Project Finance in South Africa’s Power Sector & Financial Modeling

By Fiona Wilson | April 24, 2024

In Conversation – Wikus Kruger (UCT GSB Power Futures Lab)

In this episode of In Conversation, Fiona Wilson interviews Wikus Kruger, Director of the Power Futures Lab in South Africa. Based at the University of Cape Town’s Graduate School of Business since 2001, the Power Futures Lab (PFL) works to create enhanced knowledge and capability in key network infrastructures in Africa that promote economic development and improve social welfare within the bounds of environmental sustainability.

In addition to undertaking research on power markets in the region, PFL also runs week-long short courses for professionals in the power sector, including two courses taught by Pivotal180’s Haydn Palliser: Financial Modeling for Utility Tariff Setting and the new Financial Modeling for Power Project Finance.

In this interview, Wikus shares findings from PFL’s research on investment in Southern Africa’s power markets and what factors contribute to the success of IPPs and power procurement processes. The conversation also sheds light on how a more widespread understanding the basics of project finance and financial modelling can contribute to the success and progress of the power sector.

Financial Modeling for Power Project Finance takes place from 10-14 June in Cape Town, South Africa. If you’d like to learn more about the upcoming course, you can reach out to Pivotal180 at or to the Power Futures Lab at

We’d love to hear your feedback on the interview, so please comment with questions or reflections. Thanks for watching! 

Power Futures Lab

Interview Transcript 

Fiona: Okay, welcome back to “In Conversation.” Today, we have a really great guest, Wikus Kruger, who’s the Director of the Power Futures Lab at the University of Cape Town’s Graduate School of Business. I’m really excited about this interview. I’ve done a number of the Executive Education courses at the GSB when I lived in Cape Town. I’m a huge fan. So welcome Wikus, really happy to have you on the show. Yeah, great to have you. So, just to kick it off, can you share a little bit about the Power Futures Lab, the work that you’re doing, the research that your team has undertaken?

Wikus: Yeah, thanks, Fiona. I mean, we’re pretty specialist, smallish research unit at the University of Cape Town, and we have focused on three main areas that we see as the kind of key challenges to the African power sector. The one is a lack of investment, so we just don’t have enough power stations, we don’t have enough lines, just nowhere near enough money flowing into the continent’s bio sector. So that’s the first area. And in that area, we research, at the moment, quite a lot on renewable energy auctions or tendering programs, mechanisms to kind of attract more investment. And we also look at Chinese investments or Chinese-funded projects as another key source. And then we maintain a database where we track all private investment all by IPPs being built in finance on the continent. So that’s the first kind of research area. And then we also do research on the kind of improvement of utility performance through regulation, through power sector reform. Increasingly, markets are being incorporated in some African countries. And then the third area is broadly the energy transition, and we’re looking at this from different angles. One of this is like the political economy, just how does that shape the energy transition in Africa, but also… And facilitate and understand the kind of impacts of the transition. So those three areas of research kind of lead into training that we do through, as you said, Executive Education, short courses we run here, which we have four of. And we can speak about those later, but those are really great ’cause we actually get to take the research and a lot of the expertise that exist on the continent or that kind of exist for the continent out to the people that make decisions and build these projects and fund them. And then we do advocacy work as well when we get asked, whether it’s kind of supporting government, or the private sector, or development partners. So those are kind of, in a brief nutshell, the three big things that Power Futures Lab thrusts in.

Fiona: Got you. I’m sure you’re all busy. That’s some substantial work in all of those different areas. Yeah, thanks for that rundown. So yeah, you mentioned the Executive Education courses. I have done those in the past, I’ve loved them. I think they’re a great opportunity just for working professionals who are not gonna necessarily pause their career to do an entire degree, but really wanna be staying relevant and building this skillset. Haydn Palliser, who’s one of the founders of Pivotal180, and teaches now two courses at Power Futures Labs. So one of them has been ongoing for a couple years now. That’s the Financial Modeling for Tariff Setting course, which is upcoming. It’s happening this April in 2024. And then this year, there’s now a new one that’s about financial modeling more broadly for power project finance. I think that one’s taking place in June the 10th to the 14th, you can correct me if I’m getting that wrong. But yeah, can you share a little bit about the Executive Education program and just kind of how you see those courses and that line of work at the Power Futures Lab contributing to the power sector regionally? Because it’s not just South Africa, it’s Southern Africa and the continent more broadly. Correct?

