‘Bankability’ by the Lab is being approached as a relative exercise based on deviations to the widely used Independent Power Producer (IPP) business model. This model has tripled down to almost every electricity generation proposition and determines the mindset of most financiers through internal ‘policy’ guidelines. Scalability of (new) business models for renewable energy and energy efficiency propositions depends a.o. on successful explaining of deviations to the IPP model.
The relative approach, along the building blocks depicted here, has been developed by 1to3 Capital as from 1995 facing structured financed projects, often in emerging markets, where ‘credit ratings’ as such were not common, if available at all. The approach was promoted through the UN’s website for several years as from 2006. The U.N. has developed a much similar approach in recent years but tailored to support governments.
The Lab’s approach is supported by an excel-based financial ‘shadow’-model through which several hundreds of renewable energy proposition have been re-modelled to reach 100% understanding of developer’s model – business case. The Lab’s bankability building blocks are integrated in the ‘shadow’-model which also integrates the U.N.’s country approach on ‘readiness’ of renewable energy and together allow for a rather detailed credit paper / report to be derived from the model.
Hence, financial models need to be able to aggregate or consolidate financial forecasts of smaller projects, and deal with multiple currencies, different implementation and operational timing per project, investments during operations, sequential funding patterns at project and/or holding level, etc.
The Case for Mini-Grids
Financial models - the business plans - for mini-grids, face complicating issues:
- mini-grids are small per proposition and are of interest for financiers if a portfolio of mini-grids can be offered which is often in many currencies,
- mini-grids are evolving from a pure public funding play (grants) into a more commercial setting with blended finance and result based finance bridging this process,
- tariffs for mini-grids are often denominated in hard currency to attract ‘better’ priced long term funding although funding in local currency would be better for reasons of affordability,
- funding is often not at one moment but sequential in time which requires a patchwork of financial structuring i.e. grant or funding committed today needs to take into account the terms and conditions of funding committed at later stages, and
- scalability requires today’s view on future securitisation and today’s standardised structuring requirements to get there which the more is relevant for the many different business models contemplated by mini-grid initiators.
What the BankabilityLab offers
The current market practice is (still) such that each renewable energy proposition in Sub-Saharan Africa is described by a developer in a proprietary excel-based model. These models differ from developer to developer, from advisor to advisor, from independent engineering firm to independent engineering firm, and from project to project and are very often not up to standard to raise finance. The Foundation creates standardised business plans for mini-grids through an independent financial modelling and bankability report, developed for renewable energy propositions since 1995.
One can easily imagine the efficiency created in review of propositions, and subsequent shortened lending approval processes, if propositions to financiers are accompanied by a bankability report and model in always the same (independent) manner.
For Who
BankabilityLab works with developers of mini-grid projects or propositions, governments, local or regional ‘green’ banks or groups of micro-finance banks and specific programmes designed to increase scalability of propositions for renewable energy mini-grids in Sub-Saharan Africa.
The Foundation is capable to assist developers. Example: you develop mini-grids in several countries in Sub-Saharan Africa against a local currency tariff and would like to apply for hard currency loan(s) on such portfolio and simultaneously explore ‘result based finance’, ‘blended finance’ on individual mini-grid propositions and deal with some ‘carried interest’ from joint-venturing local developers. Ideally your proposition is structured such that it will allow for securitisation of the portfolio in the future as well (a proposition that appears on the outset tailored for future (re)finance is more bankable today). A standard structuring, independent report and model on your business case will ease approval processes at the different institutions you contemplate in specific when none of them is taking a specific lead role vis-à-vis each other.
The Foundation is capable to assist governments. Example: a regulatory framework is implemented to boost non-grid connected and / or smaller-scale renewable energy and these initiatives are supported by a governmental fund for (limited) debt funding next to private sector financiers. Receiving similarly prepared proposals that simultaneously allow for obtaining approval from private sector financiers will ease the process and reduce community money tremendously.
The Foundation is capable to deliver the ‘bankability’ infrastructure for review and approval processes concerning funding of 10’s or 100’s of propositions in one financial model, each proposition still detailed such that full monitoring during the operational phase of a project is possible and allowing for any combination of projects in a multiple country setting for raising bank finance, (local currency) alternative finance (crowdfunding) or other additional / re-financing, but always ready for future securitisation.
Please contact us for support or download the Lab’s support manual [here].
When is using the Foundation’s services of added value?
AIf a project developer contemplates appointing a bank to lead-raising all
finance it will receive such bank’s financial model to work with. A leadbank will not rely on a developer’s financial model only which represents the developer’s interests. Instead it will rely on its own model (based on assumptions received from a developer) which has been tested in numerous syndications and is deemed reliable for external party review and lending. If it would use developers’ model such lead-bank would incur reputational risk every time. External audits can reduce but not mitigate such risk; an expensive route and it does not allow to control time.
Additional renewable energy generation capacity makes most sense in emerging markets where the need for electricity is high and some locations do not need subsidies. In specific in Africa with high economic growth figures. A handful of developing banks can provide long-term loans which is needed to reduce the end-user cost for electricity. Smaller projects (< EUR2om) cannot make up for their transactional expense related to how they deliver.
In case you are a developer and do not receive a financial model or a transparent bankability review from your contemplated lead bank the Foundation’s service is of relevance. In case you are a government,
microfinance institute, mini-grid dedicated program co-ordinator, a bank contemplating a green line, etc., and lack such model / structuring capacity the Foundation is of relevance.
