Hydro Power Africa

Project Financea

Financiers Perspective

Jean MadzongweEnergy Specialist

DBSA

19 September 2011

Outline

1. Background2. Power Supply & Demand in SADC3. Institutional Framework4. Drivers for Power Development 5. Funding Requirements & Sources6. Challenges in Project Implementation7. Project Finance8. Project Risk9. Role of DFIs – DBSA10.DBSA Energy Sector11.Conclusion

Background

• The SADC region has abundant energy resources • Over 60% of the population dependant on biomass energy• Hydroelectricity accounts for about 20% commercial energy (coal

about 74%)• Lack of access to modern energy services limits economic growth• Low levels of electrification – (20% urban; 5-7% rural)• Energy sector policies have fluctuated from security of supply to

increasing access to self-sufficiency and now focus on increasing power supply for export and power trading

• Insufficient power supply: load shedding from 2008 – 2013• Energy infrastructure is under-developed • Significant investment is required for maintenance & new projects • Projects failing to attract investment - poorly structured and not

packaged for bankability

Power Supply & Demand in SADC

No. Country Utility

Installed Capacity

[MW] As at Apr 2011

Available Capacity

[MW] Apr 2011

Installed minus

Available [MW]

2010 Peak Demand

[MW]

Capacity Required

[MW] 10.2%

Reserve

Deficit (MW)

1 Angola ENE 1,494 1,169 325 7952 Botswana BPC 202 190 12 5533 DRC SNEL 2,442 1,330 1,112 1,0814 Lesotho LEC 72 72 - 1215 Malawi ESCOM 287 287 - 2746 Mozambique EDM 199 130 69 560

HCB 2,075 2,075 - 7 Namibia NamPower 393 360 33 5648 South Africa Eskom 44,175 40,870 3,305 36,9709 Swaziland SEC 70 70 - 20410 Tanzania TANESCO 1006 880 126 83311 Zambia ZESCO 1,812 1,215 597 1,64012 Zimbabwe ZESA 1,961 1,320 641 2,029

56,188 49,968 6,220 45,624 50,278 (310)

53,401 47,632 5,769 43,722 48,182 (550) Total Interconnected SAPP

TOTAL SAPP

Source: SAPP

Levels of Access to Electricity (%)

Complex Institutional FrameworkComplex Institutional Framework

RegionalRegionalRegionalRegionalOrganisationsOrganisationsOrganisationsOrganisations

SADC, NEPAD

GovernmentGovernmentGovernmentGovernment

RegulatorsRegulatorsRegulatorsRegulatorsRERA, National Regulators

Power Pools Power Pools Power Pools Power Pools SAPP, CAPP, EAPP

MunicipalitiesMunicipalitiesMunicipalitiesMunicipalities

Fuel Suppliers

CustomerCustomerCustomerCustomerOffOffOffOff----takerstakerstakerstakers

R&D InstitutionsAcademia

ConsultantsAdvisorsExperts

ConstructionManufacturers

Operators

Private Financial Markets

Banks/FundsSponsor

Public Finance

Development Agencies IFIs + DFIs

World Bank, AfDB, DBSA, IDC

Project InvestmentVehicleSPV

Utilities / IPPs

Drivers for Regional Power Development

• High economic growth (4-5%), urbanization & growing consumption• Sector Reform, Restructuring & Unbundling of ESI• Electrification targets• Management of large capital expansion programmes• Access to finance• Potential cost savings• Climate change

• Planned generation capacity of 57,000MW to 2025 at a cost of US$83 billon

• Potential savings of US$48 billion through regional development

SADC Utilities Financing Requirements

(2011 – 2025)

