Mozambique FACILITATING PRIVATE SECTOR FINANCING FOR INFRASTRUCTURE INVESTMENTS

1. MozambiqueFACILITATING PRIVATE SECTOR FINANCING FOR INFRASTRUCTURE INVESTMENTS Future Economic Policies and Non-Traditional Sources of Finance Maputo, March 22-25, 2010 THE WORLD BANK

2. Regional and Sectoral Concentration of Private Flows in Infrastructure (1990-2008) By sector By region Total: $1,640 bn (4,251 projects) Source: World Bank

3. Factors that could affect Borrowings of Public Sector Entities • State of Finance of the SOE • Stage of development of the relevant sector and the Regulatory environment • Credit History • Credit Rating • Source of revenues (generally local currency) • Limited to access to local markets

4. Factors that could affect State Entities Access to International Financing • Limited financing capacity of local markets • Recourse to international markets to fund infrastructure investments in foreign currency • Repayment obligations in foreign currency require access to foreign exchange which often necessitates Sovereign Guarantees

5. Sovereign Guarantees • Guarantee provided by the Government to backstop a public entity’s payment or performance obligations in the context of public sector borrowings or PPPs Pros: • Facilitates access to international debt and capital markets • Enables better terms of financing from commercial markets • Endorsement of Government of the Financing/Project

6. Contd. Sovereign Guarantees 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

7. Third Party Guarantees • In addition to Sovereign Guarantees third party Guarantees may be required in support of financings because of: • Perception of political risk resulting from • Possibility of Reversal in Government Policy • Changes in Government that could lead to a reneging of previous Government’s contractual undertakings

8. Third Party Guarantees • Private Insurance Market • Export Credit Agencies • Bilateral Institutions • Multilateral Institutions

9. The World Bank Guarantee Program • Leveraging Bank resources • Catalyzing private sector finance in support of developmental objectives • Facilitating member countries access to the international debt and capital markets

10. Partial Risk Guarantees • Rationale: Promotes privatization by catalyzing private sector interest through political risk mitigation • Purpose: Supports debt financing in the form of commercial debt or shareholder loans or provides cash flow support • Guarantee coverage: Critical sovereign risks related to Government commitments under the relevant Contractual Agreements • Modality: For Privatization, Concessions, or other PPP structures, or for Greenfield Projects

11. Partial Credit Guarantees * • Partial Credit (PCG) • Generally for public sector projects/entities • Covers debt service default for specified payments • Alternative structures developed for different credits and market conditions • Policy Based Guarantees (PBG) • For Sovereign or Sub Sovereign entities • With DPO IDA Credits or on a ‘stand alone’ basis under the DPO framework • For fiscal support • To improve debt terms for government borrowings * Expected to be made available to IDA countries this year. *

12. IBRD Enclave Guarantees for IDA-only Countries • IBRD Enclave Loans can support public and private projects • IBRD Enclave Partial Risk Guarantees (PRG) support private projects • ‘Enclave Structure’ in support of foreign exchange generating projects that rely primarily on acceptable credit enhancements to IBRD (e.g. through offshore escrow accounts funded by foreign exchange (FX) revenues, strong third party guarantee) in addition to host country government counter-guarantee

13. Contd. IBRD Enclave Guarantees for IDA-only Countries • Alternative ‘Enclave Structure’ in support of projects in relatively high-rated IDA countries (i) that have clear economic benefits (e.g. import substitution) but do not themselves generate foreign exchange; and (ii) projects that have clear economic benefits with strong financial flows in local currency through an offtake to a stronger creditworthy party • IBRD Enclave support would be additional to IDA’s Country Envelope

14. Guarantees help Extend Maturities ... 18 16 16.5 16 16 15 15 15 15 14 14 12 12 10 10 10 10 10 Maturity (years) 7 7 7 8 6 5 5 5 5 4 3 2 1 1 2 0 0 0 Laos Uganda Lebanon Morocco Thailand Colombia Vietnam China Bangladesh Pakistan Russia/Ukraine Cote d'Ivoire Philippines without Guarantee with Guarantee

