In support of special economic zone (SEZ) operator Coega Development Corporation’s ambitious renewable-energy programme, the National Treasury has approved a limited recourse capital transaction – a first for the public sector.

The transaction will finance the Coega solar rooftop programme, which forms part of a larger renewable-energy pipeline for the organisation.

The rooftop programme will see solar panels installed on industrial buildings in the Coega SEZ and Nelson Mandela Bay Logistics Park.

Coega, which is based in Gqeberha, in the Eastern Cape, is the first State-owned company to propose and secure Treasury’s concurrence for the use of a limited recourse finance instrument in the public sector and the first SEZ to establish a capital office.

“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 capital-raising head Meike Wetsch.

She explains that with Treasury having granted approval for limited recourse finance, it has enabled Coega and other State-owned enterprises to pursue large catalytic capital investment projects in support of their developmental mandates without imposing risk to the fiscus and, by extension, the taxpayer. 

Limited recourse finance is used extensively in the private sector, but Treasury considered it now for the first time 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, however, 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,” Wetsch explains, adding that, too often, the country has had cases where well-intentioned projects end up presenting a liability for 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,” Wetsch says.

Coega has demonstrated its ability to finance economically-enabling infrastructure and other game-changing investment at scale.

“These projects unlock the 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,” Wetch states.

The approval of Coega’s transaction now sets a precedent for other public entities to raise capital finance for large projects without a Treasury guarantee, particularly for renewable-energy projects.

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.

“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, she adds.

For this reason, Coega has been received well in capital markets both in South Africa and abroad, with current financiers comprising South Africa’s leading investment banks and developmental finance institutions, as well as international investment funds.

Financiers are particularly attracted to Coega’s ability to scale green energy, digital infrastructure, high-value industrial innovation and our African portfolios, Wetsch says.

She adds that Coega is helping to unlock valuable export markets for South African manufacturing, intellectual property, financial services and capital to the continent, which operationalises the Africa Free Trade Area Agreement, while offering investors exceptional returns and a derisked investment environment.

PROJECT PIPELINE

Key projects in which Coega participates include the multibillion-rand Boegoebaai port and rail project, with the port development estimated at R16-billion and the related railway infrastructure a further R38-billion. The SEZ is also involved with the $10-billion liquefied natural gas import and storage facilities development and a deepwater port at the Port of Douala, in Cameroon. 

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 $300-million for the initial development, and a digital infrastructure project including several hyperscale datacenters and connectivity to continental land and sub-sea cables, a satellite ground station and related infrastructure that is designed to position the Coega SEZ as a digital port and highway into sub-Saharan Africa.  

“The sheer size of our capital investment portfolio reflects Coega's ability to develop and implement quality capital investments at scale and its 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.