Wikus: Yeah, exactly. I mean the courses are one of the key reasons we are at the Business School. The University of Cape Town’s Graduate School of Business is really well-geared to run these kind of short courses for professionals. And we have a short course that’s been running for about 20 years that’s on managing power sector reform and regulation, which kind of formed the basis for all the others, right? It was a course that was started when a lot of new regulatory agencies were being set up on the continent, and you had new regulators with very little kind of formal training on what regulation requires and why are we doing this. And so the courses was set up to do that. And we’ve kind of kept the same approach, I think, for all the short courses. We have four, so of which that is one. And they’re all initially starting with a kind of public sector focus, right? Like, we are trying to upskill initially the regulators, the decision makers in the policy space, the utility professionals, or the Ministry of Finance officials that are involved in kind of attracting investment into the sector or are trying to improve the way that the sector performs. But kind of inevitably, this becomes a resource for the entire sector, whether it’s public or private. So we’ve seen these courses attract significant interest, right? Like, these are the most popular Executive Education courses at the Business School. We fill up the classrooms, we have waiting lists, we have online participation as well to accommodate people because these skills are so important to the sector. And I think it’s been really… A big part of that is the fact that we’ve been able to work with like the best people to teach these. We intentionally go out and we kind of almost cheekily go and look for like: Who do we think is like the top person teaching a topic? Whether it’s project finance, or whether it’s financial modeling, or whether it’s regulation. Like, it has to be someone that’s conceptually clear that teaches well that has real-world experience. And so that’s been the approach we’ve used with these courses, and I’m really excited about Haydn’s new course because it’s kind of spun out of this course we run every year called Finance Contracts and Risk Mitigation for private power investment. And that course teaches like the basic building blocks of project finance. And we have Daniel Gross who teaches Project Finance at Yale, teaching this course and anchoring it. But then we also have a lot of kind of industry professionals from Africa contextualizing what’s being taught. And that’s, I think, a really a great resource. But from that course, it’s become obvious that we need to deepen people’s skills when it comes to financial modeling, and there are various reasons for that. But I think one of the things we keep on… Yeah, kind of pushing is the fact that there is a shortage of skills, especially on the public sector side. So when a deal is kind of put in front of an official, they need to be able to reverse engineer the model that they’re seeing or the contract that they’re signing. They need to fully understand what it is that they’re signing up their… Their country has been signing up for or the kind of terms that are being presented. And financial modeling, I think, is such a powerful tool to be able to do that. So that’s one of the key reasons why we’re doing this. And then, I mean the other is just… There’s a lot of new companies, new investors on the continent want to build new power stations that have the kind of appetite but maybe have limited experience with kind of project finance and have definitely often outsourced these skills. And so it’s, again, when we teach these things, like we try to emphasize like everyone needs to be… Not necessarily a specialist, but like you need to understand all the other parts of this investment space. Whether you’re an engineer, or a lawyer, or a kind of finance specialist, you need to be able to do what the other person does to some degree or at least understand what they are saying. Yeah, and that’s why we’re starting this course, which I’m, as I said, really looking forward to.

Fiona: Yeah, I think it’s gonna be a good one. I wish I could attend in person. And yeah, I really agree with you about those Executive Education courses ’cause I remember when I was attending them, there’s a lot that you can absorb just from the lectures themselves, but the other students and kind of community that was built each week of a class was quite exceptional. People coming from all over the continent, coming from outside of Africa as well. Even though the courses take place in South Africa, definitely South Africans or people working in the South African power sector with the minority. And so the conversations that would take place during the class breaks, or the questions, or examples that students would pose to the instructor, really brought it all to life. And so I actually… I kind of think you could almost attend these courses multiple times and repeat them, and just because of the context of who’s attending them and how the market has changed. And even one year, you’d get something new out of it every year, so…

Wikus: Yeah, I get something new every time. Yeah, for sure.