Utility Financing Requirements, USD billion

0

1

2

3

4

5

6

7

Utility

BPCESCOM

ENE

EDM

LEC

NAMPOW

ER

SEC

SNELTA

NESCO

ZESAZESCOESKOM

Oth

er U

tiliti

es

0

10

20

30

40

50

60

70

Esk

om

A total of USD 83 billion is needed

Source: SAPP

Major Sources of Funding

Multilateral AgenciesWorld Bank / IMF / Regional Development Banks

Policy Imperatives: Poverty alleviation; Concessional lending; Preferred creditor status; Capacity building; Prescriptive resort

Bilateral AgenciesDevelopment Banks (IFIs & DFIs):Policy imperatives: Support foreign policy goals; Restrictions on projects in sensitive sectors or with potentially adverse domestic impact

Export Credit Agencies:Policy Imperatives:Take advantage of country’s economic & political leverage to create export markets; Developmental benefits secondary; Reasonable likelihood of repayment; Eligible countries; Entice commercial lender participation at comparatively low rates

Commercial BanksFinancial Adviser / Lead Arranger / Syndicate Bank / Guaranteed Lender/ Facility Agent

Quick turnaround; Skills depth; Lower risk appetite; require PRI

OthersGovernments, Host Country support: PPPs, Guarantees, Statutory, Regulatory, Site Establishment

Pension FundsBRICS

ISSUE COMMENTS

Political Will/Commitment

Gov policy incentives ; Sector planning; Decision making & bureaucracy; Need for guarantees & letters of comfort; Support for project structure (PPP, BOT, SPV, JV, etc)

Regulatory Environment

Regulators not independent; need for transparency; Poor framework for competition (IPPs); Tariffs not cost reflective (LRMC, MYPD); delays in concluding PPAs; Environmental compliance

Institutional Weak project sponsors / developers; Limited capacit y to prepare & package projects; Projects not structured for bankability; Capacity building for SOEs; Asset management & monitoring ; Need for Transaction Advisors

Technical Choice of technology ; State of infrastructure; Geological & hydrological issues; Strong & reliable off-taker (PPA); EPC Contractor ; O & M Contractor; Power evacuation; Timelines;Transparent procurement process; Access to reliable data and information

Challenges in Project Implementation

Challenges cont’d

ISSUE COMMENTS

Financial • High dependence on foreign capital as the major source of finance• Many power utilities have weak balance sheets• Limited commercial & private sector investments – expected to grow• Lack of available equity for both public/private (debt:equity ratio)• Need for sponsor with deep pockets• Limited capacity for local financial markets•Significant project development and start-up costs• Projects are taking too long to reach financial closure• Tariffs not cost reflective to sustain industry• Problems with hedging currency mismatch between PPA and

loan repayment• Financial challenges for maintenance backlogs• Unpredictable price regime & subsidies• CDM finance possibilities for ‘clean energy’ – lengthy process

Funding is available for good and well structured projects

Project Finance

• Specific activity with finite life• Mix of funding – equity, debt, mezannine, bridge facility,

grant, concessionary• Long-term loan• Cash flow generated to service debt• Debt:Equity Ratio• Return on Equity (ROE)• Project assets as security• Specific risk profile• Managing Risk

THEPROJECT SPV

(Assets)

Purchasecontracts

Projectoutput

PURCHASERS

Supplycontracts

SUPPLIERS

Rawmaterials

EQUITYINVESTORS

Equity funds

Returns

Credit support agreement

LENDERS

Loan funds

Debt repayment

Constructioncontract

EPC CONTRACTORS

OPERATORS

O&M contract

Simplified Project Structure

Role of Transaction Advisors

Technical, Legal & Financial Experts

• Mobilise financial resources

• Conduct & review relevant Studies

• Develop Financial Model

• Develop Financing Strategy

• Develop Tariff and Power Evacuation Strategy

• Draft all Project Documents & Agreements

• Assist with negotiations with key stakeholders

• Train & develop client staff

• Ensure Legal & Financial Close

The Credit Process

Initial investigation

Mandate

Application for Finance

Due Diligence

Credit Approval Offer of Finance

Documentation

Fulfillment of CP’s

FinancialClose

LendingCommittee

Large complex projects could take up to 3 yearsLess appetite for smaller projects

Risk Management Process

Standard practice

● Identify the source

● Quantify the exposure

● Assess the impact

● Assess capability for managing risk

● Select the appropriate risk management & mitigation measures

Risk should always be allocated to the party best able to manage it

Common Risk Elements

● Sponsor Risk

Is the sponsor a strong sector player?

