Project Development – Viable. Feasible. Bankable. Same Thing, Big Difference

By Oliver Andrews, Chief Investment Officer, Africa Finance Corporation

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 different 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 (4 years) is usually less that the average time it takes to achieve to reach financial close on a large scale infrastructure project (7 years).

Across the African continent, there are many feasible (“likely doable”) infrastructure projects, and more often than not, there is the possibility of operating them sustainably (“viable”). 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 account of all 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 would double the electricity production capacity of Africa.  The project cost is estimated to be over US$50 billion. The question is whether the project makes sense which it does given the electricity deficit on the continent, but the steps required to make the project bankable are yet to be achieved. 

The journey from project feasibility to financial close, i.e. gets the full financing required to construct and get the project operational, requires dimensioning, 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 generalized. It is only when bankability is achieved, that financiers and investors are comfortable to provide financing to a project.  

“Project Development” (PD) is that journey towards achieving bankability. It is usually a long and expensive expedition which could cost as much as 5% to 10% of the total project cost. 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 tax payers’ coffers and operate in the realm 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 minimize and eliminate the risks associated with project financing of infrastructure projects. The AFC, as with other successful developers has proven that project development financing is an important asset class that is required to unlock the bottleneck associated with infrastructure development on the continent and deliver bankable projects. 

The Cenpower project, a 350 MW 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 (APDI), a think tank and network that will promote and enable PD work in Africa, by creating a platform that will foster continuous dialogue amongst members, standardize project development documents and develop market norms, organize 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. 

It is believed that 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.

To find out more about the AFC and the Africa Project Developers Initiative, please click here.
 

Around $120 trillion is raised by the global economy for infrastructure projects across the world, however, despite its pressing need, just three per cent of those funds are delivered to Africa.
 
It is the lack of well-prepared, bankable projects, that is holding us back. Investors are willing to commit their capital to African infrastructure projects, which can end up being extremely lucrative for their backers. However, poorly structured projects, political risk concerns and the unique challenges of doing business in Africa mean that infrastructure investment is often a long, arduous process, deterring potential stakeholders.
 
At AFC, the project development unit steers projects from conception to financial close, working jointly with the project sponsors in addition to providing early stage capital required to make projects bankable i.e. reduce the risks associated with the projects thus making the projects attractive for financing.
 
AFC’s focuses primarily on five sectors that we consider key to unlocking development across the continent:
  • Power
  • Transportation
  • Telecommunications
  • Natural resources
  • Heavy industry
 
The Challenge of Bankable Projects
A shortage of bankable projects remains a key bottleneck in Africa. Large infrastructure projects have extensive development periods and often entail multifaceted feasibility studies and expert transaction advice. What is lacking is the resources (financial and expertise) that are required to make the project bankable. From our experience, project development cost for infrastructure projects could be as high as 5% to 10% of the total project cost. This sort of finance is not readily available on the continent.
 
AFC provides capital and technical expertise on commercial terms, to early stage projects in order for sponsors to achieve the desired objective of mitigating the risks associated with the projects and making it more attractive to investors.

AFC’s Project Development Offering
AFC offers early stage project development investment products to clients and partners in three major forms: advisory, development financing, and co-development.
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AFC – FMO Project Development Facility
 
Facility Overview
 
The AFC-FMO Project Development PD Facility was jointly established by the AFC and the Netherlands Development Finance Company (FMO) to make early stage investments in infrastructure projects under development in Sub-Saharan Africa.
 
The vision of the facility is to bridge the infrastructure gap by enhancing and increasing the pipeline of bankable projects on the continent. 
 
  • Initial commitment of US$15 million to the facility, which is expected to run for 7 years
  • The facility which is managed by AFC, mobilizes risk capital and technical expertise
 
Eligible Sectors
 
  • Power: generation, transmission and distribution
  • Transport Infrastructure: roads, bridges, ports, airports and rail
  • Oil & Gas Midstream & Downstream: pipeline, processing facilities, gas to power
  • Agribusiness Infrastructure: water treatment, storage and logistics
  • Social Infrastructure: social housing, hospitals, education
 
Investment Criteria
 
Private Sector Led Projects
  • Public Private Partnerships (PPPs) and concessions may be considered if the project would be controlled/ substantially by private sector entities
 
Project Development Stage
  • Investments may only be made in projects as the development stage that have a business plan or have conducted a minimal level of assessment, which demonstrates the viability of the project
  • A project is classifies as being in the project development stage when there is a significant level of coordination and structuring required to the projects from concept to bankability.
 
Eligible Uses of Funds
Funds shall be used for third party advisory services and expenses required to take the project from concept to bankability, covering items such as:
 
  • Financial feasibility, assessment and structuring
  • Environmental scoping and impact assessments
  • Documentation and negotiation of project and financing agreements
  • Financial modelling
  • Market assessments and commercial feasibility
  • Technical design and advisory
  • Resource assessment review
  • Legal advisory
 
About FMO
 
FMO is the Dutch is a bilateral private-sector development bank based in the Hague, the Netherlands. It is licensed as a bank, under the supervision of the Dutch Central Bank. FMO supports sustainable private sector growth in developing and emerging markets by investing in ambitious entrepreneurs.
 
FMO believes that developing a strong private sector could lead to economic and social development, empowering people to employ their skills and improve their quality of life. FMO focuses on three sectors that have high development impact: financial institutions, energy and agribusiness (food and water). As part of its focus, FMO finances infrastructure projects in power, agribusiness, water, transport and environment.
 
With an investment portfolio of EUR 6.2billion, FMO is one of the largest European bilateral private sector development banks.
 
www.fmo.nl
 
 

 

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