Endeavor Energy Holdings LLC (“EEH”)

Response to the United Kingdom’s (“UK”) International Development Committee (“IDC”) Inquiry on the UK’s Strategy Towards Development Finance Institutions

31 January 2023

EEH values the opportunity to submit evidence to the IDC as to the impact of British International Investment's (“BII”) funding of power projects in Africa. BII has invested in two EEH projects, the 200MW Twin City Energy plant in Ghana and the 52MW Tè Power plant in Guinea.

What current investments does BII hold?

Alongside the Development Finance Corporation (“DFC”) and two South African commercial banks[1], BII provided $82.9 million in debt funding to the Twin City Power plant (total project cost of $550 million), formerly known as Amandi Energy. The plant is a 200MW combined cycle, dual-fuel power plant in Takoradi, Ghana, which reached Financial Close in December 2016[2] and began commercial operations in July 2021. EEH is the majority owner (51%) of the plant, which provides electricity to the Electricity Company of Ghana (“ECG”) under a 25-year Power Purchase Agreement (“PPA”) at one of the lowest tariffs for thermal Independent Power Producers (“IPPs”) in Ghana. The plant created more than 1,750 direct jobs during construction, and has employed more than 120 persons in Ghana, the vast majority of which are Ghanian, since the start of its operations.

BII also provided debt funding (again alongside DFC as well as CDC Group PLC) to the 52MW Tè Power Plant in Conakry, Guinea. Tè Power reached Financial Close[3] in March 2018 and began commercial operations in November 2020. BII provided debt funding of $39.1 million (total project cost of $124 million). The plant was the first international IPP to reach commercial operations in Guinea and provides reliable baseload power to balance hydroelectric power generation. The plant provides power to Electricité de Guinée (“EDG”) under a 5-year tolling PPA (expiry November 2025). Tè Power is estimated to have increased power supply by as much as 10% and improved electricity access to more than one million Guineans[4].

How does BII evaluate the impact of its investments?

EEH has had a highly positive working relationship with BII and appreciates BII’s commitment to working with the project companies and EEH corporate teams to achieve the targeted commercial, environmental and social outcomes for the power plants. Our understanding (which has been confirmed by our interactions with the deal team) is that BII seeks to invest in transformational projects that support the host country’s long-term development goals, while prioritizing the health and safety of surrounding communities and responsible environmental stewardship. Post-Financial Close, BII has continued to engage with our plant and corporate teams to understand and support our ability to deliver cost-effective power ultimately to electricity consumers in Ghana and Guinea, as well as our commitment to operating in line with the agreed systems and management plans that protect our workers, our communities and our environment.

Twin City Energy has bi-monthly meetings with lenders including BII, and BII visits the plant on a regular basis to conduct in-person engagement with the plant team. BII is next set to visit the plant on 20 February 2023. An additional environmental, social and governance (“ESG”) call takes place with BII on a monthly basis, during which the BII team actively engages with the Twin City Energy team around ESG risks and mitigants. The BII team similarly engages with the Tè Power team on both operational and ESG-related matters on a monthly basis. The BII core team also brings in specialists within BII to offer guidance as needed to ensure that both plants operate in line with the latest international best practices.

Further comments for the IDC’s consideration: Brian Herlihy (CEO of EEH)

(1)   Importance of Development Finance Institutions (“DFIs”) in Deal Structures

As described in EEH’s responses to the inquiry above, EEH has invested into two countries, Ghana and Guinea, both of which have presented significant challenges for the us as the Sponsor (equity). The Government of Guinea failed to make payments timeously, and was then subject to change in regime (through a military coup d’état) in September 2021. Similarly, Ghana was unable to make timely payments for electricity, and subsequently filed for a debt restructuring program with the International Monetary Fund (“IMF”) in July 2022.

BII (as well as the DFC) played a critical role in supporting the long-term viability of projects in the two countries:

• By taking a long-term view on the importance and viability of the projects and working to restructure project debt in Ghana (through a stand-still agreement between lenders and sponsors) to keep the plant operating;
• In both Ghana and Guinea, working together to facilitate the support of the respective embassies to relay the importance of foreign direct investment to the host governments; and
• Presenting a counter-balance to the commercial lenders that would otherwise seek to terminate the project on an accelerated basis.

