Creating a stable environment for large-scale infrastructure investments

1. Creating a stable environment for large-scale infrastructure investments Lamon Rutten Chief, Finance and energy United Nations Conference on Trade and Development First Africa Oil, Gas & Infrastructure Summit London, 12-13 February 2004

2. To recap: a truly astounding amount of money is needed just to develop Africa’s energy infrastructure - 1.2 trillion US$ from 2001 to 2030, 40 billion US$ a year. The development of water infrastructure will cost another 20 billion US$ a year. Most of this money will need to come from abroad. PROBLEM: many sources of funding are very risk-averse (will only invest in investment-grade risks), and those open to sub-investment grade risks will generally seek very high returns - perhaps not feasible for many infrastructural projects. Also, there may be a mismatch between the tenor of available funds and the cash flow profile of the project… public funds, including from development banks, will continue playing a major role in this regard.

3. Attracting investors requires sufficiently profitable projects. For example, energy supply is often a bottleneck for manufacturers, and many consumers have no or limited access to commercial energy. Blackouts are the rule in many cities, forcing those who can afford it to buy generators; and rural consumers are forced to rely on firewood as their major source of energy. Per unit of energy produced, these are very expensive forms of energy. So in principle, improved energy supply will be readily picked up by the populace of sub-Saharan countries, and it can be expected to unlock considerable economic growth potential. But will they be willing to pay the price, if investors are forced to carry all the costs of reaching them?

4. Conditions - to be put in place by African governments The traditional ones: Predictable and stable policies; good investment conditions; little red tape; low corruption; rule of law. But also: A strong local financial sector, with the capacity to share risks with foreign investors and lenders. And a newer one: Transparency - not just what you do, but what you are seen to be doing.

5. Keep in mind that you have to satisfy not just investors, but also lenders. (often the only way for investors to reach their target returns on equity is to leverage their funds through loans) A poor reputation will make loans much more expensive than would otherwise be the case at a given level of risk. The average profitability of investments in Africa is the highest in the world. This may appear favourable, but it implies that many projects with lower expected returns are not done simply because investors consider Africa as too risky - to a large extent, unfairly so.

6. These conditions are well known… but most African governments still have quite some way to go. The “traditional” conditions- it’s proving remarkably difficult for governments to implement effective policy changes. Transparency - a less defensive attitude and better PR would help. Should governments only try to improve the framework, or should they also facilitate ad-hoc, second-best solutions? De facto, it is difficult to rapidly solve the problems of a weak regulatory environment, or the inefficiency of government bodies.

7. Ad-hoc solutions: allow investors and lenders to use effective tools to mitigate all the risks that result from your country’s imperfect investment environment. E.g., allow offshore escrow arrangements; confirm certain elements of financing structures (e.g., let the Central Bank guarantee that if sufficient local funds are available, the corresponding amount of hard currency will be made available; or guarantee a concession agreement); work with multilaterals to allow them to provide insurance coverage/guarantees for finance into your country.

8. E.g., supportive role of Central Bank,Congo Elf AGIP BosCongo etc. Payment instructions Ministry of Transport Authorisations Boskalis Payment Dredging contract Cash sweep instructions Regional Central Bank Port Autonome de Pointe-Noire Work contract monitoring Loan Independent engineering company Reporting Cash sweep RMB International Partial cover Performance bond Commercial / Political risk insurance DSRA Boskalis

9. E.g, international guarantees: Bank syndicate World Bank/IDA IFC US$ 30 mln loan Guarantee US$ 42 mln loans 14-year interest rate swap US$ 30 mln loan CDC et al. US$ 58 mln loans UMIC Azito Power Gas provision, and construction and financing of pipeline to project site Compagnie Ivoirienne d’Electricité Apache Power Purchase Agreement Equity US$ 11 million IPD Equity US$ 33 million Government Cinergy Contract, inter alia to provide free gas Equity 50% 50% Equity ABB EDF

10. But consider going further: Project sponsors Escrow account US$ 50 million guarantee to cover cost overruns, US$ 10 million guarantee against “gross negligence”, penalties for each day of delay... US$ 50 million Possibility to draw if Government defaults on commitments US$ 202 million 20-year loan Government Songas Ltd. Debt service after 3.5 grace period, with right to make deductions for any late payments from Tanesco or its successors. 20-year take or pay Power Purchase Agreement, with prices set at cost-plus level US$ 20 million, replenishable if the account is drawn on Liquidity account Possibility to draw for late, unpaid Tanesco payments US$ 202 million 20-year loan Efforts to keep the account in US$ Tanesco World Bank Citibank

11. Innovative financing arrangements, like in Songo-Songo, are particularly needed because much of the required investments will create local currency receivables rather than export receivables. Few international investors will be happy to be guaranteed only a local currency reimbursement - they will need this to be converted into hard currency, preferably offshore. An entirely private sector solution that gives this result is difficult (there is “Political Risk Insurance” for the risk of currency convertibility, but it is mostly for terms of less than 3 years). So even in an entirely liberalized economy, governments may have to come in to provide financial supports.

12. Conclusion Governments should of course strive to put a favourable investment environment in place - as is, for example, one of NEPAD’s objective. But apart from this, it should recognize the risks that foreign investors and lenders take when providing finance, and the relation between the costs of finance and the risks. Financiers seek certain minimum returns that are a function of risks; therefore, to make more financings viable, governments should make it easy for these financiers to manage these risks.