MozambiqueFACILITATING PRIVATE SECTOR FINANCING

FOR INFRASTRUCTURE INVESTMENTS

THE WORLD BANK

                                               

Future Economic Policies and Non-Traditional Sources of Finance

Maputo, March 22-25, 2010

Regional and Sectoral Concentration of Private Flows in Infrastructure (1990-2008)

22Total: $1,640 bn (4,251 projects)Total: $1,640 bn (4,251 projects)

By regionBy region By sectorBy sector

Source: World Source: World BankBank

33

Factors that could affect Borrowings of Public Sector Entities

• State of Finance of the SOEState of Finance of the SOE

• Stage of development of the relevant sector Stage of development of the relevant sector

and the Regulatory environmentand the Regulatory environment

• Credit HistoryCredit History

• Credit RatingCredit Rating

• Source of revenues (generally local currency)Source of revenues (generally local currency)

• Limited to access to local marketsLimited to access to local markets

44

Factors that could affect State Entities Access to International Financing

• Limited financing capacity of local markets Limited financing capacity of local markets

• Recourse to international markets to fund Recourse to international markets to fund

infrastructure investments in foreign currencyinfrastructure investments in foreign currency

• Repayment obligations in foreign currency Repayment obligations in foreign currency

require access to foreign exchange which often require access to foreign exchange which often

necessitates Sovereign Guaranteesnecessitates Sovereign Guarantees

55

Sovereign Guarantees

• Guarantee provided by the Government to Guarantee provided by the Government to

backstop a public entity’s payment or backstop a public entity’s payment or

performance obligations in the context of public performance obligations in the context of public

sector borrowings or PPPssector borrowings or PPPs

Pros:Pros:

– Facilitates access to international debt and

capital markets

– Enables better terms of financing from

commercial markets

– Endorsement of Government of the

Financing/Project

66

Sovereign Guarantees

Cons:Cons:

– Creates contingent liability for the Government

which may require budgetary allocation

– Impacts on borrowing capacity of Government

and its debt profile

– Involves assumption of the underlying risk by

the Government

Contd.

77

Third Party Guarantees

• In addition to Sovereign Guarantees third party In addition to Sovereign Guarantees third party

Guarantees may be required in support of Guarantees may be required in support of

financings because of:financings because of:

• Perception of political risk resulting from Perception of political risk resulting from

– Possibility of Reversal in Government PolicyPossibility of Reversal in Government Policy

– Changes in Government that could lead to a Changes in Government that could lead to a

reneging of previous Government’s reneging of previous Government’s

contractual undertakingscontractual undertakings

88

Third Party Guarantees

– Private Insurance MarketPrivate Insurance Market

– Export Credit AgenciesExport Credit Agencies

– Bilateral Institutions Bilateral Institutions

– Multilateral InstitutionsMultilateral Institutions

99

The World Bank Guarantee Program

• Leveraging Bank resourcesLeveraging Bank resources

• Catalyzing private sector finance in support of Catalyzing private sector finance in support of

developmental objectivesdevelopmental objectives

• Facilitating member countries access to the Facilitating member countries access to the

international debt and capital marketsinternational debt and capital markets

1010

Partial Risk Guarantees

• Rationale: Promotes privatization by catalyzing Rationale: Promotes privatization by catalyzing

private sector interest through political risk private sector interest through political risk

mitigationmitigation

• Purpose: Supports debt financing in the form of Purpose: Supports debt financing in the form of

commercial debt or shareholder loans or provides commercial debt or shareholder loans or provides

cash flow supportcash flow support

• Guarantee coverage: Critical sovereign risks related Guarantee coverage: Critical sovereign risks related

to Government commitments under the relevant to Government commitments under the relevant

Contractual Agreements Contractual Agreements

• Modality: For Privatization, Concessions, or other Modality: For Privatization, Concessions, or other

PPP structures, or for Greenfield Projects PPP structures, or for Greenfield Projects

