A coming of age for African project finance: Ghana's KIPP development

In 2003, a group of enterprising Ghanaians met to discuss the country’s energy needs. Demand was growing faster than supply so a coherent development strategy was called for. That much was not in doubt. The challenge was: how best to address the situation.

Over the next few years, a special purpose vehicle was created, Cenpower Generation Company, to develop the Kpone Independent Power Plant (KIPP) near the Ghanaian capital, Accra.

Emerging market development group InfraCo was drafted in, aided by Eleqtra, a fund manager specialising in African infrastructure. And in 2010, local infrastructure fund Africa Finance Corporation (AFC) took a lead role in the project.

Now, the partners have raised $900m of project finance in one of the most ambitious private infrastructure deals to be completed in sub-Saharan Africa.

Vote of confidence

“We are hoping this deal will be a trailblazer for others to follow," says Oliver Andrews, Cenpower project director and chief investment officer at AFC. "The infrastructure deficit in Africa is huge, there is a wall of capital inside and outside Africa and the question has always been: how do we structure bankable transactions to attract this capital? We have shown that it can be done.” 

The deal is split between $250m of equity and $650m of 15-year debt. InfraCo is exiting the project, with equity now provided by Sumitomo Corporation, Dutch development bank FMO and specialist fund African Infrastructure Investment Fund II.

The debt includes $425m of export credit-covered South African commercial bank finance, led by Rand Merchant Bank, with Nedbank and Standard Bank as fellow lead arrangers. There is also $225m of funding from a group of international and EU development finance institutions, led by FMO.

“This financing is a real vote of confidence in Ghana and in the power project. Most of the money has been raised in Africa, the $425m of commercial bank debt is a real achievement and the fact that European institutions are providing development finance is also very significant,” says Cenpower chairman Samuel Brew-Butler.

“Most power plants in Africa have been initiated by governments and even when there is private sector involvement, it is generally dominated by foreign entities with locals playing a subordinate role,” he adds.

Long-term commitment

The project finance has been years in the making, not least because Cenpower agreed to take on the fuel supply and storage risk, meaning it is responsible for ensuring there is sufficient fuel to power the plant at all times.

“Between 20% and 25% of the project finance will go towards working capital and the logistics involved in ensuring that we can get the necessary fuel to the Kpone plant,” says Eleqtra partner Ebbe Hamilton.

“Taking on supply risk and storage is not very common in Africa but we agreed to push the boundaries,” says Mr Andrews.

Having made that decision, Cenpower needed to work up a bankable proposition. “We needed to obtain a bankable power purchase agreement and a government guarantee, as well as make sure all of our environmental and technical details were in place. So we established an off-take agreement with the Electricity Company of Ghana and we obtained a government consent and support agreement, effectively a backstop,” says Mr Andrews.

Narrowed down

Once these arrangements were in place, Cenpower went out to the market. “We received seven bids from different contractors, each working with its own financing package. Some were just too expensive but we ended up with a shortlist of three – one Greek, one Chinese and one South African,” says Mr Andrews.

The Greek bid was ultimately rejected, because Cenpower was concerned about the Greek economic situation. That left the Chinese and South African options.

“The South African package came out best in the end," says Mr Hamilton. "It had slightly better financing terms and slightly better construction pricing so the combination of the two won us over. It also had more experience of the process that we were going through and we knew it would be important to have a counterparty that knew what it was getting into.”  

Obtaining finance from within Africa was a further factor in this consortium’s favour. “It gives local kudos and sends out a message that we can do these deals in Africa. You can mobilise African capital if you have good, well-structured deals,” says Mr Andrews.

The $425m commercial tranche was initially underwritten entirely by Rand Merchant Bank (RMB), a further sign of confidence. “The fact that RMB underwrote the entire commercial bank tranche is testament to the robustness of the deal. We hope to replicate this type of transaction elsewhere,” says Mr Andrews.

The entire transaction has taken more than 18 months to put together, even after the RMB consortium was selected. “For all these lenders, the entire security they have is the project, so they are very careful about their due diligence. But now we are there and it is really exciting,” says Mr Andrews.

“This is a coming of age for Africa,” adds Mr Brew-Butler.