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

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No vested interests - neither supplier, nor contractor nor investor

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Only interest / goal is that the Project gets done

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Mediates and co-ordinates

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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

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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

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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