UNFCCC MONTREAL WORKSHOP Innovative Options for Financing the Development & Transfer of Technologies PRIVATE SECTOR DEVELOPMENT & FINANCING OF (POWER) PROJECTS & TECHNOLOGY TRANSFER Practical.
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UNFCCC MONTREAL WORKSHOP
Innovative Options for Financing the Development & Transfer of Technologies
PRIVATE SECTOR DEVELOPMENT & FINANCING OF (POWER) PROJECTS & TECHNOLOGY TRANSFER
Practical Experiences of Project Pre-Development & Financing in Sub-Saharan Africa
HER I N T E R N A T I O N A L
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CONTENTS
The Project Development Cycle Pre-Development Phase
Options
Tools & Techniques
Example Barriers Development Phase & Financing
Barriers
Tools & Techniques
Cost Issues Integration as a Possible Response
Possibilities of using Integration for financing Wind Power in Africa 2
WHAT IS PRE-DEVELOPMENT?
THE PROJECT DEVELOPMENT CYCLE PRE-DEVELOPMENT DEVELOPMENT IMPLEMENT Project Idea Pre Feasibility Project Dvpt.
Feasibility Project Dvpt.
Imple mentation
• Need • Vision • Can it work?
• What conditions?
• Which Partners?
• Estimated Cost?
• Refinancing Sources?
• Initial Structuring • Business Plan / Bankable Feasibility • Technical Design & Specification • Scope of Work • Project Structure • Investment Consortium • Contractors & Suppliers
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Pre-Development Phase
PRE-DEVELOPMENT ISSUES
Pre-Development Costs need to be financed
ca. 2% of total project costs
Total Development Costs 5 % – 7 % No Guarantee that Project will be implemented Relatively high risk
Return still uncertain Venture Capital / Development Capital nature of investment Long Term Project Development Horizon
2 – 5 Years 4
Pre-Development Phase
PRE-DEVELOPMENT OPTIONS Sponsor‘s Perspective / i.e. Government
Public Sector Route
Government / Donor funding of studies and initial development
Public Procurement Processes (Tender) Time Scale / Efficiency
Alternatives? Private Sector Route
Private Sector Developer Hybrid Routes
In practice most (power sector) projects are hybrids 5
Pre-Development Phase
PRE-DEVELOPMENT TOOLS
Usual Suspects
Development Funds (Multilaterals)
Grants & Subsidies
Facilitators / Networks Development Consortium
Spread & Diversify Risk
Public & Private Sector Partners
Avoid Equipment Suppliers / Contractors if possible Initial Analysis: Identification of strategic / special interests in the Project
Who are the Stakeholders & Benefactors?
What can be done to make project more viable / attractive?
Integration
Linkage
Increased value to Benefactors and Stakeholders 6
Pre-Development Phase
HOW DOES IT LOOK IN PRACTICE?
Zambezi Valley Development Scheme
Multi-faceted Integrated Project
Coal Mining & Export
Railway Rehabilitation for Transport
Coal Fired Power Generation at Mine Head Coal Terminal Upgrade What were the Goals?
Private Sector Financed Solution
Participation of MZ Public & Private sectors
Lowest possible burden on MZ PSB
Maximum impact on connected sectors & local economy 7
PRE-DEVELOPMENT PHASE
PUBLIC SECTOR Involved Ministries Authorities & Agencies Parastatals
Collation and Transfer of Deliverables Attendance in Task Force Activities / Meetings Participation in Sectorial Activities -- Coal Mining -- Railway / Port Operations -- Energy and Industrial Outlets -- Forestry & Agriculture HEADS OF AGREEMENT incorporating: Objectives Warranties / Guarantees / Exclusivity Channels of Communications / Task Force Development Programme Deliverables Confidentiality / Non-Disclosure FEASIBILITY REPORT AND IMPLEMENTATION PLAN
DEVELOPMENT CONSORTIUM
Developer / Investors Operators Contractor Preparation of Feasibility Report and Implementation Plan Pursue discussions with IFC / Multi-lateral and Private Funding Agencies
Pre-Development Phase
GETTING OVER THE BARRIERS
Development Consortium
Self Funding of Pre-Development Risk (part / majority)
Project Design & Specification
Commitment to provide equity at implementation phase Partnership with Public Sector Partners
Parastatals as members of Development Consortium (and later also the Implementation Consortia) Equipment Supply & Contracting put out to tender
Development Consortium retains operating responsibility, and control
Vital self-interest to ensure value for money
Bears economic risk and takes return Benchmarking 9
Pre-Development Phase
GETTING OVER THE BARRIERS
(2) Independent Integrator / Developer
