Q&A: NEDBANK CAPITAL - JSE MAGAZINE

Q&A: NEDBANK CAPITAL

Mike Peo, head of infrastructure, energy and telecommunications at Nedbank Capital, on building new generation capacity and rolling out SA’s renewables framework beyond its borders

Q&A: NEDBANK CAPITAL

Q: It’s become trendy for corporates to endorse renewable energy. Is this Nedbank’s take or is there a genuine explanation for this growing trend?
A:
Renewable energy has been a strong part of the SA government’s energy focus since at least 2010, when it introduced the Integrated Resource Plan [IRP], which essentially is the policy framework to move the economy away from old ‘dirty’ thermal power generation and minimise dependence on heavy carbon pollutants like coal.

This was significant given that the country was, at that time, among the top 10 emissions polluters in the world. The IRP proclaimed that there would be a new energy mix and that a large percentage of energy would henceforth be procured through renewable energy sources; and that by 2030, with the country needing to have doubled its energy generation capacity, at least 50% would come from various renewable sources such as wind, hydro, solar, nuclear and gas.

With this as the background, I don’t believe that companies in SA are driven by the trendiness of renewables but rather by a proper need to step away from old power generation and align with the government to mitigate climate change and bring us onto a global stage as a responsible country.

Q: How extensive is Nedbank’s commitment to renewables?
A:
As the long-standing ‘green’ bank, Nedbank was the first SA signatory to the Equator Principles, endorsing the World Bank’s standards for infrastructure project development. We undertook to ensure that all our projects would be built and operated in an environmentally acceptable and sustainable manner while still ensuring acceptable returns on our investment.

For the past decade, every deal we have signed has been reviewed by experts to confirm that it is compliant to the Equator Principles, as well as our own environmental standards. Three years ago, the government introduced the Renewable Energy Independent Power Producer Procurement (REIPPP) programme, designed to acquire – through various phases – the procurement of some 4 500 MW of renewable energy as part of IRP 2010.

Global and national renewable energy project developers are entitled to bid in the programme and banks are a primary source of the funding. Currently, there are 67 projects on the bidding table, presented in three procurement rounds. Of those, Nedbank Capital has managed to secure a third – 23 in fact.

To date, we have committed R20 billion to renewables, and that’s just in SA. We have also been active in Africa, with financial close imminent on Kenya’s Lake Turkana’s 300 MW wind project. This is the largest wind farm in sub-Saharan Africa, with a €680 million total project cost. While we may have renewable energy interests in the rest of Africa, our main focus has been our home base in SA.

‘[SA’s] renewable energy programme is being hailed as the biggest and most successful in the world. I refer to the 67 projects that are ready to go to market’

Q: Is investment into renewables ‘good’ investment, especially in Africa where big infrastructure projects have a poor history of completion?
A:
What is critical to consider is the framework around which renewable projects are built. In SA, for example, it is good investment because the policy and regulatory frameworks are so sound that our renewable energy programme is being hailed as the biggest and most successful in the world.

I refer again to the 67 projects that are ready to go to market, achieved within three years. This was enabled by the significant involvement of a team of local and international consultants who developed the programme with the Department of Energy to ensure that projects would happen; that the legal framework for such development is sound; and that a credible procurement process was put in place.

From a Nedbank Capital perspective, we need to ensure the regulatory and policy framework is set up to encourage investment in such renewable projects, and we need to be assured that technically a project can provide affordable value for money, regardless of where in Africa a project is. As a result, we see renewables as an extremely good investment – even more so now given that SA’s framework is being rolled out beyond our borders.

Q: In 2012, SA was one of the world’s top 10 largest investors in renewable energy. How are we faring in 2014?
A:
SA remains at the forefront of new renewable project developments across many technologies and this is set to be maintained over the next few years. Having a lending stake in approximately one third of SA’s renewable energy projects to date, Nedbank Capital is currently leading the field from a lending perspective, with a significant financial commitment which we hope to maintain.

Q: With such a vast number of projects requiring support, how does Nedbank Capital make a sound selection?
A:
First we look at the economic motive for a project, an assessment of the technical merits and the sponsor parties. Nedbank Capital would be guided by feasibility studies undertaken by credible organisations like the World Bank, before even considering other options.

We would need to structure the capital requirement by determining, among other things, what liquidity is needed, the capital expenditure, and the investment required for life maintenance. Due diligence is also crucial, as are legal and environmental assessments.

Such aspects are handled through Nedbank Capital internal resources, teams and committees, and involve a large number of people, dependent on the size of the project under consideration.

Q: Excluding the big projects, what does Nedbank Capital promote as worthwhile green investments?
A:
While we have generally been involved in financing large-scale wind farms, solar projects and the like, we see this from two perspectives. On the one hand, it’s about building new generation capacity. On the other is the investment into green energy and energy efficiency solutions. We are seeing an incredible number of companies coming to market with solutions for people to reduce or manage their power, and many of these include off-grid and retrofit solutions.

‘Having a lending stake in approximately one third of SA’s renewable energy projects to date, Nedbank Capital is leading the field’

Q: How important do you consider public-private partnerships (PPPs) to be in terms of this sector?
A:
They are vital. One of the biggest mistakes is thinking that PPPs are just loose terminology but in the banking sector, they represent a very formal regulatory framework designed to regulate private-sector participation in public projects. At the very core of this is government policy demonstrating political will to embark on large-scale projects.

SA now has a policy framework embedded in the NDP and we have an enabling regulatory framework under the Infrastructure Development Act, where the laws of the country encourage private- sector investment into large-scale infrastructure of energy projects.

Many countries in Africa are now developing similar frameworks, such as Vision 2030 in Kenya, and they are passing legislation so that the private sector can invest in large-scale projects, including state-owned infrastructure like ports, railway lines, dams and power stations.

Policy commitment and regulatory frameworks are crucial because if you spend time planning these enormously expensive projects, you need to know that government isn’t going to change its mind arbitrarily at a point in the future.

Aside from the expense, infrastructure projects of this nature are very expensive and require massive long-term commitment. Transactions usually range from R500 million to R10 billion, and the time it takes to structure and develop such projects is substantial.

Q: How do PPPs contribute effectively towards community development?
A:
Embedded in almost every single PPP is a socio-economic sustainability obligation, something that serves to ensure local community involvement.

If you think of a toll road, there will usually be the involvement of local communities in maintaining that road or its road reserve. The same applies to every big renewables project.

For example, in SA there is a requirement that there must be 40% BEE and BBBEE participation and a significant amount of the scoring points earned comes from the impact of the project on socio-economic development.

Q: What are the future plans for Nedbank’s renewable interests?
A:
We are highly committed to this sector and have great support throughout the Nedbank group in maintaining our status as a leading player in this arena. However, we do work within a three-year planning cycle so we have to plan ahead carefully.

We are also deeply committed to the CEO, Mike Brown’s, implementation of Nedbank’s Fair Share 2030 framework. Although it talks broadly to the group’s participation in the SA economy as a whole, it merges well into this sector, given that Nedbank Fair Share’s focus is on future-proofing the environment, society and our business.

By Kerry Dimmer
Image: Gareth van Nelson/HSMimages, Andreas Eiselen/HSMimages, Gallo/GettyImages