By John Peter Amewu
WHAT ARE CRITICAL AREAS OF CONCERN?
Some of the key factors to success in financing a power project include; the availability of the resource, the establishment of power purchase agreement, the power plant technology, the credibility of the sponsor and the developer. This section deals with other areas of concern.
Reliability of the planned cash flow
Certainty of cash flow is both the availability of the expected revenue and the payment risk associated with the mode of payment. To reduce the level of payment risk, the contractual arrangement is structured to include off-taker agreement. One of the critical concerns under the system is the reliability of the party for its performance under the payment obligation within the contract period. The off-taker agreement is often over a long term period ranging from 20 years and above. Evaluating the credit record of the off-taker is therefore key to the success of the agreement.[1]
Regulatory regime
The institutionalisation of transparent and stable regulatory regime is an answer to the success of power project financing. It is very important to structure the tariff to reflect an acceptable rate of return on investment. The price should also meet the long term cost for the
simple reason of sustainability. The tariff should be structured to pass through increased cost due to operation and foreign exchange differentials. The prices and tariffs must operate under a truly independent regulatory regime in the country. The powers and scope of the regulator are key concerns of the lenders and the sponsors. Price and tariffs must encourage reduction in inefficiencies. Since the operation of the regulator can easily affect the operational cash flow, lenders and sponsors are concern about who the regulator is.[2]
Risks
Another critical area of concern for power project financing is the element of risks associated with the construction, completion and operation of the plant. Lenders often have the feeling that, the availability of funds for the repayment of the loan will be affected by the occurrences of certain events. These events are considered as the risks elements. Commercial risk may occur as a result of early depletion of the gas field or insufficient supply of gas to the plant. Cost overruns are likely to emerge during the construction stage of the plant and this is likely to affect the project completion and hence the early cash flow from the project. Other risks such as the political risk Currency risk, Co-participants risks and Economic risks are all of equal importance and concern.[3]
Environmental Concern
Power projects are often subject to pronounced environmental concerns. As a result lenders are increasingly focusing on issues of the environment resulting from the power project and therefore set strict guidelines for review of the environmental impact assessment (EIA). Consequently before issuing their investment commitments, investors and lenders will want to gain a sufficient level of comfort with some key features of the transaction in relation to the environmental concern.[4]
WHAT ARE THE ROLES AND REQUIREMENTS OF THE PARTIES IN MAKING POWER PROJECTS BANKABLE IN GHANA?
A bankable power project is likely to attract lenders than one that is not bankable. It is important to note also that, for projects to become bankable, it must have the creation of commercial structures and financing packages. It must also demonstrate the ability of generating an operational cash flow over the project period.[5] There are various players involve in making a power projects bankable. See appendix 2 for the structure of a typical power project.
In achieving the status of bankability, each and every member of the team has a unique role to play. This section examines the requirements and role by the lenders and also looks at the various roles by the Governments and the Developers including the sponsors in making power projects bankable in Ghana.
Lender’s Requirements
Power Project financing is generally tailored to match with the commercial environment of the industry. Lenders in their attempt to finance power projects are likely to include various degrees of requirements for inclusion in the commercial agreements. These are done in connection with the external environment of the industry. See appendix 3 for the checklist of some of the detail requirements by the lender.[6] The banks will often secure power projects through various means. One of such approach is the use of project assets as a security. It is interesting to note that, the only thing the banks need more than security is more security. The financing package between the lenders and the sponsors will cover the amount of the loan, the term of the loan, repayment schedule and obligations, front end fees and interest rates. Other elements include the covenants, prepayment rights, debt service account and the governing law.[7]
Lending of money for power projects is generally an easy task. It is ensuring that the money is repaid within the time that the skill is required. The requirement for any lender to finance a power project is to obtain all the necessary data and information needed to completely examine the project proposal. It also important to note that the, lender is not too much risk averse about taking a known risk. The lender is rather risk averse to taking risks which were not known and therefore not taken into consideration during the onset of the project.
Lenders most often will like to see a self standing project company or a special purpose vehicle (SPV) with all the necessary Government and Sponsors support. In this vain lenders require the SPV to observe the necessary reporting and control mechanism which make it possible to use the project cash flow for the repayment of the loan.[8]
Additional requirement for the lenders is through the use of trustee payment. The trustee payment agreement will usually indicate that, the repayment of the loan is given priority over payments to creditors and shareholders’ dividend. For example the lender may require for the order of application of funds as a security by inserting a covenant in the agreement that will make it difficult to make payments from the trust account without the consent of the lender.
