South Africa

Details

  • Service: Advisory, Transactions & Restructuring, Corporate Finance
  • Type: Business and industry issue
  • Date: 2010/06/15

Determining the bankability of a public sector project – separating the wheat from the chaff 

“Almost any project can be made bankable if the desire and commitment to see the project through to completion is evident.”

When we think of ‘bankability’ of a project we tend to veer towards the traditional yardsticks of a positive net present value and an acceptable internal rate of return to the private sector. However, almost any project can be deemed to be bankable if the project itself is sufficiently well defined and the project environment provides sufficient incentive.

 

In this context, there are either no bankable projects or all projects can be considered bankable.

 

It therefore becomes imperative that private sector concerns are ameliorated by strong government support and political buy-in.

 

For example, with a toll road, if the private sector has to fund development, land acquisition and construction costs on the terms that it has to take all the planning risks and recover its investment only through raising user fees, even though these fees are capped and forecasts indicate that traffic would be low, the project would not be bankable. If, however, the public sector takes all the planning risks, pays cost overruns and agrees to repay the private sector through a cost plus fee system, virtually all projects of this type would become bankable.

 

When it comes to large scale, public sector infrastructure projects, such as the increased R846 billion to be spent on the Public Infrastructure Programme in South Africa over the next three years, the socio-economic benefits of a project also need to be looked at, particularly when it comes to social infrastructure programmes.

 

Typically, economic benefits are generated by increased levels of service for the users and mainly take the form of savings in, for example, vehicle operating costs, reduced travel time, mitigated impact on the environment, better quality health care and education. The benefits are often difficult to quantify but clearly fit into government’s long-term strategic objectives.

 

For example, the long-term benefits of moving towards a public transportation system may not immediately yield the desired financial rewards, but the long-term gains such as increased productivity, reduced carbon emissions, etc will often play a big part in the decision-making process.

 

The private sector investor/project finance partner would generally be looking for:

 

  • Political stability and ‘buy-in’ by all political stakeholders
  • Continuous high level political support
  • Pipeline of attractive, viable projects
  • Fair, reliable transparent procurement with open competition
  • Enforceable contracts
  • Shared risks commensurate with return
  • Well defined and consistently applied ‘rules of the game’
  • Projects that lead to new opportunities.

 

Bankability is determined by how the project is defined and the constraints that are imposed, or the incentives that are provided, in respect of the implementation through the concession contract or regulations.

 

The process of selecting bankable projects consists of selecting projects that can be given a serious chance of success with sufficient incentives through Government support and regulations (if required), while keeping these incentives within acceptable limits and in line with risk transfer objectives.