TECHNICAL WORKSHOP ON NIGERIAN POWER REFORM Key Issues for Transaction Bankability and Financial Close Presentation by:

1. TECHNICAL WORKSHOP ON NIGERIAN POWER REFORM Key Issues for Transaction Bankability and Financial Close Presentation by: Andrew Alli Chief Executive Officer AFRICA FINANCE CORPORATION May 25th 2011

2. Requirements for Bankable Power Projects There are a number of requirements for banks and private investors to finance power projects in Nigeria across the value-chain, including but not limited to: Fuel Supply • Legally binding long-term GSPA with credible supplier • Gas pricing pass-through to power off-taker in PPA • Credible gas processing, transportation and supply infrastructure • Appropriate guarantees and credit enhancement for gas payments • Construction or Rehab: Competitive lump sum, turn-key EPC contracts • Fixed delivery dates, liquidated damages, performance guarantees • Operations and Maintenance: Performance-based term O&M contracts • Proven technology, competitive procurement, credible operator • Environmental & Social Impact Assessment (Equator Principles) Generation Transmission • Long-term concession contract with world-class technical partners • Long-term capex investment and operations funding availability • Independence and capacity implement system operator role • Efficient, market-based system of rules for power contracts • Customer base and mix: demographics, creditworthiness, retail/wholesale • Operator: High technical capacity and operational experience • Network operations and customer relationship management • Capacity to invest in new technology and long-term business plan • Towards reduction of aggregate collection losses • Expansion of distribution network penetration Distribution 2

3. Private Power Finance: Key Structuring Considerations Operations Phase Project Development Phase Construction Phase • Construction finance to take project to completion: • Financing Mix: Debt/Equity typically 70/30 • Normal Viability Metrics: • Debt Service Coverage Ratios (DSCR) • Project & Equity IRRs • Requires long term (>10 yrs), low interest rate loans • Equity funding usually required prior to debt availability • Early stage risk capital for: • Environmental Studies • Feasibility/Demand Studies • Consulting/Tendering Costs • Legal and Technical Fees • Often comes up to 10.0% of total project costs • Debt Financing: • DSCRs of up to 1.5x - 2.0x may be required depending on position in value chain • EXIM and Multilateral financing typical • Debt Service Reserve Account (DSRA) typical • Interest During Construction (IDC), fees and expenses typically rolled-up into cost • Equity Investment: • Requires patient investors (public sector, specialized funds, operating companies, pension funds) • Equipment contractors also typical anchor investors • IRRs typically in the 15.0% to 18.0% range • Strong sponsors critical to catalyze debt financing • Early Stage Risk Capital: • May be provided by: • Private Funds • Developmental Grants • Private Sponsors • Government Grants • Vendor Risk Participation • This is a crucial stage in project financing as decisions here will determine project bankability • Could take up to 5 years from here to financial close 3

4. Private Power Finance: Key Risk Issues…/1 Licensing & Pricing Risk • License for bankable period (15-25 years, with ease of renewal) • Tariff commercially viable, cost reflective, FX flexible, no reversals • Fuel supply: commercial pricing to ensure availability and quality • Bankable PPA (firm tenor, viable price, FX flexible) • Credible off-taker: Strong Disco with systems, management and track-record of good collections & payment (can be SOE or POE) • If Disco not credit-worthy, need sovereign guarantee for overall project risk, and payment guarantee via LCs to mitigate delayed payment • Even with sovereign guarantee, must have strong Disco operationally, to ensure collections and system sustainability Off-Take Risk • Bankable FSA: fixed price long term contract matching tenor of PPA with credible fuel provider • Fuel availability and guarantee of supply and quality • Liquidated damages in event of lack of supply linked with liquidated damages and payments on PPA • Alternative fuel, dual fuel projects also mitigate risk Fuel Supply Risk 4

5. Private Power Finance: Key Risk Issues…/2 • Revenue formula & frequency of regulatory review • License or concession? • Tariff policy: simplify multiple tariff structures • Subsidy program that places no risk on the Disco • Ability for Disco to pass though uncontrollable costs Regulatory Issues • Customer demand study • Price sensitivity and willingness to pay • Demand /willingness to pay studies conducted by credible technical consultants • Financiers will usually require a third party validation Market Risk • Technical losses addressed via investment plan (ongoing capex) • Commercial losses and collections rate addressed via competent management and incentives, prepaid meter roll out • Collections , domiciliation of payments into specified accounts as part of payment security Operations and Technology Risk 5

6. Sample Project: Greenfield IPP in Ghana • Opportunity • Ghana is a fast-growing economy with significant electric power supply deficits forecasted based on current pace of growth • Recently discovered commercial quantity oil & gas resources, expected to start yielding revenues in 2010, with significant local gas utilization potential • AFC (in conjunction with major local and international partners) is working to develop a 340MW combined cycle thermal IPP to meet existing demand, and potentially utilize discovered gas resources • The Project is appropriately structured and has widespread support at the highest levels of local and national government in Ghana, as well as strong private sector support • Project Highlights • Work is concluded regarding necessary permits, agreements, approvals and licenses, as well as early stage project development planning • Financial close is planned for early 2012, with development plan now moving into concluding phases • AFC co-sponsors will include local entrepreneurs, international DFIs and international power companies 6

7. Sample Project: Cape Verde Greenfield Wind-Farm • Opportunity • Cape Verde is an archipelago country with outstanding wind resources, a heavy reliance on expensive imported fossil fuel for energy generation and a strong growth economy with one of the better credit ratings in Sub-Saharan Africa • The Project comprises the development, construction, ownership and operation of 30 wind turbines on 4 islands for an approximate 28 MW of installed capacity for Cape Verde • AFC is working with leading international developers, InfraCo, and local electricity company, Electra, to deliver the project • The Project is appropriately structured and enjoys widespread support at the highest levels of government in Cape Verde • Project Highlights • Project development work is near conclusion with all major contracts and agreements (PPA, EPC, O&M) in place, as well as €30.0m debt capital commitments from AfDB and EIB • Construction expected to be concluded in two phases each completed within 40 to 60 weeks of commencement • AFC’s c.40.0% ownership interest in a €61.0m innovative renewable energy project underscores commitment to this sub-sector in Africa 7

8. AFC Power Sector Financial Services Offerings The Africa Finance Corporation offers specialized advisory expertise and principal investment capabilities across the power sector value chain Upstream Gas Production Fuel Supply Infrastructure Power Generation Distribution Advisory, Capital Raising, Principal Investing • Oil & Gas Fields • Tanks, Ships, Pipelines • Greenfield IPPs, Captive Industrial Plants • Discos, Services Upstream Gas Production Fuel Supply Infrastructure • Near production oil & gas asset development • Post production asset enhancement and refinancing • Gas gathering, processing, and transmission • Gas-to-power for domestic IPPs, utilities and industrial users Power Generation Electricity Distribution • Greenfield Independent Power Plants (IPPs), with both public and private partners • Captive plants for industrials • Independent distribution networks, Privatization advisory • Post-privatization financing 8

9. For AFC Power Sector Financial Services, Contact: Andrew Alli T: +234 279 9605 President & Chief Executive OfficerE: andrew.alli@africafc.org Solomon Asamoah T: +234 279 9620 Deputy CEO & Chief Investment OfficerE: solomon.asamoah@africafc.org Oliver Andrews T: +234 279 9617 Director & Chief Coverage OfficerE: oliver.andrews@africafc.org Africa Finance Corporation A: 3A Osborne Road, Ikoyi, Lagos Nigeria T: +234 279 9600 E: contact@africafc.org