On-lending financing could be one solution to optimise the financing structure, where capital intermediaries borrow the funds from the government or other international institutions and then on-lend it to the infrastructure projects
African infrastructure financing traditionally has been limited to development finance institutions (DFIs), commercial banks and export credit agencies (ECAs) with a financing structure, which in comparison to financing structures in other regions with mature finance markets is not optimised to reduce costs to utilities. Traditional financing structures and its constraints due to nascent markets could lead to suboptimal financing. As the financing cost is one of the elements of capital cost recovery in the tariff, this is reflected in the tariff payable by utilities, and therefore, by the end consumers. This further widens the sector's cost-revenue gap since most of the utilities in Africa are not profit making as the end-user tariff is not cost-reflective.
In Morocco, the Moroccan Agency for Sustainable Energy (MASEN) has been mobilising funds to support the development of renewable energy infrastructure through on-lending and has issued 18-year green bonds in 2016 to finance the Noor Phase I concentrate solar power (CSP) project. MASEN acts as a consolidator of concessional and commercial loans, and blends it to offer a single financing package to the projects, which reduce the cost of capital and lower the overall energy generation cost.
One of the recent examples is Ghana, which is planning to on-lend through the Ghana Infrastructure Investment Fund (GIIF) to the power sector. In 2020, the government of Ghana raised US$3bn in a sovereign eurobond auction, which was oversubscribed by five times, with one tranche of US$750mn with sub-Saharan Africa's longest ever 41-year bond, with an 8.8755% coupon. GIIF will use US$1bn out of the US$3bn proceeds to refinance the currently expensive debt on IPPs, reducing the cost of power procurement for the utility.
A few possible optimisations that can be achieved by using such an on-lending structure are:
▪ Institutions could possibly lend for the full term of concession (20 to 25 years), leaving no tail on debt to IPPs as lending is backed by long tenor bonds, which active international lenders in sub-Saharan Africa may not absorb. Amortising the debt over 20 to 25 years instead of the usual tenor of 12 to 15 years may lead to significant optimisation in the generation tariff.
▪ Instead of subsidising loss-making utilities, which downweigh their creditworthiness, governments could arrange for the competitive debt cost to IPPs to drive the tariff reduction, resulting in profiting utilities and narrowing the cost-revenue gap.
▪ Other benefits of such a financing structure include building capacity of local lending institutions and attracting the private capital due to the reduced long development cycle of the project.
With more than 21 African countries having access to hard currency sovereign eurobonds and many of them coming to market with 30-year bonds, this can optimise the cost for the priority infrastructure sectors. Opting for an on-lending structure backed by sovereign eurobonds creates liabilities on sovereign balance sheet in comparison to contingent liabilities in traditional financing structure. This would require active debt management and efforts to safeguard debt sustainability for the country to avoid any impact on the sovereign credit rating.
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