15. … at the same time Reduce Spreads 9% 8.5% 8% 7% 6.5% 6% 5.0% 5.0% 5% 4.5% Interest Spreads over UST/Libor 3.0% 4% 3.4% 3.0% 3.0% 3.0% 2.9% 2.8% 3% 2.25% 2.5% 2.25% 2.0% 2.0% 2.0% 2.0% 2% 0.75% 0.6% 1% 0% Laos Uganda Morocco Vietnam Thailand China Philippines Colombia Pakistan Cote d'Ivoire Bangladesh without Guarantee with Guarantee

16. Partial Risk Guarantee for PPPs Limited Recourse Structure A Partial Risk Guarantee (PRG) can cover lenders in support of Public Sector contractual commitments Loans Project Company Commercial Lenders Contractual Government Undertakings IA PPA GSA Guarantee Indemnity Agreement Government World Bank

17. Partial Risk Guarantee for Power Distribution PrivatizationLetter of Credit Structure

18. Guarantee Coverage • Breach of Contract (e.g.): • Power Purchase Agreements • Supply of gas or water • Licensing Arrangements • Regulatory Risk • Foreign exchange availability & convertibility • Changes in law • Political force majeure • Natural force majeure events limited to government obligations • Frustration of Arbitration • Environmental liabilities • Government/Public Sector payment obligations

19. Partial Credit Guarantees can help in the following situations • Government or State Owned Enterprise (SOEs) access to capital or the bank markets • Bond issues or commercial loans by public intermediaries, or public entities • Pre-Privatization support for public entities through convertible Bonds

20. Partial Credit Guarantees can help financeLong Term Public Investments Philippines: Leyte-Luzon Power Project Bond Structure $100 m WB Support for Principal Bullet Repayment Additional term provided by WB Support Longest Term Available to the Philippines without WB Support 0 10 15 Pricing (250 bp* ) (250 bp* ) * Above US Treasuries

21. 0 15 20 Partial Credit Guarantees can help access the loan market Botswana Power Corporation (guaranteed by the government) Morupule B Power Generation Project (2009) World Bank PCG helped mobilize $825 million commercial loan with 20-year maturity World Bank Guarantees $243 m (29% of $825m) principal payments (plus one accrued interest payment ) callable on and after year 15+ 1 day • World Bank exposure under the PCG is $120m (present value of the PCG) • Only $30m (25% of $120m) to be charged to country exposure limit Risk assumed by commercial lenders World Bank guaranteed

22. IBRD “Enclave” Support for Projects in IDA Countries “Off Shore” Guarantee Lenders Counter Guarantee Loan Agreement Guarantee Fee Reserve Account PPA Export Limited Government Obligations: Concession Contract Government Creditworthy Purchaser FX Enclave Project • Permits/consents • Change in law • Political events • Expropriation

23. Application of Guarantees • Greenfield Projects/Privatizations/PPP Structures • Telecom • Power sector (Generation/Distribution/Environmental Retrofit) • Waste Water and Municipal services • Oil, Gas Pipelines • Transport (Railways/Ports/Airports)

24. Mozambique’s Infrastructure Investment Requirement • Investments in the Energy Sector (Power Generation/Transmission) • Investments in pipelines • Investments in Water, Urban and Irrigation Projects • Investments in the Transport Sector (Roads, Bridges, Ports, Air Ports and Railways)

25. Pre-Conditions for Use of Guarantees • Subject to Bank appraisal • Counter-Guarantee from the Government

26. Pricing for IDA and IBRD Enclave Guarantees * * Expected to be extended to IDA countries from this year. Is determined by the IDA Board annually.

27. Preferred Guarantee Modality • Early involvement of the Bank may help to enhance investor interest • Guarantee structure to be incorporated in the Bid Documents as an option • Bids should demonstrate value added of the Guarantee • Value added of the Guarantee to be a part of the Bid Evaluation

28. Benefits of the Guarantee to the Government • Catalyzes financing through market access, longer tenors and lower financings costs • Facilitates privatization & PPPs by enhancing investor interest • Accelerates the pace of new investment for expansion of relevant services • Sustains relatively more attractive retail tariff regimes by significantly improving the debt profile of financings • Enhances the potential “sale” value of existing assets or of the franchise for the Government

