The sponsor of Senegal’s first IPP, Nykomb’s Norland Suzor, talks about the importance of patience, political stability and what happens once you’ve got into the West African market. By Colin Leopold.
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After a seven-year wait to get his first African project over the line, Norland Suzor is sanguine about the next steps he and others must take on the continent. For a Mauritian-born developer with a head office in Sweden and a French accent not meant for crackly phone lines, he joins dots convincingly between topics as far afield as currency stability in West Africa and the Indian sugar market.
For his firm, Nykomb, and its 125MW coal-fired power station, Senegal’s first IPP was the firm’s “foot into the door” of the African market, he says. With operations in India and some experience along Africa’s east coast, the deal was the result of a long look at Senegal, its political history and prospects for future growth, in power and other markets. In the end, the decision came down to three simple factors.
“The first thing we did was ask ‘what about the political stability’,” he says on the phone from Luxembourg. “Our analysis showed that Senegal never had any problems after independence, with transitions from one government to the other going very smoothly. There’s also a single ethnic group, which makes a difference, unlike the Ivory Coast.
“Secondly, we used to be on Africa’s east side, in Malawi, Tanzania and Kenya; the problem there is you don’t know where the currency is actually going, so you have a huge risk as to how your model will actually function. West Africa has this common monetary system, which used to be supported by the French franc, and it became more stable after the euro came out.”
Number three is the considerable peat resources in Senegal. The jump from coal to peat for a Swedish company in Senegal may seem jarring but peat is where Scandinavia comes in, says Suzor.
“When you look at the power sector we thought ‘OK, maybe we start with coal’ but that wasn’t our goal,” he says. “Our long-term view is to look at Africa. With India you can never really own the land so you can’t control the crop, whereas in Africa you can do a long-term lease. The equipment doesn’t change, whether you burn coal or wood or peat, and that’s a working model.”
That working model is already moving quickly. Nykomb is now looking at another two locations in Senegal where it can grow sugar cane and is in discussions with banks for a third in Togo, which will produce mostly ethanol. Sugar cane has the highest yield of biomass per hectare so there is a strong power generation component along with sale of the crop itself.
“I originally came from Mauritius and, as a small island, sugar is how we grew up and we have developed that,” says Suzor. Later in the conversation Suzor says that he developed a patent in Hawaii for the first large-scale power production plant from sugar cane and helped write a book for the World Bank on the subject.
The model in Africa works whereby Nykomb takes the land, develops the biomass, gradually replacing the sugar cane on a seasonal basis, while using other fuels to supply power when there is no crop. The coal used at Sendou will eventually be replaced by biomass, he says, making it an even more attractive prospect. For the sale of sugar in the African market, European subsidies are the only drag, he adds, but he is confident this won’t last forever.
If Sendou has taught Suzor anything about Africa it’s patience. The tender was first floated in 2006, awarded in 2007, signed in 2008 and finally closed in June of this year. To call the five-year delay from signing to close a “very costly situation” seems slightly short of the mark, but Suzor is philosophical about the bumps in the road, most of which were caused by planning red tape at government level.
A power purchase agreement for 25 years was signed in 2008, with Senegalese state-owned utility Senelec as the single offtaker. The licence and site were promised in six months but in former French colonies there are often difficulties with third-party claims on the land. The DFIs involved, led by AfDB in its first lead arranger mandate, could not get board approval without land rights and a social and environmental assessment on the site, leaving the project in limbo until March 2010. Even after the land was handed over, a public hearing threatened to hold things up further if the president hadn’t intervened.
Sendou has now been called a game-changing project for the country. The US$206m coal-fired plant will provide 40% of Senegal’s energy requirements at a 40% lower cost, bringing Senelec into financial stability and allowing future energy projects such as wind farms to come online.
Despite one of two equity providers, French firm Sedic, pulling out of the deal due to nervousness about a change in government and its wider strategic exit from Africa as a whole, Suzor says the financing progressed relatively smoothly. Sedic was later replaced by Moroccan firm AFG, which filled the equity shortfall and took a joint stake in the project.
The AfDB was lead arranger and provided a loan of €55m. It was joined by FMO with a €35m loan. The West African Development Bank provided CFA Fr15.25m and local commercial bank CBAO provided CFA Fr38m, both in local currency. The AfDB and BOAD loans have a tenor of 14 years with a two-year grace period. The FMO and CBAO loans have a 12-year tenor with the same grace period. The debt to equity split was 70/30 and debt pricing was said to be between 500bp and 550bp.
Nykomb was given responsibility for construction and operation at the 29 hectare site, located 35km from Dakar, and the EPC contract was awarded to Indian company Dhel. The coal feeding the plant is sourced from the Richards Bay Coal Terminal on the Indian Ocean coast of South Africa, carried by a 40,000 tonne ship into the port of Dakar and then transported by road to the plant.
Senelec pays the market price for the power plus an administration fee to the sponsor and there is a separate contract on the coal price that minimises lender risk. Its payment obligations are guaranteed by a letter of comfort from the government, but not an explicit sovereign guarantee – due to a pre-existing arrangement between the IMF and the country’s Ministry of Finance, the IMF reviewed the letter of comfort and provided comment but did not provide any endorsement.
Of course, Nykomb had some help prizing the door open into Senegal. The deal would not have been done without a DFI such as the AfDB on board to lead the financing and add some political clout along the way. But with most African power and infrastructure deals still some way off luring in international commercial investment, is there more the DFIs could be doing to improve the bankability of projects?
“I think they should assist the government and help streamline the tender process,” says Suzor. “There needs to be greater projection specification without technical feasibility, like it’s done in Singapore, transparent bidding with pre-selection.” Having said that, once the PPA for Sendou was signed the AfDB was in a position to make changes, reduce risk exposure and make it more bankable – something Nykomb would have struggled with otherwise.
“There they were very effective,” he says. “Even with one or two DFIs involved it is kind of an insurance against government or a subsidiary of the government defaulting on their commitment – if that happens all the DFIs will shut the taps in the country and the governments are very aware of that.”
Nykomb is now planning to expand Sendou to 250MW and has already bought land connecting the site to the port to ease transportation of coal. Financing of the expansion is expected to take place in the next six months as there is already a structure in place and the government has been convinced of the importance of coal-fired power for the country. The capex for phase two is around €180m and there is understood to be a little more flexibility in the financing structure, with the potential for some mezzanine equity.
Suzor has said the AfDB might play a role as MLA in the second phase but it is understood that there is already commercial bank interest on the debt and equity side and the sponsor wants to fast-track the financing. For Nykomb’s Togo project, there is the possibility that the firm may raise funds through a bond issue and then complement that with a DFI for some security.
“You have to keep the DFI at a level where it can do a very straightforward thing, without the complicated due diligence,” says Suzor. “So I can create a debt fund, be the lead arranger and then bring in the DFI. But you need more than just a fund manager to do that.”
In the meantime, with the same company laws in all former French colonies as well as the currency stability, Suzor has the West African markets of Cameroon and the Ivory Coast to consider as the door he unlocked with Sendou starts to edge open a little more.