Africa’s lack of power generation capacity is one of the big­gest ob­stacles to its economic development, with the sector’s requir­ed capital expenditure put at $29 billion annually over the next 10 years. Yet despite massive demand, bank­able projects remain thin on the ground. Commercial banks tend to avoid African projects in the developmental phase, leaving DFIs and multilaterals to predominate.

Some of the biggest and boldest projects have struggled – both for consensus amongst the different stakeholders and for financial close. Now it seems smaller and manageable financings could have more luck getting out of the starting blocks.

Nigeria privatisation

That is the case in Nigeria, where international and local banks are jostling to finance the 11 distribution firms and six power stations being offered up for sale by the Bureau of Public Enterprises – the government’s privatisation agency.

Transmission will remain in government hands, although the grid’s management will be privatised. Strong local bank appetite is likely, helped by initiatives like the Central Bank’s $3 billion Power and Aviation Infrastructure Fund, which allows banks to tap long-term funds. Project loans with tenors of over 7-8 years run into trouble in Nigeria because banks fund them with short-term borrowing. Now, banks can better match their assets and liabilities by accessing this new fund, which offers 15-year loans at 7% in local currency. Power project equity, and much of the expertise, will come from offshore.

Factors investors and lenders are watching include revenue-affecting unknowns like the tariff developers will be able to charge. This rests with Nigeria’s Multi-Year Tariff Order (MYTO), which is expected to correct the low pricing of power that investors and lenders say has made projects uneconomical.

Some of the assets, like distribution companies located in populous areas, are more sought after than others and pro­jects’ proximity to transmission lines and a ready gas supply are other factors. Nigeria’s power stations have struggled to find reliable supplies of gas, despite the existence of a large LNG sector and the persistence of gas flaring in the oil production industry.

Going forward, activity in Nigeria will also focus on lend­ing to private projects to supply industrial clusters, coming off the grid to avoid power unpredictability. Such projects, dubbed “the future” by one banker, are popular because they are free from government regulation since the electricity isn’t sold to the grid. These power hungry business clusters, like cement or steel plants, are also deemed more reliable off-takers compared to Nigeria’s still-untested PPAs.

In South Africa there is similar enthusiasm for financings for mining groups developing their own off-grid cogeneration projects. These projects will either be funded on corp­or­ates’ own balance sheets or by raising funds to develop a portfolio of projects.

Renewables

Across the region, renewables promise the best deal pipe­line. In South Africa developers are eyeing 1,025MW of green energy schemes expected on stream under the government’s Renewable Energy Feed in Tariffs (Refit) program.

This next wave of small-scale financings will have to fulfil strict criteria based on a project’s funding and equity mix, its equipment suppliers, empowerment partners and prox­imity to the grid, in a formulaic due diligence that will sit comfortably with banks. The hope is that this conservative allocation will increase to over 2,000MW once the government’s new Integrated Resource Plan comes out, expected in the next couple of months.

Challenges facing these new projects will include having to borrow in dollars and euros against rand revenue streams. Liquidity in South Africa’s banking sector is good enough to support these projects and banks will lend long-term, though they may only write small tickets. Currency mis­match puts huge strain on Eskom, which has to balance its rand income with liabilities in dollars and euros.

Investors and lenders are also keenly watching to see whether South Africa’s National Treasury stands behind the Single Buyer Office, an independent power purchase body hived off from Eskom to negotiate power purchase deals separately with IPPs.

Neighbouring Zambia has seen a flurry of activity around its hydro resources, with developers reporting a growing interest in selling Zambian power in Botswana, where prices are higher.

The Kariba north bank extension, a $420 million, 360 MW peaking power project on the Zambezi, recently closed with finance for the 100% debt-funded project coming from the China Export Import Bank and the Development Bank of Southern Africa. Zambian state utility Zesco’s $230 million, 120MW Itezhi-Tezhi hydro power station is also slated to close this year. Fieldstone and Standard Char­tered Bank are joint advisors on the project being developed by ITPC, a joint venture between ZESCO and Tata, which holds a 25-year concession. The total project cost is esti­mated at $230 million, of which 30% will be equity.

Elsewhere, InfraCo is involved in preliminary studies around the 220MW $350 million Muchinga Hydro Power Project with an eye to financing at the end of 2012. In an encouraging reflection of local bank appetite for power projects, the P1.2 billion ($176 million) debt por­tion of the P1.7 billion expan­sion of Botswana’s Morupule Colliery – which will feed the Morupule B power project – was raised from the commercial bank market in local currency.

