Financiers are ﬁnding new ways of attracting private investors to African power projects. James Gavin takes the pulse.
Following ﬁtful progress in recent years, Africa is now seeing power projects that have private-sector funding at the heart of their ﬁnancial model get oﬀ the starting blocks. There are a number bankable schemes making progress. One is Ghana’s Kpone independent power producer (IPP) Cenpower Project, a 350MW combined-cycle gas plant that was the ﬁrst greenﬁeld, project-ﬁnanced IPP of its kind in the country. It reached ﬁnancial close in December 2014, although it struggled to attract private-sector investors early in its gestation.
InfraCo Africa, a Private Infrastructure Development Group (PIDG) company, invested $11m, alongside $805,000 from PIDG’s TAF, attracting support from the African Finance Corporation (AFC) to jointly develop the project. The project also beneﬁted from $22m from the Emerging Africa Infrastructure Fund (EAIF), the PIDG company that provides big ticket, long-term debt of between $10m and $50m
Cenpower will add around 13% to Ghana’s installed power generation capacity. By delivering power to Ghana’s national grid, the Kpone IPP plant will meet the power needs of more than 8m people. For PIDG CEO Philippe Valahu, the Cenpower ﬁnancing goes to the heart of its strategy to ﬁnd investable energy projects in Africa.
“This is likely to achieve COD shortly, and we spent over 10 years developing it,” said Valahu, whose company’s remit is to close the gaps that have prevented infrastructure schemes from moving forward. And yet, while this landmark scheme is an example of the successful fusion of private- and public-sec-tor dynamism, ﬁnanciers and project sponsors should be expanding their horizons, said Valahu.
“The question I have today is whether that is what we should be doing – supporting that kind of IPP, or should we instead be doing more to develop multiple oﬀ -grid mini-grids?” said Valahu. “There will inevitably be a role for IPPs, but for many of the 500m Africans who don’t have access to electricity, IPPs are not necessarily going to be the answer.”
ATTRACTING PRIVATE-SECTOR INVESTORS
PIDG is making a concerted eﬀort to do more in the oﬀ -grid mini-grid market. And this goes to the heart of how to attract private-sector investors to the continent’s energy sector. In Nairobi, where PIDG has oﬃces, a large community of developers are looking at the electricity market. But, said Valahu, they often lack ‘patient’ capital – the ﬁnal amount of capital needed to take them over the line.
“In some cases, we are talking about just $3m to $5m,” said Valahu. “However, there are not many agencies designed to do that. That will be our role through InfraCo: to put resources into the mini-grid sector to see where these mini-grids can be bundled so that you achieve a size that will attract investors – not necessarily just power-sector investors, but more institutional investors, if we can.”
InfraCo Africa is primed to play a key role in piloting projects that banks are not going to ﬁnance on their own – projects that may be too small for the development institutions but which can be done quickly and then scaled up by private players. “There are not many entities that can do that and deploy that sort of cash to pilot a project,” acknowledges Valahu. “It’s binary. If it doesn’t work you could be facing a $3m loss. But because of the nature of our funding we are able to, and you will see us doing more of this across the continent.”
By demonstrating to the market that it is safe to invest in oﬀ -grid schemes and that a decent return is possible – particularly with technology prices falling – groups such as PIDG are primed to play a catalytic role in getting projects funded. “For us, it is about de-risking and leading the way, but again, achieving some sort of scale while also coming up with innovative solutions,” said Valahu.
Innovative solutions include a project in Kenya, where the PIDG worked with the Ministry of Energy to develop a bankable power purchase agreement (PPA) denominated in local currency for small renewable energy projects under 10MW.
On the back of that, InfraCo Africa signed joint development agreements to develop two solar power projects in North Kenya, one of which will have a PPA denominated in local currency – a ﬁrst for the country. The advantage of this is that if a project is sourcing locally, there is no reason not to have a PPA denominated in local currency. This could have a galvanising impact across the sector. “If we allow others to understand that they could be doing more of the same thing – then we can really begin to shift the needle,” said Valahu.
Working with potential partners such as Africa GreenCo, which aims to increase private-sector investment in energy generation in sub-Saharan Africa by mitigating the credit risks associated with the current lack of creditworthy oﬀ takers, is another exemplar of the innovation under way in African infrastructure.
According to Africa GreenCo, the weak ﬁnancial position of utilities and limited choice of an alternative buyer in case of utility default deters private capital. An intermediary aggregator between buyers and sellers can help attract sustainable investments in the power sector on the strength of a multi-buyer model.
