At GTR’s East Africa Trade & Commodity Finance Conference, GTR conducted an onstage interview with Abubakar Ali, chief financial officer of Gulf Power, a company that designed, developed and financed the construction of an 80MW power plant fed by heavy fuel oil in the Athi river region.
GTR: Can you provide a brief update on the Gulf Power project? How far along is it and is everything on track?
Ali: We achieved what we call commercial operations in December 2014. We had a year of construction, but I must note that it took longer to close the transaction than we anticipated. The first round of tenders went out in 2009; we closed that in 2010 and achieved financial close in 2013. Three years of development for an 80MW plant is quite a long time, with three IPPs doing the same thing, at
the same time.
GTR: What was the cause of those delays?
Ali: Talking to the different parties involved contributed a lot to this. By the time we went to tender, we all assumed that we were going to get government guarantees. We were asked to bid three prices: one was assuming government guarantees; one was World Bank guarantees; and the other one was without guarantees. Even during the tendering discussion, we were all discussing government guarantee proposals but, later, when we went to the National Treasury, they said they weren’t willing to issue guarantees – that they have ratios to keep. That is fair because we understand, from the government’s perspective, that they would like to utilise this debt or allocations for whatever activities they prioritise.
GTR: How did you resolve that issue?
Ali: We went back to our plan, which was now a different discussion. We had negotiated power purchase agreements (PPAs) to a very advanced stage, so we had to return and open up discussions with the World Bank and incorporate their comments into the PPA. Some risks were not covered in the World Bank structure. We had to find a new structure to cover those risks for the investors and the lenders. We came up with something in between. I do not know how common it was before, we were given the government letter of support to mitigate some of the risks that are not covered by the World Bank partial guarantees.
GTR: Tell us a little bit about the financing mix you have in place. You mention the World Bank, but were there commercial lenders on the facility as well?
Ali: We have three lenders now, two DFIs. One is OFID, which is the OPEC Fund, and the other is the IFC. We also have Standard Bank of South Africa as a lender through IFC.
GTR: Were there no other banks involved?
Ali: No, I do not think that, even now, there are any local banks able to support the kind of debts that we have, which is 14-year and foreign-currency.
GTR: Can you highlight the benefits or limitations of having such a structure in place?
Ali: The IFC and OFID have a preferential creditor status with Kenya. Withholding tax applies to any interest to a lender outside Kenya. OFID and IFC have a waiver on the interest element payable. In the local market, there were no local banks ready to agree to this kind of structure.
GTR: If you had any need for further financing, even hypothetically speaking, what would be your options?
Ali: If it was short term, I am sure big banks would come in now, after construction and all the risks had been taken. Very few banks would take risks the way DFIs do before construction, but the main problem we would have right now is security for the lender. Having done project finance, the lender has secured everything. You have all these documents relating to each other and they are all financing documents.Bringing in anyone becomes a real problem, because they have to open several documents to bring them in, gain lenders’ approval and then the lenders have to look at the leverage and where in the hierarchy of security the new lender would come.
That is a problem that cuts across most of the lending in Kenya, in terms of how security is registered or shared individually.
GTR: Speaking from the general point of view of a developer, where do power/energy projects in the region struggle to obtain financing? Is it related to specific sub sectors?
Ali: One of the things that we have noted has not been focused on is the financing of everything other than the power plant. The power plant is the fun bit, as we say, but there is transmission, offtake and distribution, which we are now realising needs some resource allocation.
What the Kenyan government has done, at least, is assist with the transmission line off the offtaker and given it to a special unit that is not commercially driven, so that risk has been removed from the offtaker. The offtaker now has the distribution infrastructure with which to work. We are routing our power to the substation connected to the power plant and then to the grid. That is something that has done well and implements projects faster, probably at a lower cost.
GTR: Do you have any advice for companies about keeping their costs low in projects such as this?
Ali: This is for first-time developers or those without much experience: It is very important to negotiate engagements early, with the knowledge that things do not work out the way you planned. We normally have a short, aggressive period for development. The development time for a solar power plant is six months; a heavy fuel oil only takes 12 months to install, but things get delayed. Lawyers are going to cap your fees but that will probably fall away within two months and then they go back to the hourly billing until you close, which is open-ended.
Look at each engagement quite critically. Have a fixed or proper cap with all your financial advisors and lawyers. Also, be realistic with timelines. It is always assumed from signature date to drawdown it is a few months, but it doesn’t always work that way. Things get delayed. Drawdowns are also delayed for various reasons like change of costs. During this time commitment fees may be applicable.
GTR: Could there be more support from governments for these projects?
Ali: What we need is for the different departments to come together. For example, if you process an exemption,
it goes from Kenya Power to the relevant ministry which is Energy, then it goes to the Principal Secretary. He writes to the Principal Secretary Finance, which is then directed to the office and, from there, to the Kenya Revenue Authority. Such discussions should be from one window where the developer does not need to go to several departments to get things done. You have the National Environmental Management Authority on this side and the Highway Authority on that side. Sometimes Kenya Power and the Highways Authority don’t know what the other is doing, and you have land that has probably been earmarked for road construction, but someone else doesn’t know.
GTR: What is the level of project finance know-how in the region and what is needed to support that?
Ali: From a financing perspective, there is not much experience in project finance locally. Local banks could participate a little in some of the ongoing projects. There are a lot of PPPs planned by the government. If we are not prepared for some of these things, they wouldn’t have a chance to participate in these deals. One of the main challenges for the banks is the currency and the tenor.
We are looking for more than 10 years in foreign currency, which is a challenge for the local banks. The other challenge is expertise in project finance and all the documentation required, because we are not used to financing greenfields here.
Organisations like ATI could, at the time that projects are being implemented or rolled out, offer solutions like credit enhancements, investment guarantees and similar instruments, with a draft policy. This would probably help the local banks to participate.