Plugging the gap in Africa’s energy financing

It is forecast that seven of the top ten countries in terms of GDP growth within the next decade will be from Africa. But this growth is wholly predicated on increasing energy supply.
According to Calvin Walker, global head of project finance at global law firm Baker & McKenzie, the correlation between economic development and power supply highlights an absolute truth: realising Africa’s promise will require significant increase in funding to meet anticipated growth in electricity demand.
‘International banks, investment funds and other investors are slowly being lured by the promise of higher infrastructure investment returns than those in developed markets, but it is Development Finance Institutions (DFIs) and Export Credit Agencies (ECAs) which still have a vital role in increasing lending and drawing in more foreign investment,’ says Walker.
Infrastructure spending in Africa is set to grow by 10 percent per annum for the next decade and exceed $180bn by 2025. Questions however remain of where the money will come from and how much more will be required.
Lending volumes of non-bank institutions such as ECAs and DFIs are continuing on an upward trend, rising by more than $25bn in 2013 compared to 2012, for example.
These non-bank institutions play a disproportionately important role in funding smaller projects and facilitating long-term investment by commercial institutions.
As well as finance, these institutions provide banks and institutional investors with help on the ground in conducting due diligence, issuing guarantees and negotiating with local authorities.
Afreximbank attracted some $8 billion into Africa in 2014 through 19 syndicated financing deals. Meanwhile, the World Bank’s International Finance Corporation (IFC) made new investments in Africa of $4.7bn in the year to June 2015 across 30 countries and made increasing energy supply and power transmission one of its major priorities.
The US Power Africa Initiative will see US Exim lend around $3bn and the World Bank $5bn to African projects by 2020.
In China, the People’s Daily recently reported that China Development Bank, the largest of China’s three policy banks, has granted more loans to Africa than the World Bank, the African Development Bank and the Asian Development Bank combined over the past six years.
There are also new players: the BRICS-led New Development Bank (NDB) may turn out to be a serious player in Africa through its proposed regional centre in Johannesburg.
In terms of specific examples of DFIs flexing their muscles, Morocco’s Noor II and III 350MW concentrated solar power (CSP) deals reached financial close recently, with seven DFIs lending $1.6bn in total to state utility Masen. Last year EKF, the Danish ECA, and two DFI’s, the European Investment Bank and the African Development Bank –provided a package of guarantees on the $523m financing for the 300MW Lake Turkana wind farm in Kenya. The 95MW Tobene IPP in Senegal had similar DFI backing, this time from the World Bank.
DFIs are often the only lenders on smaller infrastructure deals, without whose support many projects would not be completed. And the balance sheets of ECAs make them increasingly important to major deals, as structured products backed by ECA guarantees long-term cash flows, decrease risk and encourage long-term funding by institutional lenders. Increased issuance volumes for ECA-backed bonds are likely as institutional investors seek lower-risk ways to support African infrastructure.
A recent survey of Loan Market Association Members identified ECAs and DFIs as likely to grow their lending into Africa this year by more than any other institution except local banks.
Members also overwhelmingly identified energy, power and infrastructure as the areas most likely to drive future growth in Africa.
So lenders believe there are enormous opportunities in African energy. But banks and other private investors provide finance based on certainty, not faith. DFIs and ECAs can provide such certainty to help turn aspirations into Megawatts.

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