1. Does Africa’s newest independent state see lessons in the continent’s history?
2. "Green" energy in the U.S.
3. Nigeria investors buy government bonds as NSE equities hit lows
Wednesday, September 28, 2011
The Complications of Trying to Save the Planet (a look at involuntary resettlement)
A recent report by Oxfam about a forestry company with a project in Uganda has generated a lot of headlines, for example:
Killing Ugandans to Save the Planet
UN and the World Bank now involved in land theft over carbon credit scheme
Oxfam Report Says Thousands Evicted in Uganda Land Grab
And the actual Oxfam report here.
The issue in question is the alleged forced relocation of inhabitants in an area granted to New Forests Company (NFC), a U.K.-based forestry developer (website here) backed by HSBC, the European Investment Bank (EIB) and Agri-Vie, a South Africa-based fund with investment from IFC, the World Bank’s private sector investment arm. The Oxfam report claims that inhabitants on the land, some 15,000, were terrorized and forced off the land, and received no compensation from the company or the government.
This all sounds pretty bad, and certainly the sensationalist headlines pick that up for more dramatic effect. I haven’t spoken to anyone directly involved in this project or at Oxfam but wanted to offer some thoughts based on the Oxfam report and various other articles.
I called this article The Complications of Trying to Save the Planet because a central element of NFC’s project is to use its forest to offset carbon emissions, and sell carbon credits to polluters around the world.
First, it’s helpful to step back and understand how projects like this one would be structured in a developing country like Uganda. It seems clear from the Oxfam report that NFC was granted a concession over some amount of land for a period of 50 years. This means the Government of Uganda and NFC entered a Concession Agreement, a document that outlines the full scope of the two parties’ relationship to each other during the concession period, including various obligations of the parties, a detailed map of the concession area, the applicable tax regime, what happens if either party breaches the agreement, etc. This is a very typical contractual arrangement for infrastructure projects in Africa and around the world.
Unfortunately for many of these projects, especially in densely populated regions like Uganda and Rwanda, the area that the government grants to a company under the Concession will likely have some residents. The residents will need to be moved off the land for the project to proceed, and it would be typical (and absolutely desirable from the company’s point of view) for the government to take full responsibility under the Concession Agreement for any relocation and compensation owed to the inhabitants.
The issue can be tricky. Inhabitants may not have legal rights to be on the ground, having effectively squatted on the land, often for many, many years. The lack of legal right to the land may be an administrative matter, or linked to government ownership of the majority of the land in some areas.
For companies like Provinceroot and others who work with development finance institutions (DFIs), there are highly developed guidelines for dealing with involuntary resettlements (and a full range of other environmental and social issues). Any infrastructure project in a developing country will need an Environmental and Social Impact Assessment (ESIA) performed by an independent consultant. The ESIA will go into great detail in addressing the project's risks to environmental and social conditions, and explain the project’s mitigants, and, if necessary, highlight the unmitigated risks to the environment or communities. The ESIA process typically includes a community consultation that would involve a presentation of the project to the local stakeholders and provide an opportunity for concerned residents to comment on the project; there may be additional follow up interviews as well. The whole consultation process will be summarized as part of the final written ESIA report as evidence that the project has taken full responsibility to interact with the community and address concerns.
To the extent that a project has caused an involuntary relocation, the full details will be included in the ESIA report. Additionally, the company would typically commit to a Resettlement Action Plan (RAP) to meet with IFC guidelines (the World Bank Group’s policy on Involuntary Resettlement (OD4.30)) in the event of a loss of assets, impairment of livelihood or physical relocations. The RAP should consider the full impact of the resettlement and contain appropriate compensation and/or offsetting measures, and take a dedicated look at whether the resettlement disproportionately affects women and children. IFC has a Handbook for Preparing a Resettlement Action Plan here.
The financing parties take a very keen interest in the ESIA. The DFIs, as development institutions, all take these issues seriously, and the more seriously a project developer handles the ESIA process the easier the financing (or insurance) process will be. Additionally, most DFIs will need to post the ESIA report publicly on their website in order to solicit comments from the public, NGOs or other interested parties. And as we can see from the Oxfam report and subsequent sensationalist headlines, any discussion of resettlement or related issues can become, well, heated.
