Abstract:
Electricity supply in Sub-Saharan Africa is inadequate, unreliable and costly. With cheap energy resources such as sun light, wind, hydropower, and natural gas widely available in the region, the problem is infrastructure to harness them. Given the high cost of infrastructure and other pressing social needs placing demands on government budgets, the support of private sector is needed in the provision of the infrastructure.
Project finance (PF) may be instrumental to firms in raising funds for infrastructure projects given the regionÕs economic and political uncertainties. The risk mitigation properties and non-recourse nature of PF affords project sponsors the means to implement lucrative, high risk projects without risking the core firm. It also enables firms take up larger projects than their corporate balance sheets can support. Corporate finance, which depends on the inherent value of the firm, limits its scope of projects. PF could be a potent answer to the infrastructure challenge in Sub-Saharan Africa.
The research aimed to understand the prevalence of PF as well as the extent of influence of its drivers in power plant projects in Sub-Saharan Africa. Analysing 156 projects from 22 countries, with financial close between 200 and 2016, PF was found to be highly prevalent in the sector. Its use increased with increase in investment size but decreased with increase in country political risk. PF was found to be an effective investment mechanism, but high country political risk is a hinderance to its use. Reduction in political risk in the region will enhance PF and infrastructure investments.
