Africa remains a promise for Institutional Investors. Apart from the natural resource, the demand for infrastructure and energy projects in Africa continues to exceed supply. It is estimated that the African continent requires around $100 billion of investment per year from 2020 to 2050 to meet its target of the Infrastructure gap, according to the roadmap set out by the Africa Development Bank (AfDB).
However, while the opportunity is there, actual deployment into the continent remains slow despite a large amount of capital pledged by funds for infrastructure and energy investments. There is seemingly money to be spent, but a lack of projects or better still, not a lack of projects, but a lack of projects developed to a point where the large majority of the risk has been well mitigated. Western investors are looking to dip a toe into the African market. However, their investment mandate is limited to investing in operational projects or, at the very least, a completely bankable solution.
Some so-called bankable projects don’t get financed because most sponsors just rush to develop feasibility reports or use the term bankable feasibility report. A number of reports we have reviewed at Brickstone have so many gaps that have discouraged investors from investing in such projects. To give further reasoning as to why gaps are usually identified in reviews of feasibility studies, the notion of what constitutes a bankable feasibility study must be understood.
It is common these days to see feasibility studies that claim in their titles to be bankable and the term is very misleading anyway. No feasibility study at the time of submission can claim to be bankable until it is accepted by a lender and there are several steps to go through before that occurs. A feasibility study should prove a project’s technical and economic viability, but not necessarily the bankability. It is the steps that follow the development of a feasibility report that determines the bankability of the project, not the bankability of the feasibility study report itself.
The banks will decide what is bankable – after all, the bank provides the funds and should be considered as the majority owner throughout the tenure of the loan, assuming a typical 75:25 debt: equity ratio is adopted.
The lenders will aim to make changes to construction contract provisions that are in the owner’s (borrowers) interest, to ensure the borrower swims rather than sinks. While any feasibility study needs to describe (and challenge) the technical risks, ‘other’ risks (such as participant risk, legal risk, regulatory risk, etc.) should be covered by a risk mitigation plan for those assessed risks. Moreover, the bank will engage its team of advisors – staff specialists and/or independent advisors for technical, legal and insurance advice.
From our survey at Brickstone, major entrepreneurs show a desire to lead in the development of infrastructure but about 80% of them do not currently have the human knowledge and capacity to demonstrate bankability and develop and execute these projects. They are unable to show and demonstrate in-depth knowledge of their large scale projects to Institutional Investors. As a result, these Infraprenuers with the mind-blowing idea are not able to get the right equity funding to attract the necessary loans or debt facility to fund the project.
With this bottle-neck, many African investors never get their project to move forward. As such, the African Infrastructure private sector has not maximized its full potential or taken its rightful place in project development and delivery.
It’s due to these highlighted problems that Brickstone Africa has set up The Brickstone Infrastructure Bankability Model which is best used to understand how Lenders will assess the project holistically. These factors must be appropriate to the bankability test (whether a large or small project), which are:
- Projects must be characterized by a high degree of revenues predictability under a (partial or full) Contracted Revenue Arrangement with a creditworthy counterparty
- Projects must be delivered under a fixed construction price and schedule with a Building (or EPC) Contractor with appropriate penalties in the form of liquidated damages (LDs) for its failure to perform
- Projects must intend to independently operate in an environmentally sustainable manner with appropriate social and governance plans during operation
Brickstone considers that there is no such thing as a bankable feasibility study upon delivery of that report. Unless the terms of reference for a technical feasibility study are developed to address the key issues that are of interest to prospective lenders, then it remains likely that those lenders during their due diligence process will require additional updates in one or more fields.
At Brickstone’s goal to bridge this knowledge and skill gap amongst African businessmen who develop projects aimed at closing out Africa’s Infrastructure gap. Hence Brickstone created the Brickstone Infrastructure Acceleration Programme to provide tailor-made training to its participants with project ideas and we guide them through the life cycle of such infrastructure projects from Early Development Stage, Pre Financing Stage, Financing Stage and Post Financing Stage.
Brickstone InfraLAB is a focused incubation and acceleration programme aimed at building capacity for African Entrepreneurs involved in large scale industrial and infrastructure projects in Africa. Brickstone sees the need for an Accelerator Programme to fill the gap in the infrastructure space by helping first-time sponsors to accelerate the projects to a bankable state where investments can be sourced adequately. It is an in-depth training program for Aspiring and Emerging Infraprenuers seeking to be part of the Brickstone InfraLAB.
The first course to begin the InfraLAB programme is the Project Finance Fundamentals for Infrapreneurs. This course helps to provide the content and depth of knowledge for Infraprenuers to understand the heart of limited recourse financing from a point of view of their Large Scale projects. The program aims to equip sponsors and investors with the tools to understand project development and financing life cycles.