The specification for the use of the Lender’s repayment requirement is an attempt to minimise the repayment risk by employing the trustee payment agreement. A typical requirement of the agreement is that, whiles the seller invoices the buyer, payment for the power generated is made to the trustee bank. The seller receives the proceeds from the sales after schedule loan repayment. Again in the event of default, lenders require for step-in-right. This allows the lenders the right to step in and complete the project or assume the operation of the project.[9]
The Lender often request that, the borrower shall ensure that all project cost overruns are or will be met by it and will, in relation to any project cost overrun notified to the lender from time to time, provide certificate from an authorised signatory confirming that such project cost overruns have been met or that provisions have been made to meet the payment of such contingencies.[10]
Government’s Role
Governments can encourage investment in the power sector in Ghana by establishing clear regulatory and fiscal regimes. It is a fact that the risk-reward profile of power projects can be improved by expounding the rules of the game and assuring project sponsors and lenders of the stability of relevant policies within the sector. Governments may also benefit by studying the practices of other countries with regard to fiscal systems and the parameters of regulatory regimes. The World Bank and other multilateral institutions can offer valuable assistance based on their cross-country experience.
It is important for the Government of Ghana (GOG) to execute a very transparent, fair and stable Independent power purchase (IPP) development policies within the current framework of Government energy policy. This policy with adequate strategies must be well communicated to both the consumers and the investment public. GOG must also ensure
Satisfactory project security and also facilitate the deregulation process of the power sector.
The institutionalization of these processes will encourage the investment flow from the private sector into the country. Once the power sector becomes unbundle and separated into generation, transmission, distribution, supply and metering, power prices are likely to be determine by competitive means rather than the current system of Government controlled regulation. It is also important for Government to note that existence of the long term contract (PPA) can also impede the transition to a competitive market where the power merchant plants are likely to play major role in power generation.[11]
Sponsor’s Role
Sponsors of power projects often find themselves in seemingly never-ending process whiles designing the ownership structure of the SPV, the security package and the financing package. Sponsors must make an effort in reducing the financing cost and related risks. They must reduce and manage the project risk by considering more players in the SPV. It is also important for the sponsors to consider the inclusion of local partners in an attempt to demonstrate the local content policy agenda and also show some level of ownership by the citizens. This will help in achieving sufficient level of technological transfer and capacity building. Sponsors must also create the platform to receive support from the multilateral institutions such as the World Bank.[12]
Similarly the assistance of the World Bank (WB) in establishing open and competitive power market and also encouraging the protection of the environment cannot be rule out. The WB need to assist in the establishment of legal and regulatory framework that can facilitate the involvement of private sector.
CONCLUSION
Increasing the rate of bankability of power projects in Ghana requires an extensive contribution from all the players within the sector. Coordinated actions by the Government of Ghana, the Lenders, Sponsors, Private financiers and project developers are all needed to facilitate and encourage increasing flows of bankable power projects into the country.
It is in the interest of all parties to see the growth of strong independent private power projects in the country. The Government must execute clear and fair policies with high level of transparency and good governance. This is more likely to attract private investment into the sector.
Similarly the developers must create an avenue for long term relationship with the government rather than short term gain and interest. The creation of long term relationship is likely to eliminate some of the associated risk in the sector.
Finally, Lenders must promote power project bankability by providing the necessary loans given the political risk insurance and also providing other elements of the credit facility that will lower the political risk.
Nutshell
This is the final installment of the article by J.P Amewu on project financing of power projects in Ghana. Here the author discusses the key features which financing institutions will consider when faced with making a financing decision to lend or not to lend to a project and the various roles, responsibilities and requirements from all the interested parties in making power projects bankable. Read, Learn, Share and Discuss!!! Comments and questions on this issue are welcome.
[1] Lecture Note Unit : Project finance Structures and arrangement
[2] Stickely Dennis C. 2006. A Framework for Negotiating and Managing Gas Industry Contract
[3] Ibid note 9 page 270
[4] Lecture Note Unit 4: Lender’s concerns, drivers and approach to financed transactions
[5] Lecture Note, Project finance structure and agreements Unit 2
[6] Stickely, Dennis C. A Framework for Negotiating and Documenting Petroleum Industry transaction (1st edition 2006)
[7] Ibid page 91
[8] Ibid note 16.
[9] Stickely, Dennis C. A Framework for Negotiating and Documenting Petroleum Industry transaction (1st edition 2006)
[10] Ibid note 11
[11] Cameron P. Competition in Energy Markets (Oxford University Press 2nd Ed. 2007)
[12]http://siteresources.worldbank.org/INTGUARANTEES/Resources/PowerProject_Finance.pdf ( date visited 9th Jan 2012)
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