No vested interests - neither supplier, nor contractor nor investor
Only interest / goal is that the Project gets done
Mediates and co-ordinates
Brokers (forces) the compromises & the issues
Economic Logic & Project Success are sole drivers 10
Pre-Development Phase
THE BARRIERS
Developer(s) / Consortium required comfort that they would take benefit out of the Project assuming positive feasibility
Return on investment in development costs & risks Pressure for an early decision Conflict with established procurement procedures Political Unease & Resistance because of Issues of
Control
Value for Money
Transparency All of which were however addressed by the Structure Project now being implemented in its constituent parts
No integration
Financed by PSB 11
Development / Implementation Phase
MAIN BARRIERS TO FINANCING
Legislative & Regulatory Environment Economic & Commercial Risks Standard Tools are indispensable
Multilaterals
ECAs / Commercial Political Insurance
Hedging Identifying & Generating Secure Refinancing Streams
Off-takers
Integration 12
PARASTATALS
CONCESSIONS & ASSETS
IMPLEMENTATION PHASE
Debt Financing - IFC - ECAs - Commercial banks
SECTOR: MINING
Developer: Coal Miner (Commodities Trader)
$
SPECIAL PURPOSE COMPANY
SECTOR: TRANSPORTATION
Developer: Railway Operator Rehabilitation: Contractor
$ IMPLEMENTATION CONSORTIUM
Developer Investors Operators Contractors EQUITY FUNDING
MOZ. COMPANIES SECTOR: POWER
Development: Utility Operator & Parastatal
$ GENERATED OPERATING INCOME
Interest Principal Repayment of Debt On-going Maintenance Costs Dividends
Global Scheme up to full Repayment of Debts and Return on Capital
Development / Implementation Phase
REVENUES ARE THE KEY
Export of High Quality Coking Coal
Arms length long term off-taking contract with independent commodity trader
Indexed to market prices: Security of Revenues
Offshore Hard Currency Payments
PPA / Off-taking Agreements
Industrial Users for base load
Local Utility and International Utility Price was key (<2 cts / KWhr.) Export into SAPP Operator Experience & Know-how
Guarantee of operating targets Equity Component 14
16 14 12 10 8 6 4 2 0
Price Considerations in the Development Process
PRICE ISSUES IN RELATION TO CHOICE OF TECHNOLOGY
(1) Ranges of Energy Production Costs €-cent / KWh
Wind Hydro Gas Coal Nuclear Biomass
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Price Considerations in the Development Process
PRICE ISSUES IN RELATION TO CHOICE OF TECHNOLOGY
(2) COMPARISON OF CAPITAL COST OF NOMINAL PEAK CAPACITY USD / MW
1.750.000
1.500.000
1.250.000
1.000.000
750.000
500.000
CCGT Thermal Wind Hydro
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Development / Implementation Phase
INTEGRATION AS A TOOL TO ADDRESS PRICE ISSUES Wind Energy in RIM / MZ / ANG / TNZ
€ cents 5 - 9 / KWhr make Wind Energy an apparently unattractive commercial proposition in Africa Thermal Production Costs much lower (subsidy) Ideas for Integration:
Decentralised Locations (reduction of transmission costs)
Combination with Desalination
Combination with establishment of refrigerated processing & storage facilities for local fishing industries
Cooperation with white goods manufacturers for production of appliances with low voltage ratings 17
Development / Implementation Phase
EFFECTS OF INTEGRATION
Diversification & Increase of Revenue Streams for Repayment of Financing Risk diversification (although increased in absolute terms)
Reduction of pure economic risks
Increased Revenue Earnings diversification Foreign Currency Potential Higher Added Value
Increased benefits to a wider community of stakeholders
Nominal high price is made more acceptable
Linkage Increased Complexity 18
Conclusions
CONCLUSIONS
Price of (new) Renewables Technology is the chief barrier
No need to buy a Rolls Royce if a 2 CV also gets you there
External cost argument is only partially accepted in Africa Private Finance, Developers & Tools are available for pre-development phases of New Technology Projects
Combination with existing tools and financing instruments Need for increased flexibility for dealing with parties
able & willing to take development risk
Development of appropriate control mechanism Transparent criteria for calculation of return Further third party funding sources / funds Potential of Project Integration to create Linkage and increase Stakeholder benefits
Can be used to raise finance for a VW-Golf 19