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Africa’s energy funding costs, capital access, risk profile under the spotlight

18th July 2017

By: Natasha Odendaal

Creamer Media Senior Deputy Editor

     

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Aligning power generation and distribution projects with the host country and government’s mandate is a step forward in attracting more internal and external financing to develop comprehensive energy and power infrastructure.

This is one of the messages emerging from this year’s PowerGen Africa conference, being held in Sandton from July 18 to 20, where much of the financing possibilities for an energy-strapped Africa is being mulled.

Despite the overshadowing perception that Africa lacks the cash flow to fund itself and that foreign investors are hesitant to inject funds owing to a perceived high risk, there are funds – domestic and international – for Africa’s energy plans and investors hungry to invest in the best projects.

Of the $90-billion a year required for Africa’s infrastructure development, some $45-billion was energy-related, said Barclays Africa Investment Banking power, utilities and infrastructure principal Bhavtik Vallabhjee.

However, African Development Bank (AfDB) senior investment officer Fernando Balderrama told delegates during a finance and investment panel that there was quite a bit of capital right available on the continent.

“It is more a matter of being able to retain the capital,” he explained, noting that there were more outflows of investments than inflows. He also pointed to the need for enhanced confidence, certainty and an enabling environment.

“We [at AfDB] try to find those projects that are of chief importance to the country and the mandate of the government,” Balderrama noted, citing elements of bankability targeted by the bank during application processes.

CMS CEO and cofounder Mark Moriarty agreed, saying there was “no question” of the huge demand and opportunities; however, increased transparency, certainty, tighter policies and commitment from government would go a long way in bringing international capital to Africa’s shores.

For funding to flow, there was a strong need for strong policy, future tariff certainty and solid programme roll-out, along with a strong and robust regulatory environment to support the industry, added AfDB senior operations officer Liezl Harmse.

The question surrounding the perceived risk and attached higher interest rates and costs also need to be addressed.

“Investing in Africa is not more risky than [investing in] Europe,” said US-based Edison Electric Institute VP international programme Lawrence Jones, adding that defaults in Africa were negligibly higher than in developed countries.

Jones challenged the view that building a power station in Africa was more risky than building, for example, a road, pointing out that the energy sector was drowning in negative perceptions.

“Energy is always seen as being the most risky [investment],” Jones commented.

He further questioned the high financing costs that were attached to the high risk, noting that the stringent requirements and high-risk profiles stipulated by international finance banks and institutions bump up costs for projects and this hampered any development.

BANKABLE PROJECTS
Jones, meanwhile, raised a red flag over the narrow focus on power generation, without much regard for the long-term view of delivery and distribution.

“There is a missing part of the conversation. You can build as much power [generation capacity]as you want, if you can’t deliver the power, the bankability of the project is already lost. The project becomes a nonstarter.”

If Africa was going to industrialise, a hybrid approach incorporating decentralised and centralised generation is required.

Harmse added that, along with the delivery of energy, there should be discussion over the modernisation of the recovery of revenue.

Edited by Creamer Media Reporter

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