Private investment

By Andre Wepener

Governments both local and international are gaining private sector buy-in to invest in and provide funding for projects in South Africa and across sub-Saharan Africa, on condition that these prospects are suitably designed to attract funding.

Infrastructure has been described as the backbone of a country. In South Africa, the development of infrastructure has been identified in the National Development Plan (NDP) as a key component in achieving the goals of economic growth, job creation, and improving the quality of life of its citizens.

MAINinsightImage credit: infrastructurecouncil.org

Infrastructure projects are, by definition, capital intensive and are typically funded either directly by government or by a form of partnership between the public and private sectors. The initial capital cost is followed by ongoing operating and maintenance costs, and regular maintenance is essential to ensure that the full benefit of the asset is enjoyed over its useful life. There has been a backlog in maintenance expenditure in some sectors in South Africa; for example, some road and water infrastructure have deteriorated to the point that it is beyond repair and must be rebuilt at a substantial cost. 

There is strong demand from the private sector, both local and international, to invest in and provide funding for projects in South Africa and across the rest of sub-Saharan Africa, provided these opportunities are appropriately structured to attract funding. In contrast to some other sectors, infrastructure attracts investors who are seeking long-term, low-risk, stable investments, with moderate and predictable returns.

The project needs to be initiated and procured through a transparent and well-understood regulatory framework. Andre Wepener, Investec

Investors and lenders in an infrastructure project are essentially taking a view that they will earn their investment return or be repaid from the future cash flows to be generated by a project that has not yet been constructed, without recourse to any other security or assets outside of that project. To be comfortable with this, the financing structure should mitigate the key risks associated with the project, some of which are addressed below.

The project needs to be initiated and procured through a transparent and well-understood regulatory framework. Two good examples of this is the Public Private Partnership (PPP) framework established by National Treasury that was used extensively over the past two decades, and the Renewable Energy Independent Power Producers Programme (REIPPP). Within both of these programmes, there was centralised project preparation and procurement, with good governance structures and transparency of process. There was strong buy-in from both government and private sector investors, and the rules of the game were well understood and governed by standard documentation. Investors therefore had a high level of confidence about government’s role and responsibilities. Other recent examples in sub-Saharan Africa are the Scaling Solar and GET FiT programmes that were rolled out in several countries with assistance from the Development Finance Institutions (DFI).

Investor returns can be severely hampered by cost overruns and delays during the construction phase, and underperformance in the operating phase. The strongest mitigators to these risks are ensuring that the parties in the development consortium have the appropriate experience and resources to deliver, including:

  • A developer with experience in the technology, sector, and jurisdiction;
  • An EPC contractor with the financial resources to ensure that they can deliver a fixed-price, turnkey asset, and the technical capability to construct the project on time and on budget;
  • Key components supplied by a reputable OEM;
  • An operator with financial substance and sufficient experience in operating similar projects; and
  • Legal, financial, insurance, technical, environmental, and other advisors to ensure that all risks are understood and appropriately mitigated.

The strength of the offtaker and structure of offtake agreements are critical in the assessment of bankability of a project. Investors and lenders are taking a long-term view and need comfort that the party responsible for payment of the tariff or unitary charge, which ultimately drives the revenue, will be committed and able to make these payments for the duration of the contract. Provision will need to be made for appropriate compensation in the event that the offtake agreements are terminated. Where offtakers are state-owned entities (SOE) or utilities that do not have a substantial balance sheet, support in the form of a guarantee would be required from the respective government. In countries where government is not willing or able to provide such support, this risk is in some cases underwritten by DFIs or multilateral agencies to ensure bankability.

There is growing demand from the private sector for investment and funding opportunities in the infrastructure sector in South Africa, and the players have historically included commercial banks, asset managers, and pension funds. Managers of pension fund assets are particularly interested in the sector, given that the long-term, predictable, and often inflation-linked returns are a good match for their pension liabilities. There are also potential synergies between players with different funding mandates, and different funding tranches can be structured to complement each other with differing repayment profiles, a combination of shorter and longer tenors, and commencing pre or post construction.

Looking ahead, there is growing optimism in the financing community around the development of infrastructure in South Africa. There are a number of forums where public and private players are engaging on these issues, and in public statements, the president himself has acknowledged the need for private sector engagement and investment in the sector. This may include a revival of the PPP programmes, which would be viewed in the market as a positive step. The PPP framework has been used around the world to fund energy, transport, water and sanitation, waste management, medical, education, and correctional facility projects, to name a few. Successful implementation of projects in these sectors would contribute significantly towards the country’s goals of reducing poverty, inequality, and unemployment and boosting economic growth and foreign investment.

Andre Wepener

About the author

Investec’s Andre Wepener is the head of the Power & Infrastructure Finance team at Investec Bank, based in Johannesburg. The team provides funding solutions for power and infrastructure projects across sub-Saharan Africa. In addition to providing debt financing, they also play the role of developer and equity provider on select projects.


 

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