I want to say very clearly that I don’t know all the facts of the case and cannot form a clear opinion. Digging through the Oxfam report, the key issue seems to be that the company, NFC did not pay compensation, even though it is willing to pay an amount to the government that would be distributed to the people who were relocated, because the government did not want to set a “dangerous precedent” (see footnote 19 of the Oxfam report). And of course the alleged violence that was used during the relocations has received a lot of attention.
The thing that causes me some pause in reading the Oxfam report is that the IFC, EIB and FSC (an independent group that certifies forestry investments that adhere to best operating practices regarding labour, social and environmental issues) all signed off on the project. An IFC spokesman is quoted in a Wall Street Journal article (here) confirming that the group takes the issues very seriously but that the project has met IFC standards. I know from direct experience working with IFC that the group does indeed take the issues very seriously. While it’s possible IFC may have made some errors in judgement (which does not appear to be the case here, to be clear), in general the group is an extremely credible group that does an enormous amount to promote private investment and development around the world. I don’t think the IFC sign-off on the project should be dismissed so lightly.
Additionally, while Oxfam seems to target NFC in its comments, many of the issues seem to stem from actions by the Government of Uganda, as far as I can make out, though before forming any judgement I’d want to know more about the exact responsibilities under the Concession Agreement for carrying out the relocation and the discussions surrounding the government’s alleged insistence that no compensation be paid out.
So, no firm conclusions here, though I did want to point out some areas of concern in the Oxfam report. Getting large projects done in developing countries can be outright messy, with many factors at play. Governments want to attract investment and have it within their powers to grant concessions to investors and developers. I am grateful that there is a well-formulated process to dealing with many of the social issues that may result from infrastructure or other projects.
Note: I had never heard of New Forests Company before these recent articles. Neither I nor Provinceroot International has any interest in New Forests Company (or currently in any forestry project in Africa).
Killing Ugandans to Save the Planet
UN and the World Bank now involved in land theft over carbon credit scheme
Oxfam Report Says Thousands Evicted in Uganda Land Grab
And the actual Oxfam report here.
The issue in question is the alleged forced relocation of inhabitants in an area granted to New Forests Company (NFC), a U.K.-based forestry developer (website here) backed by HSBC, the European Investment Bank (EIB) and Agri-Vie, a South Africa-based fund with investment from IFC, the World Bank’s private sector investment arm. The Oxfam report claims that inhabitants on the land, some 15,000, were terrorized and forced off the land, and received no compensation from the company or the government.
This all sounds pretty bad, and certainly the sensationalist headlines pick that up for more dramatic effect. I haven’t spoken to anyone directly involved in this project or at Oxfam but wanted to offer some thoughts based on the Oxfam report and various other articles.
I called this article The Complications of Trying to Save the Planet because a central element of NFC’s project is to use its forest to offset carbon emissions, and sell carbon credits to polluters around the world.
First, it’s helpful to step back and understand how projects like this one would be structured in a developing country like Uganda. It seems clear from the Oxfam report that NFC was granted a concession over some amount of land for a period of 50 years. This means the Government of Uganda and NFC entered a Concession Agreement, a document that outlines the full scope of the two parties’ relationship to each other during the concession period, including various obligations of the parties, a detailed map of the concession area, the applicable tax regime, what happens if either party breaches the agreement, etc. This is a very typical contractual arrangement for infrastructure projects in Africa and around the world.
Unfortunately for many of these projects, especially in densely populated regions like Uganda and Rwanda, the area that the government grants to a company under the Concession will likely have some residents. The residents will need to be moved off the land for the project to proceed, and it would be typical (and absolutely desirable from the company’s point of view) for the government to take full responsibility under the Concession Agreement for any relocation and compensation owed to the inhabitants.
The issue can be tricky. Inhabitants may not have legal rights to be on the ground, having effectively squatted on the land, often for many, many years. The lack of legal right to the land may be an administrative matter, or linked to government ownership of the majority of the land in some areas.
