The first significant foreign investment in Togo in more than a decade was concluded last month when ContourGlobal's independent power project in the West African country of Togo reached financial close.

Togo - firmly on the United Nations' list of the world's Least Developed Countries - had a per capita GDP of just US$436 in 2008. Until very recently it was effectively cut off from the global economy, with aid flows drying up due to concerns over human rights and democracy.

All that means it takes a determined investor to take a risk on Togo - and commitment from a lender willing to take project finance into virgin territory. But the need for the project was never in doubt.

Among many things, the country is desperate for electricity - its electrification rate is estimated at only 17 per cent. Now ContourGlobal - with financing from the US Overseas Private Investment Corporation (OPIC) - will add substantial generating capacity to Togo and the region.

ContourGlobal's project overcame fuel supply challenges and even switched technologies part way through development as the originally intended fuel proved to be unavailable.

Construction is already underway, with the plant aiming to be operational by early next year. IJ power reporter Tom Bowker lifts the lid on the project and its financing.

The Project

Discussions first began with the Togolese government in late 2005. In October 2006, the Concession Agreement was executed which provided ContourGlobal with the exclusive right to manage the Centrale Thermique de Lomé (CTL) and to increase the installed capacity by 100 MW.

This contract is the cornerstone for all of the subsequent agreements, including the Power Purchase Agreement, which were executed during the development process. Alain Tronche, vice president for Africa at ContourGlobal, who led the contract negotiations emphasises: "The substantial trust and confidence built between the parties during this early stage was critical to establishing an effective framework for addressing the technical and commercial challenges which arose during the contract negotiations. Nothing would have been possible without this first step."

Lee Muller, executive vice president for business development at ContourGlobal, elaborates further on the circumstances surrounding the project's early development: "West Africa has an overwhelming need for power. The electrification rate is very low. We know the region, have strong local relationships, and liked the site very much. The project is on a brownfield site in Lome, with easy access to fuel, water and transmission and it is very close to the port."

The 100MW IPP was initially to be fuelled by natural gas from the West African Gas Pipeline, a 678km pipeline from the gas reserves in Nigeria's Escravos region of the Niger Delta to Benin, Togo and Ghana.

However, in just one example of the difficulty of pulling off infrastructure projects in Africa, the pipeline has not achieved commercial operation despite having already been completed.

ContourGlobal realised their project would be ready before the supply of gas would be available. They could wait for the gas, use turbines and burn expensive diesel in the interim or they could change course.  Says Muller: "We decided that the country could not wait for power but developing a project based upon expensive diesel was worse than no project at all.  So we sold our turbines and switched technology."

The solution came in switching technology, from GE gas turbines to six 18V50DF Wärtsilä tri-fuel engines - which can switch between natural gas, heavy fuel oil (HFO) and diesel in as little as 30 minutes. Wärtsilä was engaged as EPC contractor, providing a fixed price turnkey contract.

A 25-year PPA was signed - following two years of negotiation - with the national electricity provider, Compagnie Energie Electrique du Togo (CEET).

The Republic of Togo agreed to support CEET's obligations under the PPA, with additional structural enhancement over the prioritization of payment streams incorporated to further improve the project's credit.

One-stop Financing

According to Muller: "When you're operating in Togo you're pretty much dealing with multilateral lenders. We felt that given the financial crisis it was easier to do a 'one stop shop'.

"We decided to work with OPIC which had the ability to do a single tranche - without needing to syndicate or co-finance - and we were also able to purchase political risk insurance from OPIC, and that allowed us to streamline certain inter-stakeholder issues between the lender and the insurance provider."

The US$190 million project was financed on a 75:25 debt-equity ratio, with the entirety of the US$143 million lending commitment coming from OPIC. ContourGlobal provided 100% of the project's $47 million equity capital.

The project also financed an upgrade to the transmission system and substations supporting the project.

Legal and Institutional Challenges

Indeed, no transaction of this nature had ever been done before in Togo, so the three international law firms on the deal - Shearman & Sterling, Allen & Overy, and Gide Loyrette Nouel - were starting from scratch with the various Togolese institutions involved.

There were of course other, more mundane challenges presented by working in Togo - for example, during the financial closing brown outs, internet outages and telephone, fax, and cell phone complications caused some excitement. This brought into sharp focus the need for the project in Togo.

Commitment to Emerging Markets

It took three and a half years to negotiate and execute the commercial and financial arrangements necessary to achieve financial close.  During this period numerous amendments to the project documents had to be negotiated to accommodate both the change in technology and the requirements of OPIC.

Tronche says: "This is a clear demonstration that, in emerging markets and particularly in Africa, it is critical to maximize flexibility and to maintain a positive approach throughout the development process."

Muller adds: "We decided to lead with a firm and clear commitment to the project. We led with capital and investment and started making deposits on equipment and investing in the project during the development process." It was important to fortify local confidence in the project. "West Africa has a history of developers promising things and not delivering," says Muller.

"Most developers would have had very little exposure, a few million dollars at most. We invested substantially more to give the Togolese confidence in the project itself but also in the timeframe for development. We locked in equipment, we locked in the cost, and we locked in the schedule."

Muller says: "The project is revamping the West African power sector. It's one of the largest infrastructure investments in Togo's history, and puts Togo in the position of self-sufficiency for electricity."

ContourGlobal has over 1,000MW of projects in operation, construction and development elsewhere in Africa, The United States, Europe and in developing countries such as Ukraine, Brazil, Colombia, and Romania. ContourGlobal is building 'Quad Gen' combined heat and power plants at many of Coca-Cola Hellenic Bottling Company's bottling facilities from Europe to the Ukraine, Russia and Africa.

In Africa, the Company is also currently developing power plants in Nigeria and Rwanda, including the groundbreaking Kivuwatt methane gas extraction and power project. ContourGlobal is also pursuing potential projects in eastern and southern Africa.