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Interviews  
31 March 2017

Exclusive interview with Subha Nagarajan

Dr Nagarajan is the Managing Director, Africa, Overseas Private Investment Corporation (OPIC), US Embassy – Abidjan, Côte d'Ivoire. Nagarajan is a featured speaker at the upcoming African Power Finance & Investment Forum at African Utility Week.

The Opic interview:“Our current commitments will support the creation of almost 1,500 new MW of electricity generation across Sub-Saharan Africa”

1.    Can we start with an overview of OPIC and projects.
Background
The Overseas Private Investment Corporation (OPIC), the U.S. Government’s development finance institution, mobilizes private capital to help solve critical development challenges and in doing so, advances U.S. foreign policy.  Because OPIC works with the U.S. private sector, it helps U.S. businesses gain footholds in emerging markets, catalyzing revenues, jobs and growth opportunities both at home and abroad.  OPIC achieves its mission by providing investors with financing, political risk insurance, and support for private equity funds.

Key capabilities of OPIC:
•    Direct loan and guarantees up to $250 million worth with maturities as long as 20 years on projects that meet minimum U.S. ownership requirements.
•    Political risk insurance, including coverage for both direct investments and support for private equity investment funds to help mobilize additional resource mobilization.
•    Support project development funding of clean energy ventures through the U.S. Africa Clean Energy Finance Initiative (U.S.-ACEF), a $20 million initiative, co-sponsored with the U.S. State Department and Trade and Development Agency

Since 2010, OPIC has:
•    Committed more than $1billion a year to renewable energy projects
•    Supported more than 85 renewable energy projects across the developing world
•    Supported projects that avoid 6.8 million in CO2 emissions
•    The equivalent of removing 1,400,000 passenger vehicle from the road

Currently, OPIC has committed more than $2.2 billion in financing and insurance to energy projects in countries stretching across western, eastern and southern Africa. OPIC support projects that range from small off-grid solutions to improve access to energy to large utility scale power plants to improve availability.

The challenge
About two-thirds of Sub-Saharan Africa 600 million people lack regular access to electricity.  This widespread energy poverty limits access to food, healthcare, education, and overall economic opportunity.

How the U.S. is helping Power Africa
Power Africa, launched in 2013, is a collaboration of over one hundred public and private sector partners to encourage investment in Africa’s energy sector.

OPIC’s Role
OPIC surpassed its initial pledge to provide $1.5 billion in financing and insurance for private sector led energy development to create power solutions across Sub-Saharan Africa, and has pledged an additional $1 billion.  OPIC’s current commitments will support the creation of almost 1,500 new MW of electricity generation.

1.    How has financing of power deals changed over the last five years?
Sovereign guarantees are harder to obtain from Governments. This has led to several innovations for enhancing project credit structures including partial credit guarantees, letters of comfort, put call option agreements and other instruments.

This change has been occurring as government debt management offices are increasingly managing their balance sheets, especially for those countries whose debt was reset to nearly zero after the HIPC debt relief process.  Due to deteriorating fiscal and macroeconomic situations, countries requiring IMF support are constrained in the level of future indebtedness they can incur – limiting the availability of sovereign guarantees to backstop financial obligations from state owned enterprises which are financially insolvent.

2.    What in your view are the biggest misconceptions prospective investors have about Africa?
•    Corruption and lack of transparency
•    Investment in Africa is too risky
•    Unstable political environment
•    High returns are guaranteed

Investors seeking opportunities in Africa should not have outsized return expectations, and should be willing to take a long term view of market evolution when balancing their risk-return expectations.

One of the biggest challenges to investing in Africa continues to be the dearth of infrastructure required to support project construction and implementation. Many projects are having to incur the upfront cost of financing transmission line or substation infrastructure, which ultimately is charged back to host governments through creative tariff adjustments. In some cases road infrastructure to improve site access is simply absorbed into project costs, requiring a blend of grant financing to defray the capital expenditure cost.

3.    Can you name some highlights of power deals that have taken place recently in Africa?

The Amandi Energy project is a 200MW combined cycle, dual-fuel power project in Ghana, expected to come online in April 2019. The plant’s construction will create 400 jobs, most of which will be locally filled, and the plant’s operations will employ up to 40 people full time. The Amandi Project will be crucial in helping to meet Ghana’s growing power needs. Once constructed, the plant will be one of the most efficient power plants in the country and will produce more than 1,600 gigawatt hours per year, energizing up to one million Ghanaian households.

In spite of the challenging economic environment in-country currently, as well as local presidential elections, the closing of this transaction represents the faith that the international investor and lending community has in Ghana, and is a further diversification of the economy away from commodities.

Deal highlights:
1.    Only large scale base-load independent power generation project in sub-Saharan Africa to achieve financial close in 2016; also, it’s the first project financed IPP in Ghana to achieve financial close since the Cenpower Kpone IPP in 2014.
2.    Innovative finance structure in which the commercial lenders received non-ECA and non-MIGA political risk cover. As noted above, this cover was arranged by two US-based commercial political risk insurers and was supported by OPIC PRI reinsurance.
3.    The Amandi Project signifies a significant achievement for the U.S. Power Africa programme and is OPIC’s largest financial commitment to date in West Africa
4.    $418 million project finance debt was raised in total.

4.    Outlook for financing African energy, what is next?
For off-grid projects, more community ownership and involvement will increase the uptake of distributed solutions. This will challenge larger traditional financiers on how to efficiently participate in smaller value deals that are with retail customers with little or no credit history. Solutions will continue to evolve in order to address these challenges. This space will continue to see consistent growth in the coming years.

For grid-connected projects, investment will continue to increase as utilities become better managed and energy demand continues to increase. With increasing industrialization happening across the continent, increasing grid-connected energy solutions is crucial to increase and improve energy availability which will underpin economic growth and FDI in other sectors.

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