I got into international project development via a background in project finance advisory starting at Credit Suisse First Boston. Over the years, I developed a substantial knowledge base on things like how to allocate project risks to the parties best suited to bear the risks, how to present a credible, developed project “story” to equity investors and lenders, and how to go through the loan agreement and conditions precedent process. When I moved to the developer side of the business, I formed an integrated view of managing the technical, commercial and financial aspects of large projects in developing countries.
While I’ve always considered myself a reasonably socially conscious person, the developmental aspect of the projects I was working on had not been the driving force for much of my career. Given my background, my focus had traditionally been to act on behalf of a client, or the company that I worked for, in order to get the project done and/or to get financing in place. Rather, I worried about whether there was a single point of responsibility in the EPC contract(s) (and if not how to manage negotiations in order to keep the project bankable), whether the financial model was “lender friendly” (often not), why the IRR keeps going down, and why the conditions precedent for a project included so many major elements (i.e. we are never going to close, are we?).
As I spent more time on location in different countries, especially in Africa, I found that there is a group of people that were driven in their work by developmental concerns: poverty reduction, higher quality of life, security, empowerment of women and children. These people worked for a wide variety of organizations from a wide variety of countries, often known by acronyms of 4 letters or more. They often drove around town in white Land Cruisers or Range Rovers. They were the aid workers with many of the donor agencies active in Africa. And surprisingly, we had little contact and seemingly no overlap in work scopes.
Sure, I had worked with the lending arms of many development finance institutions, but these groups acted as lenders to projects and had more in common with commercial banks than with the numerous aid workers in country.
When I started Provinceroot early in 2010, I wanted to make the developmental impact of infrastructure projects an explicit part of the company’s mission. Living in Africa had changed me, and I now saw how a power generation project or wastewater project could immediately and directly have a huge, positive impact on the lives of many people. Being able to apply the skills I had developed (and bringing in the additional expertise of Provinceroot’s associates and partners) in order to advance infrastructure in countries that desperately need it – that was something to be proud of, and served as a daily motivation for building and investing in Provinceroot.
It’s helpful to take a step back and think about the developmental impact of building, for example, a power plant. In many countries in Africa (and other regions, of course, including parts of southeast Asia and Latin America), electricity available through the grid is a small percentage versus the amount of electricity consumed from small, inefficient diesel units (much of the world calls these “emergency generators”, which gets a strange look in the parts of the world where these are the norm). The electricity generated through the grid may be restricted to one, or perhaps two, sources. Some countries are lucky enough to have established hydropower facilities, which are a terrific way to have cheap and relatively reliable power, but in the periodic dry seasons and droughts, without power from another source, there are inevitably periods of load shedding. Transmission lines to deliver the power are often low voltage, resulting in substantial losses as electricity travels the wires.
The basic picture of electricity in many developing countries is: expensive for those that can afford generators and the diesel fuel to power them and unreliable and often unavailable for most of the rest of population. Electrification rates in many countries in sub-Saharan Africa are under 10%.
The impact of both a complete lack of electricity and unreliable electricity supply is dramatic and many fold. Without electricity, people rely on wood for fuel and candles for lighting. Providing electricity to new communities can help stimulate economic growth by both enabling growth of work opportunities outside the home (i.e. with new companies) and also create new jobs by enabling new products and services at home. The effect of electrification can especially impact women and children by decreasing the daily subsistence workload; with new food storage and cooking options, women are better able to pursue new enterprises and children are able to pursue education.
Unreliable power negatively affects both people and industries. If the electricity is unreliable, the benefits of having it, as described in the above paragraph, will be limited. While the effects of power outages are easy to imagine for large industries such as mining and cement production, there are impacts at a much more basic level as well. Consider fishermen. Without reliable electricity, ice production is erratic. On days when there is no ice with which to store the daily catch, fishermen are forced to sell less-than-fresh fish for a large discount. To make up for lost income, the fishermen may fish longer in order to get more fish, resulting in a potentially over-fished situation with direct environmental and economic consequences. For many other industries, a similar analysis holds: lack of reliable electricity results in lost revenues, with often harmful side effects.
Let’s go back to the aid workers I mentioned at the beginning of this article. Given my simple outline above on the enormous developmental impact that a single power plant could provide, encompassing positive environmental, social and economic effects, I had to ask the obvious question: Why aren’t the various donor agencies more directly involved in helping to support power or other infrastructure projects?
Part of the answer is that they are, of course. The World Bank provides funding for everything from feasibility studies to large transmission network projects, for example.
