Session 1: Fostering Infrastructure Investment in the MENA Region

Luigi de Pierris, AfDB Paris, December 4th/2014

Economic growth in North Africa has bounced back after the slow-down evidenced in the wake of the events of the “Arab Spring”.

Infrastructures and Growth

Inadequate infrastructure is a factor reducing the productivity of the private sector enterprises and holding back economic growth.

African Governments are increasingly turning to the private sector through PPPs to provide a broad range of services previously delivered by the public sector.

This shift from traditional procurement methods places new demands on Government agencies: Ability to assess the life-cycle cost of the project to taxpayers (more

difficult than in traditional projects). Capacity to structure projects with a profile of risks and incentives

that makes them attractive and bankable to the private sector. North African governments seem to have fully embraced this concept

and have shown political willingness to enhance their respective PPP programs.

PPP units have been created in Egypt (2008), Morocco (2011), and Tunisia (2013).

Infrastructures and Growth

Promoting Private Sector Participation: How to make the difference?

Once the policy reform process is completed and the PPP

framework is in place, it is important to work at transaction level Select carefully the projects to be procured through PSP and

PPPs Improve the tendering processes to boost investors’

confidence Devise coherent risk-allocation models, applying the principle

that each risk should be allocated to the party that is in the best position to control it

Make use of the various risk mitigation instruments that are available in the market

Multilateral Development Banks (MDBs): how can they assist?

MDBs are repositories of knowledge, with vast experience across

most sectors and jurisdictions. MDBs can actively support reform processes. For instance, AfDB

offered a technical assistance grant to operationalize the PPP law in Tunisia through the set-up of a central unit and pipeline development.

MDBs can act as a partner, by sharing their technical expertise and assisting in the various phases of the project cycle.

Using their financial muscle (AAA rating), structuring skills and risk management instruments, MDBs can get commercially viable projects off the ground.

Mitigate political risks: MDBs can play the role of “honest broker role”, leveraging on their relationships with the host governments.

Capacity building and advisory services. The AfDB is in the process of creating a regional PPP hub within North Africa with the goal to foster and accelerate the conduct of successful PPPs in the region.

Capacity building: AfDB has launched important initiatives in RSA and Nigeria

Risk Mitigation Instruments Local Currency Loans

Syndicated Loans and Co-financing

DESCRIPTION:

A loan that is provided by a group of financial institutions / lenders (syndicate) and is structured, arranged, and administered by one or several arranging financial institutions

Financing structure

(i) parallel co-financing

(ii) the A/ B-loan structure

RATIONALE:

To provide mitigation against political risk through the Bank’s Preferred Creditor Status

To attract private capital to the continent by acting as lender-of-record and co-financier

To maximize the development impact of capital resources

Syndicated loans and Co-financing: the A-loan / B-loan Structure

Syndicated loans and Co-financing: the A-loan / B-loan Structure

DO MORE WITH LESS

CROWDING IN

RISK SHARING

Attracting private investors to Africa Greater amount of capital, enabling

governments to share risks/financing with the private sector

Leverage the Bank’s risk capital to avail more funds to projects

In comparison to loans, guarantees tie up resources for a shorter period of time and improve commitment capacity

Opportunity to cooperate with other private and public risk mitigation providers as well as sister institutions through the sharing of risks, knowledge, and due diligence.

Credit Enhancement: Guarantees

A PRG is a financial guarantee for lenders to a project, covering debt service defaults that result from the non-performance of a government or a government owned entity on its obligations with respect to the specific project.

These obligations are usually defined in contracts between the government and the private sponsor responsible for the implementation of the project, which can be a green-field investment project, an expansion or rehabilitation of an existing project, or a privatization project.

The PRG is available to cover private lenders or investors in both the countries eligible to borrow from the ADB window and those eligible to access the concessional ADF window.

The AfDB Guarantee Platform Partial Risk Guarantees (PRGs)

1. Currency inconvertibility and non-transferability Protects against losses arising from inability to:

Convert local currency into foreign exchange within host country

Transfer funds out of the host country

Currency depreciation and devaluation not covered

Pre-existing restrictions on conversion or transfer not covered (unless government has expressed to undertake cover)

Conversion / transfer has to be lawful in host country at time when coverage is issued

2. Expropriation

Including confiscation, nationalization, and deprivation (referred to as CEND), or other acts by the host government which may interfere with a foreign investor’s fundamental ownership rights

Partial Risk Guarantees – Covered Risks

3. Political Force Majeure Risks

Such as - damages to assets resulting from politically motivated strikes, riots, civil commotion, terrorism, sabotage, war and / or civil war

4. Breach of contract including government contractual payment obligations, such as:

Termination payments; Contractual performance of public counterparties such as failure by

state-owned entities to make payment under an off-take agreement or an input supply agreement;

Regulatory risk and change of law such as negation or cancellation of license and approval or non-allowance for agreed tariff adjustment formula or regime;

Frustration of arbitration.

