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Infrastructure in Africa – a Debt Perspective

G8 Africa Infrastructure Investment Conference29th to 30th June 2009

Nick Rouse

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- FMFM- FMFM

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Frontier Markets Fund Managers –FMFM

A Fund Management Team Managing transactions for

– Emerging Africa Infrastructure Fund; and– GuarantCo

A group of multi nationals fluent in English, French, Spanish, Dutch and Italian

Based in London

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- EAIF- EAIF

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Emerging Africa Infrastructure Fund - EAIF

First dedicated debt fund for sub-Saharan Africa

Size: US$498 million to be increased to US$600 million by Q209

Original sponsor: UK Government – DFID

3 other European Governments joined (Sweden, Netherlands, Swiss)

Debt from three development finance institutions and two private sector

international banks

Public/private sector partnership

Donor aid funds leveraged private sector capital for development

purposes

First multi-donor initiative by Private Infrastructure Development Group

(PIDG)

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EAIF – investment policy

Lend to private sector owned, managed and controlled entities with infrastructure sector focus

– Power– Transport– Telecoms– Water– Manufacturers of components of infrastructure e.g. cement– Infrastructure within mining, agribusiness projects

Sub-Saharan Africa focus excluding Mauritius Investment Size:US$10 -36 million, however FMFM can arrange US$200

million and more through its financing partners Tenor: up to 15 years Instruments: Senior and Mezzanine Debt (possibly with equity features) Does not require a Political Risk Insurance (PRI)

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EAIF - selected transactions

Project: Ethiopian Airlines Sector: Transport Country: Ethiopia Description and Financing Parameters:

– this is a unique project, EAIF has committed a US$36 million loan to the airline expansion project.

– Ethiopian Airlines is a 100% publicly-owned entity often held up as a model business for other airlines in Africa.

– The EAIF financing is bridging a crucial gap enabling the airline to purchase additional, new aircraft at a cost of US$460 million.

Project: Rabai Sector: Power Country: Kenya Description and Financing Parameters:

– FMFM was the lead arranger of Euro85 million facility for the Rabai Power Project in Kenya, developed by Aldwych International together with BWSC.

– Debt package comprised of a Senior and Subordinated Debt.

– Lender Group included, FMO, Proparco, DEG and EAIF.

– African Power Project of the Year 2008

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EAIF - selected transactions (contd’)

Project: Moma Sector: Mining Country: Mozambique Description and Financing Parameters:

– The developers of this titanium mineral sands project approached EAIF as a ‘lender of last resort’.

– Located in one of the most under-developed regions of Mozambique, the US$413 million project is the second lowest cost producer of titanium in the world.

– EAIF committed US$36.5 million of senior and subordinate debt (total debt package of US$270 million).

– The project received deal of the year awards from both the Mining Journal and Project Finance International publications.

Project: Seacom Sector: Telecom Country: Pan African Description and Financing Parameters:

– The US$600m Seacom project is the first undersea fiber optic cable project along the east coast of Africa, the only region in the world not currently served by such an infrastructure.

– EAIF provided US$36.5m debt financing to a special purpose vehicle controlled by Industrial Promotion Services (Kenya), one of the sponsors and a subsidiary of the Aga Khan Fund for Economic Development.

– The project received deal of the year award from Project Finance International.

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GuarantCo

Aims at addressing failures in domestic markets to supply capital to infrastructure projects in Emerging Markets by:– providing guarantees as credit enhancement of

local currency debt– supporting both:

private and municipal sectors to obtain such capital domestic market to supply such capital

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GuarantCo

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

Initial capital of US$73m Increase to US$100m likely early 2009 Additional backing from KfW / Barclays up to total of US$400m Covers similar infrastructure sectors to EAIF

Operates globally

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GuarantCo offers

Partial credit guarantee covering default risk on a portion of a loan or bond - generally on demand and unconditional

Partial risk guarantee covering default risk due to specific events - such construction failure or revenue shortfall

Cover for senior, mezzanine or sub debt; maturity, coupon or principal strips; Loans, bonds or securitisation

Other methods of risk transference considered (e.g. insurance / reinsurance or CDS / derivatives)

Preference for risk sharing - defined on a case-by-case basis

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GuarantCo - sample transactions

Project: Celtel Sector: Telecom Country: Kenya Description and Financing Parameters

– Partial Credit Guarantee (75%) of a US$50m equivalent 5 year bond issue for network expansion.

– Only the third commercial bond issued in Kenya and largest at that time

Project: Safal Sector: Industrial Goods Country: Pan African Description and Financing Parameters Safal Group is the largest East African

producer of roofing material. GuarantCo provided credit guarantee

(75%) of a US$30m equivalent 9 year bond issue by Mabati Rolling Mills and ALAF.

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GuarantCo has a strong diversified pipeline

Potential transactions US$20m 15 year guarantee for a

US$200m toll road in Kenya US$12.5m 15 year loan guarantee for a

gas fired power project in Nigeria US$20m in construction performance

bonds for water and road projects in Uganda and Kenya

US$12m gtee of subordinated and mezzanine tranches for a US$105m securitisation of housing micro finance mortgage receivables in Central and Southern America

Guarantee of a US$20m subordinated loan in a US$250m 12 year mobile phone mast financing in India

Mandated transactions Partial guarantee of US$18m finance for

a new private sector utility on Bugala Island, Uganda

Partial guarantee of a US$75m contingent cost overrun facility for an oil refinery in Southern India

US$10m partial guarantee to enable an Indian Infrastructure Finance institution to access the 10 year rupee bond market

partial guarantee of a US$65m financing for a cement plant in Assam, India

Partial guarantee of a US$22m broadband backbone service in Niger

Partial guarantee of a US$340m steel plant in Orissa, India

US$15m partial risk guarantee for a new mobile phone operator in Palestine

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Infrastructure finance – hierarchy of difficulty

Easy

Difficult

• Telecoms

• Mining

• Agribusiness

• Power

• Transport

• Water

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And how this looks in figures?

