Magazine article Global Finance

Up for Financing: Sub-Saharan Projects

Magazine article Global Finance

Up for Financing: Sub-Saharan Projects

Article excerpt

An evolving region will finance more big deals in 2001 but at a high cost for risk.

Sub-Saharan Africa could be the diamond in the rough this year with more than $4 billion worth of project financings scheduled to close. Those projects include the region's largest ever-a $1.5 billion Nigerian liquefied natural gas (LNG) project expansion. The market's reception to Nigeria's (Bonny Island) LNG and other large financings this year could be a litmus test for further project financed development in Nigeria and throughout Southern Africa, say observers.

Formidable risks still abound, and the road to further development in the region may still be a journey through the heart of darkness. But project financiers are encouraged by the signs they see of democratization in the region and demand for infrastructure development that is higher than ever.

This year's slate of financing will also include a $1.3 billion financing for the AfricaOne telecommunications project in Kenya, as well as a $600 million financing for the Chad Oilfield Development (also called the Chad-- Cameroon Pipeline), in addition to several power and mining deals.

The majority of sub-Saharan Africa projects continue to involve resource extraction for commodities that can be shipped offshore and turned into dollars. But the emergence of power and telecom financings, which are much more reliant on local currencies, shows, in part, a greater confidence by the financial community in signs of economic strength in the region.

Nevertheless, the participation of multilateral lending agencies (MLAs) and export credit agencies (ECAs) is overwhelmingly viewed by market participants as an essential ingredient to financings in the region. For some projects, participants seek private risk insurance to supplement their MLA and ECA coverage.

"As a general proposition, African infrastructure financing is impossible without very strong World Bank and often ECA support," says a partner at a top project finance law firm in Nev%York.

"Politically, I think the time is right to marshal forces for that support, but you need a lot of money going in and you'll need to make a lot coming out."

The Nigerian LNG project, sponsored by the Nigerian National Petroleum Corporation, Shell, TotalFinaElf, and Agip is a prime example of this thinking.

The project involves the expansion of a three-train LNG operation to a total of five trains, with a financing set for this summer after the selection of lead arranging banks and ECA participants. According to Citibank, the project's financial adviser, the deal will most likely involve a combination of bank loans and a capital market offering.

By developing greater natural gas processing infrastructure, Nigerian LNG can help the state hit two birds with one stone: The project will help reduce the environmental consequences of flaring-or burning off associated natural gas that comes up with oil exploration (a practice that currently affects 75% of the country's natural gas output); and it can generate much needed revenue from the sale of the gas at competitive prices to foreign markets.

Some analysts credit the May 1999 election of Olusegun Obasanjo for reenergizing interest in developing infrastructure in the oil rich country. Obasanjo came to power in the first democratically held election in Nigeria in 15 years, and his pledges to restore democracy and deregulate key industries was welcomed by the world financial community. …

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