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Frontier Markets Fund Managers
Financing the Power Sector – the case for local currency
Chris VermontHead, Debt Capital MarketsOctober 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 $800m
"The most prominent fund in project finance in Africa" Project Finance
International - 2008 yearbook
Infrastructure projects financed / in the process of financing by EAIF
4
Case Study – The Bugoye Power Case Study – The Bugoye Power ProjectProject
5
Bugoye power project basic facts
Bugoye is located at the foot of the
Rwenzori Mountains - western
Uganda, bordering DRC
It will be a run of the river hydro
plant with an installed capacity of
13 MW
It will feed its energy into the main
grid
6
The Project’s Structure
Total Project Costs:
US$ 56m
Grant from GON:
US$ 10m
Equity:
US$ 16m
Total Debt US$30 m
- Tranche A: US$ 6m,
5 year tenor
- Tranche B: US$ 24m 15 years tenor
Trønder Energi
Trønder Kraft
100%
Tronder Power Limited (the Borrower)
Norfund
Ca 70% Ca 30%
GON Grant
EAIF
Grant ca 10 MUSD
Govt of Uganda
UETCL
Support Agreement
PPA
ERA
NEMA
DWD
Licence & permits
Dire
ct a
gree
men
ts
Construction contracts
Contractor
Norplan
Owners’ engineer
7
The Project Time Line
Mandate signed October 2007 Credit Committee Approval December 2007 Board Approval January 2008 Financial Close May 2008
A project A project cancan be closed in 8 months be closed in 8 months
8
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?
Key Success Factors
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
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…..
Reliance on $ debt
from DFI’s and
Multilaterals
Crowding out of
Domestic lenders
Absence of
long term
debt markets
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]
