Transcript Emergin Africa Advisers

Frontier Markets Fund Managers
Financing the Power
Sector – the case for local
currency
Chris Vermont
Head, Debt Capital Markets
October 2008
Emerging Africa Infrastructure Fund EAIF

First dedicated infrastructure debt fund for sub-Saharan Africa

Size: US$365 million, increasing to US$ 600m shortly

Equity capital from governments of Sweden, Netherlands,
Switzerland and UK

Additional debt from development finance institutions and private
sector international banks

Over $130m financing provided for AES Sonel (Cameroon),
Bugoye (Uganda), SAEMS (Uganda), Rabai (Kenya) and Aldwych
(pan African). Total investment enabled - over $800m
"The most prominent fund in project finance in Africa" Project
Finance International - 2008 yearbook
Infrastructure projects financed / in the
process of financing by EAIF
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Case Study – The Bugoye Power
Project
4
Bugoye power project basic facts

Bugoye is located at the foot of the
Rwenzori Mountains - western
Uganda, bordering DRC

It will be a run of the river hydro
plant with an installed capacity of
13 MW

It will feed its energy into the main
grid
5
The Project’s Structure

Total Project Costs:
US$ 56m
Trønder Energi
100%
Trønder Kraft

Grant from GON:
US$ 10m
Debt US$30 m
- Tranche A: US$ 6m,
5 year tenor
- Tranche B: US$ 24m
15 years tenor
Norfund
Ca 30%
ERA
GON Grant
Equity:
US$ 16m
Total
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Ca 70%
Licence & permits
Tronder Power Limited
(the Borrower)
Grant ca 10 MUSD
Direct agreements

NEMA
EAIF
Govt of Uganda
UETCL
DWD
Support
Agreement
PPA
Owners’
engineer
Construction
contracts
Norplan
Contractor
The Project Time Line
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Mandate signed October 2007
Credit Committee Approval December 2007
Board Approval January 2008
Financial Close May 2008
A project can be closed in 8 months
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Key Success Factors

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A funding structure that mitigates hydrology risks
Strong sponsors – Tronder Energi & Norfund
A well established power sector and regulator in
Uganda
A dedicated team which worked together with GOU, the
sponsors and the lenders to find a bankable structure
……but who bears the FX risk?
8
GuarantCo
Enabling infrastructure Finance in
Local Currency
The GuarantCo initiative
GuarantCo’s business is:
“Credit enhancement of local currency debt
issuance by the private, municipal and
parastatal infrastructure sectors in lower income
countries”
In addition to enabling infrastructure this approach also
builds sustainable financing capacity in domestic capital
markets through partnering with local institutions and
introducing new approaches to project risk evaluation
and financing
Why local currency finance?
Local currency finance is better at both project level
and country level
 Financing in local currency allows a project to match its
currency of revenue with its currency of debt service
 Even if a GenCo has a PPA with a DisCo that allows pass
through of currency risk, the end consumer may not be able to
pay if there is a devaluation - contractual agreements may fail
 Financing with local currency involves productive recycling of
savings within a country instead of increasing the country’s
external debt burden
 Involvement of domestic banks and institutions helps build
capacity to finance further projects
…So why are most power projects
in Africa financed in $ or Euro?
 DFI’s and multilaterals find it
easier to lend in $ or Euro
 National utilities are used to
accepting pass through of
currency risks through PPA’s
Reliance on $ debt
from DFI’s and
Multilaterals
Absence of
long term
debt markets
Domestic debt markets cannot
usually offer the tenors required
and interest rates may appear
comparatively high
But national governments can
begin to break the vicious
cycle…..
Crowding out of
Domestic lenders
Local currency guarantees.
A partnership between offshore
guarantors and domestic institutions
 Funding of projects by domestic banks / pension funds who
take as much or as little risk as they wish
 Partial risk or partial credit guarantees from offshore for the
balance risks
 Offshore guarantors have more experience of assessing
project risks
 Domestic lenders have more experience of conditions on the
ground
 Partnership with important contributions from both sides
 The key focus is extending debt maturities – both credit risk
and funding risk
Extending tenor of domestic
finance – Nigerian IPP example
 180MW open cycle gas fired IPP. Financing requirement $120m of
which $25m equivalent in Naira
 Local banks would not take repayment risk on the Naira loan
beyond 7 ½ yrs or funding risk beyond 10 years
 IPP needs 15 years finance to make tariff affordable
Solution….
The local banks make a 15 year loan with GuarantCo guaranteeing
loan repayments after year 7 ½. GuarantCo also agrees to take over
the loan at the end of year 10 if the local banks wish to exit.
The guarantee is flexible and can be cancelled at any time
There is a viable alternative………
Contact
•
•
Chris Vermont, Head Debt Capital Markets
Tel:
+ 44 207 8152950
Email:
[email protected]
Douglas Bennet, Senior Guarantees Executive
Tel:
+44 207 8152786
Email:
[email protected]