Financing Infrastructure Development
African Capital Markets Conference29th & 30th April 2008
Chris Vermont
Head of Debt Capital Markets
Emerging Africa Infrastructure Fund - EAIF
First dedicated debt fund for sub-Saharan Africa Size: Currently US$365m. Approval to increase to US$600 m Original sponsor: UK Government – DFID 3 other European Governments joined (Sweden, Netherlands,
Switzerland) Debt from three development finance institutions and three
private sector international banks Public/private sector partnership leveraging private sector
capital for development purposes First multi-donor initiative by the Private Infrastructure
Development Group (PIDG)
GuarantCo
GuarantCo’s business is:
“Credit enhancement of local currency debt issuance by the private, municipal and parastatal infrastructure sectors in lower income countries”
An additional objective, over the medium term, is to help build capacity in domestic capital markets through deal flow, product innovation and risk sharing.
Private sector investment in infrastructure by region, 1990 - 2006
Statistics relate to low and middle income countries
Spending in Africa is dwarfed by other regions
Private sector more entrenched in Latin America / Caribbean and East Asia
23%
19%
39%
5%
9%
5%
East Asia and Pacific
Europe and Central Asia
Latin America and the Carribean
Middle East and North Africa
South Asia
Sub-Saharan Africa
Source: World Bank
Number of countries by region
Africa must compete with other low income countries for investment
Sub Saharan countries in the data total 41 (33% of the World’s low and middle income countries)
Small countries= Small individual requirement= Few projects of international
scale
16%
17%
20%9%
5%
33%
East Asia and Pacific
Europe and Central Asia
Latin America and the Carribean
Middle East and North Africa
South Asia
Sub-Saharan Africa
Infrastructure finance – hierarchy of difficulty
Easy
Difficult
• Telecoms
• Energy / Power
• Transport
• Water
NB GuarantCo and EAIF finance a broader definition of infrastructure which includes basic industries and infrastructure aspects of mining & Agribusiness
Sector breakdown of private investment in infrastructure, 1990 – 2006, SSA Vs rest of the developing world
Telecoms a success story
Energy / Power has been constrained at roughly half the developing world average
Water virtually non existent
16%
64%
20%
0%
Energy Telecoms Transport Water and sewerage
30%
49%
16%
5%
Sub Saharan Africa All Regions
Investment by country (US$ mn), 2000 - 2006
By far the most investment has been in Nigeria and South Africa with 66% of the total, followed by Mozambique, Cameroon, Benin and Tanzania
Within “other” the largest destinations have been Angola, Benin, Ghana, Kenya, Madagascar and Somalia
Nigeria S. Africa Moz'bique Cameroon Benin Tanzania Other TotalTelecoms 9,263 1,123 139 348 134 311 2,680 13,997Energy 1,920 1,261 1,206 532 590 376 2,059 7,945Transport 2,618 3,988 335 0 0 28 1,491 8,458Water 0 31 0 0 0 9 3 43Total 13,800 6,403 1,679 880 724 723 6,234 30,443% of total 45% 21% 6% 3% 2% 2% 20% 100%
Mobile phone penetration rates in % (August 2004)
Snapshot of mobile phone penetration in 2004
From 2001 to 2006 fixed line penetration increased from 4.4% to 4.7%
During the same period mobile phone penetration went from 6.5% to 16.3%
Infrastructure finance – Future requirements
Predictions are difficult. US$30.4 bn invested during 2000 to 2006
The Banker magazine predicts US$26.4 bn in the next 5 years. This compares with a target of US$500m for India over the same period!
A big gap between ambition and reality– e.g Grand Inga project 55,000 MW & US$50 billion
Infrastructure finance - Sources
International Commercial Banks – short tenors Domestic Banks – short tenors
some hard currency
ECA’s – some appetite up to 15 years
DFIs – 15 years
Private Equity, Hedge Funds – equity with exit International Bonds – limited but may pick up again Local Bonds – good potential but little track
record
Infrastructure finance – Attitude of Banks
Country Risk Capacity Tenor Limits Lending US$ against Local Currency cash flows Availability of insurance – ECA, MIGA, Private Sector Sectoral Appetite Strategic Considerations Current liquidity crisis
Why Local Currency Guarantees?
Project Level:
Matching currency of project revenue with currency of debt service reduces project risk for both developers and lenders:
more efficient – no need for currency swaps which are often expensive in illiquid markets
lowers financing risk by avoiding devaluation and convertibility risks
involvement of local lenders on the ground may also improve monitoring and reduce risk of discriminatory action by host government
Country level:
Reducing reliance on offshore finance and minimising hard currency debt service (unlike local currency loans from offshore providers) more sustainable – helps build capacity within country’s own financial sector
recycles internal savings, via pension funds, life assurance and banks, for productive use in the economy
flexibility – can provide as much or as little support as is required to enable local financing
GuarantCo’s Products
Guarantees covering default risk on underlying debt service - partial credit guarantees
Guarantees covering default risk due to specific events - partial risk guarantees
Cover for senior, mezzanine or sub debt; maturity, coupon or principal strips, monetisation of carbon credits
Other methods of risk transference (e.g. insurance / reinsurance or CDS / derivatives)
Preference for risk sharing (defined on a case-by-case basis)
Eligible Clients
Private sector project companies undertaking greenfield projects or expanding existing facilities
Municipal infrastructure if funded largely through user fees (or ring-fenced structure providing satisfactory security)
Parastatals if privatisation is planned (or case by case if operations are along commercial lines)
Refinancing of existing projects if cross-border financing is substituted by local currency debt
Resources
Participation per project $5m - 20m (initial period)
For larger requirements, GuarantCo can syndicate risk to other investors if requested (up to $100m)
Portfolio targeted at $300 - 500m in the medium term
Technical Assistance funds eg. up to $500k per initiative / project but most are likely to be $25 – 100k
Transaction tenor up to 15 years
Guarantee pricing will vary according to risk but unlikely to be below 2%pa (do not wish to displace commercial risk takers)
Funding Tenor Extension
Tenor of local bank lending often constrained due to absence of longer tenor deposits (asset / liability mismatch)
Either internal treasury or external regulator constraint
GuarantCo is prepared to offer “put” options to local lenders:
– guarantee can be called for liquidity reasons (as well as credit reasons)
– Could cover funding risk beyond a certain date or during times of unusual volatility
– Only offered in conjunction with partial risk or credit guarantees (ie not standalone)
Frontier Markets Fund Managers Team
Direct Tel Number Email Address
+44 (0)20 7815- @frontiermarketsfm.com
Nick Rouse Managing Director 2780 nick.rouse
Chris VermontHead of Debt Capital Markets 2950 chris.vermont
Douglas BennetSenior Guarantees Executive 2786 douglas.bennet
Orli Arav Director 2782 orli.arav
Roland Janssens Senior Investment Adviser 2926 roland.janssens
Tarun Brahma Investment Adviser 2951 tarun.brahma
Benito Grimaudo Investment Adviser 2784 benito.grimaudo
www.emergingafricafund.com
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