1111

Partial Credit Guarantees

• Partial Credit (PCG)Partial Credit (PCG)– Generally for public sector projects/entitiesGenerally for public sector projects/entities– Covers debt service default for specified paymentsCovers debt service default for specified payments– Alternative structures developed for different credits and Alternative structures developed for different credits and

market conditionsmarket conditions

• Policy Based Guarantees (PBG)Policy Based Guarantees (PBG)– For Sovereign or Sub Sovereign entitiesFor Sovereign or Sub Sovereign entities– With DPO IDA Credits or on a ‘stand alone’ basis under With DPO IDA Credits or on a ‘stand alone’ basis under

the DPO frameworkthe DPO framework– For fiscal supportFor fiscal support– To improve debt terms for government borrowingsTo improve debt terms for government borrowings

* Expected to be made available to IDA countries this year.* Expected to be made available to IDA countries this year.

**

**

1212

IBRD Enclave Guarantees for IDA-only Countries

• IBRD Enclave Loans can support public and private IBRD Enclave Loans can support public and private

projectsprojects

• IBRD Enclave Partial Risk Guarantees (PRG) support IBRD Enclave Partial Risk Guarantees (PRG) support

private projectsprivate projects

• ‘‘Enclave Structure’ in support of foreign exchange Enclave Structure’ in support of foreign exchange

generating projects that rely primarily on acceptable generating projects that rely primarily on acceptable

credit enhancements to IBRD (e.g. through offshore credit enhancements to IBRD (e.g. through offshore

escrow accounts funded by foreign exchange (FX) escrow accounts funded by foreign exchange (FX)

revenues, strong third party guarantee) in addition revenues, strong third party guarantee) in addition

to host country government counter-guaranteeto host country government counter-guarantee

1313

IBRD Enclave Guarantees for IDA-only Countries

• Alternative ‘Enclave Structure’ in support of projects Alternative ‘Enclave Structure’ in support of projects

in relatively high-rated IDA countries (i) that have in relatively high-rated IDA countries (i) that have

clear economic benefits (e.g. import substitution) clear economic benefits (e.g. import substitution)

but do not themselves generate foreign exchange; but do not themselves generate foreign exchange;

and (ii) projects that have clear economic benefits and (ii) projects that have clear economic benefits

with strong financial flows in local currency through with strong financial flows in local currency through

an offtake to a stronger creditworthy partyan offtake to a stronger creditworthy party

• IBRD Enclave support would be additional to IDA’s IBRD Enclave support would be additional to IDA’s

Country EnvelopeCountry Envelope

Contd.

Guarantees help Extend Maturities ...

77 77

33

55 55

77

0011

55

11

55

1515 1515 1515

1010

1515

1010 1010

1212

1010

1414

1616

00

22

44

66

88

1010

1212

1414

1616

1818

China

China

Philip

pine

s

Philip

pine

s

Pakist

an

Pakist

an

Leban

on

Leban

on

Mor

occo

Mor

occo

Russia

/Ukr

aine

Russia

/Ukr

aine

Thaila

nd

Thaila

nd

Cote d

'Ivoi

re

Cote d

'Ivoi

re

Colom

bia

Colom

bia

Bangl

ades

h

Bangl

ades

h

Vietna

m

Vietna

m

Mat

uri

ty (

year

s)M

atu

rity

(ye

ars)

without Guaranteewithout Guarantee with Guaranteewith Guarantee

00

16.516.5

Laos

Laos

1616

Ugand

a

Ugand

a

22

1414

… at the same time Reduce Spreads

3.0%3.0%

4.5%4.5%

3.0%3.0%3.4%3.4%

8.5%8.5%

6.5%6.5%

3.0%3.0%

5.0%5.0%

0.6%0.6%

2.0%2.0%

2.8%2.8%

0.75%0.75%

3.0%3.0%

2.0%2.0% 2.0%2.0%

2.9%2.9%

2.0%2.0%2.5%2.5%

5.0%5.0%

0%0%

1%1%

2%2%

3%3%

4%4%

5%5%

6%6%

7%7%

8%8%

9%9%

China

China

Philipp

ines

Philipp

ines

Pakist

an

Pakist

anUga

nda

Ugand

a

Mor

occo

Mor

occo

Thailand

Thailand

Cote

d'Ivoire

Cote

d'Ivoire

Colom

bia

Colom

bia

Bangl

ades

h

Bangl

ades

h

Vietn

am

Vietn

am

Inte

rest

Sp

read

s o

ver

US

T/L

ibor

Inte

rest

Sp

read

s o

ver

US

T/L

ibor

without Guaranteewithout Guarantee with Guaranteewith Guarantee

2.25%2.25%

Laos

Laos

2.25%2.25%

1515

1616

Partial Risk Guarantee for PPPs Limited Recourse Structure

A Partial Risk Guarantee (PRG) can cover lenders in support ofA Partial Risk Guarantee (PRG) can cover lenders in support of

