Appetite to finance power projects in Sub-Saharan Africa is persistently growing, with a widening range of investors and developers looking to get a foothold in the market. However, the sector is still plagued by delays and a lack of sufficient momentum from governments and African utility providers. Kevin Godier reports.
A more upbeat mood about the prospects for Africa’s power sector has been evident over the past year, bringing new hope that the reliable, long-term power supply that the continent needs to push forward will fall into place over the next decade.
“The power crisis that engulfed South Africa in the beginning of 2008 has galvanised much thought and action regionally, both amongst developers and financiers,” notes Paul Holmes, transactor, energy project finance, at Nedbank Capital.
Just as important, he says, “have been some high profile deals banked recently such as Bujagali and Cahora Bassa,” both of which Nedbank Capital took a hand in. The Bujagali Falls hydropower scheme in Uganda initially appeared on the drawing board in the 1990s, and went through changes of sponsorship and a range of environmental debates before a US$682mn financing package closed in late 2007. The first half of 2008 saw closure on US$800mn worth of 10-year acquisition financing linked to Mozambique’s Cahora Bassa hydropower facility in northern Tete province.
“Whilst long in the making, these have shown what is possible. Our project pipeline remains robust and we expect many projects to be banked over the course of the next few years and remain positive about the sector,” Holmes underlines.
A recent financing closed for Aldwych International’s 90MW Rabai independent power project (IPP) in Kenya has also been seen as a new marker for the growing buoyancy characterising many sponsors and financiers of African power projects.
“The sentiment has definitely improved – Africa is being perceived as a little more stable than in the past,” says Winfried Nau, head of the Africa department at Germany’s Deutsche Investitions- und Entwicklungsgesellschaft (DEG), one of a cluster of development finance institutions (DFIs) that provided long-term debt for the Rabai scheme at Mombasa, as well as for Bujagali.
“We are seeing smaller developers such as Aldwych coming in and getting things done,” remarks Bernhard van Meeteren, senior investment officer, Africa department, at FMO, the Netherlands-based DFI. “Africa’s first wave of transactions involved companies like AES and EDF, which have retracted and then come back for larger projects, and now the smaller players are filling the gap that the large developers aren’t interested in.”
Adds Abhay Ketkar “Interest in the wider power and infrastructure sector in Africa has gone up in the last four-to-five years,” head of power and infrastructure (Africa), project and export finance at Standard Chartered Bank, which successfully led the Bujagali IPP financing.
Ketkar highlights a “fundamental story that stacks up in terms of demand – supply gap and the availability of natural resources – fossil fuel reserves and hydrology.”
From the financing perspective, “there have been a number of investors keen to grow their business in Africa, which is seen as potentially an attractive investment destination as equity returns elsewhere appear to be waning,” he says.
Ketkar highlights that private equity groups such as the US’s Reservoir Capital and AES, the UK’s Aldwych International and Globeleq, plus a growing slew of Asian investors, have all been attracted into the sector.
“The appetite to develop power projects across Africa exceeds the project availability,” observes Paul Kunert, a director at Actis, who oversees Globeleq’s African power sector assets. “There are simply not enough requests for proposals (RFPs) at present from Africa’s governments and utilities.”
To ensure continued improved momentum, “Africa needs a few more wins – as these will lead to a greater level of investor and lender interest”, says Standard Chartered’s Ketkar. “There are so many projects that are talked about, and so much potential, but the gap between potential and reality is still huge.”
He adds: “The best projects, which tempt the private sector to participate, offer the promise of economic power supply. One example is the Grand Inga hydropower scheme, which may be the way to go over the long-term. Over a shorter horizon, we are working with Tata Africa on the Itezhi Tezhi hydro project in Zambia, a joint venture with Zesco, which we believe has the potential to be a quick win – the dam is already constructed.”
Ketkar predicts another “quick win” is possible in West Africa, where Standard Chartered is working with an Asia client on an acquisition financing deal. “I also see potential for quick wins in Ghana and in Nigeria, for example the Ibom Power project in Nigeria, which is at an advanced state of construction, and where Standard Chartered is acting as a mandated lead arranger, provided the gas and power contracting framework is addressed satisfactorily,” he says.
