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Infrastructure in Africa – a Debt Perspective

Infrastructure in Africa – a Debt Perspective. G8 Africa Infrastructure Investment Conference 29 th to 30 th June 2009. Nick Rouse. - FMFM. Frontier Markets Fund Managers – FMFM. A Fund Management Team Managing transactions for Emerging Africa Infrastructure Fund; and GuarantCo

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Infrastructure in Africa – a Debt Perspective

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  1. Infrastructure in Africa – a Debt Perspective G8 Africa Infrastructure Investment Conference 29th to 30th June 2009 Nick Rouse

  2. - FMFM

  3. Frontier Markets Fund Managers –FMFM • A Fund Management Team • Managing transactions for • Emerging Africa Infrastructure Fund; and • GuarantCo • A group of multi nationals fluent in English, French, Spanish, Dutch and Italian • Based in London

  4. - EAIF

  5. Emerging Africa Infrastructure Fund - EAIF • First dedicated debt fund for sub-Saharan Africa • Size: US$498 million to be increased to US$600 million by Q209 • Original sponsor: UK Government – DFID • 3 other European Governments joined (Sweden, Netherlands, Swiss) • Debt from three development finance institutions and two private sector international banks • Public/private sector partnership • Donor aid funds leveraged private sector capital for development purposes • First multi-donor initiative by Private Infrastructure Development Group (PIDG)

  6. EAIF – investment policy • Lend to private sector owned, managed and controlled entities with infrastructure sector focus • Power • Transport • Telecoms • Water • Manufacturers of components of infrastructure e.g. cement • Infrastructure within mining, agribusiness projects • Sub-Saharan Africa focus excluding Mauritius • Investment Size:US$10 -36 million, however FMFM can arrange US$200 million and more through its financing partners • Tenor: up to 15 years • Instruments: Senior and Mezzanine Debt (possibly with equity features) • Does not require a Political Risk Insurance (PRI)

  7. Project: Ethiopian Airlines Sector: Transport Country: Ethiopia Description and Financing Parameters: this is a unique project, EAIF has committed a US$36 million loan to the airline expansion project. Ethiopian Airlines is a 100% publicly-owned entity often held up as a model business for other airlines in Africa. The EAIF financing is bridging a crucial gap enabling the airline to purchase additional, new aircraft at a cost of US$460 million. Project: Rabai Sector: Power Country: Kenya Description and Financing Parameters: FMFM was the lead arranger of Euro85 million facility for the Rabai Power Project in Kenya, developed by Aldwych International together with BWSC. Debt package comprised of a Senior and Subordinated Debt. Lender Group included, FMO, Proparco, DEG and EAIF. African Power Project of the Year 2008 EAIF - selected transactions

  8. Project: Moma Sector: Mining Country: Mozambique Description and Financing Parameters: The developers of this titanium mineral sands project approached EAIF as a ‘lender of last resort’. Located in one of the most under-developed regions of Mozambique, the US$413 million project is the second lowest cost producer of titanium in the world. EAIF committed US$36.5 million of senior and subordinate debt (total debt package of US$270 million). The project received deal of the year awards from both the Mining Journal and Project Finance International publications. Project: Seacom Sector: Telecom Country: Pan African Description and Financing Parameters: The US$600m Seacom project is the first undersea fiber optic cable project along the east coast of Africa, the only region in the world not currently served by such an infrastructure. EAIF provided US$36.5m debt financing to a special purpose vehicle controlled by Industrial Promotion Services (Kenya), one of the sponsors and a subsidiary of the Aga Khan Fund for Economic Development. The project received deal of the year award from Project Finance International. EAIF - selected transactions (contd’)

  9. GuarantCo • Aims at addressing failures in domestic markets to supply capital to infrastructure projects in Emerging Markets by: • providing guarantees as credit enhancement of local currency debt • supporting both: • private and municipal sectors to obtain such capital • domestic market to supply such capital

  10. GuarantCo 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 • Initial capital of US$73m Increase to US$100m likely early 2009 • Additional backing from KfW / Barclays up to total of US$400m • Covers similar infrastructure sectors to EAIF • Operates globally

  11. GuarantCo offers • Partial credit guarantee covering default risk on a portion of a loan or bond - generally on demand and unconditional • Partial risk guarantee covering default risk due to specific events - such construction failure or revenue shortfall • Cover for senior, mezzanine or sub debt; maturity, coupon or principal strips; Loans, bonds or securitisation • Other methods of risk transference considered (e.g. insurance / reinsurance or CDS / derivatives) • Preference for risk sharing - defined on a case-by-case basis

  12. Project: Celtel Sector: Telecom Country: Kenya Description and Financing Parameters Partial Credit Guarantee (75%) of a US$50m equivalent 5 year bond issue for network expansion. Only the third commercial bond issued in Kenya and largest at that time Project: Safal Sector: Industrial Goods Country: Pan African Description and Financing Parameters Safal Group is the largest East African producer of roofing material. GuarantCo provided credit guarantee (75%) of a US$30m equivalent 9 year bond issue by Mabati Rolling Mills and ALAF. GuarantCo - sample transactions

