What are the biggest challenges in financing a big energy project? How can one create more bankable schemes to attract a wide range of investors?
Broadly speaking, the challenges involve structuring, accepting an element of potential risk and de-risking a scheme as far as possible to make it interesting and financeable.
There are a number of crucial factors. First is the host country. Is there an adequate legal framework? Can property rights and claims be enforced? What are the specifics of local power markets, and how sure can investors be of projected returns?
Second are the financial institutions and credit insurers. Are there export credit agencies? And is there a development bank or multilateral institution involved? The presence of such lenders reassures investors and can help host countries establish viable frameworks.
Third is the role of the supplier. We see more and more so called EPC contracts (engineering, procurement and construction). To what extent can we reduce some of the construction risk, ensure performance guarantees and be comfortable that services will be delivered as planned?
Fourth are the compliance requirements, which can now mean that participating banks might have a much broader range of concerns than the payback period or interest rates. Employee health and safety on a project, for example, has become very pertinent. And finally, there is always the risk of the unexpected. Many projects now involve renewables, with financing for wind parks and the like based on subsidy regimes for the electricity produced. However, we know policy can change – even overnight.