For companies like Provinceroot and others who work with development finance institutions (DFIs), there are highly developed guidelines for dealing with involuntary resettlements (and a full range of other environmental and social issues). Any infrastructure project in a developing country will need an Environmental and Social Impact Assessment (ESIA) performed by an independent consultant. The ESIA will go into great detail in addressing the project's risks to environmental and social conditions, and explain the project’s mitigants, and, if necessary, highlight the unmitigated risks to the environment or communities. The ESIA process typically includes a community consultation that would involve a presentation of the project to the local stakeholders and provide an opportunity for concerned residents to comment on the project; there may be additional follow up interviews as well. The whole consultation process will be summarized as part of the final written ESIA report as evidence that the project has taken full responsibility to interact with the community and address concerns.
To the extent that a project has caused an involuntary relocation, the full details will be included in the ESIA report. Additionally, the company would typically commit to a Resettlement Action Plan (RAP) to meet with IFC guidelines (the World Bank Group’s policy on Involuntary Resettlement (OD4.30)) in the event of a loss of assets, impairment of livelihood or physical relocations. The RAP should consider the full impact of the resettlement and contain appropriate compensation and/or offsetting measures, and take a dedicated look at whether the resettlement disproportionately affects women and children. IFC has a Handbook for Preparing a Resettlement Action Plan here.
The financing parties take a very keen interest in the ESIA. The DFIs, as development institutions, all take these issues seriously, and the more seriously a project developer handles the ESIA process the easier the financing (or insurance) process will be. Additionally, most DFIs will need to post the ESIA report publicly on their website in order to solicit comments from the public, NGOs or other interested parties. And as we can see from the Oxfam report and subsequent sensationalist headlines, any discussion of resettlement or related issues can become, well, heated.
I want to say very clearly that I don’t know all the facts of the case and cannot form a clear opinion. Digging through the Oxfam report, the key issue seems to be that the company, NFC did not pay compensation, even though it is willing to pay an amount to the government that would be distributed to the people who were relocated, because the government did not want to set a “dangerous precedent” (see footnote 19 of the Oxfam report). And of course the alleged violence that was used during the relocations has received a lot of attention.
The thing that causes me some pause in reading the Oxfam report is that the IFC, EIB and FSC (an independent group that certifies forestry investments that adhere to best operating practices regarding labour, social and environmental issues) all signed off on the project. An IFC spokesman is quoted in a Wall Street Journal article (here) confirming that the group takes the issues very seriously but that the project has met IFC standards. I know from direct experience working with IFC that the group does indeed take the issues very seriously. While it’s possible IFC may have made some errors in judgement (which does not appear to be the case here, to be clear), in general the group is an extremely credible group that does an enormous amount to promote private investment and development around the world. I don’t think the IFC sign-off on the project should be dismissed so lightly.
Additionally, while Oxfam seems to target NFC in its comments, many of the issues seem to stem from actions by the Government of Uganda, as far as I can make out, though before forming any judgement I’d want to know more about the exact responsibilities under the Concession Agreement for carrying out the relocation and the discussions surrounding the government’s alleged insistence that no compensation be paid out.
So, no firm conclusions here, though I did want to point out some areas of concern in the Oxfam report. Getting large projects done in developing countries can be outright messy, with many factors at play. Governments want to attract investment and have it within their powers to grant concessions to investors and developers. I am grateful that there is a well-formulated process to dealing with many of the social issues that may result from infrastructure or other projects.
Note: I had never heard of New Forests Company before these recent articles. Neither I nor Provinceroot International has any interest in New Forests Company (or currently in any forestry project in Africa).
Wednesday, September 21, 2011
Tuesday, September 20, 2011
U.S. Commercial Service features Provinceroot on website
I'm very pleased that the U.S. Commercial Service team working with the African Development Bank has linked to Provinceroot's "Projects are Interdisciplinary and Local" article. Check out the link here (click on "U.S. Company Tips for Doing Business in Africa").
The U.S. Commercial Service and the export.gov website are both wonderful resources for companies pursuing business abroad.
The U.S. Commercial Service and the export.gov website are both wonderful resources for companies pursuing business abroad.
Monday, September 19, 2011
Bullish but realistic views on investing in Africa
Here.
Some interesting points raised in the article:
“Africa has a perception attached to it which is often outdated to the realities of it”;
Ghana set to grow 12% in 2011;
60% of African private equity fundraising comes from DFIs.
