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The challenges of this financing are magnified in sub-Saharan Africa, as there is a paucity of projects that meet the high-water mark required by most investment banks. Basic requirements include experienced and credit-worthy sponsors, healthy financial ratios and forecasts, exhaustive technical due diligence, and a stable and cohesive political and legal framework. Development finance institutions (DFIs) are more flexible than investment banks, but African governments are increasingly less willing to accept the more onerous conditions attached to their funding.
By Musonda Chibwe Kapotwe
Musonda Chibwe Kapotwe is legal counsel for project finance at Citigroup in London. is legal counsel for project finance at Citigroup in London.
The scarcity of project finance in Africa arises not only from the obstacles detailed above but also from the adverse impact of capital constraints imposed by Basel III, which make big-ticket loan commitments and long tenors of project finance an expensive business. There has also been a change in strategy since the credit crisis for some project finance banks, which has resulted in a quiet but noticeable retreat back to their local markets. Moreover, sponsors’ frustration with the relatively lengthy transaction timetables and high deal costs for project finance has grown. To address these challenges, Africa is seeking alternative funding solutions in other financial markets.
The starting point has been to tap the international sovereign bond market. Recent Eurobond issuances by the governments of Senegal, Rwanda and Kenya have all specified infrastructure projects as the proposed use of proceeds. A disadvantage of capital market debt for financing projects is the need for upfront payment of bond proceeds. Project debt facilities allow for funds to be drawn down in stages to meet scheduled project costs, thereby avoiding any excessive negative carry.
In contrast to project financing, sovereign bondholders are principally concerned with yield and liquidity and less so with overly prescriptive contractual terms to manage the risks of the underlying project. This grants the sovereign two immediate advantages: more flexibility and less monitoring of how bond proceeds are applied, and a new investor base of institutional investors who would not typically participate as lenders in a project financing. Unlike DFIs, investors’ motives for funding are purely commercial. They are not seeking to correct the perceived lack of transparency of certain African business and political practices or to manage potentially adverse socio-environmental effects of the project.
The Rwandan sovereign bond is a good example of transparency. The government chose to set out the specific projects the bond would fund, including $50m to finance the Nyabarongo hydro power project. By contrast, the Zambian bond referred only to “general budgetary purposes” providing much wider latitude for alternate government spending, although this was later corrected with press statements listing the projects to be funded.
Governments that are reluctant to issue a Eurobond (due to timing constraints, the perceived administrative burden or concern with onerous securities law compliance) have used private placements of bespoke securities. These placements include repackaged loans, loan participation notes or credit-linked notes. Tanzania completed a $600m private placement in 2013 to finance upgrades in power supply. Similarly, Angola undertook a placement of up to $1bn in 2012. Both governments successfully raised capital market debt while bypassing the fanfare and scrutiny that a public Eurobond issuance would undoubtedly have attracted in the media.
Domestic capital markets should not be ignored. Local currency bonds enable some projects to match their revenues to their debt and build an alternative asset class for Africa’s latest investors, the pension and sovereign wealth funds. In South Africa, the most mature and liquid market, there was the recent closing of the innovative R1bn ($86.42m) project bond issued by semiconductor company Soitec, which was one of the first publicly listed project bonds to finance an African solar project. Islamic finance markets are also finally being utilised. Senegal issued a local currency sukuk bond raising approximately $200m to finance domestic infrastructure, and South Africa is also following this trend with its own $500m sukuk. These transactions successfully target regional Islamic investors who invest solely in sharia-compliant debt which leaves them excluded from conventional external debt financings in Africa.