There are significant opportunities in Africa for renewable energy but securing financial backing for projects can be a problem owing to a number of challenges facing the investor community.
This was indicated by speakers during a panel discussion at the African Energy Indaba on March 1.
UK Export Finance West Africa country manager Steve Gray mentioned that one of the biggest constraints was a lack of transparency of data that was needed to measure risk.
Therefore, investors had to resort to assumptions about potential projects, which could lead to these being passed on – because the perception of risks, based on a lack of data, fell outside of companies’ risk framework, he explained.
He noted that this was a view that was held by many outside of the continent.
He explained that the reality was often different, however, with studies that looked at project finance transactions in Africa, the US and the UK indicating that the biggest failures actually occurred in the US, with the leading cause being political risk.
Therefore, he said there was a mismatch between perception and reality and, moving forward, Africa needed to be better at providing data so that risk could be better measured for investors, thereby unlocking much-needed capital.
Standard Bank renewable energy, power and infrastructure head Rentia van Tonder reiterated the importance of data and transparency.
She also said that, as a commercial bank focused on funding projects on the continent, one key driver that it looked at was having an enabling environment that was a conducive environment for investment.
She said the biggest challenge to securing finance was a lack of bankable projects. She explained that, while big projects were being considered and developed, these did not progress fast enough to a bankable state for investors, and that an enabling environment needed to be pursued to ensure the bankability of projects.
African Infrastructure Investment Managers investment manager Hlompho Vuyo Ntoi echoed Van Tonder’s views, saying the company had also observed a limited amount of bankable projects.
He explained further that this was a function of some of the things that constrained the continent.
Firstly, he highlighted scale. He explained that Africa had a very big population, but mainly poor countries with people who were unable to pay the market rate for services rendered.
As a result, tariffs for electricity, for example, were not cost-reflective of the service being provided, Ntoi pointed out.
Therefore, he said, the utilities that provided these services were not bankable on a standalone basis. As renewable energy projects would be selling to these utilities, it was difficult to back up contracts with these financially impaired utilities, he pointed out.
Moreover, Ntoi said the lack of scale contributed to a lack of interest from some of the bigger developers globally. Rather, small developers who were not financially strong entered the space and developed projects on the continent – but the small developers might not have the skills or expertise to drive projects to a close, which exacerbated the dearth of bankable projects.
Ntoi said there needed to be a strategy that attracted big developers. For example, this could be seen with South Africa’s Renewable Energy Independent Power Producer Procurement Programme, which aimed to bring in investors on a long-term basis, rather than just a one-off project.
He also pointed to the need for bankable utilities, where power was provided on a cost-reflective basis. Solving these two issues would go a long way to resolving the continent’s energy crises, Ntoi posited.
Export Credit Insurance Corporation (ECIC) senior underwriter Lebohang Mosetu mentioned another risk as being environmental and social issues. He also reiterated Van Tonder’s view of a lack of regulatory framework being a problem.
He reiterated other speakers’ concerns about utilities sometimes not being credit worthy and requiring guarantees from the State. He noted that lenders have come to the ECIC owing to a breach of contract in terms of such guarantees.
Also of concern to lenders that the ECIC has observed is changes in laws happening in countries on the continent.