Bruce Johnston and Helena Guidolin at Morgan Lewis write for Oil Review Africa, looking at financing infrastructure projects in Africa, focusing both on the energy and local financial sectors and how they are funded
Financing infrastructure projects in Africa will undeniably help to unlock the economic potential of the continent. Finance for investment in African infrastructure is hindered however, by various factors relating to the complexity, size and viability of infrastructure projects generally.
In energy-related infrastructure projects, there are continuing challenges in project planning and preparation that need to be surmounted to ensure a bankable proposal that is attractive to investors.
Local financial markets are less developed, which means more cross-border lending in US dollars. National oil companies sometimes lack the expertise and financial resources to develop some projects. Undoubtedly, there is a need to accompany physical infrastructure development with other required elements such as upskilling of labour, regulatory adaptation, and streamlining of administrative requirements. Projects can take longer to develop, which may lead to early decisions that impede a later financing.
Determining viable processes by which funds for project development can be raised is pivotal and requires a clear understanding of the options available for financing, taking into consideration the specific nature of differing projects. In time, however, the methods and sources of financing oil and gas projects worldwide will be used in Africa.
The basic premise of this article is that commercial decisions made early in an oil or gas project in Africa often preclude certain types of financing at later stages. This is often because decisions about financing are not made at the start of the oil or gas project.
This article examines the financing options for upstream oil and gas projects in Africa, and to set out the criteria for the availability of such finance. Only then, can developers of oil and gas projects in Africa ask, at the start of a project, "from where will the project get its funding?" and use the answers to structure the project properly in order to enable the funding to be raised. The financiers of an upstream project will also require insurance against damage to physical assets and political insurance.
Since 2008, increased regulation of banks (including under Basel III) has meant that fewer banks are willing to lend to oil or gas projects in Africa, and long-term lending is less freely available. This has resulted in more finance coming from private equity and from non bank lenders, and more trade based lending.
Recent growth in African economies has also meant increased interest from investors in both debt and equity for African projects (not only oil and gas). As a result, there are many new investors, including many Africa focused debt and equity funds.
The full version of this article will appear in the next issue of Oil Review Africa in January. The latest issue can be found here.