The Role of Commercial Debt In Infrastrcuture Funding

LAGOS (Capital Markets in Africa) – It is without a doubt that innovative, consistent, funding sources are needed to fill the estimated circa USD93 billion annual African public infrastructure shortfall over the next decade in rail, road, port, water, and power infrastructure across the continent. A lot has been written about the state of existing infrastructure and the lack of new investment and maintenance which has led to the slow and meagre generation of GDP (gross domestic product) and Trade. Africa accounts for 16% of the world’s population but only generates 2.5% of global GDP [source PIDA]. An improved regulatory and investment environment in many African jurisdictions has led to the inflow of private commercial debt. This form of funding works together with and compliments the use of development finance and multilateral funding, export credit agency funding and other forms of concessional funding. Collaboration between these sources of funding is not an option but a necessity to ensure success.

The role of commercial debt funding in African infrastructure projects cannot be underestimated and is, in fact, simple – Banks are set up with their front and middle office teams to undertake these large scales in depth complex projects. In addition, Banks understand equitable risk allocation – this statement is contentious but in the context that private sector funding carries huge public accountability to depositors it is only right that certain risks are assumed by Governments, Sponsors and to the extent possible, development financing institutions. Only a limited set of risks capable of being diligence should be accepted by Banks. It is ultimately an investment and not a gamble, one that is long term and recouped over time without the loss (the last being an imperative). The role of commercial debt funding is to facilitate infrastructure investment where the building blocks stack up and the probability of successful implementation and operation is achieved.

Commercial funders are more “undiplomatic” than their counterparts and ask the difficult questions which other organisations may not be willing to ask or explore. Each project has to be put through a rigorous test to confirm bankability. At the end of the day, private sector funding is more likely to demand tighter controls and risk sharing matrix to achieve this. The time invested too deeply and intimately understand transactions allows commercial debt providers to comfortably increase their risk appetite resulting in commercial lenders participating in tranches that would not necessarily be palatable to their counterparts.

The recent Amandi Energy Power Plant, a 192 MW combined cycle dual-fired independent power producer project, located in the Western Region of Ghana at Aboadze, is an excellent example of collaboration between development finance institutions and commercial banks.

The development finance institutions played a significant role when it came to risk allocation to make the deal bankable. The development finance institutions also assisted and facilitated the procurement of political risk coverage for the benefit of the commercial debt providers and thus enabled participation by the commercial banks. In return, commercial banks were able to offer a unique supplier guarantee facility – a facility that the development finance institutions had limited appetite to participate in.

A major challenge that faces infrastructure projects on the continent is the rate projects are rolled out. Projects that have secured commercial debt funding are more likely to reach financial close more rapidly due to the non-bureaucratic approval procedures in banking and the adoption of a proactive approach to planning a transaction and to ensuring that these plans are efficiently and effectively executed. Where commercial debt funding plays a leading role, time frames are established and respected.

Further, execution risks associated with projects are greatly reduced. Overall the abilities within the Banks contribute to the end result. Diligence risk is mitigated by experienced in-house expertise and personnel applying the best market practice to evaluate projects. Having the “A” Team on any financing is already a winning recipe.

The commercial debt providers’ role and value add extend beyond traditional lending. Alongside the provision term funding, commercial banks are increasingly fulfilling multiple roles on transactions. The spectrum of services includes the provision of in-depth financial and commercial advisory services, underwriting meaningful debt sizes, fulfilling the roles of facility agent, security agent, interest rate and currency hedge provider, and construction /supplier guarantee provider and performing the account bank role.

Services development finance institutions and institutional investor would typically not offer. A key differentiator of the commercial debt offering is the ability to simultaneously perform various vital roles on a transaction and bring this together for the benefit of the project.

The role of commercial debt funding in African infrastructure projects is to fill the funding gap and bring these projects to close, in an efficient and timely manner. It will not be the biggest cheque in the project but it is strategic. The emphasis though should always be on the overall collaboration between the funding sources which in the current context and given the mammoth African infrastructure pipeline ahead, is a necessity, not an option.

Further, given the greater risk appetite, in-house technical expertise and commercial debt sense and checks, no transactions should be concluded in the absence of private commercial debt. With this in mind, the involvement of the commercial debt will, in all likelihood, be a key determinant a project’s success.

This article is featured in the April 2017 edition of INTO AFRICA Magazine, Powering Africa’s Energy Projects.

Contributors’ Profiles 
Inal Henry is an admitted Attorney and Notary Public in South Africa having obtained her LLb at the University of Natal and her LLM at the University of Cambridge. She has over 10 years’ experience in Banking and joined RMB in 2014 to head the Export Financing for the Investment Banking Division. She was previously a Director in the Capex Financing Solutions Team at Barclays Africa and prior to that a Senior Transactor in the International Finance Department of  the Industrial Development Corporation. Inal has won 6 International Deal of the Year Awards for her Export Credit Transactions.

Khetha Rantao is a Chartered Accountant and joined the RMB  Infrastructure Finance team in 2010.  Her banking exposure extends across the business landscape including retail banking, investment banking, treasury, and asset management. Khetha has been involved in several infrastructure deals in the power, industrial, roads and PPP sectors, particularly in Mozambique, Ghana, Namibia, Tanzania and Zambia over the last 7 years since joining RMB. She has significant experience in project finance in Africa with a particular focus on transactions that involve the use of Export Credit Agencies. Examples of Khetha’s recent arranging experience includes the Amandi Energy Power Plant IPP, a US$552m 192 MW combined cycle power station in Ghana and  Cenpower Generation Company IPP, a US$900m, 350MW gas-fired combined cycle power station in Ghana Xina Solar One (RF) 100MW concentrated solar power (“CSP”) project in the Northern Cape of South Africa, at a price tag of R10.2 billion.