Export Credit Agencies (ECAs) and Development Finance Institutions (DFIs) will have lent more than US$60 billion to energy and infrastructure projects in 2013, a threefold increase in less than four years, a major report by global law firm Baker & McKenzie reveals today, 14 Novemeber 2013.
Conducted by Baker & McKenzie and Infrastructure Journal, the report, entitled Power Shift: The Rise of Export Credit & Development Finance in Major Projects, takes the most in-depth look to date at the role these institutions play in funding the projects that will meet the world’s future energy and infrastructure needs.
ECAs are government-backed lenders that provide finance in support of that country’s exports, while DFIs are lenders backed by multiple governments to provide credit and guarantees to facilitate private sector investment in developing countries.
“The presence of ECAs and DFIs on deals not only provides an essential source of funding, but they also bring valuable comfort to commercial banks, allowing them to make the longer tenor loans that are essential for large scale energy and infrastructure projects,” said Calvin Walker, Baker & McKenzie’s global head of project finance.
“The ECAs and DFIs have filled the funding gap during the financial crisis, while commercial banks rebuilt their balance sheets and now the new market is more collaborative and more open to new sources of funding, including project bonds under a capital markets structure.”
The report indicates that ECAs are starting to become more prominent in Africa, with African projects lending from all sources exceeding the 2012 total in the first half of 2013. “This is welcome news, as it corresponds to a positive technology transfer and additional financing for Africa,” said Wildu du Plessis, Managing Partner of Baker & McKenzie Johannesburg.
“In sub-Saharan Africa, the supply of bankable projects has increased dramatically as a result of more long-term political and economic stability across many of the region’s countries and increased supply and appetite for investors. There is definitely an improved risk perception of Africa, with a growing interest for infrastructure assets.”
According to the report, domestic lenders have become more sophisticated in recent years and are increasingly providing funding for large cross-border project finance transactions. One example is South Africa’s current Renewable Energy Independent Power Procurement Programme, which stipulates that investors must lend in local currency.
“This approach has paid off, as local banks, working alongside local DFIs, have committed heavily to projects under the scheme, increasing confidence in the local institutions and their ability to structure major deals,” said du Plessis.
“The result is that international banks are now watching the South African financing market with keen interest.”
The report also reveals the importance of local capital in South African projects, showing that in the past five years 69% of project finance funding has come from local lenders, 23% from Development Finance Institutions and 8% from international lenders.