The biggest hybrid project/export financing to date by Chinese lenders in the African market, the $825 million of 20-year debt for the $1.6 billion 600MW Morupule B coal-fired power and transmission project in Botswana is also the cornerstone of state-owned Botswana Power Corporation's (BPC) plan for security of supply – Eskom accounted for around 75% of Botswana's power but has been forced to divert supply to meet South Africa's own power shortages.

The deal is also a template for future co-operation between Chinese commercial lenders and the African project market. Lead arranged by Standard Bank and Industrial and Commercial Bank of China (ICBC) – which has owned 20% of Standard Bank since 2008 – the project is their first large scale jointly arranged financing and combines Chinese lending muscle with the expertise of an experienced project bank.

The project – a 4x150 MW coal-fired circulating fluidized-bed power plant in the township of Palapye, northeast of Gaborone – will source feedstock from the same mine as the existing 132MW Morupule A plant. The project has three main components – the Morupule B Power Station (estimated cost $1.21 billion, including taxes and duties of $138 million); a 400kV Morupule B–Phokoje transmission system and associated sub-stations linking the plant to the BPC grid, which will be funded by equity (estimated cost $275.2 million, including taxes and duties of $36 million); and a 35-borehole well-field and associated water reticulation system (estimated cost $53 million, including taxes and duties of $6.1 million).

Works for the project started in June 2009 and the four generation units are scheduled to come online sequentially between January and October 2012. The power transmission system will be commissioned by December 2011.

The major EPC works have been awarded to China National Electric Equipment Corporation (CNEEC) and Shenyang Boiler Works and are to be implemented over 42 months. Penalties for liquidated damages are invoked if the EPC contractor fails to commission the plant within 42 months from the commencement date. Plant operation and maintenance will also be the responsibility of the EPC contractor for a period of two years from project completion, after which it will be fully operated by BPC staff.

Beyond the scope of the project are two elements of associated infrastructure: Morupule Colliery Ltd (MCL) is expanding its coal mine, which also supplies coal to the Morupule A Power Station, for the dual purposes of supplying coal to Morupule B and the export market; and MCL has built a 22km underground water pipeline from the North-South Carrier (NSC) to supply water to both the Morupule Colliery and Morupule B.

Timing for the project's financing could not have been worse – the formal request for proposals (RFP) was issued in December 2008, just after the global financial crisis had hit. BPC was looking for general funding and a bond financing. Given the lending climate the bond was not an option.

Standard Bank and ICBC had already made proposals to BPC prior to the RFP and submitted an all inclusive deal – a bank debt and ECA-backed deal based around the EPC contractors (CNEEC is a major ICBC client), which had been awarded the $970 million EPC in November 2008.

The deal includes a $140 million nine-month equity bridging loan which signed along with the long-term facility on 15 June 2009 and has since been drawn. ICBC is sole provider of the equity bridge with Standard Bank guaranteeing against BPC credit risk, which is ultimately backed by a Botswana Ministry of Finance guarantee.

The $825.048 million long-term debt is guaranteed by Sinosure (commercial and political risk insurance) for the first 15 years, followed by a partial guarantee from the IBRD/World Bank for the remaining five. Approvals from the World Bank and Sinosure were signed in October 2009.

Margin on the debt is a flat 160bp over Libor for the first 15 years, ratcheting up to 200bp through years 15 to 20. There is also a liquidity premium of 3% for debt provider ICBC. The deal was syndicated by ICBC to Chinese banks.

Standard Bank also provided 20 year currency and interest rate hedging – a cross-currency swap designed to convert US dollar funding into fixed rate synthetic Botswana Pula, thus minimizing BPC's exposure to adverse movements in foreign exchange and interest rates, and enabling the sponsor to align loan currency with the currency of its revenue stream for the full repayment period.
In addition to the guarantee from Botswana's Ministry of Finance, the project also benefits from multilateral loans to Botswana which are on-lent to BPC – a $162 million loan and a $243 million guarantee from the IBRD, and a $203 million loan from AfDB.

Morupule B is the first step in a radical overhaul of the Botswanan power sector. BPC has historically been able to keep tariffs low by sourcing the bulk of its supply from Eskom. Going forward BPC's cost structure will radically change, with the corporation sourcing the bulk of its power from its own plants and possibly IPPs. Consequently, the government has committed to establishing an independent regulator by 2011 to set tariffs at a level that enable BPC to operate as a commercially viable entity and attract private investors into the sector.

Morupule B
Status: Financial close November 2009
Description: $1.6 billion 600MW coal-fired power and transmission project
Sponsor: Botswana Power Corporation
Lead arrangers: Standard Bank; Industrial and Commercial Bank of China
Multilaterals/ECAs: IBRD; AfDB; Sinosure
Financial adviser: Delphos International
Sponsor legal counsel: Minchin & Kelly
Lender legal counsel: Clifford Chance; Armstrongs
EPC Contractor: CNEEC