15 August 2012
Public-private model for renewable energy infrastructure showing its value
The way the bidding process for South Africa's multi-billion rand renewable energy
programme is being implemented is providing convincing evidence that public-private
partnerships can be effectively established as a means to close the country's infrastructure
deficit, says David Humphrey, Global Head of Power and Infrastructure at Standard
Bank Group.
Mr Humphrey says that Standard Bank estimates that more than R100-billion of capital
has been raised in the first two bidding rounds of government's renewable energy
programme. The estimates are based on feedback from the Department of Energy.
"Funds actually committed are the ultimate test of a programme, and we believe that
the R100-billion put on the table so far is a clear indication that adopting principles
of public-private partnerships attracts global investment," says Mr Humphrey.
Use of public-private partnerships in the financing, design, building and operation
of infrastructure has emerged as one of the most important models employed by governments
around the world to close the infrastructure gap, says Mr Humphrey. He notes that
South Africa still has many opportunities to extend the use of the public-private
partnership model to keep infrastructure development moving.
Broadly, a public-private partnership, or PPP, refers to an arrangement between
the public and private sectors where part of the services or works that fall under
the responsibilities of the public sector are provided by the private sector, with
clear agreement on shared objectives for delivery of public infrastructure or public
services.
Standard Bank Group is the leader in public-private partnerships in South Africa
and Africa, having been involved in all but two of the major PPPs locally.
Mr Humphrey describes the essence of PPPs as contracts between public sector institutions
and the private sector, in which the latter assumes substantial financial, technical
and operational risk in the design, financing, building and operation of projects.
He believes the extension of the core principles of public-private partnerships
into the renewable energy sector is a significant development as these projects
are typically accompanied by extensive skills transfer as part of their implementation.
"The South African power sector is undergoing an important transition, with a number
of sector reforms primarily driven by the need to attract private investment into
new generation capacity. Currently Eskom generates 95% of the country's electricity.
So government's programme is therefore following a hybrid model where independent
power producers sell what they generate to Eskom."
Mr Humphrey says major institutional reforms are being introduced to ensure that
independent power producers enter the market.
The renewable energy programme is one of the areas in which core principles of PPPs,
particularly those relating to risk allocation, are being used successfully. The
programme has attracted the interest of several local and international financiers
and independent power producers, with the bidding process to build a number of wind,
water and solar energy projects being oversubscribed.
Ntlai Mosiah, Head of Power and Infrastructure Advisory and Coverage at Standard
Bank Group, notes that numerous lessons from the public-private partnership programme
have been incorporated into the Renewable Energy Independent Power Producer Programme,
which is one of the largest project finance undertakings in South Africa to date.
"These lessons include a realistic assessment of the depth of South Africa's debt
and equity capital markets, a risk allocation matrix acceptable to government and
lenders, and provisions for black economic empowerment."
Mr Humphrey says that of particular interest is the compulsory inclusion of communities
as equity participants in each participating bid, funded by local development finance
institutions. The inclusion of the Development Bank of Southern Africa in the tender
specification documents made it easier for investors to identify potential funding
sources for local communities and entrepreneurs. Strong participation from the Industrial
Development Corporation and recent activity by the Public Investment Corporation
also greatly assisted lenders and investors, he says.
A key factor in the success of the renewable energy programme is that the bidding
process has been predictable, clear and orderly, says Mr Humphrey. He believes government
went out of its way early to appoint the best advisors based on an enabling environment
that had been agreed with all stakeholders, including a critical role for the independent
energy regulator, NERSA.
He draws particular attention to the fact that the it is commercially viable for
private sector players because of pricing that ensures appropriate return, government
support for the programme, and South Africa's ability to construct and fund the
projects.
"Paying attention to commercial viability early on is important because renewable
energy is initially expensive compared to traditional sources, but will become cheaper
over time as technology improvements and installed volumes lead to a fall in prices."
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