By Greg Boyd, Partner in the Transactional Group at Harneys in the BVI Office
There is nothing more satisfying than project success for an impact investment in a frontier or emerging market. However, the tragic conundrum that exists is that whilst these are the markets that most require international investment, they also present the most risk for any sensibly minded investor. The investment paradigm is all about risk and reward. And frontier and emerging markets routinely display the full spectrum of risk.
Investors are required to evaluate the risks and returns related to a project before committing to invest. The risk profile of investments commonly includes political, geographic, currency, infrastructure, institutional, legislative, corporate and court risk. Risks that are important to consider, but are often not immediately apparent, include legislative, corporate and court. Legislative risk refers to a jurisdiction’s laws; some jurisdictions have less modern and investment friendly laws that are obstructive to the ease of doing business. Corporate risk relates to the nature and type of corporate entities and their ability to be aligned with the corporate governance and control expectations of investors. Court risk covers the ability to resolve disputes efficiently and fairly through access to reputable courts with a deep bench and strong precedent.
Innovators are often entrepreneurs and to achieve success, like any start-up, they need to attract investment funding, usually from multinational investors. Choosing the appropriate capital raising vehicle and legal framework to attract and protect the investment can be difficult. Most multinational investors will look to be treated equally, and prefer the transaction documents being governed by common law opposed to civil code law and have access to reputable courts with that deep bench and strong precedent.
Fortunately, it does not take a rocket scientist to identify how a jurisdiction that offers modern corporate laws, efficient and effective court relief and investor neutrality can add value through a corporate structure for frontier and emerging market projects reliant on multinational inbound investment.
The BVI is a jurisdiction that offers such corporate solutions. While this does not reduce all the risks faced by investors, such structures can and do mitigate legislative, corporate, transactional and court risk – this is known as the BVI Corporate Advantage .
Kingo Energy and Hybrico have each attained project success and changed the lives of people in rural communities previously deprived of energy owing to their inaccessibility to traditional grid connectivity. Kingo and Hybrico are energy pioneers in that they have harnessed technology solutions to overcome challenges that traditional methodologies could not solve in the energy space. Kingo provides off-grid villages with decentralized solar energy services, while Hybrico powers cellular towers in rural areas with green and hybrid energy. When solar power is blended with mobile technology and internet network access it is life altering.
The International Finance Corporation in 2012 found that every year worldwide, poor households spend US$37 billion on kerosene for lighting, biomass for cooking, and other unsustainable and unhealthy fuels. Hundreds of millions of people have no access to grid electricity and consequently are exposed to health risks from fuel-based energy sources.
Employing the BVI Corporate Advantage, Kingo and Hybrico chose to use a BVI company as their capital raising vehicle and BVI law to govern the transaction documents. However, they could have equally used New York law or English law as the flexibility of BVI law would have accommodated this. BVI corporate law enabled the constitutive documents of the BVI company to be shaped and designed to satisfy the corporate governance and control requirements of the investors thereby helping to protect their investment and promote project success.
In these cases, due to the zero-tax applicable to the BVI company, each investor also attained investor neutrality in that there were no pros and cons for the investors that would otherwise exist in relation to double tax treaty forum shopping. To clarify, a BVI company is tax neutral and simply a corporate conduit – the cable connecting the solar panel to the battery. The investment flows through the BVI company from the multinational investors directly into the operating company in the frontier market. The operating company is a local company and subject to tax in that frontier jurisdiction. When returns are paid to investors on their investment, they again flow through the BVI company back to the investors who are accountable for applicable taxation on those returns in their own jurisdictions. Subjecting the BVI company to a BVI tax would simply reduce the funds available for investment and/or the return on investment for the investors by adding a layer of unnecessary and irrelevant tax. Both projects are fully transparent and aligned with the Environmental, Social, and Governance (ESG) objectives required of development finance institutional investors.
The BVI Corporate Advantage is helping to overcome those challenges by ensuring that impact investment transactions are maximised for those vitally needed projects in emerging and frontier markets.
Greg Boyd is a Partner in the Transactional Group at Harneys in the BVI Office. He is expert in maximising BVI Corporate Advantage in impact investment transactions. Greg has extensive experience in BVI corporate and finance matters. His client base includes financial institutions, public and private businesses, private equity funds, family offices, high-net-worth individuals and start-ups. Harneys is a gender and diversity balanced law firm that seeks to add impact where it can be relevant, useful and add value.