Fiona: Definitely. So I also… I wanna circle back a little bit to the research that you and your colleagues have been doing at Power Futures Lab. So again, the research is regional, it’s not just about the South African market and definitely not just about Cape Town and the Western Cape, but kind of a key part of the research is looking at independent power producers and investment in the power sector more broadly in the region. And some of those trends over time. Another feature of that is how our independent power producers procured is that through an auction, what do those auctions look like? What have we learned about auction design and how governments, and regulators, and procuring entities can kind of structure those auctions so that they can get really competitive pricing and benefit their power sector. So I’d love to for you to share a little bit more about that research. I have some sub-questions of like: Yeah, why is private sector investment so key for the region? And what are the key parts of auction design that you really wanna highlight as being important for success? But I’ll let you take it from there and then I’ll probe a little further.

Wikus: Yeah, I was actually looking at the data again this morning and feeling a little bit frustrated ’cause the gap is just so big, right? Like, there’s just this massive amount of investment needed to electrify the continent and I, again, looked at like how Africa compares to the rest of the world. It is just… It’s a complete outlier when we look at like how many people there are and how many people have access to electricity, and it’s definitely one of the big issues we need to solve. And the kind of… The thing that really kind of tickles me is the fact that it’s not a technological issue. Like the technology exists, like we’ve solved this everywhere else. And so it really like this… This kind of financing issue, I think, is really important. So I mean like just in terms of the IPP investment trends. Yeah, so like we see a big need for increased private sector investment in the sector. Like, the public sector just doesn’t have enough money. Like there are lots of competing needs, and it is a sector that the private sector can invest in, and that is where there’s kind of returns that are reasonable, but that can be done in a way that makes the power affordable for everyone. And that’s really going to be important. So private sector investment is key, but getting it into the continent in sufficient volume and in the right way is really, I think, where a lot of the work needs to be done. So when we’ve analyzed IPP investment trends and kind of determinants of eventual, whether these projects get built or not and like where the countries can attract sufficient volumes, there are a number of key issues, but like kind of at the heart of a lot of this, it’s this planning procurement nexus. Like, if a country is able to project demand, and come up with a plan that meets that demand on least-cost basis, and then translates that into competitive bidding windows in a predictable way, it’s able to attract some really big volumes of investment and do it competitively, so you end up with good tariffs. And that’s been one of the key areas we’ve been working on. So I mean, when you talk about auctions, like that’s exactly it, right? Like these competitive tender programs or some people call it like international competitive bidding or auctions, they’ve been really successful in attracting volumes. But there’s also been like lots of hiccups and many countries kind of being stuck. There’s about 30 countries that have launched an auction, and like at least half of them are stuck somewhere in the process, projects either not closing or even those that have been successful kind of not doing a second or a third round. And so some countries are kind of reverting back to the old model, which is this unsolicited bids, direct negotiation, very little transparency, often pricing being inflated. So we see a lot of work that needs to be done around auctions, and kind of as you said, like designing good auction. And when we talk about like auction design, in my mind there’s two aspects, right? So there’s the actual designing of the kind of orchestra mechanism almost, right? It’s just like decisions that need to be made around how much power we gonna procure. What technologies will these be? Like, what qualifications will we use, or will we set ceiling prices? Like things that are often, like economic-theory-driven. And where there’s really good knowledge that exists on kind of what works and what doesn’t. But to my mind, that’s almost kind of secondary in our context. Like what’s really important for successful auctions in Africa so far is the implementation aspect. Like the institutional, how can I put it? Like the foundation of these auctions. ‘Cause they’re often being implemented in contexts where the institutions are really weak and you have to somehow set up a credible program that’s gonna attract large volumes of big-ticket investors that are super comfortable with your country’s risks and with the program’s risks and are willing to put often millions of dollars just into the process of bidding without having been awarded. So doing that takes a lot of work, and I think a great deal of our research at the moment is also looking not only at the kind of as you said to the kind of design aspects, but these implementation aspects. Like, what kind of institutions do we need? What skills do they need to have? What’s the governance and arrangements that need to be in place? How do you ensure transparency so that people trust the actual process, trust the outcomes? Those are like… Yeah, like primary, I think, considerations. And then like once you have that, then we can think much more and I think in much greater detail about: How do you design the actual kind of minutiae of the auction process? But that’s… Yeah, so I think like it’s the kind of the nicer part, but often the part that comes before the really important part, which is the institutional part.

