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Innovative
Financing Models for Energy Infrastructure in Africa by Milken Institute:

The
Power sector has the one of the greatest lack in infrastructure development in
sub-Saharan Africa. Daily per capita electricity use in Africa is reported to
be just 124 kilowatt-hours, the equivalent of using a 100-watt bulb for three
hours and about one-tenth of per capita usage elsewhere in the developing
world. The problems in the Power sector are limited access, unreliability, and
increasing costs in the region. Every year, the companies face nearly 60 days
of power shortages on average across sub-Saharan Africa. This makes business
much less attractive for investors and significantly damages the necessary
capital flows. Currently, most of the infrastructure investment in sub-Saharan
Africa is funded by the public sector, either through domestic government
funding or external official development assistance (ODA). The remaining part
was mainly funded by African governments, the private sector, and other
countries, such as China. Other than domestic government funding, multi- and
bilateral organizations and development finance institutions (DFIs) like the
World Bank, the International Finance Corporation (IFC), the Overseas Private
Investment Corporation (OPIC), the Multilateral Investment Guarantee Agency
(MIGA), and the African Development Bank are also providing funds for Power
sector projects. These organizations plays a major roles in helping the
government to attract private-sector investment into the country.

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Since
Development Finance Institutions have a long track record in funding projects
that both encourage sustainable development and allow for economic returns on
investment, they are persuasive and compelling partners for traditional
financiers. Development Finance Institutions offer tools that have a main role
in risk mitigation in the country which has political and economic instability.
Development Finance Institutions uses variety of instruments like loan
guarantees, insurance, and subordinated equity, to mitigate risk and to encourage
the investors to invest in the country by increasing the confidence.

OPIC
and MIGA helps multiple power projects in sub-Saharan Africa by providing loan
guarantees and political risk insurance (PRI). Other development institutions
like the Africa Development Bank (AfDB) and the International

Finance
Corporation, has also succeeded in funding the projects by providing funds
through direct loans, credit enhancements, and first-loss funds. The IFC, a
member of the World Bank Group, provides financing for power projects in Africa
through huge debt and equity funding, and helps governments to initiate
public-private partnerships for Power projects. Export credit agencies (ECAs)
have also helped to balance the financing gaps, by providing similar instruments,
such as guarantees and insurance, through either a public agency, such as the
U.S.’s Export-Import Bank, or a private company, such as Coface.

 

Table: DFI Financing Tools

Mechanism

Direct
public financing or guarantee?

Debt or
equity?

Rick
level

Mitigates
which risks?

Political risk insurance

Guarantee

Mix

Medium

Currency inconvertibility, expropriation,
regulatory, political violence

Credit enhancements

Guarantee

Debt

Medium

Commercial/default risks

Full credit wrap

Guarantee

Debt

High

Credit

Sovereign guarantees

Guarantee

Mix

High

Contractual ,failure to pay

Partial risk guarantees

Guarantee

Debt

High

Political, sovereign, contractual

Direct debt finance

Direct financing

Debt

Medium

Perceived credit and political
risks by commercial banks

Forex liquidity financing

Direct financing

Debt

Low

Liquidity

Portfolio guarantees/first loss

Direct financing

Equity

High

Credit, political

Project finance is another
traditional source of funding provided by commercial banks, these traditional
source of funding have constraints like liquidity requirements of Basel III and
other market policies have made lending very difficult for Power projects. Domestic
and foreign commercial banks provides major funding contributions to the Power
projects , including Bank of America, which recently announced a US$10 billion
“Catalytic Finance Initiative” to bridge the lack of availability of renewable
energy investments. The London-based Standard Chartered Bank recently agreed to
double its financing to US$5 billion for USAID’s Power Africa initiative which
is aiming to increase access to electricity in the country. Rand Merchant Bank
(RMB) in South Africa, has invested US$11.31 billion in African Power projects
over the last two decades. In August 2014, General Electric announced to invest
$2 billion in Power generation development over the next four years for
projects to develop power grid in Algeria and Nigeria.