The view of most private capital is that DFIs provide a “halo effect” to host-country investments. As sponsors, part of our internal investment pitch to our investment committees is that the DFIs’ presence in transactions creates greater assurances that the Government will honor its obligations (please see below for further commentary on this point). We believe that projects that benefit from DFI investment often are perceived to be lower risk projects to sponsors - Government may allow the contractual project situation to bend, but not to break.

(2)   Relationship Between Sponsors and DFIs

Particularly as it relates to projects in Africa, the relationship between DFIs and sponsors is important, whereby both parties play critical roles in infrastructure development and on-the-ground development work. Africa is undercapitalized and often presents difficult working environments that lead to longer development timelines, especially for large infrastructure projects. These challenges often prompt investors to consider alternate investment destinations, particularly for larger capital pools that have geographic flexibility and potentially higher opportunity cost of capital.

DFIs are reliant on capital to lead development work, negotiate with the governments, etc.  While DFIs have extensive structural and contractual experience, they are not suited to be on-the-ground full-time conducting development work. To this end, it is clear that today’s investment environment presents a major risk to Africa’s future ability to attract capital. Two items should be examined as it relates to this point:

• How did we get here; and
• What do we do going forward?

How did we get here?

In the power and infrastructure sector in Africa, there has been a paradigm shift in the allocation of risk from governments to equity sponsors. For the most part, during this shift in risk allocation, debt’s risk exposure has remained relatively stable. If one examines a historical Power Purchase Agreement (“PPA”) such as that of the Bujagali Hydroelectric power plant, the Government of Uganda carries most of the contractual risk for risks beyond that of the investor constructing and operating the plant correctly (for example, the Government carried the risks associated with currency fluctuations, failure of its obligations to make timely payments and to issue permits, etc.). Over the past decade, there has been a push to shift risk from governments to equity capital, led by the governments themselves but also by the DFIs and multilaterals. Today, the negative impacts of these shifted risks is materializing to the detriment of equity, where there is limited or no equity recourse to cause the governments to honor their obligations under the contracts (for example, to make timely payments) or to facilitate the environment that allows sponsors to execute projects as envisaged by both parties at contract inception.

In addition, there has been a rise in the number of equity developers that are sponsored by DFIs that have aggressively pursued projects with “looser” terms and lower IRRs. We believe that lower IRRs do not adequately price in the high probability that governments will be late on payments or otherwise not honor contractual obligations. We believe it is important that DFIs, through their direct or indirect investments; push for the sanctity of the investments to represent the true market risks and not let the objective of putting MW distort the true risk adjusted returns of the market.  An interesting example of this would be the Azura PPA in Nigeria vs. IPPs in Ghana.  While the Azura project has been painful, the strictness of the PPA has resulted in Azura being paid, whereby in Ghana, the looser PPAs (and their enforcement) has resulted in an industry that is now owed over $1 billion by the Government of Ghana.

What do we do going forward?

The answer to this question may appear ironic relative to the statement made above.  However, there is a clear exit of global private equity capital from Africa. It is likely that DFI and DFI-backed sponsors will need to step further into this vacuum and may be required to play a role of buying assets that private equity is exiting. I believe that private equity will return, but that DFIs will have to use this downward cycle to instil certain discipline back into the energy sectors across Africa. Many countries have failed to implement Energy Sector Recovery Programs (“ESRPs”).  As these countries seek bail outs, it is imperative that political willpower is placed behind these ESRPs to restore structure to the sectors. I believe players like Globeleq and others should lead the way in restoring the appropriate risk allocation necessary to operate a 20-year contract. Quite simply, governments must be responsible for government risks (as the only party who can influence the probability of said risks materializing) and the idea that we hope those risks will not materialize is not sustainable.

(3)   Conclusion

Understanding the complexity of development and competition of development (e.g., other sovereigns playing by different rules) makes BII’s task very difficult, but I would like to emphasise its importance and its contributions. There will always be more that investors ask but it is clear that the positive impact that BII has had on Africa (the geography I work in) and our specific projects has been tremendous. The difficult reality of imposing better governance on long-term contracts is a difficult but necessary task. I have run platforms for two large private equity firms (Blackstone and Denham Capital) and both are no longer or will no longer (in their next fund) be investing in Africa, despite very large and sincere prior commitments to the continent. This is greatly disappointing as such decisions by large capital pools indicate that long-term institutional funding may not be available for large-scale projects in Africa going forward. My story is just one, but it is not in isolation. I speak to many pools of capital that are pulling back from Africa due to their views on political risk, a skewed risk allocation and a lack of fair risk-adjusted returns.