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.

 

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