 

Table: Africa’s Largest
Infrastructure-focused Funds

Fund

Manager

Fund vintage

Target size(Millions) 

Final close size (Millions)

Abraaj infrastructure and Growth
capital fund

Abraaj capitals

2007

USD 2,000

USD 2,000

Astics infrastructure fund

Astics

2008

USD 1,000

USD 752

Idb Infrastructure fund

EMP bahrain

2001

USD 1,000

USD 731

ADCB macquarie infrastructure fund

 Macquarie infrastrucutre and
real assets

2008

USD 1,000

USD 630

Pan America infrastructure fund

Harith

2007

USD 1,000

USD 630

African infrastructure investment
fund II

African infrastructure investment managers

2011

USD 1,000

USD 500

Inframed infrastructure

Inframed Management

2010

EUR 1,000

EUR 385

Mudabala infrastructure partners fund

Mudubala infrastructure partners

2010

USB 300

USB 425

Alcazar Capital partners fund I

Alcazar Capital

2007

USD 300

USD 300

GCC Energy fund

GCC Energy fund managers

2005

USD 300

USD 300

 

Structuring project
finance

Project financing is based
on the prediction of future cash flows in the earlier times. Cash flows are
determined by energy an IPP generates and they sell to a third party or state owned.
The developers and deal sponsors create power purchase agreement (PPA) to
project cash flows and also sale of energy into a different power source. The
price, capacity, performance, and contingencies for losses, damages, and
emergencies and their terms and conditions are enlisted.

Project finance is
organized to incorporate beginning time value from bargain
“sponsors,” as a rule an engineer upheld by a private value firm or
corporate speculator, that is then supplemented by mezzanine (mid-term
obligation) and long haul obligation gave by business banks, DFIs, ECAs, or
public sector funding. Inside a specific capital structure, for instance, a
venture may get value speculation from a private value firm or gathering of
financial specialists, with a insurance wrap from a DFI and promised obligation
from a bank, for example, Standard Bank. Institutional speculators may partake
either straightforwardly or through a private value distribution or the buy of
other financing alternatives for example, government infrastructure bond. An
assortment of financing items and stages are accessible for energy
infrastructure investment.

Many financing choices are
available in African capital markets. This is especially valid for the debt
market in the country. While a few nations, similar to South Africa and
Nigeria, have made the necessary regulatory administrative system to take into
account an assortment of settled pay items, numerous nations presently can’t
seem to build up a speculation situation helpful for the broadest menu of
choices. Without robust capital markets, Lab individuals agreed, doubtlessly
coordinate speculations would be the dominating alternative for financial
specialists looking for circumstances in vitality foundation in Africa.

 

New path for African financing by Adesegun Akin-Olugbade suggest that the Africa Finance Corporation’s approach to project funding is undergoing an interesting
evolution, from standard project financing into providing corporate financing
to holding companies that control multiple projects, sometimes across several
national borders. He raises call todevelop robust publicprivate
partnership (PPP) regimes. Project development financing assists the sponsors
in developing the project to fund the required feasibility studies. This
structure aligns with the sponsor’s interests and has been used in a hydro dam
project in West Africa, a wind farm in West Africa and a thermal power plant in
Southern Africa. A recent example was in a peat power plant project in East
Africa, where in order to bridge the funding gap and enable the participation
of a finance institution that required insurance cover for its facility; we
agreed to provide the initial insurance credit cover. The key pressures on
projects remain the typical issues relating to sponsors expertise, currency
unavailability or shortage, local currency convertibility issues, regulatory complexities
and the environmental and social issues in a given sector.

 

INTER-AMERICAN INVESTMENT CORPORATION by
James Scriven,

In this he analyses the environment for project
financing across Latin America. He maintains that renewable energy has been a
fertile ground for commercial lenders, which have been stepping into a
territory previously dominated by development institutions, and that the cost
of renewable projects has dramatically fallen in just the past three years.

Crowding in private sector financing, innovation and sustainability are
the major trends in 2016 in terms of project developing and financing.

Crowding in private sector financing is happening in the renewable
energy, port, road and airport sectors. This is a trend that started with
public and multilateral money. Private sector has shown growing interest. Innovation
and pushing new frontiers describe how the Inter-American Investment
Corporation aims to be bold in infrastructure. Sustainability takes into
consideration several megatrends revolution project developing.

