Creating a stable environment for large-scale infrastructure investments

Lamon Rutten

Chief, Finance and energy

United Nations Conference on Trade and Development

First Africa Oil, Gas & Infrastructure Summit London, 12-13 February 2004

To recap: a truly astounding amount of money is needed just to develop Africa’s energy infrastructure - 1.2 trillion US$ from 2001 to 2030, 40 billion US$ a year. The development of water infrastructure will cost another 20 billion US$ a year. Most of this money will need to come from abroad.

PROBLEM: many sources of funding are very risk-averse (will only invest in investment-grade risks), and those open to sub-investment grade risks will generally seek very high returns - perhaps not feasible for many infrastructural projects.

Also, there may be a mismatch between the tenor of available funds and the cash flow profile of the project… public funds, including from development banks, will continue playing a major role in this regard.

Attracting investors requires sufficiently profitable projects.

For example, energy supply is often a bottleneck for manufacturers, and many consumers have no or limited access to commercial energy. Blackouts are the rule in many cities, forcing those who can afford it to buy generators; and rural consumers are forced to rely on firewood as their major source of energy. Per unit of energy produced, these are very expensive forms of energy.

So in principle, improved energy supply will be readily picked up by the populace of sub-Saharan countries, and it can be expected to unlock considerable economic growth potential. But will they be willing to pay the price, if investors are forced to carry all the costs of reaching them?

Conditions - to be put in place by African governments

The traditional ones:

Predictable and stable policies; good investment conditions; little red tape; low corruption; rule of law.

But also:

A strong local financial sector, with the capacity to share risks with foreign investors and lenders.

And a newer one:

Transparency - not just what you do, but what you are seen to be doing.

Keep in mind that you have to satisfy not just investors, but also lenders.

(often the only way for investors to reach their target returns on equity is to leverage their funds through loans)

A poor reputation will make loans much more expensive than would otherwise be the case at a given level of risk.

The average profitability of investments in Africa is the highest in the world. This may appear favourable, but it implies that many projects with lower expected returns are not done simply because investors consider Africa as too risky - to a large extent, unfairly so.

These conditions are well known… but most African governments still have quite some way to go.

The “traditional” conditions- it’s proving remarkably difficult for governments to implement effective policy changes.

Transparency - a less defensive attitude and better PR would help.

Should governments only try to improve the framework, or should they also facilitate ad-hoc, second-best solutions?

De facto, it is difficult to rapidly solve the problems of a weak regulatory environment, or the inefficiency of government bodies.

Ad-hoc solutions: allow investors and lenders to use effective tools to mitigate all the risks that result from your country’s imperfect investment environment.

E.g., allow offshore escrow arrangements; confirm certain elements of financing structures (e.g., let the Central Bank guarantee that if sufficient local funds are available, the corresponding amount of hard currency will be made available; or guarantee a concession agreement); work with multilaterals to allow them to provide insurance coverage/guarantees for finance into your country.

Port Autonomede Pointe-Noire

RMB International

Regional Central Bank

ElfAGIP

BosCongoetc.

Independentengineering

company

Boskalis

Ministry ofTransport

Payment instructions

Payment

Cash sweep

Loan

DSRA

Dredging contract

Authorisations

Workcontract

monitoring

BoskalisPerformance bond

Cash sweepinstructions

Commercial / Political risk insurance

Partial cover

Reporting

E.g., supportive role of Central Bank,Congo

Cinergy

IFC

UMIC

ApacheGas provision, and construction and

financing of pipeline to project site

Equity US$ 33 million

IPD

ABB EDF

Compagnie Ivoirienne

d’Electricité

Equity

Government

World Bank/IDA

14-year interest

rate swap

US$ 42

mln loans

Equity

Equity US$ 11 million

US$ 30

mln loan

CDC et al.

US$ 30 mln loan

US$ 58 mln loans

Guarantee

Contract, inter alia to provide free gas

50% 50%

Power Purchase Agreement

Azito Power

Bank syndicateE.g, international guarantees:

Government

Escrow account

Liquidityaccount

Tanesco

20-year take or pay Power Purchase Agreement, with prices set at cost-plus level

Songas Ltd.

Project sponsors

Possibility to draw for late, unpaid Tanesco payments

Possibility to draw if Government defaults on commitments

US$ 50 million

US$ 202 million 20-year loan

Debt service after 3.5 grace period, with right to make deductions for any late payments from Tanesco or its successors.

Citibank

US$ 20 million, replenishable if the account is drawn on

Efforts to keep the account in

US$

US$ 50 million guarantee to cover cost overruns, US$ 10 million guarantee against “gross negligence”, penalties for each day of delay...

But consider going further:

World Bank

US$ 202 million 20-year loan

Innovative financing arrangements, like in Songo-Songo, are particularly needed because much of the required investments will create local currency receivables rather than export receivables.

Few international investors will be happy to be guaranteed only a local currency reimbursement - they will need this to be converted into hard currency, preferably offshore.

An entirely private sector solution that gives this result is difficult (there is “Political Risk Insurance” for the risk of currency convertibility, but it is mostly for terms of less than 3 years). So even in an entirely liberalized economy, governments may have to come in to provide financial supports.

Conclusion

Governments should of course strive to put a favourable investment environment in place - as is, for example, one of NEPAD’s objective.

But apart from this, it should recognize the risks that foreign investors and lenders take when providing finance, and the relation between the costs of finance and the risks. Financiers seek certain minimum returns that are a function of risks; therefore, to make more financings viable, governments should make it easy for these financiers to manage these risks.