renovation, Upgrading and Operation of the DJOUE Hydropower Station was signed on 4 July 2022 with Hydro Operation International, a Swiss company (Official Gazette dated 4 April 2024).
• The Concession Contract for Maintenance, Upgrade and Operation of MOUKOUKOULOU Hydropower Station with WIETC.

Compared to the concession contracts signed prior to the enactment of the PPP Law, there is greater clarity regarding the financing obligations of private investors (concessionaire), and it has been stipulated that neither the government nor public entities will provide any form of shareholder loans to project companies. However, efforts will be made by the government to assist in obtaining approval for security and guarantees for financing purposes.

In light of this, one primary challenge facing Chinese investors seeking participation in PPP projects in Congo is to secure financing. In coming years, if a Chinese company possesses sufficient financial capability of securing fund from those non-China financial institutions, then undoubtedly their prospects for securing these PPP projects in Congo will significantly increase.

Additionally, Chinese enterprises must also ensure the feasibility study report (including financial models) to be scientific, accurate, localized and economic at investment decision-making stage.

Finally, during drafting and negotiation stages of relevant PPP contracts it may be beneficial to deviate from conventional paths and thinking patterns used within China (or engage consultants) in order to enhance design and financial modelling capability. Such actions can improve success probabilities associated with PPP projects.

 

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* This article is not intended to provide legal advice or guidance under any circumstances. For any legal service needs, please feel free to reach out to the author at zhiguo.li@dentons.cn, or connect on WeChat by edwinleezhiguo.

[i] https://www.focac2024.com/detail/17255370886704.html

[ii] http://cg.mofcom.gov.cn/article/jmxw/202407/20240703522725.shtml

[iii] We interpret this to pertain to the PPP Supervision and Evaluation Committee, which has been established within the Ministry of International Cooperation and PPP Promotion, rather than the supervision committee outlined in Article 47 of the PPP Law. It is important to note that the PPP supervision committee mentioned in Article 47 is a provisional body formed by private investors and public entities under the terms of the PPP contract, with the specific purpose of overseeing the execution of relevant contracts.

[iv] https://www.brazzaville-airport.com/the-company/