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Independent Power production Some thoughts Edward Marlow Managing Director – Principal Investments HSBC Emerging Market PowerPoint Presentation
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  1. Independent Power production Some thoughts Edward Marlow Managing Director – Principal Investments HSBC Emerging Markets - Sub-Saharan Africa

  2. Tunisia 2004 2001 2005 2006 2005 Morocco EUR375mn Syndicated dual currency revolving credit facility Co-Manager Advising Transtel on its participation in the second national fixed line licence Advisor ZAR1.7bn Acquisition of 80% stake in Regie des Tabacs Marocains from Moroccan state Advisor ZAR250m Acquisition of 50% of Early bird from Afgri Advisor USD18.7bn Financial advisor to De Beers on the offer by DB investments Advisor USD8.1bn Joint financial advisor to Harmony Gold Mining Company Limited on its unsolicited offer for Gold Fields Limited Advisor ZAR4.3bn Initial Public Offering Initial public offering of secondary shares Co-Manager USD1bn Mandated lead arranger in raising a syndicated facility for the South African Reserve Bank Arranger USD1.1bn Strategic financial advisor for the restructuring of the IDC’s steel and other metal-based interests Advisor USD125m Standard Bank of South Africa Ltd Joint Mandated Arranger USD284.5m EUR23.5m 5.02% due 2012 5.32% due 2015 (EUR) 4.10% due 2012 Arranger USD300m Nedbank Ltd Joint Mandated Arranger EUR 156.7M Sole advisor to Bidvest Group Limited on the acquisition of Deli XL Financial Advisor USD700m Joint Mandated Arranger Algeria Libya Western Sahara Egypt Mauritania Mali USD2bn Advisor to Mittal on partial offer for up to 12.9 % of Iscor Advisor Niger Senegal Eritrea 2002 2005 2005 Djibouti Sudan Chad Burkina Guinea Nigeria Ethiopia Central African Republic Cameroon Somalia Uganda Ghana Congo Kenya Gabon Congo (Zaire) Côte d’Ivoire USD1,000m South African Reserve Bank Joint Mandated Arranger Rwanda Equat. Guinea 2003 2006 2004 2005 Liberia Burundi Togo Tanzania Sierra Leone Benin Guinea Bissau Malawi Angola The Gambia Zambia Mozambique Zimbabwe Namibia Madagascar 2002 2003 2003 2005 Botswana Swaziland Lesotho Republic of South Africa HSBC – A leading investment bank in AfricaVoted “best investment bank in Africa and Middle East” by Global Finance (August 2005)Voted “best equity investment bank in Africa” by Euromoney (July 2006) Advisory Capital Raising

  3. Morocco Turkey Ongoing Doga Power Plant US$915m Mandated Lead Arranger and Due Diligence Bank Ongoing Tartafaya Wind Farm USD TBAm Financial Adviser Ongoing Cap Ghir IPP USD TBA m Financial Adviser Jordan Egypt 2002 Samra Gas Fired US$400 m Financial Adviser 2006 Sidi Krir IPP USD 251 m Sole International Underwriter Hedge Arranger/ Global Agent Sole Bookrunner South Africa Ongoing Project Bravo Financial Adviser Ongoing Project Medupi Financial Adviser Ongoing Project Lima Financial Adviser Ongoing PBMR ZAR TBA m Financial Adviser HSBC power project finance credentials: Africa

  4. HSBC – The global leader in infrastructure advice…… • HSBC was awarded the Global Financial Advisor title by Infrastructure Journal in 2006. It had been awarded the same title in 2005 by Project Finance International magazine • Infrastructure Journal is one of the leading and most respected magazines covering infrastructure investment / project finance. Its annual league tables are an impartial assessment of market activity • During 2006 HSBC closed 13 transactions around the world with total project values of almost USD 20.2 billion Global Financial Advisor 1 HSBC 13 20,241 2 SMBC 5 15,572 3 Macquarie 12 14,681 4 JP Morgan 3 12,032 5 PwC 15 11,934 6Deutsche Bank 3 11,457 7 Societe Generale 10 10,179 8 DrKW 1 10,000 9 UBS 1 10,000 10 Lazard 1 9,130 HSBC Market Share: 9.0% Global Financial Advisor The first half of 2007 has seen HSBC continue to reinforce its leadership in Project Finance Advisory as the outright #1 Global Financial Advisorby transaction volume and number of deals. (all amounts are in USD millions) Source: Infrastructure Journal, Full Year 2006 1 HSBC 11 11,998 2 Societe Generale 7 6,693 3 Macquarie 6 5,590 4 KPMG 14 4,630 5 BNP Paribas 3 4,627 6Citigroup 2 4,620 7 Ernst & Young 11 4,392 8 Rothschild 3 4,290 9 SMBC 2 4,095 10 RBS 5 4,083 Infrastructure Journal Source: Infrastructure Journal, H1 2007

  5. IPP process: Private versus public funding • The participation of private capital is dependent on the underlying premise that Project is expected to be income-accretive and therefore borrowings can be repaid and sponsors equity return requirements can be achieved • Regarding the “Private Capital is more expensive vis-à-vis public borrowing” debate, we note • Private sector arguably is able to deliver significant cost savings in several project aspects e.g. design, construction procurement, operation, management, maintenance • Lower public funding costs – a flawed argument? Consider the “true” risk of the project i.e. private capital builds in the risk into the cost of funds. Government cost of borrowing is cheaper due to perceived risk of default rather than assessment of the quality of returns from a specific investment. (i.e. the “true” risk is transferred to taxpayers) • Therefore, so long as private sector financing transaction costs are not significantly higher than public financing costs (not likely in Namibia), the cost of capital should not be a compelling argument against IPPs • Hence to achieve an optimum combination of lowest Project cost (levelised tariff) & quality (reliability/availability), IPPs should be awarded as a result of an international, competitive bid process or alternatively via an open book negotiated incentivised contract format.