Some interesting points raised in the article:
“Africa has a perception attached to it which is often outdated to the realities of it”;
Ghana set to grow 12% in 2011;
60% of African private equity fundraising comes from DFIs.
Friday, September 16, 2011
Assorted Links: Togo, Malawi, etc.
1. Togo President’s brother lost this fight
2. Malawi civil groups reject further talks with government, sets new protest date
3. Anadarko pursuing aggressive Africa exploration program
4. The case for Africa in your portfolio
5. McKinsey Quarterly’s archive of articles on Africa
2. Malawi civil groups reject further talks with government, sets new protest date
3. Anadarko pursuing aggressive Africa exploration program
4. The case for Africa in your portfolio
5. McKinsey Quarterly’s archive of articles on Africa
Thursday, September 15, 2011
Five Tips for Doing Business in Africa
This is a short article I sent around in March 2011.
Provinceroot International is a project developer and advisory firm focused on sub-Saharan Africa. I founded Provinceroot International (www.provinceroot.com) in 2010 to pursue a broad range of opportunities in Africa and to help other businesses do the same. Here are my top 5 tips for working on one of the fastest growing and most exciting places in the world today:
1) Be on the ground !
If you want to do business in Africa, you need to be in Africa. The right amount of time, and the timeline for establishing your presence, varies for the individual project.
If you set up a meeting with a company or government official, don’t fly out on the next flight after the meeting. Spend several days or a week, preferably including a weekend. Schedule meetings with embassy staff, local banks, contractors, distributors, or whomever you might be in contact with if your project goes forward. This will be time well spent.
If you do stay, don’t be a tourist. Look for friends of friends or other introductions to people who can take you out to dinner, local coffeeshops or bars. Try to understand what life is like in that city or town – you may very well be living there in a few months, or supervising someone who does.
As your project advances, one week at a time is not enough. You’ll need to spend two or three weeks. At some point you will need to open an office with a manager and support staff for a full-time presence. If that manager is not you, you’ll still need to visit regularly (see point 2 below).
While email, cellular phones and skype are useful tools, they cannot replace time in country.
The trick, of course, is finding people that are flexible enough to spend time on the ground and experienced enough to have high impact.
2) Include experienced commercial and investment managers
As your project matures through development phases, you’ll need to make sure that your on-the-ground team is in close communication with senior management, the board of directors, etc.
Many projects in Africa, especially ones in infrastructure, end up being a broad partnership between many diverse institutions, including the primary developer and/or equity investor but also other shareholders, lenders, insurers, sovereign governments and all the participants in the host country. Someone needs to be coordinating and constantly re-assessing the process between all of these parties, and especially the impact on your organization.
You will need a manager with commercial and investment experience to be this coordinator. And Tip #1 applies here: this manager needs to spend time on the ground to be most effective.
Do not treat the project as simply an engineering or sales task ! You need a focused, experienced executive to oversee the process.
3) Consider political risk insurance
Political risk is one of the largest concerns about investing in emerging markets for many investors in North America and Europe. You should know that there are ways to mitigate many of the risks.
Political risk insurance does not just cover “gunboat expropriation,” i.e. the host country government seizing assets using violence (though to be sure part of the policy can cover outright political violence).
Many other political risks can be covered such as the risk that the central bank will not allow local currency to be converted or transferred out of the country. “Creeping” expropriation, a more subtle way for a government to apply pressure on a project by eroding the commercial and legal framework, may also be covered.
Both the Overseas Private Investment Corp. (OPIC) and the World Bank’s Multilateral Investment Guarantee Agency (MIGA) offer sophisticated packages of insurance to cover these risks.
4) Establish a – credible – network
You may be contacted by someone who is related to a government official, or someone with a permit for a site and a special connection to a minister. If you work with them, they promise, you’ll have a carefree project in no time.
In almost every case, just say no.
If you are interested in doing business in a country, you’ll need a high-grade network. Contact your embassy’s commercial service and economic officer. If a law firm you have worked with has a local office, set up a call with -- or better visit -- one of the partners. Consult with any of the development finance institutions (DFIs) active in the region. Meet with regulators, investment promotion agencies and privatization commissions. If you can raise interest in your project by contacting these entities you will be able to credibly step forward to the ultimate decision makers in the country.