Partial Risk Guarantees – Covered Risks

AfDB Role

• AfDB Long-term Loan

• Lead Arranger of DFI’s participation

Key Figures

Total Project Cost USD 585 million

Debt / Equity 70% / 30%

ADB Senior Loan USD 100 million

The Project

Development of a 300 MW wind farm in the north west part of Kenya • Will consist of 365 wind turbines of 850

KW capacities • Adds clean energy to the power grid • Increases Kenya’s national installed

power by 25% • Project Sponsor(s): Aldwych, KP&P, IDC,

Norfund, Vestas, IFU

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LTWP – Lake Turkana Wind Power Project

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Simultaneously with the Lake Turkana Wind project, a 400kV transmission line extending from Loyngalani to the Suswa substation (428km) is being commissioned.

The line will serve as a major backbone of Kenya’s transmission system allowing the 300MW LTWP plant and future geothermal power plants to deliver low cost, renewable power to the nation.

The Kenya Electricity Transmission Company (KETRACO), KETRACO will own the transmission line and have a tolling arrangement with the off-taker Kenya Power.

The works for the transmission line will be funded by the Spanish Government and by commercial banks on the basis of a guarantee issued by the Spanish Export Credit Agency CESCE.

Construction works will be undertaken by Spanish contractor Isolux.

LTWP – Lake Turkana Wind Power Project

Partial Risk Guarantees - Extent of Coverage

Loans and other forms of debt instruments Guarantee maturity is dependent on the financing terms that the Host

country would be eligible to obtain from the Bank/Fund All or part of the outstanding debt service obligations to a lender May include principal and/or interest payment obligations Equity investments are not eligible for coverage

Partial Risk Guarantees - Counter Indemnity

An AfDB PRG cannot be extended unless the member country in whose territory the investment project is located or who is benefiting from the guarantee provides an indemnity under which the member country agrees to reimburse the Bank/Fund for any payments the Bank/Fund would make under the guarantee.

Any payment made by the Bank/Fund is immediately due and payable by the country providing the counter indemnity.

Failure to pay can lead to arrears, similar to failure to make timely debt repayment of a Bank/Fund loan and will trigger the sanction policy and cross default provisions as appropriate.

However, the Bank/Fund, in its own right and at its sole discretion, may amortize the amount to be paid in the form of a loan over a period of time.

Partial Risk Guarantees - Transaction Diagram

IRMA - Initiative for Risk Mitigation in Africa

IRMA - Initiative for Risk Mitigation in Africa

In the face of the growing needs for risk mitigation in the African continent, the African Development Bank has devised a range of financial instruments intended to offer risk mitigation solutions to various stakeholders and investors.

The Initiative for Risk Mitigation in Africa (IRMA) - a program promoted by the OECD with financing provided by a Trust Fund established by the Italian government – has the objective of supporting the effective use of the Bank’s risk mitigation platform.

Interacting with the various departments of the Bank, IRMA ensures that the best and most cost-effective risk mitigation solutions are implemented.

By paying specific attention to the different layers of risk involved in a transaction, deals can be structured in a coherent and cost efficient way.

IRMA - Initiative for Risk Mitigation in Africa

IRMA is carrying out a far-reaching capacity building programme in the Continent to increase awareness and capacity in governments on risk mitigation issues

Wrap-up

Investment needs in North African infrastructure are huge. Private

Sector Participation and PPPs remain an attractive option

Governments are improving policies and processes to encourage private investment in infrastructure

Risk perception remains high among international investors. MDBs and other providers have developed a panoply of instruments aimed at mitigating business risks

Optimal usage of the available instruments can make the difference in

attracting private investment

Luigi de Pierris Private Sector Operations IRMA - Initiative for Risk Mitigation in Africa CCIA Building, Office 7R 01 BP 1387, Avenue Jean-Paul II Abidjan 01 Côte d’Ivoire Tel: (+225) 21261244 Mobile: (+225) 06125347 E-mail: l.depierris@afdb.org www.afdb.org