Waiting for government to give green light

Renewable energy players will have to scurry when ‘close’ is announced, writes Siseko Njobeni

THE delay in the financial close of the 28 projects selected last year as part of the renewable energy procurement programme has prompted project companies, contractors and the lenders to engage in tough negotiations amid rising project costs, Eversheds director Rajen Ranchhoojee said yesterday.

Some industry players could suffer a squeeze in their margins.

In commercial transactions, the close is when all conditions for funding have been met and the first monies are released to projects, Mr Ranchhoojee said.

The delay in reaching the financial close had enabled project developers to address a number of “loose ends and gaps” that were left in critical negotiations prior to being awarded preferred bidder status, he said. “There are a number of developers who would welcome, to a large degree, the delay that has come through from government in bid one. The only problem is the way in which the delay has been communicated,” Mr Ranchhoojee said.

“I think projects now are fairly settled. If the government were to say we will be closing in two weeks, will they be ready? There will be a major scurry because there are still some minor loose ends to tie up. But in the main, these projects would, in fact, be ready to close.”

Because the delay to reach financial close had endured since June, when the first financial close was anticipated, various industry players were anxious.

These projects have fixed-price engineering, procurement and construction (EPC) contracts. They are known as fixed-price turnkey, fully wrapped contracts. To get to that fixed-price number, the EPC contractors go out to their subcontractors, they identify the risks, and they identify the costs of materials — nuts and bolts — to construct the power plant within a certain time frame, Mr Ranchhoojee said.

“There is, as a result, a real difference in the price of materials needed. Also, a large quantity of the spend is on equipment that comes in from Europe. So now … the exchange rate risk has increased.”

The delay forces companies to approach their respective EPC contractors. “There are very long and hard negotiations happening at the moment between project companies and EPC contractors as to how they are going to reach middle ground on closing these projects. Somebody will have to take a knock on their margins.”

Mr Ranchhoojee said the delay in the commencement of the third round would affect land acquisition rights. For the projects to get money, developers must first sign all of the renewable energy programme agreements. “But there are pages and pages … leverarch files full of conditions to be met to reach ‘true’ financial close. You are looking at permits that are required, property that must be purchased, final agreements that must be reached with contractors and vendors amongst others.

“You must also ensure that the correct guarantees are in place. Now this is where I think we are going to see certain delays between project companies, contractors and the lenders. South African banks have taken a very conservative view on the types of guarantees that they will be prepared to accept and have made it clear that certain European guarantees — specifically guarantees from certain local Spanish or Italian banks — will not be accepted,” Mr Ranchhoojee said.

This could result in some contractors withdrawing from projects because the banks were not accepting their guarantees, and having them replaced with new contractors. But to do that, the permission of the Department of Energy is needed. Mr Ranchhoojee said the department was reluctant to approve any changes to the projects that were bid because there are inherent risks that the procurement process may be breached.

“The other option is where you are seeing major contractors, major sponsors, major players in the renewable space, looking to change their banks. They change their European banks to global corporations whose guarantees will be acceptable. But this is not a process that can just happen overnight. That is why this delay is working in favour of some of these projects,” Mr Ranchhoojee said.

Meanwhile, Kieran Whyte of Cliffe Dekker Hofmeyr said the industry was waiting for the government to come back with the date for financial close. “Everything is now in place; there has not been any clarity when it might be; it could happen (this month) because bidders have been asked to confirm that the validity of EPC prices will remain in place until the end of (this month),” Mr Whyte said.

Commenting on prospects for financing, he said there was sufficient liquidity in the market.

“The Industrial Development Corporation is involved, the Public Investment Corporation is going to be involved, export credit agencies involved. There is an appetite to lend, however, if the delay in financial close carries on for too long, capital is mobile and the appetite might wain, long delays might see sponsors dispose of equity in projects and move on.

There are solar projects being looked at in Brazil, competing against those, there is a window of opportunity here,” Mr Whyte said.