Building bankability for major projects
Finance
INFRASTRUCTURE
Building bankability
for major projects
accessible domestic gas supplies
and proximity to Johannesburg
Gauteng, South Africa’s leading
market for power. As a result,
several leading investors such as
Gigajoule International, Sasol and
Aggreko have constructed power
plants in Mozambique designed to
supply the Gauteng region,
delivering power to the more than
adequate grid network that links
Is there a shortage of project finance for energy infrastructure
two countries.
projects or not enough bankable projects? asks Nicholas Newman. theThis
record of performance,
whilst no guarantee of future
returns, generates confidence in
future project proposals.
hortage of finance has long
Key criteria
Unfortunately, similar power
Presenting a bankable long-term
been cited as the main
projects have gone badly wrong in
energy infrastructure project
cause of the dearth and
gas-rich Nigeria where failure to
delays in construction of energy
to potential lenders involves
contract for sufficient gas supplies
infrastructure, particularly in
establishing a project’s viability in
developing countries. However,
terms of social, economic, financial, to newly built gas power plants,
ongoing criminal sabotage of gas
industry insiders today more
technical, environmental and
pipelines, and tariffs which do not
often cite a shortage of ‘bankable
administrative criteria. It is also
cover costs has resulted in power
projects’ for the widening gap
necessary to consider government
plants lying idle, reported Nigeria’s
between supply and demand
approval and permits and the
Herald in September 2015. This
for power generation, grid and
all-important prospects for a
record of failure, in turn, makes
distribution networks.
power purchase agreement and
potential lenders look critically at
‘Simply put, the dearth of
cost reflective tariffs, to ensure a
proposals for power plants and
investment-ready projects has led
reasonable return on investment.
distribution proposals.
First and foremost is the
to a widening gulf between what is
affordability issue. Can the
required and what is delivered’,
government afford the project? Can Government support
said Thomas Maier, EBRD
the population afford to pay for the Another important consideration
Managing Director for
is the question of government
electricity? Will proposed tariffs
Infrastructure, in November 2014.
capacity to undertake large-scale
cover costs? Is the market demand
Projects are too often presented to
energy projects. A case in point
sufficiently large for this scale of
potential lenders without
is South Africa’s giant 4,800-MW
project? Such basic fundamental
sufficient preparation of the
Medupi power plant, whose project
issues lie at the heart of project
commercial, financial and
costs have risen from an estimated
preparation.
economic case, reported the
initial R69bn ($4.2bn) in 2007 to
A case in point is the Namibian
Institution of Civil Engineering in
around R154bn ($10.1bn) today
government’s plan to build the
December 2015.
$2.3bn, 1,050-MW Kudu gas power and is seven years late.
Across the world, the
plant on its border with South
Bankability issues
availability and amount of
Africa. The project proposal
Better project preparation is
government support and
highlights the twin issues of
essential to win over lenders. Far
affordability and market size. ‘From guarantees is a major
too many project proposals are
a fiscal point of view, looking at the consideration for perceptions of
based on out-of-date engineering
current economic climate, we have bankability. For example, according
studies, poor choice of technology,
to the Financial Times, the UK
submitted to cabinet that Kudu is
inadequate market demand
not feasible, since it would put too government’s withdrawal of
studies or optimistic financial and
substantial subsidies to the
much strain on the country’s
demand projections. Luis Nuche
renewables industry in October
national budget,’ observed
at Vaisala, a Finnish company
2015 has resulted in billions of
Namibia’s Finance Minister, Calle
specialising in wind measuring
promised new investment being
Schlettwein, as reported in
products and services, argues:
Engineering News, September 2015. cancelled, since their bankability
‘There is a tendency for those
credentials had been removed.