In the first renewable energy deal in the region, and remarkable for its lack of sub­sidy, Cape Verde has closed a Eu65 million wind project that aims to sup­ply 25% of the island’s power needs. The EIB and African Development Bank fin­anc­ed the Eu40 million debt portion and African Finance Corporation, Finfund and InfraCo came up with the Eu20 million equity slice, in a 14-year deal priced at 375bp over Euribor. Elsewhere, Korea Midland Power, Sojitz Corp­or­ation and United Africa Group have signed a joint devel­opment agreement to develop Namibia’s first wind farm in Luderitz, on the Atlantic coast, in south-west Namibia. The 44MW project will require around $150 million raised though project financing and will involve a long-term power supply agreement with Namibia’s national power company. It is expected that operations will start in 2013. A second phase will increase the generating capacity to 90MW.

The African Development Bank has approved a $25 mil­lion loan to ContourGlobal’s KivuWatt methane-to-power project in Rwanda, bringing Rwanda’s first independent power project a step closer to financial close. The FMO and Emerging Africa Infrastructure Fund are providing another $50 million in debt, with sponsor equity from Contour meeting the rest of the project’s $128 million cost. Miga has been approached to provide political risk and breach of contract insurance.

Ambitious projects struggle

It is Africa’s more ambitious projects that are struggling to close. The delayed financing of Aldwych International and GECAD’s Tema Osonor power project in Ghana is a case in point. Tantalisingly close to financing, the project now hinges on the government ratifying the power purchase agreement in another unexpected twist. “It’s the kind of thing that scares commercial banks witless,” comments one source. The 126MW project will run on gas, diesel or heavy fuel oil, and sell power to the Volta River Authority under a 25-year power purchase agreement. The roughly $90 million in 15-year senior debt and $10 million in mezzanine debt is back­ed by lenders including FMO, the Emerging Africa Infra­structure Fund and the African Development Bank, some of which first committed back in 2008.

Botswana’s Mmamabula power project hit the buffers after failing to secure a power purchase agreement. The Toronto-listed CIC Energy suspended development of the coal-fired plant in December 2009 when it couldn’t agree a PPA with South Africa’s Eskom, the main offtaker for the 1,320MW plant. Now CIC has sold the 2.6 billion metric-ton Mmamabula coal field and the Mmamabula power project to India’s resource-hungry JSW Energy in a C$422 million ($414 million) takeover. Given the project’s chequer­ed history with Eskom, it could now be developed with Botswana Power Company as the main offtaker.

Hopes in Kenya, where only 17% of the population have access to elec­tricity, for a flagship Eu600 million wind power project off Lake Turkana in northern Kenya remain thwarted. The current debt requirement figure stands at Eu346 million, with a debt-equity split of 70/30. The AfDB is ex­pected to directly lend Eu100 million with the remaining Eu246 million coming from B loan lenders. The loan facilities will have a DFI tenor of 15 years with a 3-year grace period, and the lead banks will attempt to achieve the same tenor for commercial banks, or at least 12 years. The project has a 20-year PPA at a price of Eu0.0722 per kWh on a take-or-pay basis with Kenya Power & Lighting Company.

One of the latest challenges to hit the 300MW project has come with the IMF raising concerns about the level of government guarantees offered against the debt portion of the project to reassure lenders. Delays in the financing could affect carefully negotiated contracts, with suppliers unable to hold the same price levels, and equity investors promised a certain return. The two-pronged project, which combines 365 giant wind turbines with a 428km transmission cable to transport the electricity to market is another risk for lend­ers. The different transmission and interconnection aspects of the deal could become more costly than the electricity generation itself, with lenders facing worrying scenarios like the transmission line not being ready in time.

The obstacles to financing African power projects are huge. Commercial lenders deem most projects in the devel­op­mental phase too risky, yet DFIs also attract criticism for distorting the market with lower rates – higher margins would stimulate interest from commercial banks, say some. Conservative African governments are reluctant to provide guarantees for utilities with poor financial track records and outside South Africa and Nigeria, local currency investment is rare. Local banks struggle with long-term horizons and rates are high. In Ghana, where they hover around 18%, the Tema Osonor deal includes taking out a local lender from the project.

For now, many African power projects seem stuck in a chicken-and-egg conundrum. Only when projects are oper­ational and generating revenue will their risk profile fall, tempting commercial banks. Yet for this to happen, more projects need to close and get over the developmental hump. It may be Nigeria’s privatisation programme and South Africa’s renewables that do just that.