  6. IPP process: Summary PHASE 1 PHASE 2 PHASE 3 PHASE 4 PHASE 5 1. Prioritise Key Project Objectives 2. Agree Project Concept 3. Obtain Stakeholder Approval 1. Pre Qualify Bidders 2. RFP Development 3. RFP Issuance to Pre Qualified Bidders 1. RFP Clarifications 2. Tender Period - Bid Preparation - Bid Submission 1. Bid Evaluation 2. Bid Clarifications 3. Preferred Bidder selection 1. Negotiation of Project Agreements 2. Achieving Financial Close Estimated Timeframe: 2 - 3 months Estimated Timeframe: 2-3 months Estimated Timeframe: 5 - 6 months Estimated Timeframe: 2 months Estimated Timeframe: 3 - 6 months Needless to say that within the IPP process chain, there are many opportunities for delays, inappropriate deal structure, risk of no interest and abandonment of the Project  leading to grid capacity shortfalls, tarnished IPP reputation, expensive temporary solutions and high opportunity costs So what are Investor’s primary concerns and considerations when they look at “emerging markets” IPP opportunities?

  7. IPP process: Key investor considerations (I) Aspect Investor’s concern Pre emptive action Project Timetable • Delay to the Project timetable resulting in clash with other regional and global power projects • RFP launch prior to receiving Stakeholder approval • Front load Project development work, to • ensure; • an attractive RFP and bankable Project • stakeholder approval can be obtained in good time before RFP issuance Clear Regulatory Framework • A clear and enforceable legal framework is a top priority for the Project’s investors • “Rules of the game” to remain credible • Sound regulatory framework in place before inviting investors will reduce delays and related opportunity costs for investors Project Bankability • Improper risk allocation strategies leading to an unattractive Financing Structure proposed to Sponsors and Lenders • Payment assurance and cash flow adequacy – tariff adjustments, etc • Commercial risk allocation and suitable “pass -through“ of power purchase costs in the Project agreements • Availability of credit enhancement or a Government guarantee Commercial Viability • Lack of a “level playing field” where IPPs and existing state owned utilities have unequal rights (e.g. fuel / grid access) and regulatory treatment (e.g. tax regime) • Legal framework issue to be discussed/ agreed in the development stage and explicitly addressed through the Project agreements

  8. IPP process: Key investor considerations (II) Aspect Investor’s concern Pre emptive action Termination Compensation • Does the PPA include provision for payments on termination to cover investor’s equity investment/ project debt and return on investment ? • Termination rights may be a significant component of the PPA’s protection against regulatory risk. Level of termination and expiry payments will ultimately be critical in defining the Project’s acceptability to investors Competitive Tender / Evaluation Criteria • Lack of transparency governing selection and evaluation criteria. • Unclear procurement strategy as part of larger sector development. • Bid evaluation criteria should reflect government’s policies pertaining to the power sector and clearly spelt out in bid documentation • Development of a detailed Bid Evaluation Financial Model Site suitability • Investors typically will only accept site risk when their contractor has surveyed the Project site. • Site suitability studies to be carried out in the Project concept stage Governing Law • Concern of dispute resolution and enforcement mechanisms • Local Law PPA • International Arbitration

  9. What leads to a successful tender • Developers and Lenders will not take • Unlimited Liability • Unquantified Risk • Developers and Lenders only wish to take risks they can control, pass to someone else or at least mitigate. Why? They only have one asset to get their money back from - the opposite of portfolio diversification • Risk Allocation is critical • Development risk • Political risk • Environmental risk • Completion risk • Cost increase risk • Reward is not a mitigation for unsatisfactory risk. The transaction’s risk allocation will feed back through the pricing/IRR but beyond a certain point will impact on whether a developer will bid at all Risk Reward

  10. The structure – Contracted power plant Investors Lenders Equity Guarantees Facility Agreements Security Agreements Operator Shareholders Agreement Operation and Maintenance Contract Contractor(s) EPC Contracts) Project Company Gas/Coal Supply Contract Support Agreement(s) Fuel Supplier Power Purchase Agreement (concession) Government Power Purchaser Concession

  11. Power purchase agreement Grants the concession Sets the charges The power purchase Agreement is the primary document that should be focused on. To some extent all others are secondary Grants the concession • Grants the concession - gives the project the right to exist, and the right to generate electricity. Term typically 20-25 years from completion of construction Ownership • BOO or BOT Sale and purchase of capacity • Generator paid on the availability of net dependable power capacity irrespective of despatch sufficient to cover debt service, equity return and fixed O&M • Procurer takes price and despatch risk • Take or Pay Sale and purchase of Net Electricals • Variable O&M costs recovered through the sale of the net electrical energy dispatched Indexation • Tariff payments may be indexed for inflation and movements in Foreign Exchange rates • Procurer may take inflation and forex movements risk Base capacity component Fixed O&M component Fuel adjustment payment Variable O&M payment Capacity Payment Output Payment Service Payment

  12. Non documentation issues Other risks Fuel • Security of Fuel Supply • Volatility of Price • Technical Specification Risk • Efficiency of Fuel Utilisation Environmental • Environmental Impact Assessment • Environmental Management Plan • Equator Principles • Permitting • Flue Gas Desulphurisation • Compliance costs Localisation (CSDP, NIPP, BEE) • Disincentives to international bidders if over onerous obligations • Compliance • Change in law provisions re future legislative changes Project on Project Risk • Interdependence on other projects - Fatal Flaws Macroeconomic Risks • Interest Rate risks • Foreign Exchange risk • Inflation Risk