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The ability to bring international funding looks set to remain a critical success factor for developers in emerging markets even as industry bankability grows elsewhere. “If you look at what has been happening in emerging markets, on projects currently being built, the big majority have international financing… mainly multilateral financing,” said Josefin Berg, senior analyst for solar demand at IHS Technology.
In particular, bodies such as the World Bank’s International Finance Corporation are still having to fund a large proportion of projects in new solar markets “because the risk is so big,” she said. Lenders such as the Multilateral Investment Guarantee Agency (MIGA), part of the World Bank, can offer political risk insurance (PRI), which may be of value to developers concerned about unstable market conditions.
According to MIGA , PRI issuance went up by 33% in 2012, the last year surveyed, and studies found “that investors are more likely to face higher risk in contractual relationships involving public utilities than in other sectors.” The need for international funding is not just driven by risk concerns but also by the limitations of banks in current solar boom regions such as Central America or Southeast Asia. “In new markets, local banks might not be up to speed on how to finance these projects,” Berg noted. As a result, financing costs tend to be higher than for international banks.
Finally, developers may be better off seeking international funding for projects because multilateral agencies frequently have mandates to back development work, including renewable energy. The one market that bucks the trend is South Africa, where local lenders are comfortable with financing large projects at competitive rates. However, South Africa is not typical of many emerging markets for solar because it has a relatively strong and diversified economy, along with a track record of investment in novel and complex infrastructure projects. South Africa is also developing solar within the framework of a highly structured and transparent bidding process that gives investors a clear view of project returns.
Elsewhere, Berg said, multilateral financing is likely to remain the norm for emerging markets for some time, at least until local banks become more acquainted with the risk profile of solar projects. “National banks are cautious,” she said. “The bank doesn’t want to take any risks.” An alternative to resorting to multilaterals is the strategy used by Enel Green Power in Chile. There the developer secured a USD$150 million loan from the Chilean arm of Banco Bilbao Vizcaya Argentaria (BBVA), Spain’s second-largest bank. The money, to cover Enel Green Power’s Chilean investment plan, came with strings attached, however.
“The five-year loan will be disbursed in the next months at an interest rate in line with the market benchmark and will be backed by a parent company guarantee released by Enel Green Power,” stated the developer in a press release .
Whether such funding arrangements become more common elsewhere remains to be seen.