Moreover, the plan’s financial
new to the technology to often
In many countries, the role of
viability relies on the certainty of
ignore the basic steps, such as
international support can be vital.
selling 300 MW of power to South
not completing a comprehensive
Overseas aid finance for energy
Africa’s Cape Province, for which
wind survey and, because of cost
infrastructure, led by governments
considerations, selecting a product there is no real prospect, given the
in the west, China and Japan,
massive ongoing development of
that is not sufficiently robust
new gas, solar and wind generating alongside many development
enough for the location.’
banks, can soften the stringency of
capacity in Cape Province, which
Project preparation is an
the criteria needed to establish
simultaneously encourages South
expensive and time consuming
African power exports to Namibia, bankability. For example, Ethiopia’s
exercise. According to James
ambitious dam building
Leigland, Team Leader of the World thereby destroying the case for
The cost of South Africa’s
programme relied on very
such a large sized power plant as
Bank’s Public-Private
4,800-MW Medupi power
plant has risen from an
generous terms provided by
Infrastructure Advisory Facility, as Kudu.
estimated initial R69bn
Chinese banks and civil
In contrast, power projects in
a rule of thumb, the cost of project
($4.2bn) in 2007 to around
preparation will take at least 5% of Mozambique are seen as ‘bankable’ engineering companies as reported
R154bn ($10.1bn) today
by AfrElec (Africa Power Monitor) in
given the presence of large and
a project’s investment cost.
Source: Eskom
S
18 Petroleum Review | February 2016
Finance
‘The UK
government’s
withdrawal of
substantial
subsidies to the
renewables
industry in
October 2015
has resulted in
billions of
promised new
investment
being cancelled,
since their
bankability
credentials had
been removed’
Financial Times
May 2015. However, some
countries, such as South Sudan and
Malawi, need more help than
others to ensure their power
projects are built. In their case,
strict market rules are being put
aside by aid agencies to kick start
economic development.
In addition, the involvement of
export–import banks and credit
guarantee agencies provide
additional credence to project
bankability. For instance, the
failure of the US Congress to renew
the mandate of Export-Import
Bank of the United States, has
forced American-owned General
Electric to relocate its main base of
construction of gas turbines to
France, in order to take advantage
of both French and EU export aid.
There is also aid in the form of
venture funds such as American
based Blackrock and sovereign
funds like the Norwegian
Government Pension Fund.
Lastly, potential lenders
nowadays take into account the
quality and capacity of the project
consortium. That includes their
experience, reputation and record
of accomplishment from the lead
partner down to the smallest
sub-contractor, in order to
minimise potential delays and cost
overruns. This is especially
important given the trend to
implement various transparency
and corruption legislation
worldwide.
Creating a bankable proposal
In an attempt to overcome
the problem of inadequately
prepared packaged project
proposals, agencies such as the
African Development Bank (ADB),
Development Bank of South
Africa, and the European Bank for
Reconstruction and Development
(EBRD), amongst others, have
established infrastructure project
preparation facilities (IPPF) to
provide project proposers with the
requisite expertise and funding
that underpins the preparation of
‘bankable’ project proposals. For
example, the ADB and EBRD have
each allocated around $40mn
to their infrastructure project
preparation facilities.
The EBRD’s IPPF has two
windows – a Public Private
Partnership (PPP) Window, where
private finance is featured and a
Sustainable Infrastructure Window
(SIW) for commercialised public
sector investment projects. The
IPPF’s objective is to improve the
efficiency and replicability of
infrastructure projects for the
benefit of its clients. It will do this
by greatly reducing the ‘time to
mobilisation’ of consultants
through use of ‘call-off’ framework
consultants to deliver project
preparation, over an initial
three-year period from-.
This approach should also improve
the quality of preparation through
the application of consistent,
market-proven structures that both
the public and private sectors will
support.
The IPPF’s project preparation
services are provided in parallel
with high-level policy talks with
concerned government
departments and state-owned
utilities to develop a viable case on
which both governments and
potential lenders can make an
evidence-based decision. The IPPF’s
linkage of policy advice with
project preparation will enable
true peer-to-peer knowledgesharing between the public and
private sectors, thus enriching and
strengthening local capacity.
Fortunately, many energy
infrastructure project promoters
now realise the importance of
doing their homework before they
present their case to potential
funders. ●
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