Due to the capital-intensive nature of such projects, most startups find it nearly impossible to fund the project entirely on their own.
This is where project finance in African countries and other countries around the world comes into play. We provide long-term debt financing in the form of restricted or non-recourse financing packages tailored to the project’s projected cash flows, secured solely by the project assets.
The process of obtaining project financing typically requires the formation of a “special purpose vehicle” (SPV) by the investor. An SPV is an economic entity established to design, structure and manage the finances of a particular project, thereby ensuring sound financial health to lenders. It is a proven method for financing large-scale, risky and complex industrial projects.
The question now is whether this is the right investment opportunity for you. How can project finance in Africa help you if you are dealing with an infrastructure project?
In this blog post, we look at some of the reasons why project finance provides a path to project success. read more…
Key benefits of project finance for industrial projects in Africa
Risk diversification
Using project finance to finance industrial projects allows investors to spread the project’s risks among SPV stakeholders who can financially absorb the risks. Additionally, because the equity commitment is less than the estimated project budget, a significant portion of the risk is transferred to creditors.
Off-balance sheet or limited recourse
Project financing allows you to pay off debt from your balance sheet. The cash flows generated by the project’s proceeds are used only to repay capital and interest. As a result, if the borrower defaults on repayments, the lender can only claim the responsible SPV’s assets and nothing else, even if their value is less than the amount owed.
Excellent tax treatment
Obtaining project financing allows the borrower to benefit from tax incentives. This is why it is the most popular option for financing long-term projects.
Impact of Sponsor Credits on Projects
This financing structure not only optimizes the project’s leverage, but also ensures that the sponsor’s creditworthiness does not negatively impact the project.
Three stages of industrial and infrastructure project financing
pre-financial stage
At this stage, we develop a project plan based on business needs and market trends, thoroughly investigate the risks involved, and determine whether the project is technically, politically, economically, and environmentally viable.
Funding stage
At this stage, the sponsor, acting as an SPV, obtains capital and financing from financial institutions, reaches a mutually documented agreement on payment terms and loan amount, which is then injected into the SPV to finance the project. Payments are made through a combination of debt and equity, with a typical debt:equity ratio of 70:30 (which may vary from case to case). Once the project is fully funded, it will move to the financial close stage.
Post-funding stage
Once a project is fully funded, the project cycle and its milestones are closely monitored and driven to completion ahead of set deadlines. After the project is completed, the loan will be repaid with project proceeds.
What does the future hold for industrial project finance in Africa?
To date, many infrastructure projects such as roads, airports, power plants and mines have been successfully completed in African countries through project finance. With sufficient support from African governments, the implementation of large-scale projects, especially those related to urban development, is expected to increase by around 65% in the years to 2030.
Offshore lending is also being liberalized to provide African banks with more financing options. Therefore, a sharp increase in demand for project finance is expected, indicating an economic boom to come.
For example, in South Africa, the Renewable Energy IPP Procurement Program (REIPP) has defined the project finance market in recent years, successfully completing three rounds of projects on a project finance basis and facilitating investments of over USD 10 billion. Apart from the REIPP project, certain large infrastructure projects have also been closed on a project finance basis, including the Gautrain light rail project, certain liquid fuel and liquid petroleum gas (LPG) import terminals, and mining-derived projects.
Going forward, project finance activity is expected to focus on additional renewable projects (subject to policy planning), power/energy projects procured on a similar basis, including both coal and liquefied natural gas (LNG), and water projects. This is because creditworthy off-takers are increasingly looking to private sector solutions for services traditionally provided by the public sector.
Another potential focus for the project finance market is investments in gas-fired power, off-grid electricity, oil and gas infrastructure (such as pipelines and refineries), and transportation infrastructure projects (such as toll roads and ports).
What is the regulatory framework governing project finance?
Africa’s project finance sector is not governed by a single broad regulatory framework. The regulatory approvals and processes required for each project are determined by the area and type of infrastructure being purchased or financed.
For example, in South Africa, a framework has been established under section 34 of the Electricity Regulation Act 2006 (ERA), which requires the Minister of Energy to specify the following details when procuring new generation capacity from renewable energy sources:
Technology Megawattage (MW) Purchasing Identity Purchaser of the electricity generated
Looking more closely at South Africa’s policy framework, Financial Regulation No. 16, promulgated under the Public Finance Management Act 1999 (PFMA), is the core legislation governing national and local government public-private partnerships (PPPs). Generally, when a project is procured or implemented by a government department or entity, the PFMA applies to project expenditures and security provided by the government (among other aspects). If the project is being developed privately, the necessary approvals will be determined by the relevant department. For example, the Minerals and Petroleum Resources Development Act 2002 (MPRDA) applies if the project involves the extraction or production of mineral products. If your project involves the storage, transportation, or distribution of gas or other refined products, the Gas Act applies.
Looking to the future: new frontiers for Africa’s infrastructure
Africa’s infrastructure is being strengthened year by year. But only with the right support from the right investors can it maintain its strength.
Stay tuned to ConstructAfrica for the latest news from Africa’s construction industry. We bring you the latest news, data and analysis to help you discover investment opportunities in the construction industry in African countries.
Photo: Office building under construction (Martijn Mulder | Dreamstime)
