Engineering firm Thuthuka Group and Investec have joined forces to offer an innovative approach to financing projects valued at between R5-million and R100-million.
"We’re hoping to capture the non-traditional project finance market, particularly targeting projects involving waste water treatment and air pollution control," explains Etienne Meyer, financial director of Thuthuka Group Limited (TGL).
"The value of most of our projects falls somewhere in the middle of those two figures and the lack of readily accessible finance has proven to be a constraint in some instances."
Investec’s Michael Meeser adds: "The implementation of a project finance structure is expensive because of the due diligence required for transactions of this nature, which frequently eliminates smaller transactions from access to project finance.
"Our portfolio approach reduces the due diligence and documentation processes by using a standardised transaction approach that can be adjusted for each transaction."
This is the only economical way for clients to finance small projects, using a portfolio approach and outsourcing the project finance as non-core business.
TGL has teamed up with Investec to provide a product for waste water treatment and air pollution utilising limited recourse project finance.
Investec’s primary role is to provide and structure the funding, while TGL provides the client with its technology and operational skills. The result is an all-encompassing solution that removes the risk for the client, allowing the client to focus on core business activities.
Meeser adds: "Investec is excited about this opportunity as there is capacity for repeat business. We believe that South Africa’s environmental laws will encourage that repeat business by compelling the industry to become more ecologically aware."
Meeser and Meyer agree that companies should focus on their core area of business. Project finance is a highly specialised area, yet where it is not a core business activity for the client, it generally has very low priority in the capital allocation process.
The TGL/Investec offering takes care of non income-producing activities on behalf of the client that are nonetheless essential in terms of legal and environmental requirements.
It makes good financial sense for a company to outsource these functions to an organisation that is able to take them on at a premium, compared with more traditional financial institutions that might offer a more long-term – and costlier – solution.
Meeser says: "Our core business is project finance and we understand how to mitigate risks inherent in such projects including construction, commissioning and operational.
"We anticipate that the initial projects will involve a steep learning curve in terms of preparing the documentation but, once that has been finalised, it will merely be a matter of replicating the transactions for subsequent projects.
"This will reduce transaction times, which will benefit all parties in the transaction. We’re using traditional project finance technology in an unconventional manner," he adds.
"We see this as an opportunity for TGL to offer its technology to markets that traditionally struggle to find project finance, while it gives Investec an opportunity to find clients who require cash flow leveraging off a single asset," Meyer says.