Business Day

Turning feasible into bankable

• Financial institutio­ns on the hunt for opportunit­ies on the continent

- Martin Meyer

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.

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