Fiona: Mm-hmm, yeah, it makes sense, that makes sense. Yeah, there’s a lot to go into there, I’m sure, in the courses, but also a few. If you read the research you guys are putting out. But yeah, thanks for that context. I guess what I’m also thinking about is maybe it’s easier for some of us to wrap our heads around why financial modeling would be kind of a key skill for a developer or a project sponsor who’s gonna invest in the project. They might be looking at: Does the project pencil at all? Or how can we tweak different inputs to make it commercially viable? How do we reflect the risk of a project or a regulatory environment in the inputs that we’re putting into our model? And maybe that’s more straightforward to some folks. What would you say about why it’s important for those working in government agencies or involved in the procurement process that are part of these institutions that contribute to the overall environments that attracts investment or maybe are struggling to attract investment? What are your thoughts on how financial modeling would be a useful skillset for those professionals?

Wikus: Yeah, it’s… Yeah, it’s so key, right? So I think there’s several ways in which there’s impacts. I think the viability of the sector and specifically projects. And one, like financial modeling is just… Firstly, it’s a really powerful tool to understand the impact of your decisions. Like, if a government wants to, for example, implement kind of a accelerated depreciation tax policy, like understanding what that impact is going to be on different kinds of businesses is something you can’t do without a financial model. And it’s crucial to do that. Like, because there are clear policy decisions that have been made about what kind of people or businesses we want to support. So like that’s one aspect, I think, like just understanding trade-offs, understanding like impacts of specific policy decisions. The other aspect, I think, is really like understanding your investors and the things that they are asking you for. And it becomes tricky because so oftentimes, there are really good projects that get put on someone’s table and at reasonable returns, requirements. And if a government official can kind of reverse engineer that model, they can say, “Yes, this looks like a good deal, we can go ahead.” But very often, that’s not the case. And we’re increasingly seeing actors into the continent that are like not very transparent in terms of like what these projects are or what the kind of return expectations are, whether these are real projects or not, whether the tariffs they’re asking for are reasonable. And all these questions just often come down to a model. Like, you need to be able to understand and unpack that model. So I think for any official that is gonna make decisions and has to sign a contract or has to design a policy, it’s really important that they understand the models. They also need to understand the contracts. And that’s another aspect that we don’t necessarily cover in this course, but we try and others. But it is like reverse engineering these kind of key terms, key decisions, key assumptions, and inputs, I think, is super, super important. But then there’s another part to it, which is specifically around tariffs and reasonable expectations. We just see a lot of time being wasted often on very… Yeah, protracted kind of discussions around what is a reasonable tariff for this project or for a country. And part of that can be solved to kind of competitive processes, but then we still get stuck at some point in the process where people are just not kind of happy with what they’re seeing. And that might be because my neighboring country got a lower tariff on their competitive tender. Why is that? And again, like if you wanna fully understand why that is, you need to be able to understand the model and you need to understand, well, why cost of capital in my country maybe looks different than my neighbor’s. And what that does in the end to the tariff I end the paying. And I think, again, like not having that skillset really often delays project closure, delays the… Yeah, just the kind of the investments we need to get into the sector as a baseline, never mind kind of scaling this up.

