Plugged in: the elephant in the project room

Plugged in: the elephant in the project room

There’s an elephant in the room on most energy and infrastructure projects.

Everyone can see it. People walk around it. People talk about it. Entire projects move around it. But no one really wants to deal with it properly. That elephant is bankability.

Working around the elephant

At the start of a project, the room is empty. There is space, flexibility and optionality. Then the furniture starts to arrive.

The project structure goes in one corner. The EPC package gets pushed up against the wall. Grid arrangements get slotted in beside it. Shareholder positions, land arrangements, O&M assumptions, interface risk allocations – all carefully manoeuvred into place. Meanwhile, the elephant is still standing in the middle of the room.

It feels manageable. It might be annoying but people can squeeze by and move furniture around it. The project is still moving. The room is filling up. And the assumption is:

“We’ll deal with the elephant later.”

or even

“Someone else will deal with the elephant.”

Different people see a different elephant

Part of the problem is that not everybody is trying to achieve the same thing.

The project and package teams want their workstreams delivered so the project progresses and is ultimately built.

Sponsors see the risks but tolerate them if the upside is clear.

Debt funders look at the elephant different. They don’t want to be left carrying it. They look at downside protection and recoverability.

“If the sponsor disappeared tomorrow, does the project still work?”

That naturally produces a different view of the elephant. A commercial compromise to a sponsor and a practical solution to the project that keeps the project moving, might seem like an unresolved interface risk to a lender.

No one is necessarily wrong, but they’re looking at the elephant from different sides of the room.

If those perspectives are not reconciled early enough, the furniture fills the room around the competing assumptions of what the elephant actually is.

Why projects get caught out

The issue is rarely that teams lack experience or commercial awareness. Although sometimes there’s a lack of understand on what bankability is:

“Why is that elephant there?!”

Yet often the elephant becomes a future problem.

“We can deal with it at financing”. “We can deal with it in the next workstream”. “We can paper for it later”.

Or, it can feel like it’s in hand.

“We’ve already discussed this with the lender”. “The lender has already consented to this”.

Sometimes the elephant appears calm. The lenders seem comfortable. The project is progressing. The documents are moving. Nobody is shouting.

But calm elephants are still elephants…

A structure can feel directionally right and the commercial principles may broadly make sense, but lenders finance structures that withstand detailed scrutiny.

Then the elephant starts to move…What was a future problem is now here today. The lenders look more closely at the structure and principles. The gaps start to appear.

The elephant begins to become disruptive. Inconsistencies appear between project documents, interface risk sits awkwardly between contracts, downside assumptions no longer hold, commercial positions become difficult to reconcile with financing requirements.

Individually, these items are solvable. However, now the room is full. The furniture is heavy. The layout is fixed and space is tight. People like where they’ve put things and moving anything means moving everything else around it.

We need to move the elephant…

This is when frustrations comes.

The team are tired. They’ve worked really hard to get this far. The end is in sight. Budgets and timelines are getting tight. They want documents signed, financing closed and construction started.

And now, the elephant is in the way. We really need to deal with this elephant…

Now, the team is forced into reopening settled issues, renegotiating under time pressure and restructuring arrangements that others have built around.

Moving the elephant around a crowded room suddenly adds cost and delay in solving problems that were visible much earlier in the process. And the mood changes quickly…

Suddenly, the elephant is deeply irritating. Not because it appeared unexpectedly but because everybody knew it was there all along.

“Why are we only dealing with this now”

…because nobody led the elephant out of the room whilst there was still space to do so.

The cost of leaving the elephant in the room

Bankability is not a binary pass or fail. Projects sit on a spectrum from barely fundable to technically and efficiently financeable.

Where a project sits on that spectrum affects cost of capital, financing timelines, transaction friction, operational flexibility, and future refinancing and sell-down opportunities.

Bankability issues rarely disappear after the first financing once you get it away. If anything, elephants tend to get larger over time…

Leaving fundamental bankability issues unresolved often mean they are rediscovered – usually at a point where flexibility is even more limited.

Dealing with the elephant

I’m not suggesting that early-stage development needs to be a fully fledged financing exercise.

Also, lenders aren’t always right. Sponsor-led risk taking can be entirely rational and lender requirements can be unnecessarily conservative.

However, it’s important that somebody take ownership of the elephant early.

Handling the elephant well usually means:

• Defining what bankability actually means for the project
• Understanding how lenders are likely to analyse downside risk
• Pressure-testing structures before positions harden
• Identifying the issues that will become painful later
• Preserving optionality wherever possible
• Understanding how a lender might view the decisions you make

This isn’t about slowing projects down. It’s about avoiding the situation where an entire project has been arranged around an elephant that nobody properly dealt with at the point that it was easiest to move.

So, think about your elephant

Bankability does not need to be solved on day one. However, if you leave the elephant standing in the middle of the room for too long, thinking it’s not a problem, eventually the room fills up around it.

Once that happens, the elephant becomes far harder, far more expensive and far more frustrating to handle than dealing with it when the room was still empty.

That does not mean every project needs a fully lawyered financing exercise from the outset.

But it does help if somebody is thinking early about how the elephant eventually gets out of the room.

Often, the most valuable input is not producing hundreds of pages of documents at day one. It is helping shape structures, pressure-test assumptions and preserve a workable route through the room before the furniture becomes too difficult to move.

I’ve seen it in many different forms over the years, and I can say with some confidence that thinking about the elephant earlier usually stops it breaking the furniture later.