Globeleq is developing Ibom alongside Akwa Ibom state. The project “has one outstanding contractual issue around the gas supply”, explains Kunert. “To some extent it is a victim of Nigeria’s reform programme, which is seeking to unravel the gas and power sectors, and introduce market processes.”
Nigeria is seen as an African market where specific types of projects can be structured on a commercial debt only basis – as shown when Diamond Bank and Standard IBTC financed the Geometric Power IPP, which has a captive industrial market in the city of Aba.
Nedbank has taken project risk in Mali, where it solely refinanced the debt of the Morila Power project, which was structured on the back of offtake from a gold mining company. “In general however, and certainly in the larger cross-border projects, one would like to see some form of DFI or export credit agency (ECA) involvement as they bring, amongst other factors, a combination of political risk mitigation and cheaper funding,” stresses Holmes.
A key contribution from DFIs is undoubtedly their ability to provide long-term project financing in higher-risk situations, as illustrated by the 16-year tenor provided for Bujagali, affirms Nau. “Where commercial banks are comfortable, there is no strong role for us.”
In the many African projects roping in DFI financing, one growing positive, emphasises Van Meeteren, is a beginning of coordinated group action, via an ongoing reduction in the number of negotiating parties. “At Bujagali, nearly all the DFIs were there, as were commercial banks and multilaterals such as the European Investment Bank, the African Development Bank, the IFC and the World Bank. It was a huge group that was quite difficult to manage, whereby things were only able to move forward when everybody had made their decisions.”
In future, he forecasts, there will be fewer parties at the negotiating table, as the concept of arranging for and acting on behalf of DFI peers becomes stronger. “Sponsors say that they would like to have a smaller and more co-ordinated group to negotiate with – and we saw a start to this with the Rabai project, where the Emerging Africa Infrastructure Fund negotiated on behalf of other financiers such as FMO, DEG and Proparco.”
“Kenya is one of our key countries,” says Nau, flagging up DEG’s long-term financing support for the Kipevu II 74.5MW diesel-fired IPP, and other potential DEG power project support in Tanzania. FMO, for its part, has backed East African power generation projects in Kenya, Tanzania and Uganda, and has structured a financing package to parallel the development of Equinox’s copper mine in Lumwana, Zambia, whereby it is extending some US$5mn in funding for the electrification of the mining town’s new housing estate, where 5,000 inhabitants will be supplied with electricity from the Zambian grid by Northwestern Energy.
“We isolated the supporting infrastructure elements, and are offering a 15-year tenor for the power element and a 15-year loan tenor for the housing component,” says Per van Swaay, an FMO senior investment officer. “The funding structure lets the developer go the extra mile to develop sustainable facilities that will last beyond mine exhaustion.”
Ketkar acknowledges the importance of the DFIs in the African power space. He goes on to say “DFIs and commercial banks should work closely together to ensure confidence building and to draw on each other’s strengths. Bujagali is a case in point. However, sometimes we see instances such as Rabai where DFIs make available longer-term funding beyond what the commercial bank market is able to provide. While this helps keep the individual project tariff low, one should also be mindful of the fact that several international developers consider commercial bank lending as a proxy for commercially viable project structuring. Commercial bank involvement is thus key to attract continued private sector investment.”
West African prospects
In West Africa, DEG is examining hydropower possibilities in Cameroon, where the Memve’ele Hydropower project is being developed by Globeleq, One International, a local partner and FMO. Meanwhile a range of projects are shaping up in Ghana, including the 126MW Tema Osonor Power thermal generation scheme to be financed by the African Development Bank (AfDB), EAIF and FMO and for which the AfDB recently approved a US$32mn loan.
The Tema Osonor Power project is one of several in Ghana that is awaiting Nigerian natural gas from the West Africa Gas Pipeline (WAGP). To rescue a project that has threatened to run out of momentum, FMO is providing equity finance for the offtakers in Benin and Togo – Societé Beninoise de Gaz (BenGaz) and Societé Togolaise de Gaz (Sotogaz).
To help market the gas, FMO made a convertible €3mn grant available to Bengaz for the joint development, with Globeleq, of a 100MW power plant in Benin, plus a transmission component routing the power back to Nigeria. Moreover the Dutch ministry of housing, spatial planning and the environment is engaged to evaluate, certify and possibly purchase carbon credits from the envisioned power plant.
