As is demonstrated in the table below the funding need is substantial for even for a small sample of countries, utilities and a few projects currently being developed. If it is considered that all utilities in sub-Saharan Africa are in a similar position the combined requirement including Independent Power Producer’s (IPP) for funding is considerably higher. Utilities and IPP’s will need to ensure that all funding options are explored in order to meet this need.

Table 1: Selected power utilities in sub-Saharan Africa

Limited recourse structures are expected to play a large role for this investment with the hope of attracting greater foreign private investments into sector within the region. The interest in programmes being run in countries like South Africa, Kenya, Nigeria, and Ghana have indicated that the funding for these projects, in the form of both equity and debt, is equally available.

The challenge, rather, is the lack of experience among stakeholders generally leading to lengthy development periods negotiations to reach closure on a project. In addition, the awarding of concessions and associated bureaucracy have also taken its toll on the time it takes to close projects.

Although, these tribulations have not proven to be insurmountable, there is still a significant project gestation period. In 2010 alone, only four projects where reported to have reached financial close in the World Banks PPI database in the energy sector.

Recognising that limited recourse financing continues to be the dominant funding product available to projects in the region, the question becomes what is the capacity of the relevant offtakers (typically utilities) to sign up to all of these IPP projects. As much as the IPP market takes away the need for utilities to fund power project directly it does place a burden on the utilities from the perspective of long-term offtake obligations.

Specifically, this becomes increasingly onerous in countries where multiple Power Purchase Agreements are signed in quick succession, not allowing time for recovery and strengthening of the utility balance sheet, or where historically the utility has seen an under-recovery of costs.

This need to have creditworthy offtakers often leads to a discussion around support for utilities including that from a sovereign level. Increasingly the material infrastructure requirements faced by sovereigns often forces sovereigns to have a negative view on providing support to projects.

As such there is a compelling need for utilities to develop their own credit strength. This will not only attract IPP’s to the regional markets but will also to allow the utility to invest in its own capital programs.

Regionally other forms of support have been found including support from bilateral and multilateral organizations similarly. This support may be in the form of direct or indirect financial instruments such as the provision of credit, guarantees or the ability to reduce counterparty exposures. From the commercial market, the provision of access to capital markets, export credit agency based financing and risk management solutions have been key.

Utilities can improve their own positions through ensuring profitable and efficient management. This includes utilisation and enactment of cost reflective tariffs, reduction of technical losses, and implementing sound governance structures for expenditure within the utility.

Over the recent period the tariff increases in South Africa, Tanzania and Uganda have indicated a positive trend. Utilities operating profitably for a long period of time can grow their credit strength over time and this will improve their borrowing ability as well as their ability to act as offtaker in order to attract investors.

Utility credit strength is therefore as important in a liberalised market or a market with a dominant vertically integrated utility. Historically, the focus of most investment programmes have been on providing the optimal IPP solutions and associated transmission infrastructure. Looking forward, investment into utilities is a just as important requirement.

In conclusion this short commentary on financing of power projects highlights the importance of the utility as a central stakeholder and enabler in the sector. It is imperative that utilities are strengthened in order to grow the sector and meet the growing requirements of the continent.

Article by: Omar Vajeth, Justin Ma and Khuselwa Klaas (Absa Capital, Power and Energy)