But the real point that I’m getting at is that donors are generally not directly involved in PRIVATE infrastructure projects. That is the critical distinction to make. I’ve had many, many discussions with different aid agencies with little result toward progressing projects over the years. Most of the efforts of aid agencies are large, systemic infusions into country budgets, or alternatively focused on small, grassroots programs, such as village energy efficiency, or providing livestock or fertilizer to rural populations – certainly the activities many of us would identify as clearly humanitarian works.
I’ve had a number of direct challenges, in fact, from various quarters, disputing the fact that power projects, or other private sector infrastructure projects, can be “developmental” because they are, well, for profit. How can anyone talk about poverty reduction and private sector in the same breath?
There was a recent article on the Guardian’s Poverty Matters blog entitled “Want to make aid more effective? Bring in the private sector” (1). The comments section, starting with the first comment, brings up the opposition to private sector involvement in the use of aid, and seems to oppose the idea in principle. It’s significant that the first commenter brings up Anglo American as an example of “bad” private sector activity. In fact, the vast majority of companies pursuing infrastructure projects in sub-Saharan Africa and similar regions are neither multi-billion dollar companies nor exploiting natural resources.
What does a private sector independent power producer (IPP) project look like? The total project costs will vary depending on size, but you can expect around USD 50 million for a small, 25 MW project to USD 200 million for a 100 MW, or even more for renewable projects. Most of that money (typically 65-75%) will come from debt providers. Equity will come from a sponsor (e.g. a private equity firm) or the project company itself if it is well capitalized. But most of the equity and debt will not be available until a project is fairly well-defined: a myriad of technical and commercial studies need to be in place; an environmental and social impact assessment needs to be done (with positive conclusions and action plans); the major project contracts such as the Concession Agreement with the government and the Power Purchase Agreement with the national utility need to be in a near complete form with little risk of changes to the key terms; engines or turbines may need to be ordered well in advance to secure the project timetable; etc. etc. In reality there is a cost of several million dollars just to get to the point where development finance institutions or other active investors will undertake a serious review of the project.
At the end of the day, once a project is fully financed, constructed and operating (hopefully) as planned, the project will need to pay off its debt over 10-20 years and distribute cash to its sponsor. Expected returns to equity will typically be in the high teens to early twenties, over the life of the project (typically 20 to 25 years). These are relatively modest returns, especially for the many risks the project faces during development, pre-completion and post-completion, and are typically not enough to attract a lot of capital in the global competitive marketplace until the project has been significantly de-risked.
The aid vs. private sector discussion calls to mind the famous 1959 lecture by C.P. Snow at Cambridge called “The Two Cultures.” In the lecture, Snow lamented the chasm between the literary intellectuals and scientists of his day. Scientists were not understood or respected by the dominant, literary culture, to everyone’s detriment, with particular implications for the alleviation of suffering worldwide. Snow highlighted that even though all educated people were expected to have read Shakespeare, very few knew the second law of thermodynamics, which he saw as a very basic quantum of knowledge. Similarly, I would argue that it seems impossible to hope for successful infrastructure development in sub-Saharan Africa on any kind of scale without incorporating an understanding of the private sector model that will attract international investment and enable the development of a sustainable and robust local economy.
The discussion here has touched on topics that need a much deeper analysis. I cannot provide an in-depth critique of the aid industry (though Giles Bolton’s Africa Doesn’t Matter: How the West has Failed the Poorest Continent and What We Can Do About It is a good start), and I am not a theoretician or a free market ideologue, or anything of the sort. I’ve simply tried to describe my own experiences of developing infrastructure projects in emerging markets, the gaps I’ve seen between two groups of people trying to do essentially the same thing but in very different ways, and highlighted what I see as the very clear, extensive and rippling positive impacts throughout society of having access to modern infrastructure. I honestly cannot think of many projects that would have a larger impact than a power plant, something that many parts of the developed world have taken for granted (in fact, this is partly the definition of what makes that part of the world “developed”), but which for many countries in areas like sub-Saharan Africa seems like a dream that might be realized, if at all, years down the road.
I will close with a suggestion to bridge the Two Development Cultures. One of the largest impediments to infrastructure development is the “early” equity to support the development process: the technical and commercial feasibility studies, reports, travel, legal fees and time spent negotiating the major contracts. Outside of a few well-capitalized developers, most projects struggle to string together the capital to support these activities. By partnering with experienced development companies to provide early stage capital, as either equity or grant money, donors could help make a tremendous contribution toward enabling major infrastructure projects to reach successful completion. Capital in this form would also result in lower end-user tariffs, further promoting the developmental impact.
Of course Provinceroot is one such experienced developer, with decades of experience amongst myself and the associate members. Provinceroot develops its own infrastructure projects, and provides consulting and development services to third parties. For more information please see the company’s website at www.provinceroot.com. The company’s new blog is on provinceroot.blogspot.com and you can follow us on both Facebook and Twitter.
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