THE Coega Development Corporation (Coega) says that National Treasury has approved the first limited recourse capital transaction in the public sector. The transaction is in support of Coega’s ambitious renewable energy programme and will finance the Coega Solar Rooftop Programme (CSRP) – one of several in a very large renewable energy project pipeline.
“Given Coega’s commitment to sustainability and the need to provide our investors with reliable access to utility-scale green energy, attractively priced, and offering forward price predictability, these are critical investments for any SEZ to make. As the Border Carbon Pricing Mechanism starts taking effect, exporters’ terms of access to both markets and capital are increasingly being determined by the extent to which they can mitigate their carbon footprints,” says Coega’s unit head of capital raising, Meike Wetsch.
As a Schedule 3(d) registered public entity in terms of the Public Finance Management Act (PFMA) of 1999, Coega was the first state-owned company to propose and secure Treasury concurrence for the use of a limited recourse finance instrument in the public sector and the first SEZ to establish a Capital Office.
By granting approval for limited recourse finance, Treasury has enabled Coega and other state-owned entities to pursue large catalytic capital investment projects in support of their developmental mandates without imposing risk to the fiscus and by extension, the taxpayer. “Coega’s Capital Unit is responsible for the development and financing of large capital investment projects that are designed to support economic development, increase export earnings and employment at scale, and that are commercially attractive enough to warrant private sector co-investment. To make a meaningful impact requires considerable, prudent, and targeted capital investments that are executed in a way that does not crowd out private sector capital formation.
“Coega has demonstrated its ability to finance economically enabling infrastructure and other game-changing investment at scale. These projects unlock economic performance of existing sectors, and act as catalysts for the development of new economic sectors necessary to diversify the Eastern Cape’s economic base. When commercially financed, such investments do not place additional burdens on the public purse which is critical when considering our national fiscal constraint” says Wetsch.
As a public entity, Coega is subject to the PFMA of 1999 and Treasury Regulations, and therefore, the transaction was considered from every possible angle to ensure regulatory compliance. While limited recourse finance is used extensively in the private sector, this was the first time Treasury considered it in the public sector. Usually, public sector borrowings are structured in a way that requires Treasury to be the final guarantor.
“The problem with this approach is that when financiers consider public capital transactions, their assessment is based more on Treasury’s ability to guarantee repayment, than the commercial and investment merits of the project they are financing. The risk here is that projects that could have been better structured and de-risked end up being financed, and we have seen too many cases where well-intentioned projects end up presenting a liability for the taxpayer,” says Wetsch.
The approval of Coega’s transaction sets a precedent for other public entities to raise capital finance for large projects without a Treasury guarantee. Several state-owned entities have already requested Coega’s assistance in this regard, while the project financier has asked Coega to draft a practice note on the application of limited recourse modalities to renewable energy projects in the public sector that will be widely circulated amongst its public sector clients.
According to Wetsch, “financing projects on limited recourse modalities means projects must be commercially sound and offer exceptional returns to investors and lenders to attract finance, as no Treasury underwrite is offered. This market discipline has a fundamental impact on how we originate projects and has resulted in Coega being able to present a robust and bankable capital investment pipeline to capital markets offering attractive returns.
“For this reason, we have been received enthusiastically in capital markets both here and abroad with current financiers comprising South Africa’s leading investment banks and developmental finance institutions complemented by their multilateral counterparts, and leading international and domestic investment funds. Financiers are particularly attracted to Coega’s ability to scale green energy, digital infrastructure, high-value industrial innovation and our African portfolios.
“Through our Africa portfolio, Coega is playing a meaningful role in operationalising the Africa Free Trade Agreement, and in connecting value chains across the Continent in the interests of shared prosperity and economic diplomacy. Africa remains the last global growth frontier and by becoming part of its growth story, Coega is unlocking valuable export markets for South African manufacturing, intellectual property, financial services, and capital to the Continent while offering investors exceptional returns and a de-risked investment environment,” says Wetsch.
Key projects in which Coega participates include the multi-billion-rand Boegoebaai Port and Rail Project (with the Port development at R16 billion and the related railway infrastructure a further R38 billion), the USD 10 billion development of LNG import and storage facilities and a deepwater port off Manica Island at the Port of Douala in Cameroon, and the R1.86 billion Bhisho Office Precinct.
Other projects in the pipeline include the development of the Fatick Industrial Zone in Senegal, the development of the Kabalega Industrial Zone in partnership with the Ugandan National Oil Company in Uganda at USD 300 million for the initial development, and a digital infrastructure project including several hyperscale datacentres and connectivity to Continental land and sub-sea cables, a satellite ground station and related infrastructure that is designed to position the Coega Special Economic Zone (SEZ) as a digital port and highway into sub-Saharan Africa and enable the 4IR and digital economy at a further R5.8 billion.
“The sheer size of our capital investment portfolio reflects Coega’s exceptional ability to develop and implement quality capital investments at scale and the ability to manage its finances to give effect to our vision to be a leading catalyst for the championing of socioeconomic development while honouring our commitment to fiscal prudence,” concludes Wetsch.
