The bankability challenge

In the world of project finance, it is common practice to use the words “feasible”, “viable” and “bankable” interchangeably. Yet in infrastructure financing, especially in Africa, there is a big difference between all three.

A lack of consensus is driven by divergent views between the various project stakeholders, including project sponsors, financiers, investors and governments, on the speed at which a project can and should be delivered. For example, the political calendar (four years) is usually less than the average time it takes to achieve reach financial close on a large-scale infrastructure project (seven years).

Across the African continent, there are many feasible infrastructure projects, and more often than not, there is the possibility of operating them sustainably, or in a viable way. During the project development lifecycle, feasibility studies are usually conducted at the appraisal phase and attempt to answer the imperative questions: What is the size of the project? Can it be done? Does it make sense? Is it likely to meet the needs of its intended target group?

The feasibility study reflects the project in its operational details taking into account all the policy, technical, economic, financial, institutional management, environmental, socio-cultural and gender-related aspects. A good example is the Grand Inga III project in the Democratic Republic of Congo, which is intended to be the world’s largest hydropower project, with a phenomenal generation capacity of 42,000MW and capable of doubling Africa’s electricity production capacity. The project is estimated to cost over $50 billion. The question is not whether the project makes sense, which it does given the electricity deficit on the continent, but that the steps required to make the project bankable have not yet been achieved.

The journey from project feasibility to financial close requires mitigating and where possible eliminating the risks associated with the project. This is what achieving bankability means. It is specific to a project and cannot be generalised. It is only when bankability is achieved that financiers and investors are comfortable to provide financing to a project.

Project development is that journey towards bankability. It is usually a long and expensive expedition which could cost as much as 5 to 10 percent of the total project. This important piece of work is often ignored in the planning process. It is not a concept public sector officials in Africa are used to, given their penchant for funding projects directly from taxpayers’ coffers. They often operate in the realms of “feasible” and “viable”, with their counterparts (sponsors, investors and financiers) more focused on making a project “bankable”.

The Africa Finance Corporation (AFC) is helping to bridge this divide by leveraging on its project development capabilities, a useful and necessary tool that lends capital and financial structuring and technical expertise to minimise and eliminate the risks associated with project financing. The AFC and other successful developers have proven that project development financing is an important asset class that is required to unlock the bottleneck associated with infrastructure development.

The Cenpower project, a 350MW power plant currently under construction in Ghana, is the result of 10 years of development work, and has provided a template for independent power producers. The AFC is replicating this model in other projects in Côte d’Ivoire, Mozambique, Rwanda and Zambia.

With a view to further develop this asset class, the AFC, alongside its development partners, is launching the Africa Project Developers Initiative, a think tank and network that will promote and enable project development work in Africa by creating a platform that will foster continuous dialogue amongst members, standardise project development documents and develop market norms, organise knowledge sharing sessions, conduct independent research and serve as a policy advocacy forum for the industry to ensure that more projects in Africa achieve bankability.

Through the activities of the network, greater understanding of project development can be fostered, and more importantly, the project development journey in Africa can be made more efficient, effective and less expensive.