Finance

NEPZA gives go ahead for US$2.5bn Maritime Africa Economic City

big24The Nigeria Export Processing Zones Authority (NEPZA) has granted a license to Nigeria's largest Free Trade Zone and Mega Port project, Maritime Africa Economic City

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AfDB builds on "transformational" 2016

map of afdb membersThe African Development Bank (AfDB) says it is ready to execute pledges outlined in its New Development and Business Delivery Model (DBDM) approved last year

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Banking transition towards digital

Ecobank mobile app demos at the Nigerian launchIn an exclusive interview with managing director and regional executive for the group's CESA region Samuel Adjei, African Review learned in its December issue how the launch of a new cache of digital mechanisms underpins a wider plan to spark greater financial synergies across East Africa

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The growth of Islamic financing in Africa's infrastructure

Philippine stock market boardAs featured in the latest issue of African Review, Islamic finance remains a niche in Africa but it is growing, driven in part by the continent's urgent need for new and innovative ways to fund infrastructure development

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Morgan Lewis: Financing energy and infrastructure projects in Africa

Kenya10shillingbmobvBruce Johnston and Helena Guidolin at Morgan Lewis write for African Review, looking at financing infrastructure projects in Africa, focusing both on the energy and local financial sectors and how they are funded 


Extracts from this piece first appeared on our sister publication's magazine, Oil Review Africa. The full article with exclusive, unseen content will appear in Oil Review Africa's digital copy in January. 

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.  

Equity

The exploration phase in an oil and gas project is the most risky.  The risk/reward ratio therefore needs to be as high as possible.  Equity is the most appropriate tool for financing the exploration phase.

Equity is also more expensive than debt and operates to dilute the ownership of the sponsors.

The traditional model is distorted because big international oil companies can raise equity from the stock markets more cheaply than an oil project can raise debt.  International oil companies therefore have a strong preference to finance oil and gas projects in Africa using equity rather than debt. 

 

Despite this, taxation systems in many countries operate so that interest is tax deductible but dividends are not.  This often means that there is debt financing of oil or gas projects in Africa which, in economic terms, is really an equity financing. 

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

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