Financing Infrastructure Development

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Financing Infrastructure Development

• African Capital Markets Conference
• 29th 30th April 2008

Chris Vermont Head of Debt Capital Markets
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Emerging Africa Infrastructure Fund - EAIF

• First dedicated debt fund for sub-Saharan Africa
• Size Currently US365m. Approval to increase to
  US600 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)

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GuarantCo

• GuarantCos 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.

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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

Source World Bank
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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 Worlds low and middle income countries)
• Small countries
• Small individual requirement
• Few projects of international scale

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Infrastructure finance hierarchy of difficulty
Easy

• 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
Difficult
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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

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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

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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

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Infrastructure finance Future requirements

• Predictions are difficult. US30.4 bn invested
  during 2000 to 2006
• The Banker magazine predicts US26.4 bn in the
  next 5 years. This compares with a target of
  US500m for India over the same period!
• A big gap between ambition and reality
• e.g Grand Inga project 55,000 MW US50 billion

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Infrastructure finance - Sources

• International Commercial Banks short tenors
• Domestic Banks short tenors
• some hard currency
• ECAs 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

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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

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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
  countrys 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

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GuarantCos 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)

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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

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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 2pa (do not wish to
  displace commercial risk takers)

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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)

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Frontier Markets Fund Managers Team
    Direct Tel Number Email Address
    44 (0)20 7815- _at_frontiermarketsfm.com
Nick Rouse Managing Director 2780 nick.rouse
Chris Vermont Head of Debt Capital Markets 2950 chris.vermont
Douglas Bennet Senior 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