Designing a Bankable Auction Package for Project Financing
A bankable auction package plays a crucial role in determining lenders' willingness to provide financing for projects. By focusing on stable cash flows, technical criteria, standardized documentation, and de-risking mechanisms, such packages can lower the cost of finance, ensure project viability, and attract favorable financing conditions. Standardized PPAs, consultation with stakeholders, and de-risking mechanisms like stapled financing contribute to making auction packages more attractive to both bidders and lenders.
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Bringing it all together: designing a bankable auction package July 17, 2019
What: A bankable auction package determines the willingness of lenders to extend financing Cash flow of the project is the main source of collateral and loan repayment (value of the operating project is higher than value of asset). Willingness to extend financing to bidders depends on stable, forecastable project cash flows (i.e. price and generation amount) Auction design Technical criteria help banks assess good quality projects Contracting structures (e.g. ESIA, land lease) can make cash flow more stable Standardized documentation PPA gives certainty about the amount and price of generation RfP incorporates design elements, makes the rules of game known to bidders De-risking mechanisms Stapled financing: principal, interest, maturity pre-arranged Guarantees and insurance to cover situations that affect project revenue 2
Why: a bankable auction package can lower cost of finance and price paid for electricity Producer Stability and magnitude of cash-flow determines leverage (how much debt can the project viable absorb?) Bankable auction package helps secure project finance at more favorable conditions (e.g. principal, interest rate, maturity) Better financing conditions lower cost of finance Buyer (Government) Lower cost of finance (potentially) lower bids lower cost of electricity 3
How: Standardized PPA Draft participation documents should be published yearly and include: draft Request for Qualification (RfQ) draft Request for Proposal (RfP) Power Purchase Agreement (PPA) Implementation Agreement (IA) A final non-negotiable contract should be published to Construct a bankable PPA, and Reassure bidders that all auction winners sign the same terms with off-taker (except for offered price) Draft and final versions of the PPA should be published To help ensure transparency Consulting the private sector, banks, and investors for feedback on a draft PPA before publication is advisable Considerations Multiple rounds of procurement give more certainty to markets, allow for learning effects 4
How: De-risking mechanism Stapled financing Advantages: reduce due diligence for bidders and banks Bidder: speeds financial closure, especially for new market entrants Buyer: strengthen the non-negotiable, bankable nature of the contracts offered Stapled financing is offered to all pre-qualified bidders but is not mandatory. Example: IFC stapled financing Tranche 1: debt on commercial terms Tranche 2: debt on concessional terms based on available grant funding. Tranche 3: needs to be sourced by bidders from other financiers, whether commercial banks, export credit agencies or other sources. Source: IRENA 2018 5
How: Guarantees and insurance Instrument Description Example Sovereign guarantee/Implementation Agreement Government Support Letter/Agreement Ministry of Finance offers to pay off-taker s payment to projects. Government supports the company's performance of its obligations and the off-taker performs its obligations under the PPA (lighter than a guarantee) Payment guarantee of letter of credit signed by utility and project company. The letter of credit states utility need to provide payment security equivalent to 6 months of IPP revenues South Africa, Uganda Kenya IDA Partial Risk Guarantee (Payment) Scaling Solar Source: IRENA 2018 6