Good local representatives are critical, but in general a credible rep is just one element of a broad consortium to setting up operations.
5) Talk to lenders early
Whether you are using commercial banks or DFIs, involve them in the process early. Early stage feedback is critical if debt is an essential component of your investment.
Plus, if the lender supports your idea it can provide a letter of interest or commitment letter during the initial development phase to lend credibility and peace of mind. Most governments will want to know that financing is in place before authorizing your project.
DFIs especially can be highly effective partners in any development process. Because DFIs have high-level contacts in the governments themselves, they can assist in a broad range of issues once their support for a project is established.
Provinceroot International is a project developer and advisory firm focused on sub-Saharan Africa. I founded Provinceroot International (www.provinceroot.com) in 2010 to pursue a broad range of opportunities in Africa and to help other businesses do the same. Here are my top 5 tips for working on one of the fastest growing and most exciting places in the world today:
1) Be on the ground !
If you want to do business in Africa, you need to be in Africa. The right amount of time, and the timeline for establishing your presence, varies for the individual project.
If you set up a meeting with a company or government official, don’t fly out on the next flight after the meeting. Spend several days or a week, preferably including a weekend. Schedule meetings with embassy staff, local banks, contractors, distributors, or whomever you might be in contact with if your project goes forward. This will be time well spent.
If you do stay, don’t be a tourist. Look for friends of friends or other introductions to people who can take you out to dinner, local coffeeshops or bars. Try to understand what life is like in that city or town – you may very well be living there in a few months, or supervising someone who does.
As your project advances, one week at a time is not enough. You’ll need to spend two or three weeks. At some point you will need to open an office with a manager and support staff for a full-time presence. If that manager is not you, you’ll still need to visit regularly (see point 2 below).
While email, cellular phones and skype are useful tools, they cannot replace time in country.
The trick, of course, is finding people that are flexible enough to spend time on the ground and experienced enough to have high impact.
2) Include experienced commercial and investment managers
As your project matures through development phases, you’ll need to make sure that your on-the-ground team is in close communication with senior management, the board of directors, etc.
Many projects in Africa, especially ones in infrastructure, end up being a broad partnership between many diverse institutions, including the primary developer and/or equity investor but also other shareholders, lenders, insurers, sovereign governments and all the participants in the host country. Someone needs to be coordinating and constantly re-assessing the process between all of these parties, and especially the impact on your organization.
You will need a manager with commercial and investment experience to be this coordinator. And Tip #1 applies here: this manager needs to spend time on the ground to be most effective.
Do not treat the project as simply an engineering or sales task ! You need a focused, experienced executive to oversee the process.
3) Consider political risk insurance
Political risk is one of the largest concerns about investing in emerging markets for many investors in North America and Europe. You should know that there are ways to mitigate many of the risks.
Political risk insurance does not just cover “gunboat expropriation,” i.e. the host country government seizing assets using violence (though to be sure part of the policy can cover outright political violence).
Many other political risks can be covered such as the risk that the central bank will not allow local currency to be converted or transferred out of the country. “Creeping” expropriation, a more subtle way for a government to apply pressure on a project by eroding the commercial and legal framework, may also be covered.
Both the Overseas Private Investment Corp. (OPIC) and the World Bank’s Multilateral Investment Guarantee Agency (MIGA) offer sophisticated packages of insurance to cover these risks.
4) Establish a – credible – network
You may be contacted by someone who is related to a government official, or someone with a permit for a site and a special connection to a minister. If you work with them, they promise, you’ll have a carefree project in no time.
In almost every case, just say no.
If you are interested in doing business in a country, you’ll need a high-grade network. Contact your embassy’s commercial service and economic officer. If a law firm you have worked with has a local office, set up a call with -- or better visit -- one of the partners. Consult with any of the development finance institutions (DFIs) active in the region. Meet with regulators, investment promotion agencies and privatization commissions. If you can raise interest in your project by contacting these entities you will be able to credibly step forward to the ultimate decision makers in the country.
Good local representatives are critical, but in general a credible rep is just one element of a broad consortium to setting up operations.
