Rand Merchant Bank (RMB) has implemented an innovative funding method for Independent Power Producers (IPPs) wishing to bid competitively in the latter rounds of government’s Renewable Energy Independent Power Producers Procurement (REIPPP) Programme.
These facilities are opening the way for Black Economic Empowerment (BEE) participants to play a more active role in the country’s relatively new sector.
“The REIPPP programme is a competitive bidding process,” said Kwabena Malgas, a senior transactor in RMB’s infrastructure finance team. “The bidder with the lowest tariff and return gets awarded preferred bidder status. To date, there have been four rounds of bidding with equity returns decreasing with each passing round. While this is good news for consumers as electricity prices keep falling, it has made it more difficult, particularly for smaller BEE participants, to raise equity financing. RMB spotted the opportunity and is offering BEE players a funding solution that helps them submit competitive bids in future REIPPP rounds.”
To date, RMB has deployed close to R1 billion to five BEE shareholder groups, many of which are small emerging black engineering or industrial players. The transactions were structured on the back of nine underlying projects – five wind and five solar – across rounds one, two and three of the REIPPP bidding programme. RMB is continuing to rollout this product to its clients and is looking at a significant pipeline of similar deals.
Xolela Albert, a senior transactor in RMB’s principal investments team, said a consequence of RMB’s funding solution is the acceleration of transformation in the sector. “It is a relatively new sector in South Africa and it is seeing increased BEE activity, helping to make it one of the more transformed sectors of the economy. Another consequence of our funding solution is that it encourages organic transformation of the sector. New skills are being learnt and transferred and we’re seeing BEE players participate more and more in ancillary services along with increasing their equity stakes in underlying projects.”
He goes on to explain that the bank provides BEE participants with flexible bespoke covenant-light funding solutions, which deliver cash flow upfront as well as over the life of their projects. In determining an appropriate risk profile for each participant, RMB considers their existing projects and potential future projects, equity cash flow projections over the course of the project life, as well as co-shareholders, sponsors and the technical partners in each project.
According to RMB, the long-term nature of the projects means that more sustainable BEE participation can be achieved. It said its funding approach can be used to increase the level of BEE participation as well as to facilitate participation across the entire value chain. RMB acknowledged that government has been a critical enabler of transformation in the sector through the IPP procurement framework.
In the past, the primary funding methods for BEE participants were provided by Development Finance Institutions (DFIs) and, in some cases, the actual project companies or co-shareholders. RMB’s funding solution results in lower funding costs for BEE shareholders and delivers improved cashflow to these shareholders.
RMB’s funding solution is not limited to BEE participants. It can be rolled out to any shareholder, as it effectively functions as a risk mitigation strategy, allowing shareholders to upfront some of their returns and derisk their investment. Malgas says that RMB’s funding method is of particular interest to international investors who may be concerned about the erosion of shareholder value through rand depreciation and sovereign rating downgrades over such a long investment period. “Our funding solution transfers some of the currency and country risk to RMB, who is better placed to manage these risks, versus an international investor.”
Albert makes the point that renewables will always have a role to play in South Africa’s energy mix, which will benefit from diversification of supply. Renewable energy also goes a long way in helping to meet South Africa’s commitments to climate change mitigation. “The country’s Integrated Resource Plan calls for mixed generation sources and is designed to diversify the energy mix away from our significant reliance on coal-fired generation, to include technologies like gas, nuclear, and of course, renewables.”