Public Sector contractual commitments Public Sector contractual commitments

Commercial Lenders

Project Company

Government

Guarantee

Indemnity Agreement

Contractual Government Undertakings

IAPPAGSA

Loans

World Bank

1717

Partial Risk Guarantee for Power Distribution Privatization

Letter of Credit Structure

Government

Service

Retail Tariff

Counter Guarantee

Consumers

PrivatizedDistribution

Company

Licensing Agreement

Regulator

BulkPower

Supplier

Tariff

Power Supply

Gov

ernm

ent

Sup

port

Agr

eem

ent

Letter of CreditCommercial

Bank

Rep

aym

ent o

f L

/ C

Covered by the Partial Risk Guarantee from the World Bank

Letter of Credit

Power Purchase Agreement

1818

Guarantee Coverage

• Breach of Contract (e.g.):Breach of Contract (e.g.):– Power Purchase AgreementsPower Purchase Agreements– Supply of gas or water Supply of gas or water

• Licensing Arrangements Licensing Arrangements • Regulatory RiskRegulatory Risk• Foreign exchange availability & convertibility Foreign exchange availability & convertibility • Changes in law Changes in law • Political force majeure Political force majeure • Natural force majeure events limited to government Natural force majeure events limited to government

obligationsobligations• Frustration of ArbitrationFrustration of Arbitration• Environmental liabilitiesEnvironmental liabilities• Government/Public Sector payment obligations Government/Public Sector payment obligations

1919

Partial Credit Guarantees can help in the following situations

• Government or State Owned Enterprise Government or State Owned Enterprise (SOEs) access to capital or the bank (SOEs) access to capital or the bank markets markets

• Bond issues or commercial loans by public Bond issues or commercial loans by public intermediaries, or public entitiesintermediaries, or public entities

• Pre-Privatization support for public entities Pre-Privatization support for public entities through convertible Bondsthrough convertible Bonds

2020

Partial Credit Guarantees can help financeLong Term Public Investments

00 1010 1515

$100 m$100 m

WB Support WB Support for Principal for Principal Bullet Bullet RepaymentRepayment

Pricing (250 bp* ) (250 bp* )Pricing (250 bp* ) (250 bp* )

* Above US Treasuries * Above US Treasuries

Philippines: Leyte-Luzon Power ProjectPhilippines: Leyte-Luzon Power Project

Bond StructureBond Structure

Longest Term Available to the Philippines Longest Term Available to the Philippines without WB Supportwithout WB Support

Additional termAdditional term provided by WBprovided by WB SupportSupport

2121

Partial Credit Guarantees can help access the loan market

00 1515 2020

• World Bank World Bank exposure under the exposure under the PCG is $120m PCG is $120m (present value of the (present value of the PCG)PCG)

• Only $30m (25% of Only $30m (25% of $120m) to be $120m) to be charged to country charged to country exposure limit exposure limit

Botswana Power Corporation (guaranteed by the government) Morupule B Power Generation Project (2009)

World Bank PCG World Bank PCG helped mobilize helped mobilize $825 million $825 million commercial loan commercial loan with 20-year with 20-year maturitymaturity

World Bank World Bank GuaranteesGuarantees$243 m (29% of $243 m (29% of $825m)$825m)principal payments principal payments (plus one accrued (plus one accrued interest payment )interest payment )callable on and after callable on and after year 15+ 1 dayyear 15+ 1 day

Risk assumed by commercial lenders World Bank Risk assumed by commercial lenders World Bank guaranteedguaranteed

IBRD “Enclave” Support for Projects in IDA Countries

2222

Limited GovernmentLimited GovernmentObligations:Obligations:

• Permits/consentsPermits/consents• Change in lawChange in law• Political eventsPolitical events• ExpropriationExpropriation

““Off Off Shore”Shore”

LendersLendersGuaranteeGuarantee

CounterCounterGuaranteeGuarantee

LoanLoanAgreementAgreement

CreditworthyCreditworthyPurchaserPurchaserEnclave ProjectEnclave Project

PPAPPAExportExport

Guarantee Guarantee FeeFee

ConcessionConcessionContractContract

FXFX

GovernmenGovernmentt

Reserve Reserve AccountAccount

2323

Application of Guarantees

• Greenfield Projects/Privatizations/PPP StructuresGreenfield Projects/Privatizations/PPP Structures– TelecomTelecom– Power sector Power sector

(Generation/Distribution/Environmental Retrofit) (Generation/Distribution/Environmental Retrofit) – Waste Water and Municipal servicesWaste Water and Municipal services– Oil, Gas PipelinesOil, Gas Pipelines– Transport (Railways/Ports/Airports)Transport (Railways/Ports/Airports)

2424

Mozambique’s Infrastructure Investment Requirement

• Investments in the Energy Sector (Power Investments in the Energy Sector (Power Generation/Transmission)Generation/Transmission)

• Investments in pipelines Investments in pipelines • Investments in Water, Urban and Irrigation Investments in Water, Urban and Irrigation

ProjectsProjects• Investments in the Transport Sector (Roads, Investments in the Transport Sector (Roads,

Bridges, Ports, Air Ports and Railways)Bridges, Ports, Air Ports and Railways)

2525

Pre-Conditions for Use of Guarantees

• Subject to Bank appraisalSubject to Bank appraisal

• Counter-Guarantee from the Counter-Guarantee from the Government Government

IDA IBRD Enclave

Fee Type PRGs PCGs PRGsUpfront Charges Front End Fee N/A N/A 0.25%

Initiation Fee 0.15% on the guaranteed amount or

USD 100,000

(whichever is higher)

N/A 0.15% on the guaranteed amount

or USD 100,000

(whichever is higher)

Processing Fee Up to 0.50% (for reimbursable expenses)

N/A Up to 0.50% (for reimbursable expenses)

Recurring charges

Guarantee Fee 0.75% per annum on guaranteed amount

0.50% per annum on guaranteed amount (in NPV terms)

200% per annum on guaranteed amount

Standby Fee Currently 0% N/A N/A

Payment of Fees (by the Private Sector) (by the Gov./ Public Entity)

(by the Private Sector)

Pricing for IDA and IBRD Enclave Guarantees

* Expected to be extended to IDA countries from this year. Is determined by the IDA Board annually.

2626

*

2727

Preferred Guarantee Modality

• Early involvement of the Bank may help to Early involvement of the Bank may help to

enhance investor interest enhance investor interest

• Guarantee structure to be incorporated in the Guarantee structure to be incorporated in the

Bid Documents as an optionBid Documents as an option

• Bids should demonstrate value added of the Bids should demonstrate value added of the

GuaranteeGuarantee

• Value added of the Guarantee to be a part of Value added of the Guarantee to be a part of

the Bid Evaluationthe Bid Evaluation

2828

Benefits of the Guarantee to the Government

• Catalyzes financing through market access, Catalyzes financing through market access,

longer tenors and lower financings costslonger tenors and lower financings costs• Facilitates privatization & PPPs by enhancing Facilitates privatization & PPPs by enhancing

investor interest investor interest • Accelerates the pace of new investment for Accelerates the pace of new investment for

expansion of relevant servicesexpansion of relevant services• Sustains relatively more attractive retail tariff Sustains relatively more attractive retail tariff

regimes by significantly improving the debt regimes by significantly improving the debt profile of financings profile of financings

• Enhances the potential “sale” value of existing Enhances the potential “sale” value of existing assets or of the franchise for the Government assets or of the franchise for the Government

2929

Benefits of the Guarantee to the Government

• No additional contingent liabilityNo additional contingent liability• Is additional to the country lending programIs additional to the country lending program• Creates market confidence through Bank Creates market confidence through Bank

leverage and track recordleverage and track record• Provides for risk sharing with the private sectorProvides for risk sharing with the private sector• No associated costs (guarantee fee would be No associated costs (guarantee fee would be

payable by the investor as part of project costs)payable by the investor as part of project costs)• Transitional - can be structured to fall awayTransitional - can be structured to fall away

contd.