 

 

IFLR Project Finance 2017 by Jihong Wang

The current main project financing trend in China is the widespread
promotion of public-private partnerships (PPP) within the infrastructure
sector, as well as utilization by PPP projects of various private investment
methods such as industrial investment funds, private equity funds, introduction
of strategic investors and financial leasing. Financial institutions primarily
support Chinese company participation in project financing through providing
security, credit and financing. China at present does not have a national PPP
law. Over the past several years, relevant government institutions including
the Ministry of Finance and National Development and Reform Commission (NDRC)
have issued a series of policies and normative documents on PPP projects.

 

Global trends by Philip
Fletcher and Aled Davies

Project finance in 2015 played out against a backdrop of falling
commodity prices. Despite the low prices, four out of the top 10 global project
finance transactions were in the oil and gas and petrochemicals sectors.

Interestingly, competition and advances in technology in the renewable
sector in 2015 led to a noticeable reduction in the pricing for renewable
energy projects, especially solar projects and projects in emerging markets.
Extremely competitive tariffs were seen on projects in South Africa, Dubai and
India.

A key aspect of activity in 2015 was that liquidity in the bank market
provided sponsors with the opportunity to refinance projects at lower pricing
and on more favorable terms and conditions. The Ijmuiden sea-lock PPP project
in the Netherlands is one such example of a project that maintained the
downward movement in pricing stemming from the re-emergence of long term

Commercial bank debt in the project finance sector.

Key challenges for policymakers of reliable energy are critical to
attracting foreign direct investment, expanding international trade, and
achieving long-term investment and growth.

 

 

Independent Power projects in Sub-Saharan Africa by Anton
Eberhard and Pedro Antmann

       The track record of
Sub-Saharan Africa’s power sector is dull. Two out of three households in
Sub-Saharan Africa, close to 600 million people, have no electricity
connection. In some countries, less than 5 percent of the rural population has
access to electricity. Endless power shortages are a main cause. The sub-Saharan
Africa cannot generate enough electricity. The Republic of Korea alone
generates maximum electricity as all of Sub-Saharan Africa.

The need for large investments in power generation capacity is common, mainly
in the face of robust economic growth, which is the main source of electricity
need over the last 10 years. The cost of balancing the shortages of Sub-Saharan
Africa’s power sector has been recognized as US$40.8 billion a year, which is
equivalent to 6.35 percent of Africa’s gross domestic product (GDP). The
existing funding is far below what is needed. This large funding gap cannot be
bridged by the public sector alone. Private participation is critical.
Historically, most private sector financing has been channeled through
independent power projects(IPPs).

IPPs are known as power projects that are mainly developed, constructed,
operated, and owned by the private companies. IPPs have a significant
proportion of private financing and have long-term power purchase agreements
(PPAs) with a utility or government.

The 48 countries of Sub-Saharan Africa had a power generation capacity in
total as of 2012 is only 83 GW. South Africa alone generates over half of this
total. The remaining countries together have a generation capacity of only 36
GW, and just 13 of these countries have power generation capacity larger than 1
GW. Twenty-seven countries have capacity smaller than 500 MW, and 14 have capacity
smaller than 100 MW. Across Sub-Saharan Africa, hydropower generation nearly
contributes half the capacity. Renewable energy such as biomass, geothermal,
wind, and solar add about 1% of the total capacity.

Public utilities have been the major sources
of funding in the past for power generation but nw the trend is changing.
Countries like Africa are unable to fund their power needs and also they do not
have grad ratings for investments, so they cannot rise debts at a reasonable
rates

Official development assistance (ODA) and development finance
institutions (DFIs) have only partially filled the funding gap.ODA and
concessional funding has fluctuated over the past decades and has been overshadowed
by IPP and Chinese-supported investment. Investments in IPPs and Chinese
funding are now the fastest-growing sources of finance for Africa’s power sector.

 

Technology
Options: A Rise in Independent Power Projects Using Solar and Wind Energy

 

In last 10 years they have observed a rising in renewable energy
technologies such as wind and solar energy, mainly in the past 5 years as costs
have demised and efficiencies improved. The same has normally not occurred in
fuel-to-power plants. Hence, for IPPs in the Sub-Saharan Africa power sector,
grid-connected renewable energy is raising traction.  Wind and solar renewable energy in South
Africa is the cheapest in the world.

This is because both solar and wind-based power generation needs higher
leading costs and different risk profiles so that those of traditional
technologies, all countries who are interested in renewable power generation have
experimented with methods to motivate private investment.

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