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New energy funding approaches from Development Finance Institutions

Malcolm Bricknell LCEDN Annual Conference June 1st 2018

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0%

5%

10%

15%

20%

25%

30%

35%

AFR EAP ECA LAC SAR

Importance of Energy and Finance to Private Sector Development (WB Surveys)

3

FullyPublic Fully

Private

Management Contract

Design Build

Design Build Operate

Lease Develop Operate

Buy BuildOperate

Build Transfer Operate

Build Operate Transfer

Build OwnOperate

Ownership Spectrum for Energy Projects

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Types of RE Financing from IFIs to address different needs

Government financing: public sector lending, grants, subsidies

Project financing: limited recourse financing to a SPV project company

Corporate financing: financing to private companies

Consumer financing: channelling funding to consumers to acquire RE products

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How IFI Additionality Improves Projects

A

B

Commercial Viability

Development Outcomes

Weak

Weak

Strong

Strong

Project without IFI

Project with IFI

More viable, e.g. via better

finance, risk reduction, advice

Improved development,

e.g. via advice, standard setting

IFI Objectives-Improving Development Impact and Viability

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Higher Project Risk/ Complexity

Higher Country Income

IFI Sweet Spot(Where IFIs have high Additionality)

Commercial Zone

Non-Viable Zone

Lower Income/ fragile Countries

Lower Middle Income Countries

Upper Middle Income Countries

E.g. inclusion, innovation

IFI Focus Areas

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Typical DFI Project Financing

Shareholders(Shareholders'

Agreement)Lenders Grantor

Fuel Supplier

ConstructionContractor Purchasers

Project Co.

FinancingAgreement

Operationand

MaintenanceAgreement

ConcessionAgreement

Shareholding

Operator

ConstructionContract

PurchaseAgreements

Fuel Supply

Agreement

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Grantor/ licensing authority

Lenders

Operator

Purchasers

ConstructionContract

Price

Shareholders

OperationFees

EquityContribution

ConcessionFee

Fuel Supply

Payments

FuelSupplier

ConstructionContractor

DebtServicing

Return onInvestment

Tariff Payments

ProjectCompany

Debt

Typical Flow of Funds in Project Finance

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Overview: Classical Project Financing

loans to a company created for the purpose of a particular project (i.e. a Special Purpose Vehicle or SPV)

the shareholders of the SPV have limited liability

the lenders have ‘limited recourse’

the lenders’ security is based around the SPV

the project must be ‘bankable’, i.e. the lenders must be able to depend on the project payment scheme

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Committed and experienced investor/operator/developer

Clear regulatory / contractual framework eg strong PPA from creditworthy utility/client

Competitiveness of power generation

Confirmation of renewable resource

Construction risk mitigated

Well prepared assessments by reputable independent parties (Technical feasibility study, ESIA)

Main Criteria for DFIs

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Comprehensive Lenders Security

security over every asset (fixed or floating) security over contracts security over shares security over every insurance policies security over bank accounts security over voting rights.

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Challenges and new initiatives-Currency Hedging

Historic limitations of Currency Swaps and Back to Back transactions

Evolution to Local Capital Markets Funding and The Currency Exchange Fund

Longer Term Solutions in Developing Local Capital Markets

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New Initiatives-Extending Lines of Credit Via Local Banks

• Mainstream DFI product• Targetting both SMEs and Consumers• Frequently Combined with TA Programmes • Mixed results• Scope to extend through eg first loss schemes

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Social Impact Investing

Fund of Funds equity approach eg Geeref, CDC Impact Fund

Base of Pyramid Schemes subsidised by ODA

Microfinance including emergency support

Grant programmes sometimes linked to lending to enhance effectiveness

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Greater private sector focus of MDBs

More partnerships (e.g. with governments, private sector, NGOs)

Greater focus on development impact and results

Innovations, e.g. in PPPs/blended finance, mobilization, local currency finance, risk products, inclusive business, gender

Future DFI Trends in RE Funding