Fiona: Yeah, yeah, I agree and that makes a lot of sense. That’s some helpful context I hadn’t thought of as well, but I guess from my perspective, I’m a big believer in kind of understanding the skillset or like the constraints, at least, of other professionals that you’re working with, whether that’s internally in a business where you’re on the finance side. And you do need to understand a little bit about what the engineers are dealing with, and their constraints, or… Yeah, if you are working in government, it’s actually helpful for you to have some insight into the potential investors who are building power plants, what their constraints are, and what wiggle room they do or don’t have. And exactly what’s possible for them, even if there is, I guess you could say there’s somewhat of a not-adversarial dynamic. But governments would love lower prices from independent power producers, and they want to get the highest price possible. So of course, there’s some competing interests there, but to have a window into what your counterparts are dealing with and how you can help them help you, I think, is really powerful.

Wikus: When we teach Project Finance, like we often say that like key to successful project finance, especially in this part of the world, is empathy. Like, it’s weird thing to think about, but you need to be able to understand what the other guy is facing, right? And so I fully agree with you. And we’ve seen like different… Like in some instances… For example, where there are instances where projects have been directly negotiated, and that might be because they were specific technology that’s just so complex or like so site-specific that it’s difficult to run a tender. But where the developers or the kind of investors still want to give government like certainty that you’re getting a fair price or a fair tariff, like they will open up the books completely. But then doing that like does mean that the government needs to understand, “This is the model, these are the inputs, like this is how they flow through, and this is reasonable or not.” Yeah, and we also see like auctioning authorities increasingly asking bidders to submit their full model, and they will run stress tests on the model. They will try and understand like what happens when equipment costs go out of scope, or ForEx moves too much, or like those kind of key inputs that they’re also worried about ’cause they want to get these projects spoke. And so I think we are seeing more appreciation of the value of the models from the public sector as well.

Fiona: Yeah, definitely. I, for sure, don’t think you need to be in a pure finance position to benefit from the skillset. And you don’t need to be the person building the model from scratch and owning the model and living and breathing models to really benefit from understanding how they work. I’m excited about the course. We’ll definitely link to the course when we post this interview. Again, I think it’s the 10th to the 14th of June in Cape Town. I think there’s some online content as well, so it’s not fairly limited to that one week. But yeah, check that out on the website. You can of course contact Pivotal180. Haydn Palliser from Pivotal is teaching the course. But yeah, just as final thoughts, because I guess what’s your hope for how this new course is gonna impact energy transition in the region? Do you kind of feel like it’s connecting the dots, it’s just building on the courses you’re already running, and that hopefully you’ll see some return students to it, or any thoughts in that regard?

Wikus: Yeah. Yeah, I mean, I love the fact that this course is like a… Kind of a natural progression of what’s come before, right? Like that there is a, through the teaching we’ve done and the work that we’ve done in the richer space, it’s just clear like this is a skillset that’s important, and it’s not being addressed. And so it’s great that we are at the university and we can do this. So I’m really excited about that part. I mean, I think what I love about the courses in general is the fact you’re sitting with, as you said, like you’re sitting with public and private sector people from so many countries, different parts of the sector. And I think what is gonna be great about this course specifically is that everyone’s gonna be working with the same model and understanding the same inputs and the same constraints. And I think like in terms of creating empathy and helping move kind of… Or at least create a shared understanding and move projects forward, like I think it’s gonna be really, really helpful doing that.

Fiona: Yeah, cool. I’m excited to check in and see how it went, come June. But yeah, this has been fantastic. Yeah, yeah, I’ll definitely check in. But yeah, thanks for sharing some of the background. I think maybe folks who are just looking at the course online might not be sure if it is the right course for them, but there’s so many people who would benefit from this material. And yeah, thank you for sharing more about Power Future Labs. It’s a really fantastic institution, so I always love to talk about your research.

Wikus: Thanks, Fiona.

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