Dollar funding ‘no silver bullet’ for Africa

More workable project finance models are delivering a boost to the region but some significant risks remain, according to Standard Bank.

A report from Standard Bank, the Johannesburg-based African banking group, finds that “more workable and pragmatic” models for project finance are helping improve the flow of deals in Africa.

However, “significant risks” remain with progress varying country-by-country and uncertainty being caused by the tendency to use dollar funding for power projects where the revenue is in local currency.

The report says that, unless currency volatility risk is absorbed on a ‘user pay’ basis, the increasing local currency funding requirement caused by depreciation against the dollar becomes a major risk when it is often followed by liquidity and convertibility constraints in the country in question.

Dollar funding, the report says, is not a “silver bullet”. David Humphrey, global head of power and infrastructure at Standard Bank, says those investing in African energy projects need to “go in with their eyes wide open”.

However, the report finds that Africa – with economic growth in Sub-Sahara having exceeded 5 percent a year for more than a decade – is very much on the radar of major investors, including those from the US.

One example given is General Electric (GE), which has built a $6 billion business in Africa over the last decade “virtually from scratch”. GE Africa, which operates in 35 countries on the continent, has pledged to invest $2 billion in new African investments by 2018.

The report also references the US’ Power Africa initiative, launched in 2013, which aims to double access to power in its six partner countries of Ethiopia, Ghana, Kenya, Liberia, Nigeria and Tanzania. More than $7 billion has been committed through financial support and loan guarantees.

The report adds that the development of an independent power project (IPP) industry is “beginning to take shape and bodes well for the future”. The Triumph Power Generating Company is the first locally owned IPP in Kenya and is developing an 83-megawatt (MW) heavy fuel oil power plant with power to be sold to Kenya Power and Lighting Company under a 20-year power purchase agreement (PPA).

Furthermore, the REIPPP (Renewable Energy Independent Power Producer Procurement) programme in South Africa – despite slower progress than hoped for – is showing “promising signs” with lower tariffs being achieved due to active competition. It is hoped that the programme may be replicated across Africa.

“The future of the energy sector in Africa will continue to be exciting and rewarding for those that manage their risks correctly,” notes Humphrey.