Bankable means lendable: three pillars to test an energy project against

Energy developers across Africa are repeatedly told that their project is not bankable. Few are told what the word means. Femi Awofala, founder and chief executive of Brickstone Africa, argues that the meaning has stayed inside investment banks, law firms and advisory firms.

Bankers brought the word into use, and bankable means lendable. A lender's first concern is getting the money back with interest, however attractive or impactful the project may be.

A feasibility study is not the finish line

A feasibility study proves that a project is technically, economically and legally viable. Bankability is a lender accepting the project's risks, and it is settled by the steps that follow the study. No study is bankable at the point of submission, Awofala says.

On a gas-to-liquids project where militants could interrupt supply, a study can name the risk and a mitigation plan, but it will not sign the community cooperation agreement the lender wants. A liquefied petroleum gas (LPG) plant may look profitable today, yet planning, financing and building can take three to four years. By then, thirty other plants may be running and prices falling. An offtake agreement signed early secures a buyer whatever the market does at commissioning.

Africa, in his view, lacks not capital but projects with most of their risk already mitigated. He estimates that eighty per cent of African promoters cannot yet demonstrate bankability, while their advisers take their fees and leave them with the loan.

Three pillars a promoter can apply alone

So Awofala built a framework promoters can use themselves, before turning to consultants.

• Predictable cash flow, under a partly or fully contracted revenue arrangement with a creditworthy counterparty. Lenders fear surprises more than they mind the interest rate. On a $10 million loan with two years of construction, can they trust you to pay $2 million a quarter for eight quarters from the third year?
• Fixed construction delivery and optimal operations. The lender will ask how the contractor was chosen, whether there was a tender, and whether liquidated damages apply. Long-term supply agreements for key inputs and an operations and maintenance contract belong here too.
• Independent governance and sustainability. The project company is a legal entity with its own shareholders, and it must run independently of its founder. That means a board of more than the founder's family, and a shareholders agreement that settles matters such as anti-corruption policy.

Predictable cash flow does not always need an offtake agreement. Where there is one, the test is the buyer's creditworthiness, not their stated interest. Where there is none, an independent market study must show revenue robust enough to remove price, demand, business cycle, inflation, currency and operational risk. Awofala points to the Global System for Mobile Communications (GSM) operators who entered Nigeria with no offtake, relying on that market work and a five-year exclusivity.

Different sectors, different pressure points

In oil, gas and coal, a sector bankers know well, he sees long-term purchase agreements as effectively the only route to predictable cash flow. The difficulty is finding a creditworthy partner when most governments are indebted. Construction is simpler there, so supply of key inputs needs the most attention.

In renewables, mini grids struggle to balance commercial viability against what consumers are able and willing to pay, which is why the space is driven largely by non-governmental organisations, blended finance and development finance institutions. On a wind farm, where one party builds the base, another supplies the blades and another the turbines, the developer must bind them into one accountable arrangement.

In the questions from the room, one answer noted that mini grids run largely on subsidy, with government, development agencies and the World Bank filling the gap, and suggested pointing projects at industrial and commercial users who can sign long-term purchase contracts, with a contractor delivering to a fixed price and schedule.

Rounding up, the facilitator then asked: standing where the lender stands, would you lend to yourself?

On a final question, about delay and cost overrun, the advice was a single end-to-end engineering, procurement and construction (EPC) contract, liquidated damages agreed before signing, a completion date with headroom and a fixed price.