Private participation in infrastructure, in Sub Saharan Africa 1990-2005Source: Private Participation in Infrastructure Projects Database, World Bank Group

Primary Sector

Investment in government assets (US$ millions)

Investment in facilities (US$ millions)

Total investment (US$ millions)

% of Total investment

Energy 1,086 6,084 7,171 20.7%

Telecom 3,773 19,754 23,527 67.9%

Transport 899 2,927 3,826 11.0%

Water & Sewage 35 111 146 0.4%

Total 5,793 28,876 34,669 100%

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Infrastructure finance – Future requirements

2002 - EAIF Established – US$8 BN of projects identified 2007 - The Banker – “US$26 BN to US$40 BN in next 5 years and

average of US$10 BN a year after that” 12th October 2007 - Engineering News – “Congo signed a deal to

construct 1500 KM of new railways worth US$3 BN” Inga Falls – Grand Inga 55,000 MW cost US$50 BN Nigeria – 18 IPPs

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Infrastructure finance - Sources

International Commercial Banks – shortest tenors Domestic Banks – shorter tenors

some hard currency DFIs – 15 year + tenors

Tied aid? Private Equity, Hedge Funds – equity with exit International Bonds Local Bonds

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Infrastructure finance – Telecoms

Mainly Mobile Well established model – Celtel worth US$3.4 billion Operators have a full control on cash flows generation No failure once EBITDA positive Less risk than Developed World

– No free handsets– Lower churn / competition

Financing issues:– US$ lending -v- local currency cash flows– Short Tenors – repay in five years

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Infrastructure finance – Mining and Agribusiness

US$ cash flows available

Good development benefits– Clean water– Power– Transport links– Employment– Health services

Market Risk

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Infrastructure finance – Power

Creditworthy off-takers Regulator not always independent or in place (political interference in tariff

setting) Affordability / subsidy availability Fewer sponsors

– Enron departed, leading to other developers retreating from the region– Current Players

Globeleq Aldwych Corporate Local players

Financing issues:– US$ lending -v- local currency denominated tariffs– Long Tenors – repay in fifteen years or more

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Infrastructure finance - Aircraft

ECA Finance available for new aircraft But only max 80% Pre-delivery finance need and balance of funding Long tenors on “naked risk” – over 10-years So need financially sound operations In Sub-Saharan Africa only South African Airways, Kenya Airways and

Ethiopian Airlines qualify Ethiopian Airlines is a role model

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Infrastructure finance - Ports

Public Sector model generally sub-optimal Vested Interests Experienced international operators available – Maersk, P & O

Nedlloyd, Mersey Docks & Harbour Board Problems re security/deficient legal systems “National Assets” – expropriation risk BOT opportunities – SPM Ghana US$ income to match US$ borrowing

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Infrastructure finance - Airports

Public Sector model generally sub-optimal Vested Interests Experienced international operators available Problems re security/deficient legal systems “National Assets” – expropriation risk BOT opportunities US$ income to match US$ borrowing

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Infrastructure finance - Pipelines

Open multi-jurisdiction – lowest common denominator Country Risk Vested Interests Problems re security/deficient legal systems “National Assets” – expropriation risk BOT opportunities Local currency income versus US$ borrowing

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Infrastructure finance - Railways

Colonial Legacy assets Colonial configuration and rationale Some private sector dedicated building – mining project based Privately owned rolling stock becoming more prevalent – computer

tracking Vested interests – power of employees Freight is the future Local currency versus US$ borrowing Gautrain?

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Infrastructure finance – Roads and Bridges

Historically, no successful toll road or bridge outside South Africa but Lekki in Nigeria signed in September 2008

Transparent tendering for contracts an issue Sub-economic tendering? Limited sponsor interest Bad experience with donors – Grinaker LTA History of loss-making for contractors Cost versus capacity / willingness to pay Shadow toll roads the answer?

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Infrastructure finance – Water

Political Interference Universal entitlement – Should be free Too many “misunderstandings” No private sector capital Only 14 PPI deals since 1996; mainly Management Contracts Debt pushed out by grant monies

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General Lessons

Private Ownership or management necessary for efficiency gains And to address vested interests Political will Legal framework for contracts Good regulation to address regulatory risk Recognising private sector concerns Government capacity

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Frontier Markets Fund Managers Team

   Direct Tel Number Email Address

    +44 (0)20 7815- @frontiermarketsfm.com

Nick Rouse Managing Director 2780 nick.rouse

Chris VermontHead of Debt Capital Markets 2950 chris.vermont

Douglas BennetSenior Guarantees Executive 2786 douglas.bennet

Roland Janssens Senior Investment Adviser 2926 roland.janssens

Orli Arav Director 2782 orli.arav

Martijn Proos Senior Investment Adviser 2951 martijn.proos

Benito Grimaudo Investment Adviser 2784 benito.grimaudo

www.emergingafricafund.com