The key to an energy project’s success is to reduce development time and uncertainty, as well as prove political willingness. This is according to Monique Koning, Head of Division, Project Finance and Guarantees, Africa Caribbean and Pacific, European Investment Bank, who spoke to Engerati at the Africa Energy Forum.
“Many projects revisit the same approach but what works is a standardized, framework or system, much like South Africa’s standardized PPA. Although it takes time to establish, it works. There is no need to reinvent the wheel for every project,” explains Koning. In addition to this, it is essential to bring in the right expertise to move a project forward.
While these standardized systems tend to work well, project managers can also adapt them to local circumstances and needs. “Local governments still don’t realise that they can use others’ frameworks-especially where projects have seen great success.”
About the bank and what it offers
The European Investment Bank is the European Union’s largest long-term lending institution. It lends and provides an advisory service. The bank also provides grants to specific projects in order to strengthen bankability.
Last year, the bank provided 71 billion Euros in project financing1 billion Euros from the bank last year.
Says Koning, “We are big on energy, specifically renewable energy and energy efficiency development in Europe, as well as overseas. The European Union has asked the bank to help the African energy market since its energy access is extremely low and needs assistance.”
While the bank is keen to help many countries with their energy projects, the bank still assesses bankability. The bank also asks for an environmental and social impact study before it will invest. “This is very important to us. We have a large group of sector engineers that will assess all of this before an investment is made.”
The bank also assists governments with finance. Koning explains, “We aim to make loans more concessional for the government. The bank also helps finance environmental and social impact studies and assists with bankability. This is how we try to bring down project costs along the way. Most of our technical assistance is grant-based.”
New financial instruments
The bank also develops new financial instruments for specific projects where necessary. For instance, loans are created that are not necessarily grants but are not priced at a commercial level either. A good example of this is the Lake Turkana project in Kenya.
The bank has provided 200 million Euros to the 300MW wind farm project. In addition to this, the bank also provided a 25 million Euro equity investment-a preferred equity stake which gets renumerated at a lower level than the other equity holders. “This relies on a project’s success. If the project is successful, the loan will be re-paid over 15 years.
However, if the project is delayed or creates unexpected costs, it is possible that the bank may not see any of this money again says Koning “We take risks. We price it below commercial market rates. Grants can also have a very catalytic role.”
“If you reduce the high level of uncertainty during the development stage of a project, you will avoid high risks,” explains Koning. The government can play a big role here as they can provide the permits on time and show political willingness to support the project. “Many things that can be done to reduce development time and uncertainty.”
In conclusion, Koning points out that there is enough liquidity and equity in the market. She says that there are a lot of potential projects and that many of the ingredients are already there. “With these things in the bag, it is now time for Africa to move to take the next step.”