Frontier Markets Fund Managers

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Frontier Markets Fund Managers

• Financing the Power Sector the case for local
  currency
• Chris Vermont
• Head, Debt Capital Markets
• October 2008

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Emerging Africa Infrastructure Fund - EAIF

• First dedicated infrastructure debt fund for
  sub-Saharan Africa
• Size US365 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

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Infrastructure projects financed / in the process
of financing by EAIF
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• Case Study The Bugoye Power Project

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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

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The Projects Structure

• Total Project Costs
• US 56m
• Grant from GON
• US 10m
• Equity
• US 16m
• Total Debt US30 m
• - Tranche A US 6m,
• 5 year tenor
• - Tranche B US 24m 15 years tenor

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The Project Time Line

• Mandate signed October 2007
• Credit Committee Approval December 2007
• Board Approval January 2008
• Financial Close May 2008

A project can be closed in 8 months
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Key Success Factors

• 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?

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GuarantCo
Enabling infrastructure Finance in Local Currency
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The GuarantCo initiative

• GuarantCos 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

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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 countrys external debt
  burden
• Involvement of domestic banks and institutions
  helps build capacity to finance further projects

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So why are most power projects in Africa
financed in or Euro?

• DFIs and multilaterals find it easier to lend
  in or Euro
• National utilities are used to accepting pass
  through of currency risks through PPAs
• 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..

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Local currency guarantees. A partnership
between offshoreguarantors 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

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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
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  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

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Contact

• Chris Vermont, Head Debt Capital Markets
• Tel [phone]
• Email chris.vermont_at_frontiermarketsfm.com
• Douglas Bennet, Senior Guarantees Executive
• Tel [phone]
• Email douglas.bennet_at_frontiermarketsfm.com