5) Talk to lenders early
Whether you are using commercial banks or DFIs, involve them in the process early. Early stage feedback is critical if debt is an essential component of your investment.
Plus, if the lender supports your idea it can provide a letter of interest or commitment letter during the initial development phase to lend credibility and peace of mind. Most governments will want to know that financing is in place before authorizing your project.
DFIs especially can be highly effective partners in any development process. Because DFIs have high-level contacts in the governments themselves, they can assist in a broad range of issues once their support for a project is established.
Africa's Middle Class Likes Roller Coasters
I saw this article on amusement parks in Africa linked to by a blog a few weeks ago.
It’s a short but interesting article that provides an important snapshot of one of the most interesting and dynamic parts of the world today. Africa’s middle class is robust and flourishing, and the rise of the amusement park, especially in West African countries, is one confirming sign of this undeniable phenomenon. Six Flags, the popular U.S. roller coaster park operator, announced in 2009 it would open one of only 3 non-U.S. locations in Nigeria, inspired by the sheer demographic opportunity. That project has delayed, unfortunately, but others have sprung up in Nigeria as well as Senegal and Guinea-Bissau.
For anyone who has worked on large projects in Africa or other emerging markets, it’s no surprise to see a big project delayed. Nonetheless, many projects do get done, and the deciding factor between success and failure is often an experienced emerging market advisor or developer. A view of the non-specialized big picture is important for successful project execution, since most projects will require managers with integrated understandings of technical, commercial and financial elements due to the often complicated commercial and financial structuring requirements of the most active investors and lenders.
With the growing middle class in Africa and the huge need for critical (and not-so-critical) infrastructure, the opportunity for the right project – backed by the right skills – is enormous.
It’s a short but interesting article that provides an important snapshot of one of the most interesting and dynamic parts of the world today. Africa’s middle class is robust and flourishing, and the rise of the amusement park, especially in West African countries, is one confirming sign of this undeniable phenomenon. Six Flags, the popular U.S. roller coaster park operator, announced in 2009 it would open one of only 3 non-U.S. locations in Nigeria, inspired by the sheer demographic opportunity. That project has delayed, unfortunately, but others have sprung up in Nigeria as well as Senegal and Guinea-Bissau.
For anyone who has worked on large projects in Africa or other emerging markets, it’s no surprise to see a big project delayed. Nonetheless, many projects do get done, and the deciding factor between success and failure is often an experienced emerging market advisor or developer. A view of the non-specialized big picture is important for successful project execution, since most projects will require managers with integrated understandings of technical, commercial and financial elements due to the often complicated commercial and financial structuring requirements of the most active investors and lenders.
With the growing middle class in Africa and the huge need for critical (and not-so-critical) infrastructure, the opportunity for the right project – backed by the right skills – is enormous.
Projects are Interdisciplinary and Local
I often get asked why I pursue infrastructure projects in emerging markets. "Isn’t it risky/expensive/unprofitable/prone to delays and uncertainty?"
I usually answer in two parts: First, an admission and warning: yes, you are correct, and if you can think of anything else to do with your life, do it (similar to the advice I got when I was contemplating graduate school in philosophy). Second, a deeper admission: yes, you are correct, but I would not do anything else.
Ever since I started project finance advisory as a young investment banker at Credit Suisse First Boston, I’ve been captivated by the interdisciplinary requirements of the field. I learned that a successful project in an emerging market requires diverse skills: among others, building and auditing a financial model, analyzing technical and commercial risks, analyzing and negotiating contracts, building relationships with a wide range of stakeholders (e.g. government officials, development finance institutions, export credit agencies, equity investors, local communities, etc.), and arranging debt and equity financing. As my career progressed and I moved to the developer side of the business, I’ve found these core project finance skills to be critical to executing projects, plus I’ve had the satisfaction of seeing projects immediately and directly improve the quality of life of large numbers of people.
