Renewable Energy

Why Green Revenue
Bonds Makes Sense For
African Countries

A.     Introduction

As at the end of 2015, African countries have mobilized about US$2.5billion in green bonds for renewable projects.[1] Morocco, Nigeria, and Kenya were the first countries to consider sovereign green bonds.[2] As such programs grow in popularity, the need to issue bonds that rely upon less government support has become crucial. With mounting debt and increasing macroeconomic deterioration, financing programs that rely heavily on public credit enhancements to make them feasible may no longer be sustainable for many African countries.

Thus, it is no accident that many governments across Africa are beginning to allocate project financing and development risks through public, private partnerships and less burdensome funding mechanisms like Put Call and Option Agreements that rely less on sovereign credit enhancements.

A similar thought process should apply as governments consider issuing green bonds to fund renewable energy projects. Instead of issuing bonds that obligate governments to guarantee repayment, Revenue Bonds solely backed by the revenues derived from funded projects should be the better alternative.[3]

This post justifies why African governments should pursue revenue as opposed to obligation green bonds as they diversify their climate financing options.

B.      Revenue versus Obligations Bonds

The nascent green bonding programs that are beginning to emerge across Africa are general obligations bonds that rely on government guarantees.[4] The first of such bond was issued by the Moroccan Agency Solar Energy (Masen) to fund the NOOR PV 1 solar power project. The 1.15bn Dirhams (USD 100m) bond, was underwritten with a Kingdom of Morocco's ("KOM) guarantee. While KOM support enhanced Masen’s ability to obtain a favorable interest rate, KOM would be liable repaying the capital (principal) and accrued interest (coupon) if Masen defaults.[5]

Unlike sovereign obligation bonds, revenue bonds are non-recourse obligations solely repaid “from the revenues (and other specified pledged funds) generated by the project.”[6]  Thus, the credit exposure in the bond linked to the pledged cash flows or revenue streams. The proceeds of the bond are used to fund the renewable project.[7]

C.      Why Green Revenue Bonds Is In African Countries Best Interest?

 While it was understandable for African governments to have assumed the parastatal

risks in the early stages of partnering with independent power producers (IPPs), these partnerships have stretched the capacity of governments to continue to share risks. This problem, aptly stated by Ghana's former Power Minister is that "one of the reasons we embarked on the power sector reform program was to share the risk, take away the risk from government and let the market also absorb some of it. And therefore when the private sector comes back to the government to provide them with guarantees then the risk sharing is avoided, and we do not think that is right."[8]

As a result, in considering green bond options, revenue bonds appears to be more suited given the financial realities and the maturing institutional frameworks of the power sector in many countries.

The other the reason that supports revenue-backed bonds is that they can ease fiscal pressures on government contingent liabilities. This particularly pertinent in Africa where debt to gross domestic product is growing in many countries or debt levels are becoming unsustainable. For instance, Ghana's debt to Gross Domestic Product ("GDP") increased from 35.5% in 2004 to 67.6% in 2014. The IMF has forecasted that Uganda’s public debt will keep rising due to ongoing ambitious infrastructure investments by government.[9] Kenya’s support for IPP projects in the form of government credit various enhancements instruments is reportedly no longer sustainable. Evidently, because revenue green bonds would fund projects without the pledge of government credit, governments would be able to deploy resources to other priorities.

Also, because revenue bonds would be non-recourse to the government issuer, it will direct liability to the income and collateralized renewable assets that are funded by the bonds.

D.     Guidelines and Best Practices

 The Green Bond Principles-Voluntary Process Guidelines for Issuing Green Bonds, 2016

version (GBP) by the International Capital Markets Association offers a “voluntary process guidelines that recommend transparency and disclosure, and promote integrity in the development of the Green Bond market.”[10]

 Further explainedthese guidelines espouse transparency and integrity principles concerning the use of proceeds of a bond, evaluation, and selection of projects, management of proceeds, and reporting on the utilization of the bond proceeds.[11]

Because these guidelines are not prescriptive, additional operational and legal safeguards that will strengthen compliance and protect investors that are outlined below may be necessary for the emerging green bond markets of Africa:

i.                    Use of the Proceeds- To enhance the disclosure requirements of the "green"

use of the proceeds of the bond, strict project eligibility categories must be specified as covenants in the bond documents holding issuers and governments accountable for the intended use of the proceeds. This measure will prevent the errant or unrelated use of proceeds.

ii.                  Special Obligations-The bond documents should also specify that the bonds are special obligations of the issuer. Thus, the bonds would be solely payable from revenues or proceeds of the bonds. Consequently, bonds would not be considered a debt of the government or the issuer.

iii.                Security for the Bonds- Because revenue bonds are special obligations and not

an obligation of the government, the issuer should be required to irrevocably pledge (or set aside) the stream of income (or net revenue stream) or hold the same in trust for the benefit of the revenue bondholders.[12]

E.      Conclusion

With increasing interest in green bonds around Africa, governments should evidently opt for revenue bonds as opposed to obligation bonds.  The former will ease the burden on their finances, while latter will not.

[1] Uche and Nyong, Why Africa Needs Green Bonds.

[2] Africa’s Green Bonds: A Way To Finance The Future at

[3] Green Bonds at

[4] Green Bonds at

[5] Solar Power Agency Masen Issues Morocco's First Green Bond at

[6] Lemke et al., at

[7] Recent Developments in Green Bond at

[8] See more at


[10] White and Case


[12] Lemke et al., at