● Engineering Risk

Has the plant been properly designed? Performance? Reliability?

Power evacuation?

● Construction or Completion Risk

Will it be built according to plan and within budget?

● Operating Risk

Will it be run properly?

Is the technology appropriate?

Is the management team properly qualified?

Risk cont’d

● Supply Risk

Are the sources of fuel or input requirements secure?

● Market Risk

Power supply - demand balance? Affordability?

● Logistical or Infrastructure Risk

Can the project get its product to the market – connections & access

to grid?

● Legal Risks

How does the system operate? What laws apply?

● Regulatory Risks

Concessions? Licensing? Tariff adjustments?

Risk cont’d

● Commercial Risks

Is project profitable? Are the returns good enough? Strong cash flows?

● Economic Risk

How will changing interest and inflation rates impact on IRR and the

ability to service debt?

● Credit Risk

Can the project service debt?

● Foreign exchange Risk

Are proceeds convertible and is there currency available?

● Syndication Risk

Can the lead bank place the debt?

Risk cont’d

● Political Risks

Could their be adverse government action? Nationalisation?

● Force Majeure

Has FM risk been adequately allocated?

● Insurance Risk

Is the project adequately insured?

● Environmental Risk

Are there possibly any adverse environmental consequences?

Risk MitigationRisk Mitigation

Country Policy environment; Market studies; Capacity building; Surveys; PRI; Guarantees; Geological & Hydrological risk cover; Insurance

Regulatory Independent Regulator; Legal Review; Cost reflective tariffs; Environmental compliance

Technical Reliable & proven (Appropriate) technology; Professional & experienced contractors; Turnkey contracts, BOO, BOT; Reputable suppliers; Training & technology transfer; Take or pay contracts; Liquidated damages; Performance guarantee/bonds; Contingencies

Institutional EPC contract: O&M contract; Capacity building & Training; Experienced Transaction Advisors

Finance Well structured financing – Mix & Tenor; Ring-fencing & Cash Flow Ratios; Escrow accounts; Guarantees; Greater risk tolerance from DFIs; Develop local capital markets Monitoring; Hedging; Indexation of contracts

The Role of DFI’s - DBSA

• To promote economic growth & development through investments in economic infrastructure

• Fill gaps in lending capabilities arising from market failures• Provide access to long-term capital at affordable rates• Aim to improve the quality of life & alleviate poverty• Create a balance between commercially viable and socially desirable

investments• Exploit energy resources in an environmentally friendly & sustainable

manner• Support delivery of access to basic energy services• Diversify regional power supply – increase use of ‘clean energy’ resources • Provide the customer with choice of supply• Capacity building & technology transfer • Strengthen institutions, policies and practices• Job creation during and after construction• Develop local capital markets• Enhance environmental benefits – reduce GHGs

DBSA - Energy Sector by CountryTotal Loan Book approx R35bn – Energy represents 14%

South Africa

54%

Multi-Regional

14%

Mozambique

13%

Zambia

11%

Namibia

5%

Malawi

2%

Tanzania

1%Lesotho

0%

Swaziland

0%

Energy portfolio by country

DBSA Sector Loan Book

Conclusion

• The SADC region offers immense investment opportunities with high and sustainable returns and manageable risks, despite the existence of some key challenges

• Regional co-operation is necessary for socio-economic growth and development

• Political will required to drive regional vs national agenda• Pooling of technical and financial resources is key to

addressing investment requirements• Improve project preparation capacity & resources• However, there is a need to explore innovative

approaches for new services & investments• Exploit opportunities for co-funding where-ever possible