Nkandu Machungwa, Vice President for Energy, Infrastructure and Real Estate Finance at Stanbic Bank, has called for well-structured public-private partnerships (PPPs) to attract private capital into energy and infrastructure projects across Africa.
Machungwa said bankable PPPs required clearly identifiable revenue streams, appropriate risk allocation and sustainable financing structures to ensure projects delivered value to governments, investors and end-users.
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Speaking during a keynote presentation titled “Structuring Bankable Cross-Border PPPs in Energy” at the Energy Forum for Africa Conference in Lusaka on Friday, Machungwa said financing arrangements should be built around predictable cash flows that could support debt repayment and provide investors with reasonable returns.
He said unlike conventional government-funded projects, PPPs required a clear understanding of how infrastructure investments would generate revenue over their lifetimes.
“Anywhere where we can identify a cash flow or a means of servicing an exposure, we can then design a financing package around that,” Machungwa said.
He said potential revenue streams could include road tolls, pipeline fees, electricity wheeling charges and tariffs paid for power generated by energy projects.
Machungwa said clearly defined and predictable revenue streams were essential because PPP concessions typically ran for between five and 30 years.
He said investors needed assurance that the revenue generated by a project would be sufficient to cover operating costs, service debt and provide a fair return on investment.
Machungwa cautioned that electricity tariffs also needed to be carefully considered when structuring energy projects to ensure they could sustain investments.
“You don’t want to be an investor coming in, developing a plant, and the tariff is one that can’t effectively pay for the cost of generating the power,” he said.
He said governments, developers, lenders and operators should also ensure that risks were allocated to the parties best positioned to manage them.
For instance, Machungwa said developers should not bear the risk of changes in legislation when they had no control over such decisions.
He said appropriate risk allocation was particularly important for cross-border investments, where foreign exchange movements and the ability to repatriate investment returns could affect project viability.
Machungwa said PPPs were not a source of free financing and required a clearly established mechanism for meeting project costs.
He said governments could provide financial support where necessary, but such commitments needed to be assessed carefully to avoid placing additional pressure on public finances.
Machungwa said not every infrastructure project was suitable for a PPP, particularly where there was no identifiable revenue stream or a government could not credibly support the financing structure.
In such cases, he said conventional public financing could be a more appropriate option.
He said competitive procurement was also critical to ensuring value for money by identifying developers and operators with the capacity to deliver projects at competitive prices.
Machungwa said successful PPPs should provide governments with reliable infrastructure and services, investors with reasonable returns and banks with confidence that projects could repay their loans.
He said projects also needed to incorporate maintenance and other lifecycle costs to ensure infrastructure remained operational throughout the concession period.
Machungwa said banks were often approached to finance projects before they had reached the necessary level of development and readiness.
He said many lenders were generally not positioned to finance feasibility studies, making it important for project sponsors to undertake the necessary preparatory work before seeking financing.
Machungwa said financial institutions were increasingly engaging with stakeholders to strengthen understanding of PPP structures and expand their use in addressing infrastructure financing gaps.
He said his institution had held a PPP conference the previous month involving players from the sector, including the PPP Office, to help develop the market.
Machungwa said mobilising private capital would be increasingly important in addressing Africa’s energy and infrastructure deficits.
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