With Nigerian power requirements officially targeted at 60,000MW by 2020, Abuja has been unbundling its National Electric Power Authority since 2005, “but the slow pace of progress has proved that sector unbundling alone is not a panacea – what are needed are commercially set tariffs that allow for the cost of generation and supply to be paid for,” contends Ketkar.
“The sensible and obvious model for curing the power problem is the same that sorted out the telecoms sector – implementing a sensible regulatory framework, that ensures cost recovery and reasonable profits for operators and investors who will then enter the market,” agrees Chuka Mordi, Lagos-based head of infrastructure at FCMB Capital Markets. “But no power purchase agreements (PPAs) have been signed between the independent power producers (IPPs) and PHCN,” he adds, referring to the new entity set up to purchase and distribute electricity.
Mordi’s comments tally with those of Ketkar, who cites the need to “get the structures right” in order to entice private sector participation.
He adds: “In particular, you need a properly-structured bidding process and other contractual structures for IPPs to happen.
“Look at the differences between the Middle East – where there are two or three new IPPs developed annually – and Africa. Projects could be developed via IPPs across all of Africa, but people are attracted to the Middle East because of that road map and the comfort that the projects once announced and bid out will lead to a successful financial close within a finite timeframe.”
“IPPs can only proceed where a strong offtaker exists,” says DEG’s Nau, underscoring that the offtaker for Rabai, the Kenya Power & Lighting Company, has been reformed and floated on the Kenyan Stock Exchange. “Generally utility offtake in Africa lacks sufficient credit strength necessitating structuring techniques such as ministry of finance guarantees, partial risk guarantees and the involvement of DFIs,” chimes Holmes.
Eskom offtake structures dominate the southern African region, blighted by years of under investment. “The development of various regional projects has been accelerated, including in countries like Zambia, Botswana, Mozambique and South Africa,” observes Alastair Campbell, director, project finance, at Standard Bank.
“In the likes of Namibia and Botswana there are various projects underway to replace Eskom-imported power such as run-of-river hydro, various wind initiatives, diesel and gas-fired opportunities as well as the larger Mmamabula project,” points out Holmes.
Located just inside the Botswana border atop a massive coalfield, the planned Mmamabula plant has attracted huge attention in recent years, initially for its proposed 3,600MW size, and more recently because a locked-in engineering, procurement and construction (EPC) price against a background of soaring construction costs prevented the closure of an RFP.
However the scheme appears to be going forward again, after the sponsoring CIC Energy appointed NM Rothschild and Sons (UK) as financial advisor in late October. A company statement said that “a large segment of funding being targeted is from an export credit agency”, which will be accompanied by DFIs and South African commercial banks.
In South Africa, the power shortages and a handful of Eskom programmes designed to bring IPPs into the market have meant that a number of large and small-scale projects are being developed under the Eskom co-generation, MTPPP and base load programmes, and via the department of minerals and energy’s Peaking Power IPP project.
Looked at it cumulatively, “there are some really large numbers out there in the SADC region, mostly brought on by the energy crisis in South Africa”, says Campbell. “The number of projects that eventually come to market in the next 18 months will depend primarily on Eskom. To achieve simultaneous financial close on all of them at the same time is going to be pretty much impossible as there just isn’t enough liquidity in the market to accommodate all of these projects at the same time.”
A small start was made in August, when Eskom tapped a 17-year, €250mn export credit financing jointly arranged by KfW-Ipex Bank and HSBC Bank, supported by guarantees from Germany’s Hermes, that will be used to partially finance the construction of the parastatal’s new coal-fired Medupi power station in the Limpopo province.
“There are certainly enough proposed projects out there. For us, the worry is whether there is enough debt for all of them – many billions of US dollars will be needed in rand terms, and many international lenders will not be present, so ECAs and DFIs will be needed,” says Jonathan Berman, partner at Johannesburg-based Fieldstone Capital.
He suggests that one additional source of financing capacity could be domestic South African institutional investors, “which have bought Eskom paper before, but not as project finance investors”. Berman adds that the South African government has “said that it is open to providing guarantees, where required, but doesn’t want to provide a blanket guarantee”.