“What they are trying to be is a creditworthy intermediary oﬀ taker and power-trading company in Zambia, essentially removing the oﬀ taker risk of the utility by assuming it them-selves through having a strong balance sheet,” said Valahu. “They then pool that power internally, where they have access through the power pool in Southern Africa across borders.” This underscores that new thinking and new initiatives make a diﬀerence. Going forward, African energy schemes will want to make greater use of institutional forms of funding.
LOCAL CURRENCY GUARANTEES
One of PIDG’s six companies is GuarantCo, a credit solution entity that includes local currency guarantees to banks and bond investors to develop local capital markets. Two years ago it set up an entity in Nigeria called InfraCredit Nigeria, which is designed to provide credit enhancement on Naira-denominated issuance in Nigeria for infrastructure projects. “This is a small project, but again in the infrastructure space it attract-ed – for the ﬁ rst time ever – into the infrastructure asset class 13 Nigerian pensions funds and three insurance companies,” said Valahu.
“That was made possible because we set up InfraCredit Nigeria, which had a proper rating. Equally, we provided training and capacity building to the pension funds and insurance companies that had never underwritten an infrastructure as-set before, and were doing it only in Nigerian treasuries.” Valahu points out that it was working outside of the InfraCredit model on domestic bond issuance to infra-structure projects, such as in Ghana.
“We’ve provided credit enhancement for an entity’s 10-year corporate bond in local currency in Ghana; a ﬁrst in the country.” said Valahu. “We also achieved a dual listing of some of the bonds on the London Stock Exchange (LSE) following a partnership we entered into with it. Interestingly enough, investors have a huge appetite for that kind of asset class on the LSE.”
The aim is to replicate this and encourage more domestic African issuers to tap into markets such as London’s. “Nigeria is a suﬃciently large market and, like Kenya and Uganda, has a deep pool of pension funds and insurance companies. But that won’t be the case in every African country,” said Valahu.
But while pension funds and insurance companies are ready to invest in Africa’s infrastructure, questions remain as to whether there are suﬃcient projects to attract them. “We keep talking about a lack of bankable projects, but my concern is what we are doing collectively to ensure there is a greater pool of bankable propositions,” said Valahu. In this respect, the African Development Bank’s Africa50 initiative, in association with a number of regional governments, is a positive step.
“They have clearly stepped up their game,” said Valahu. “And with InfraCo Africa and the likes of Berkeley Energy in the private sector, there are now a handful of people out there that have the knowledge and deep pockets to develop infrastructure projects.” Other future energy schemes being looked at by PIDG include a geothermal project in Ethiopia. “For me, the challenge is about deploying money more intelligently to develop these projects,” said Valahu. “I don’t think you will have a problem attracting funding once you have the bankable transactions.”
IPPS MAKE INROADS
Public-private partnerships (PPPs) are now firmly on regional financiers’ agendas. Independent power projects (IPPs) such as Ghana’s Kpone facility have established that private investors will back African schemes if the structures and framework are right.
There are other IPPs making headway elsewhere on the continent. South Africa’s Standard Bank closed the financing on a 37MW IPP for Namibia’s NamPower in 2018, in what was the largest IPP project in the country to date, and the first large-scale renewable project to reach financial close in the country. As one of the largest solar photovoltaic plants in Africa outside South Africa, the project is expected to increase Namibia’s generation capacity by 7%, producing 120,000MW/h per annum for more than 25 years.
It is an example of the kind of funding innovation that Standard Bank’s Head of Power, Rentia van Tonder, is keen to see more of. Standard Bank effectively secured a phased risk transfer guarantee from Proparco, with a deal structure that allowed it to extend the tenor of the funding from eight to 15 years. Since the project didn’t benefit from a government guarantee, there was no political risk protection in the power purchase agreement (PPA) between NamPower and Alten Hardap, the IPP sponsor developing the plant.
In response, Standard Bank partnered with Proparco to build a hybrid guarantee structure that allowed the development finance institution to extend a ZAR-based guarantee to Standard Bank, aligned with its risk appetite.
Standard Bank’s strong in-country balance sheet and presence enabled Proparco to take on the credit risk in local currency, effectively reducing the bank’s own exposure from 15 to the first eight years of the project. This removed the additional cost of political risk insurance since the guarantee from Proparco extended the tenor to the client by an additional seven years. What was key to the success of the transaction was NamPower’s readiness to provide the level of PPP that private players are comfortable with, said van Tonder.
“In general, private players prefer partnerships within a clear framework, depending on the private player and level of participation they are comfortable with. At this stage, we usually see a 20-30% participation depending on the government’s appetite, but that still gives you a level of private-sector support to be able to influence decisions.”
This article is an extract from the Africa Energy Yearbook 2019, a partnership between African Business and EnergyNet.