  13. GuarantCo has a strong diversified pipeline Mandated transactions • Partial guarantee of US$18m finance for a new private sector utility on Bugala Island, Uganda • Partial guarantee of a US$75m contingent cost overrun facility for an oil refinery in Southern India • US$10m partial guarantee to enable an Indian Infrastructure Finance institution to access the 10 year rupee bond market • partial guarantee of a US$65m financing for a cement plant in Assam, India • Partial guarantee of a US$22m broadband backbone service in Niger • Partial guarantee of a US$340m steel plant in Orissa, India • US$15m partial risk guarantee for a new mobile phone operator in Palestine Potential transactions • US$20m 15 year guarantee for a US$200m toll road in Kenya • US$12.5m 15 year loan guarantee for a gas fired power project in Nigeria • US$20m in construction performance bonds for water and road projects in Uganda and Kenya • US$12m gtee of subordinated and mezzanine tranches for a US$105m securitisation of housing micro finance mortgage receivables in Central and Southern America • Guarantee of a US$20m subordinated loan in a US$250m 12 year mobile phone mast financing in India

  14. Infrastructure finance – hierarchy of difficulty Easy • Telecoms • Mining • Agribusiness • Power • Transport • Water Difficult

  15. And how this looks in figures? Private participation in infrastructure, in Sub Saharan Africa 1990-2005 Source: Private Participation in Infrastructure Projects Database, World Bank Group

  16. Infrastructure finance – Future requirements • 2002 - EAIF Established – US$8 BN of projects identified • 2007 - The Banker – “US$26 BN to US$40 BN in next 5 years and average of US$10 BN a year after that” • 12th October 2007 - Engineering News – “Congo signed a deal to construct 1500 KM of new railways worth US$3 BN” • Inga Falls – Grand Inga 55,000 MW cost US$50 BN • Nigeria – 18 IPPs

  17. Infrastructure finance - Sources • International Commercial Banks – shortest tenors • Domestic Banks – shorter tenors some hard currency • DFIs – 15 year + tenors Tied aid? • Private Equity, Hedge Funds – equity with exit • International Bonds • Local Bonds

  18. Infrastructure finance – Telecoms • Mainly Mobile • Well established model – Celtel worth US$3.4 billion • Operators have a full control on cash flows generation • No failure once EBITDA positive • Less risk than Developed World • No free handsets • Lower churn / competition • Financing issues: • US$ lending -v- local currency cash flows • Short Tenors – repay in five years

  19. Infrastructure finance – Mining and Agribusiness • US$ cash flows available • Good development benefits • Clean water • Power • Transport links • Employment • Health services • Market Risk

  20. Infrastructure finance – Power • Creditworthy off-takers • Regulator not always independent or in place (political interference in tariff setting) • Affordability / subsidy availability • Fewer sponsors • Enron departed, leading to other developers retreating from the region • Current Players • Globeleq • Aldwych • Corporate • Local players • Financing issues: • US$ lending -v- local currency denominated tariffs • Long Tenors – repay in fifteen years or more

  21. Infrastructure finance - Aircraft • ECA Finance available for new aircraft • But only max 80% • Pre-delivery finance need and balance of funding • Long tenors on “naked risk” – over 10-years • So need financially sound operations • In Sub-Saharan Africa only South African Airways, Kenya Airways and Ethiopian Airlines qualify • Ethiopian Airlines is a role model

  22. Infrastructure finance - Ports • Public Sector model generally sub-optimal • Vested Interests • Experienced international operators available – Maersk, P & O Nedlloyd, Mersey Docks & Harbour Board • Problems re security/deficient legal systems • “National Assets” – expropriation risk • BOT opportunities – SPM Ghana • US$ income to match US$ borrowing

  23. Infrastructure finance - Airports • Public Sector model generally sub-optimal • Vested Interests • Experienced international operators available • Problems re security/deficient legal systems • “National Assets” – expropriation risk • BOT opportunities • US$ income to match US$ borrowing

  24. Infrastructure finance - Pipelines • Open multi-jurisdiction – lowest common denominator Country Risk • Vested Interests • Problems re security/deficient legal systems • “National Assets” – expropriation risk • BOT opportunities • Local currency income versus US$ borrowing

  25. Infrastructure finance - Railways • Colonial Legacy assets • Colonial configuration and rationale • Some private sector dedicated building – mining project based • Privately owned rolling stock becoming more prevalent – computer tracking • Vested interests – power of employees • Freight is the future • Local currency versus US$ borrowing • Gautrain?

  26. Infrastructure finance – Roads and Bridges • Historically, no successful toll road or bridge outside South Africa but Lekki in Nigeria signed in September 2008 • Transparent tendering for contracts an issue • Sub-economic tendering? • Limited sponsor interest • Bad experience with donors – Grinaker LTA • History of loss-making for contractors • Cost versus capacity / willingness to pay • Shadow toll roads the answer?

  27. Infrastructure finance – Water • Political Interference • Universal entitlement – Should be free • Too many “misunderstandings” • No private sector capital • Only 14 PPI deals since 1996; mainly Management Contracts • Debt pushed out by grant monies

  28. General Lessons • Private Ownership or management necessary for efficiency gains • And to address vested interests • Political will • Legal framework for contracts • Good regulation to address regulatory risk • Recognising private sector concerns • Government capacity

  29. Frontier Markets Fund Managers Team www.emergingafricafund.com

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