Credit Issues in Offtake Agreements

The classic way of financing a project is to execute an offtake agreement with a buyer with a maturity as long as the loan term. Given that project loans, especially from the development finance banks such as IFC/World Bank, African/Asian Development Banks and the European Bilaterals such as FMO in the Netherlands or Proparco in France, are between 10 and 15 years, so the offtake agreement needs to be at least the same length of time.

10 to 15 is a long time in politics, as they say, and much can change in that time. The reason we mention politics is that, in developing economies at least, the offtaker will often be state owned and it's fortunes are accordingly closely linked to the fortunes of the owner government.

There are well tested ways of mitigating the offtake risk of a developing economy offtaker. Debt service reserve accounts can provide a short term cushion against non payment but, longer term, the project lender should look for some sort of creditworthy guarantee. These guarantees are offered by development finance banks who, like the World Bank, often have a representative office in many developing countries and can bring political pressure to bear on governments to have their state owned offtaker perform, having in mind the wider financial support a country may be receiving through World Bank programmes.

The World Bank guarantees offtakers through the Multilateral Insurance Guarantee Agency - www.miga.org. These products are not cheap nor do they come quickly but they can make the difference between a project being bankable or not.