3030

Benefits of the Guarantee to the Private Sector

• Would help to mitigate critical perceived political risksWould help to mitigate critical perceived political risks• Would help to make privatizations financeable Would help to make privatizations financeable

through facilitating direct access to financial marketsthrough facilitating direct access to financial markets• Would help to catalyze long term “non recourse” debt Would help to catalyze long term “non recourse” debt

financing thereby reducing the risk profile of the financing thereby reducing the risk profile of the investment and overall capital costsinvestment and overall capital costs

• Associates the Bank with the project providing Associates the Bank with the project providing comfort on Government governance issuescomfort on Government governance issues

Country Project Project Cost

(Million)

PRG Amount (Million)

Date

Morocco Jorf Lasfar Power $1,400 $180 1997

Cote d’Ivoire Azito Power Project $223 $30 1998

Uganda Distribution Concession $65 $5.5 2005

Mozambique/South

Africa

The Sothern African

Regional Gas Project

R 3.692 R 140m

R 70m

2005

Ghana West African Gas Pipeline $590 $50m 2005

Uganda Bujagali Hydropower

Project

$799 $115 2007

Kenya Railway Concession $120 $40m 2007

Uganda Railway Concession $120 $10m 2007

Nigeria Energy & Gas Improvement

Project

$4,000 $400m 2009

Botswana Morupule B Power Project $825 $243m 2009

Completed PRG Operations in Africa

3131

3232

Case Study

Nigeria Energy and Gas Nigeria Energy and Gas Improvement Project Improvement Project

(NEGIP) - 2009(NEGIP) - 2009

3333

Nigeria Energy and Gas Improvement Project

• Sector Issues:Sector Issues:– Abundant gas resources yet shortage of gas Abundant gas resources yet shortage of gas

for powerfor power– Pricing structure for gasPricing structure for gas– Contractual arrangementsContractual arrangements– Creditworthiness of the Power UtilityCreditworthiness of the Power Utility

3434

Nigeria Energy and Gas Improvement Project

Solutions:Solutions:• Sector ReformSector Reform

– Pricing restructuringPricing restructuring– Imposition of domestic gas obligations on International Imposition of domestic gas obligations on International

Oil Companies (IOC)Oil Companies (IOC)– Change in existing contractual arrangementsChange in existing contractual arrangements– Appointment of a Gas RegulatorAppointment of a Gas Regulator

• Risk MitigationRisk Mitigation– PRG to backstop the Power Utility‘s payment PRG to backstop the Power Utility‘s payment

obligations under the Gas Supply and Aggregator obligations under the Gas Supply and Aggregator Agreements with IOCsAgreements with IOCs

PRG Contractual Structure in Support of Gas Supply and Aggregation Agreements

IDAFGN

L/C Bank

PHCN

Indemnity AgreementGuarantee

Agreement

PRG

L/C Reimbursement & Credit Agreement

JV Operator

Stand

by L

/C

Proj

ect A

gree

men

t

Contractual Agreements with no regular Payment flows

Payment flows in the event of a Breach of the Gas Supply Agreement

JV Agreement

NNPC 60%

IOC 40%

Contractual Agreements & regular Project Payment flows

PRG Support Agreement

Gas Supply Agreement

EscrowAccount

AggregatorAggregator

3535

3636

Benefits of the PRG

• Underpinned market development for domestic Underpinned market development for domestic gasgas

• Helped to create an enabling environment for Helped to create an enabling environment for sector reformsector reform

• Minimal risk mitigation of US$400m will help to Minimal risk mitigation of US$400m will help to catalyze around US$4 bn of gas flows for the catalyze around US$4 bn of gas flows for the priority power sectorpriority power sector

• Will help to mobilize substantial investments in Will help to mobilize substantial investments in the sector from the private sectorthe sector from the private sector

