Owing to robust demand and acceptable hard currency returns, there has been a swing towards private equity funds and banks providing project financing for power-related projects in Africa in the last two years, says multinational financial services provider Barclays Africa head of natural resources Africa Craig Brewer.

Barclays Africa is one of the larger lenders for power and natural resource projects and it is ready to provide financing for projects in Africa, confirmed Brewer.

He explains that, in light of the lower level of generation capacity and Africa’s increased electricity demands as it continues to progress up the economic curve, there is significant demand in Africa for new power generation. Therefore, power generation and associated projects, such as coal resource development for power-energy feedstock, coal logistics and transmission grid infrastructure, are seen as viable from a project-financing perspective.

“Power generation projects might have a longer return, but this is where there is a significant amount of focus and capital available in Africa,” says Brewer.

While the commodity cycle is currently weak, the power and infrastructure- development cycles are healthy, adds Barclays Africa head of resource and project finance manager Theuns Ehlers.

Weak Commodities
Owing to the sustained depression in commodity prices, the greenfield resource project space has been fairly quiet and project sponsors, producers and financiers are waiting for commodity prices to improve before funding arrangements can be undertaken on a large scale, explains Ehlers.

Brewer points out that the cyclicality of the commodities market curtails the viability of financing certain of these projects, “ . . . as many operating mines are currently free cash-flow negative at current commodity spot prices, which means any new resource development will require an optimistic view on commodity prices over the project duration as at spot prices, these projects appear marginal and not convincingly viable; however, we do not have the line of sight of knowing what the commodity market will look like in a year from now, so projects may well be viable in a year or so from now”.

There has been significant global oversupply in many commodities, which means that in the medium term, it is quite likely that prices will remain flat. The oversupply of commodities, such as iron-ore and coal, has come from both increased supply coming to market over the past couple of years and the global slowdown, in particular, from China’s slowed growth and decreased demand, he explains.

Because commodity prices are likely to remain flat, project financing, especially for nonenergy-related commodities, remains challenging. Current resource project developments can provide sufficient cash flows for a mine development to pay off its project finance debt and provide the required returns for equity providers, is not convincing, says Brewer.

Ehlers notes that it has proven to be quite challenging to raise sufficient capital from equity providers and is more difficult than it was in 2012. Project development requires a combination of both bank project finance debt and equity finance and the reluctance of equity funds to commit capital is particularly pertinent in terms of greenfield projects because of the risk associated with these projects and investors return requirements.

Brewer argues that China will take some time to recover because it has built overcapacity and the country will, therefore, not be the commodity-demand pull to remedy the weak commodities market in the short term.

He also points out that the inherent attributes of commodity cycles pose challenges because resource development projects are long-term projects. This means that supply takes time to come to the market, therefore, new projects and the supply of the commodities, which are expected to spark an uptick, need to synchronise as much as possible with the commodity cycle, explains Brewer.

Political risk and logistical factors, such as the required rail and port infrastructure to export commodities, which is often inade-quate in Africa, must also be taken into account when calculating the overall capital expenditure costs of commodity production and add to the cost of extraction, notes Brewer.

The reduction in the need for project finance for the development of resources in Africa is balanced by the current demand across Africa for power and energy projects, including significant investment in renewable energy, which will provide increasing demand for project finance capital – both from debt and equity providers – Brewer concludes.