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PRIVATE SECTOR DEVELOPMENT & FINANCINGOF (POWER) PROJECTS & TECHNOLOGY

TRANSFER

Practical Experiences of ProjectPre-Development & Financing in Sub-Saharan Africa

SEPTEMBER 2004

HERAI N T E R N A T I O N A L

UNFCCC MONTREAL WORKSHOP

Innovative Options for Financing the Development & Transfer of Technologies

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CONTENTS

The Project Development Cycle

Pre-Development Phase Options Tools & Techniques Example Barriers

Development Phase & Financing Barriers Tools & Techniques Cost Issues

Integration as a Possible Response Possibilities of using Integration for financing

Wind Power in Africa

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WHAT IS PRE-DEVELOPMENT?THE PROJECT DEVELOPMENT CYCLE

ProjectProjectDvpt.Dvpt.

PrePreFeasibilityFeasibility

PRE-DEVELOPMENT

• Can it work?• What conditions?• Which Partners?• Estimated Cost?• Refinancing Sources?• Initial Structuring

FeasibilityFeasibility ProjectProjectDvpt.Dvpt.

Imple-Imple-mentationmentation

DEVELOPMENT IMPLEMENT

• Business Plan / Bankable Feasibility• Technical Design & Specification• Scope of Work• Project Structure• Investment Consortium• Contractors & Suppliers

ProjectProjectIdeaIdea

• Need• Vision

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PRE-DEVELOPMENT ISSUES

Pre-Development Costs need to be financed ca. 2% of total project costs Total Development Costs 5 % – 7 %

No Guarantee that Project will be implemented

Relatively high risk Return still uncertain

Venture Capital / Development Capital nature of investment

Long Term Project Development Horizon 2 – 5 Years

Pre-Development Phase

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PRE-DEVELOPMENT OPTIONS

Public Sector Route Government / Donor funding of studies and initial development Public Procurement Processes (Tender) Time Scale / Efficiency Alternatives?

Private Sector Route Private Sector Developer

Hybrid Routes In practice most (power sector) projects are hybrids

Sponsor‘s Perspective / i.e. Government

Pre-Development Phase

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PRE-DEVELOPMENT TOOLS

Usual Suspects Development Funds (Multilaterals) Grants & Subsidies Facilitators / Networks

Development Consortium Spread & Diversify Risk Public & Private Sector Partners Avoid Equipment Suppliers / Contractors if possible

Initial Analysis: Identification of strategic / special interests in the Project Who are the Stakeholders & Benefactors?

What can be done to make project more viable / attractive? Integration Linkage Increased value to Benefactors and Stakeholders

Pre-Development Phase

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HOW DOES IT LOOK IN PRACTICE?

Multi-faceted Integrated Project Coal Mining & Export Railway Rehabilitation for Transport Coal Fired Power Generation at Mine Head Coal Terminal Upgrade

What were the Goals? Private Sector Financed Solution Participation of MZ Public & Private sectors Lowest possible burden on MZ PSB Maximum impact on connected sectors & local economy

Zambezi Valley Development Scheme

Pre-Development Phase

HEADS OF AGREEMENTHEADS OF AGREEMENTincorporating:

Objectives Warranties / Guarantees / Exclusivity Channels of Communications / Task Force Development Programme Deliverables Confidentiality / Non-Disclosure

Preparation of Feasibility Report and Implementation Plan

Pursue discussions with IFC / Multi-lateral and Private Funding Agencies

Collation and Transfer of DeliverablesAttendance in Task Force Activities / MeetingsParticipation in Sectorial Activities-- Coal Mining-- Railway / Port Operations-- Energy and Industrial Outlets-- Forestry & Agriculture

FEASIBILITY REPORTFEASIBILITY REPORT

ANDAND

IMPLEMENTATION PLANIMPLEMENTATION PLAN

DEVELOPMENT CONSORTIUM Developer / Investors

Operators Contractor

PUBLIC SECTOR Involved Ministries

Authorities & AgenciesParastatals

PRE-DEVELOPMENT PHASE

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GETTING OVER THE BARRIERS

Development Consortium Self Funding of Pre-Development Risk (part /

majority) Project Design & Specification Commitment to provide equity at implementation

phase

Partnership with Public Sector Partners Parastatals as members of Development

Consortium (and later also the Implementation Consortia)

Equipment Supply & Contracting put out to tender Development Consortium retains operating

responsibility, and control Vital self-interest to ensure value for money Bears economic risk and takes return

Benchmarking

Pre-Development Phase

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GETTING OVER THE BARRIERS (2)

