Ai CEO Infrastructure Project Developers Summit 2016
Hi my name is Alex Katon I’m with InfraCo Africa. As mentioned briefly by EleQtra, InfraCo is an infrastructure project finance vehicle; we provide both capital and expertise to develop very early stage infrastructure projects.
So our starting point is getting a site, starting to measure wind in the case of a wind project, in case of a hydro project its hydro studies; so we take very early development risk on projects. Some of the speakers on the first panel today from the private equity business using a lot of terms about risk capital, about exit multiples, cash multiples and I guess that’s the business were in. It really is risk capital – it’s very early-stage, its binary – either the project happens and you get your money back (maybe a bit on top) or it doesn’t happen and you lose all your money.
In terms of is it is successful profitable business, developing early stage infrastructure projects? Our geographical mandate if you like is the mid-forty countries in Africa; so InfraCo will only go between north and south. Our mandate is defined by: is it a post-conflict fragile state? Is it Dac I or Dac II? Dac I or Dac II means what’s the average? It’s based on the average level of per-capita income in the country.
So we’re focused on the tough markets, we have equity investment from four European governments into our little limited company in the UK and we work with a series of developer teams, EleQtra being our principal developer team. We also work and have a contract with Aldwych and Helen Tarnoy who was on the panel earlier today. Then we work with a third group of developers, what we call co-developments, which is one group of developers who have a project that comes to us and say will you back us at this early stage to try to get this project to financial close? What kind of deal can we come to together? There’re some guys from our Western Power Project which is in the western province of Zambia; so APP which is one of our other developer teams who are here in the room today developing in that case, a 50 megawatt River hydro project (early-stage) in Zambia.
Last year we signed five new deals in Africa, which in our business is a real success. The previous three years we had signed two. So five new deals all in renewable energy; two hydro, two solar and one geothermal. When I say “signed a new deal” it means we signed a binding development agreement to commit capital to the development phase of that project to get it to close. So total capital commitment in those five projects for us is about US $36 million dollars, we’re committing on average roughly about $7 million dollars per project and we normally spend on average between $5 and $10 million dollars getting a project to financial close. Some of the heavy legal costs we heard earlier in that Nigerian project, $20 million dollars for legal costs. We hope not to see that in our projects, but we do spend on average $10 million.
The average project development time, we talked about patient or committed capital, so our average time in developing a project is about five and a half years on average on the eight projects we’ve got to financial close to date.
We have been running for about 12 years now so all of those projects were developed and closed by EleQtra. So eight project closed by them and we’re now working with Aldwych on a project in Chad which is one of our new solar projects; a 40MW PV project in Chad and then we’re also working with companies like Barkley Energy on a geothermal project in Ethiopia and a series of other hydro projects and a small renewable energy PV rental business. Which I’ll talk about a bit later if we come to alternative financing structures and SPACs. We’re kind of try to link that containerized PV rental business into a different kind of financing for development finance which is investing in companies that are developing projects. Trying to get away from the traditional and very time-consuming expensive project finance model.
So SPVs or Special Purpose Vehicles, most people in the room I’m sure will be familiar with the idea of setting up an individual company which has a specific objective – hence special purpose vehicle. In project finance transactions that’s very standard as the asset owning company that would then be set up as a non-recourse vehicle. So project sponsors can raise bank debt and can raise finance on a balance sheet related to that project only without effectively increasing the gearing on its parent company or its investor’s balance sheets.
We see these in most of our projects that are incorporated in different places, and we have a limited number of jurisdictions where we can incorporate these special purpose vehicles because of the particularly more focus with recent tax haven scandals in the UK. But Mauritius is the most common place for our projects to be incorporated.
We’re starting to look at projects that aren’t incorporated SPVs, that aren’t standalone project vehicles. I mentioned one which is a containerized PV rental business which is incorporated in Tanzania (as a trading company in Tanzania) as a limited company. The difference here is that we’re starting with a much smaller project, here we may be investing five million dollars in a project to get that business up and running. Now in that case some seed capital came in from the Shell Foundation; Shell had gone in to back the research and development part of this project which was to develop a containerized PV solution. With a control system, all the PV panels were packed into the container and they had a patent for a special hinge that allows these containerized power projects to be deployed in five days.
So five days from getting the container to the site, having your panels pegged out and plugged into the control system; as long as your customer has a wire that can plug into your container, you have an operating power plant it literally in five days. We didn’t really believe this because I said our average deal time is about five and a half years to get something even to financial close. We put some money into this project back in December 2015. Many power plants are running in Tanzania now within three months and from getting to site it really was five days to get them up and running.
So this is an example of a much quicker form of financing and it is in some ways similar to a Special Purpose Acquisition Company (SPAC) in that we make capital available and with Shell Foundation and other European investors, raise some money through a series of special purpose vehicles. Back to management team, they had experience which is the similarity I think with SPACs. In the context of a traditional SPAC, it really is to acquire an operating vehicle, in this case with our project in Tanzania we are backing a management team through a corporate vehicle.
We’re looking in Tanzania at another similar project finance alternative transaction which is a way to develop mini hydro project. Again, mini hydro projects traditionally, people talked about “if it’s not $50 or $100 million dollars, don’t bother trying to project finance it”. We’ve got scars to show how difficult it is to project finance a $50 million dollar project, which we did in Uganda on Lake Victoria. We set up an island utility with four different components to it; ferries, a mini-grid, a power generation PV solar-diesel hybrid power plant and a water purification distribution system. All neatly packaged, contracts negotiated, the lawyers had a field day it took about eight years to negotiate all those agreements and start the project.
Nedbank, in that case, came in and we managed to project finance it in the end. But the lesson learned from that is if it’s small try and do it on balance sheet with either just your own balance sheet or a couple of partners to get these things up and running quicker. In the case of the mini hydros we’re looking at, we will do one plant on balance sheet – so raising $15 to $20 million dollars is not impossible from either one or two institutions or institutional investors and then you can start to leverage as you can move on to number two and number three. So building a mini portfolio of many hydros is how we think you can get mini hydro operating on the grid. We’re looking at that in Zambia we’re looking at it in Tanzania.
So there’s a couple of alternative structures and don’t get me wrong I think project finance is still going to be the way on the bigger projects, it’s still going to have a huge role. But there are alternatives like the way the mobile phones businesses started out 15 years ago in Africa, they started small and grew rapidly through technology and some of the off-grid which is what our investment in Tanzania is. These off grid projects can grow very rapidly, you’re already starting to see secondary investors coming into a similar business in Kenya and investing $40 million dollars to grow expansion capital in the off-grid space.
We think we do need different financing structures and we’re starting to put some InfraCo balance sheet into those structures.
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