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Frontier Markets Fund Managers

Frontier Markets Fund Managers. Financing the Power Sector – the case for local currency Chris Vermont Head, Debt Capital Markets October 2008. Emerging Africa Infrastructure Fund - EAIF. First dedicated infrastructure debt fund for sub-Saharan Africa

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Frontier Markets Fund Managers

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  1. Frontier Markets Fund Managers Financing the Power Sector – the case for local currency Chris Vermont Head, Debt Capital Markets October 2008

  2. Emerging Africa Infrastructure Fund - EAIF • First dedicated infrastructure debt fund for sub-Saharan Africa • Size: US$365 million, increasing to US$ 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

  3. Infrastructure projects financed / in the process of financing by EAIF                       

  4. Case Study – The Bugoye Power Project 4

  5. 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 5

  6. The Project’s Structure Trønder Energi 100% Trønder Kraft Norfund Ca 70% Ca 30% ERA GON Grant Licence & permits Tronder Power Limited (the Borrower) Grant ca 10 MUSD NEMA EAIF DWD Support Agreement Owners’ engineer Direct agreements Govt of Uganda Norplan Construction contracts PPA Contractor UETCL • Total Project Costs: • US$ 56m • Grant from GON: • US$ 10m • Equity: • US$ 16m • Total Debt US$30 m • - Tranche A: US$ 6m, • 5 year tenor • - Tranche B: US$ 24m 15 years tenor 6

  7. 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 7

  8. 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? 8

  9. GuarantCo Enabling infrastructure Finance in Local Currency

  10. The GuarantCo initiative 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

  11. 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 country’s external debt burden • Involvement of domestic banks and institutions helps build capacity to finance further projects

  12. …So why are most power projects in Africa financed in $ or Euro? • DFI’s and multilaterals find it easier to lend in $ or Euro • National utilities are used to accepting pass through of currency risks through PPA’s • 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…..

  13. 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

  14. 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 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………

  15. Contact • Chris Vermont, Head Debt Capital Markets Tel: + 44 207 8152950 Email: chris.vermont@frontiermarketsfm.com • Douglas Bennet, Senior Guarantees Executive Tel: +44 207 8152786 Email:douglas.bennet@frontiermarketsfm.com

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