Turning feasible into bankable
• Financial institutions on the hunt for opportunities on the continent
The African continent remains an abundant land of opportunity when it comes to the need for infrastructure projects; however, it continues to lag other emerging markets with regards to private participation in these projects.
This lag is not due to challenges around liquidity or available funding but rather the lack of bankable projects. In fact, financial institutions are actively seeking bankable projects on the continent. For this reason it is important for developers to consider bankability issues in the development phase of a project.
There are several aspects that advance a project from feasible to bankable. First and foremost, the host country needs to have an enabling environment which includes a robust legal and regulatory system together with a stable political structure. It is also important that any work won is done so through a transparent procurement process.
Successful implementation of the project is the end goal and so, from an in-country perspective, local developers need to ensure they partner with the right technical sponsor. The track record and credentials of all parties are very important for financiers when assessing the ability of the sponsor grouping to implement the project. From a funding perspective, a clear plan of how the equity for the project will be raised is imperative and the technical sponsor should ideally have meaningful equity to contribute to the project.
The ability to accurately determine and lock in the source, quantum and certainty of the project’s revenue stream is also a key aspect to a bankable project. In certain jurisdictions, the ability to ring fence externally generated cash flow in foreign currency is an important risk mitigant for project financing. Currency risks, including convertibility and transferability, need to be assessed as funding will likely be in foreign currency whereas the revenues may be linked to a local currency.
MANAGE RISKS
Ultimately, the key feature of a bankable project is that all risks have been identified, quantified and contractually allocated to the party best placed to manage that risk for the duration of the project. All projects will have risks which cannot be managed by any of the parties; however, these would typically be wrapped with an insurance product or other suitable mitigant strategy.
This is particularly prevalent with regards to political risks. There are various options available to parties looking to insure for political risks which include policies written by export credit agencies, multilateral organisations as well as the commercial insurance market.
Environmental and social aspects are also important components of project implementation and must be dealt with through all stages of development. As a guideline, International Finance Corporation standards should be followed, even where more stringent than local legislation.
Over and above bankability, infrastructure projects which lend themselves to project financing are generally projects which have high barriers to entry or are regulated within the country. Project counterparties can be either private or with public sector entities and each will come with its own set of structuring principles. The sectors with most potential for private sector participation would typically include power (generation and transmission), toll roads (shadow or user pay), rail, port infrastructure, pipelines and social infrastructure. Each sector will have a unique risk allocation framework which needs to be structured for.
Each project undertaken on the continent is different. As a result, development and structuring requires innovative and out of the box thinking. Successful African infrastructure development requires a “bottom-up” approach, where the ultimate infrastructure service is affordable and meets local needs over the longer term. There are numerous funding structures and instruments which can be utilised to fund projects in Africa. These include equity, mezzanine finance, commercial debt, development finance funding, export credit agency products and finance, multilateral organisation products and finance, guarantee facilities and project bonds.
FINANCING STRATEGY
A financing strategy will need to be considered upfront when developing a procurement plan as export credit agency finance is typically linked to the country of origin.
The potential to do business in Africa is huge and a wellstructured project with the right counterparty, backed by a capable sponsor grouping, will attract finance. Government and sponsor groupings need to engage with reputable and experienced advisors to ensure all elements of a bankable project are dealt with early in the project development cycle for successful implementation.