3737

Case Study

Southern African Regional Gas Southern African Regional Gas ProjectProject

Mozambique – South AfricaMozambique – South Africa

IBRD Enclave Partial Risk Guarantee forSouthern Africa Regional Gas Project

• Key AgreementsKey Agreements– Petroleum Production Agreement: Govt of Mozambique granted exclusive Petroleum Production Agreement: Govt of Mozambique granted exclusive

rights for development of Pande and Temane gas fields to UJV comprising rights for development of Pande and Temane gas fields to UJV comprising Sasol subsidiary SPT and CMH a subsidiary of the Mozambican oil co.Sasol subsidiary SPT and CMH a subsidiary of the Mozambican oil co.

– Pipeline Agreement: GoM authorized ROMPCO and other Sasol subsidiary to Pipeline Agreement: GoM authorized ROMPCO and other Sasol subsidiary to construct, own and operate the gas pipeline to transport gas to South Africa construct, own and operate the gas pipeline to transport gas to South Africa

• SponsorsSponsors– Gas fields: SPT (70%); CMH (25%); IFC (5%)Gas fields: SPT (70%); CMH (25%); IFC (5%)– Pipeline: ROMPCO (100%)Pipeline: ROMPCO (100%)

• Financing Financing – ZAR3.7 bn ( US$490m) debt – full recourse with Sasol assuming all project ZAR3.7 bn ( US$490m) debt – full recourse with Sasol assuming all project

risks under debt support agreement , except for Mozambican political riskrisks under debt support agreement , except for Mozambican political risk

• IBRD Enclave PRGIBRD Enclave PRG– ZAR 140m for upstream; ZAR70m for downstream covering Mozambican ZAR 140m for upstream; ZAR70m for downstream covering Mozambican

political riskspolitical risks

• MIGA PRIMIGA PRI– ZAR820m including ZAR310m reinsured with SACE and EFIC under the PPA ZAR820m including ZAR310m reinsured with SACE and EFIC under the PPA

and PAand PA3838

Enclave Guarantee Structure

GOMGOMSPT SPT

(Sasol owned, (Sasol owned, Moz Moz

company)company)

ROMPCOROMPCO

(Sasol owned, (Sasol owned, RSA company)RSA company)

Commercial LendersCommercial Lenders

Petroleum Petroleum Production Production AgreementAgreement

Pipeline Pipeline AgreementAgreement

Project Project AgreementAgreement

Project Project AgreementAgreement

IndemnitIndemnity y

AgreemeAgreementnt

Loan Loan AgreementAgreement

Loan Loan AgreementAgreement

Guarantee Guarantee Agreement SPTAgreement SPT

Guarantee Guarantee Agreement Agreement ROMPCOROMPCO

3939

Example of Joint WBG SupportSouthern Africa Regional Gas Project

• IBRD Enclave PRGIBRD Enclave PRG

Political Risk Cover for debt to SPT & Rompco including:

• Sovereign obligations (including protection against changes in laws; non-provision of permits/ approvals, etc.)

• expropriation• Currency transferability as to funds located in Mozambique

MIGAMIGA

Political Risk Cover for equity and debt to SPT & Rompco including:•Breach of contract •Currency transferability •Expropriation •War & Civil Disturbance

IFC

IFC Investment and Advisory Role:• Equity investment in Upstream • Advisory assistance to CMH in mobilizing financing for the Upstream• Facilitating local participation

IBRD Enclave PRG was provided for local currency (ZAR) debt

4040

For Further Information Contact:

Farida MazharFarida MazharLead Financial Officer Lead Financial Officer

Finance & Guarantees GroupFinance & Guarantees GroupFinance, Economics & Urban DepartmentFinance, Economics & Urban Department

The World BankThe World Bank1818 H Street, NW1818 H Street, NW

Washington, DC 20433 (USA)Washington, DC 20433 (USA)Ph: +1 (202) 473-1235Ph: +1 (202) 473-1235Fax: +1 (202) 522-0761Fax: +1 (202) 522-0761

Email: Email: fmazhar@worldbank.orgfmazhar@worldbank.org

or visit our web site: or visit our web site: www.worldbank.org/guaranteeswww.worldbank.org/guarantees