29. contd. Benefits of the Guarantee to the Government • No additional contingent liability • Is additional to the country lending program • Creates market confidence through Bank leverage and track record • Provides for risk sharing with the private sector • No associated costs (guarantee fee would be payable by the investor as part of project costs) • Transitional - can be structured to fall away

30. Benefits of the Guarantee to the Private Sector • Would help to mitigate critical perceived political risks • Would help to make privatizations financeable through facilitating direct access to financial markets • Would help to catalyze long term “non recourse” debt financing thereby reducing the risk profile of the investment and overall capital costs • Associates the Bank with the project providing comfort on Government governance issues

31. Completed PRG Operations in Africa

32. Case Study Nigeria Energy and Gas Improvement Project (NEGIP) - 2009

33. Nigeria Energy and Gas Improvement Project • Sector Issues: • Abundant gas resources yet shortage of gas for power • Pricing structure for gas • Contractual arrangements • Creditworthiness of the Power Utility

34. Nigeria Energy and Gas Improvement Project Solutions: • Sector Reform • Pricing restructuring • Imposition of domestic gas obligations on International Oil Companies (IOC) • Change in existing contractual arrangements • Appointment of a Gas Regulator • Risk Mitigation • PRG to backstop the Power Utility‘s payment obligations under the Gas Supply and Aggregator Agreements with IOCs

35. PRG Contractual Structure in Support of Gas Supply and Aggregation Agreements IDA FGN Indemnity Agreement Guarantee Agreement Project Agreement L/C Bank L/C Reimbursement & Credit Agreement Standby L/C JV Agreement PRG Support Agreement JV Operator PHCN NNPC 60% IOC 40% Escrow Account Gas Supply Agreement Aggregator Contractual Agreements with no regular Payment flows Contractual Agreements & regular Project Payment flows PRG Payment flows in the event of a Breach of the Gas Supply Agreement

36. Benefits of the PRG • Underpinned market development for domestic gas • Helped to create an enabling environment for sector reform • Minimal risk mitigation of US$400m will help to catalyze around US$4 bn of gas flows for the priority power sector • Will help to mobilize substantial investments in the sector from the private sector

37. Case Study Southern African Regional Gas Project Mozambique – South Africa

38. IBRD Enclave Partial Risk Guarantee forSouthern Africa Regional Gas Project • Key Agreements • Petroleum Production Agreement: Govt of Mozambique granted exclusive rights for development of Pande and Temane gas fields to UJV comprising Sasol subsidiary SPT and CMH a subsidiary of the Mozambican oil co. • Pipeline Agreement: GoM authorized ROMPCO and other Sasol subsidiary to construct, own and operate the gas pipeline to transport gas to South Africa • Sponsors • Gas fields: SPT (70%); CMH (25%); IFC (5%) • Pipeline: ROMPCO (100%) • Financing • ZAR3.7 bn ( US$490m) debt – full recourse with Sasol assuming all project risks under debt support agreement , except for Mozambican political risk • IBRD Enclave PRG • ZAR 140m for upstream; ZAR70m for downstream covering Mozambican political risks • MIGA PRI • ZAR820m including ZAR310m reinsured with SACE and EFIC under the PPA and PA

39. Enclave Guarantee Structure Petroleum Production Agreement Pipeline Agreement GOM SPT (Sasol owned, Moz company) ROMPCO (Sasol owned, RSA company) Indemnity Agreement Project Agreement Project Agreement Loan Agreement Loan Agreement Guarantee Agreement SPT Guarantee Agreement ROMPCO Commercial Lenders

40. IBRD 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 Currencytransferability as to fundslocated in Mozambique MIGA Political Risk Cover for equity and debt to SPT & Rompco including: Breach of contract Currency transferability Expropriation War & Civil Disturbance Example of Joint WBG SupportSouthern Africa Regional Gas Project • 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

41. For Further Information Contact: Farida Mazhar Lead Financial Officer Finance & Guarantees Group Finance, Economics & Urban Department The World Bank 1818 H Street, NW Washington, DC 20433 (USA) Ph: +1 (202) 473-1235 Fax: +1 (202) 522-0761 Email: fmazhar@worldbank.org or visit our web site: www.worldbank.org/guarantees