Independent Integrator / Developer

No vested interests - neither supplier, nor contractor nor investor

Only interest / goal is that the Project gets done

Mediates and co-ordinates

Brokers (forces) the compromises & the issues

Economic Logic & Project Success are sole drivers

Pre-Development Phase

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THE BARRIERS

Developer(s) / Consortium required comfort that they would take benefit out of the Project assuming positive feasibility Return on investment in development costs & risks

Pressure for an early decision

Conflict with established procurement procedures

Political Unease & Resistance because of Issues of Control Value for Money Transparency

All of which were however addressed by the Structure

Project now being implemented in its constituent parts No integration Financed by PSB

Pre-Development Phase

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MAIN BARRIERS TO FINANCING

Legislative & Regulatory Environment

Economic & Commercial Risks

Standard Tools are indispensable Multilaterals ECAs / Commercial Political Insurance Hedging

Identifying & Generating Secure Refinancing Streams Off-takers Integration

Development / Implementation Phase

IMPLEMENTATION PHASEPU

BLI

C S

EC

TO

RPU

BLI

C S

EC

TO

R

PARASTATALS

Debt Financing

- IFC - ECAs - Commercial banks

Interest

PrincipalRepaymentof Debt

On-goingMaintenanceCosts

Dividends

Global Scheme up to full Repayment of Debts and Return on Capital

EQUITYFUNDING

SPECIAL

PURPOSE

COMPANY

CONCESSIONS& ASSETS

$SECTOR: MININGSECTOR: MINING

Developer: Coal Miner (Commodities Trader)

Developer: Coal Miner (Commodities Trader)

GENERATEDGENERATEDOPERATING OPERATING

INCOMEINCOME

$

$

SECTOR: TRANSPORTATIONSECTOR: TRANSPORTATION

Developer: Railway OperatorRehabilitation: Contractor

Developer: Railway OperatorRehabilitation: Contractor

SECTOR: POWERSECTOR: POWER

Development: Utility Operator & Parastatal

Development: Utility Operator & Parastatal

PR

IVA

TE S

EC

TO

RPR

IVA

TE S

EC

TO

R

IMPLEMENTATIONCONSORTIUM

DeveloperInvestorsOperators

Contractors

MOZ. COMPANIES

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REVENUES ARE THE KEY

Export of High Quality Coking Coal Arms length long term off-taking contract with

independent commodity trader Indexed to market prices: Security of Revenues Offshore Hard Currency Payments

PPA / Off-taking Agreements Industrial Users for base load Local Utility and International Utility Price was key (<2 cts / KWhr.) Export into SAPP

Operator Experience & Know-how Guarantee of operating targets

Equity Component

Development / Implementation Phase

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Ranges of Energy Production Costs

0

2

4

6

8

10

12

14

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Wind Hydro Gas Coal Nuclear Biomass

€-cent / KWh

PRICE ISSUES IN RELATION TO CHOICE OF

TECHNOLOGY (1)

Price Considerations in the Development Process

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PRICE ISSUES IN RELATION TO CHOICE OF

TECHNOLOGY (2)

Price Considerations in the Development Process

500.000

750.000

1.000.000

1.250.000

1.500.000

1.750.000

USD / MW

CCGT Thermal Wind Hydro

COMPARISON OF CAPITAL COST OF NOMINAL PEAK CAPACITY

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INTEGRATION AS A TOOL TO ADDRESS

PRICE ISSUES

Thermal Production Costs much lower (subsidy)

Ideas for Integration: Decentralised Locations (reduction of

transmission costs) Combination with Desalination Combination with establishment of refrigerated

processing & storage facilities for local fishing industries

Cooperation with white goods manufacturers for production of appliances with low voltage ratings

Wind Energy in RIM / MZ / ANG / TNZ

Development / Implementation Phase

€ cents 5 - 9 / KWhr make Wind Energy an apparently unattractive commercial proposition in Africa

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EFFECTS OF INTEGRATION

Reduction of pure economic risks Increased Revenue Earnings diversification Foreign Currency Potential

Higher Added Value Increased benefits to a wider community of

stakeholders Nominal high price is made more acceptable Linkage

Increased Complexity

Development / Implementation Phase

Diversification & Increase of Revenue Streams for Repayment of Financing

Risk diversification (although increased in absolute terms)

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CONCLUSIONS

Conclusions

Price of (new) Renewables Technology is the chief barrier No need to buy a Rolls Royce if a 2 CV also gets you there External cost argument is only partially accepted in Africa

Private Finance, Developers & Tools are available for pre-development phases of New Technology Projects Combination with existing tools and financing instruments

Need for increased flexibility for dealing with parties able & willing to take development risk Development of appropriate control mechanism Transparent criteria for calculation of return Further third party funding sources / funds

Potential of Project Integration to create Linkage and increase Stakeholder benefits Can be used to raise finance for a VW-Golf