One of the most common problems that I’ve observed projects encounter is that the interdisciplinary skill set is not fully represented in the project management. Often this takes the form of an over-emphasis on the engineering side of the project, or a too-strict division between the “technical” and “commercial” workstreams. Building a power plant in an African country, for example, where the power project could be the country’s first IPP, is vastly different from building a power plant in upstate New York. Even though the central element of the power plant – the power plant itself – could be virtually identical in both cases, the African project involves working within a concessionary framework and will certainly require juggling an ensemble cast of stakeholders, contractual obligations, technical and logistical issues, (more likely than not) funding challenges of one sort or another, deadlines and a huge amount of permits and documentation – all with an eye toward keeping the project “bankable” for lenders (commercial banks, or in many cases, only DFIs) and ultimately fulfilling conditions precedent.
And don’t forget local presence. It’s nearly impossible to have good perspective if you are thousands of miles away.
Ideally, the emerging market project needs a manager or advisor that can constantly step back and assess the “big picture” with an understanding that encompasses the technical, commercial and financial workstreams.
Provinceroot can fill this role. While Provinceroot develops its own projects, the company also provides”all around” advisory services to infrastructure projects and their stakeholders, ranging from review of specific issues to project management. Provinceroot’s goal is to see as many successful infrastructure projects as possible in emerging markets, particularly sub-Saharan Africa, and the firm is eager to add value to third party projects (on behalf of governments or companies) by contributing the extensive experience of its partners and associate members.
I usually answer in two parts: First, an admission and warning: yes, you are correct, and if you can think of anything else to do with your life, do it (similar to the advice I got when I was contemplating graduate school in philosophy). Second, a deeper admission: yes, you are correct, but I would not do anything else.
Ever since I started project finance advisory as a young investment banker at Credit Suisse First Boston, I’ve been captivated by the interdisciplinary requirements of the field. I learned that a successful project in an emerging market requires diverse skills: among others, building and auditing a financial model, analyzing technical and commercial risks, analyzing and negotiating contracts, building relationships with a wide range of stakeholders (e.g. government officials, development finance institutions, export credit agencies, equity investors, local communities, etc.), and arranging debt and equity financing. As my career progressed and I moved to the developer side of the business, I’ve found these core project finance skills to be critical to executing projects, plus I’ve had the satisfaction of seeing projects immediately and directly improve the quality of life of large numbers of people.
One of the most common problems that I’ve observed projects encounter is that the interdisciplinary skill set is not fully represented in the project management. Often this takes the form of an over-emphasis on the engineering side of the project, or a too-strict division between the “technical” and “commercial” workstreams. Building a power plant in an African country, for example, where the power project could be the country’s first IPP, is vastly different from building a power plant in upstate New York. Even though the central element of the power plant – the power plant itself – could be virtually identical in both cases, the African project involves working within a concessionary framework and will certainly require juggling an ensemble cast of stakeholders, contractual obligations, technical and logistical issues, (more likely than not) funding challenges of one sort or another, deadlines and a huge amount of permits and documentation – all with an eye toward keeping the project “bankable” for lenders (commercial banks, or in many cases, only DFIs) and ultimately fulfilling conditions precedent.
And don’t forget local presence. It’s nearly impossible to have good perspective if you are thousands of miles away.
Ideally, the emerging market project needs a manager or advisor that can constantly step back and assess the “big picture” with an understanding that encompasses the technical, commercial and financial workstreams.
Provinceroot can fill this role. While Provinceroot develops its own projects, the company also provides”all around” advisory services to infrastructure projects and their stakeholders, ranging from review of specific issues to project management. Provinceroot’s goal is to see as many successful infrastructure projects as possible in emerging markets, particularly sub-Saharan Africa, and the firm is eager to add value to third party projects (on behalf of governments or companies) by contributing the extensive experience of its partners and associate members.
Assorted Links
Investors at Sao Paulo conference bullish on Africa, with Nigeria top pick
An excellent Pittsburgh university partners with Rwanda for new technology campus in Kigali
Liberia oil exploration continues
More clarity for South Africa’s renewable RFP process
Fall of water reserves in Burundi threatens hydropower
Wednesday, September 14, 2011
Development and Development: The Private Sector and Aid (or, The Two Cultures)
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.
Endnotes
Welcome to Provinceroot International's blog
Hi everyone,
I've started this blog to post some of the articles I've written on international development and project financing. I'll also post relevant articles and insights from time to time. I hope you enjoy it. You can also find Provinceroot on Facebook and Twitter, and the company's website is www.provinceroot.com.
Jason
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