Standard Bank Group : Public-private model for renewable energy infrastructure showing its value

15 August 2012

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."