aga khan fund for economic development june 2006 akfed copyright © october 2007 aga khan fund for...
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Aga Khan Fund for Economic Development
June 2006AKFED Copyright © October 2007
Aga Khan Fund for Economic DevelopmentAga Khan Fund for Economic Development
January 2006
•AKFED & IPS - overview of global activities
•IPS Infrastructure portfolio – a brief overview
•Case Studies – small scale energy projects
Small Scale Infrastructure – Presentation overview
Aga Khan Fund for Economic Development
June 2006AKFED Copyright © October 2007
Aga Khan Fund for Economic Development
EXISTING PRESENCE AND NEW REGIONAL INITIATIVES
East Africa& Indian OceanKenyaUgandaTanzaniaRwandaMozambiqueMadagascar
Middle EastSyria
South AsiaPakistanBangladesh
Central AsiaTajikistanAfghanistanKyrgyzstan
Canada West AfricaCôte d’IvoireSénégalMaliBurkina Faso
Central AfricaDem. Rep. of the Congo
Aga Khan Fund for Economic Development
June 2006AKFED Copyright © October 2007
Aga Khan Fund for Economic Development
About AKFED For-profit agency involved in long-term
investments Difference from typical commercial investor
Over 90 project companies in: Financial Services Tourism Media Aviation Industry and Infrastructure
More than 30,000 employees 16 countries in East, West and
Central Africa; South and Central Asia
KEY STATISTICS : AKFED
Industrial Promotion Services
Tourism Promotion Services
Media ServicesFinancial Services
Aviation Services
Aga Khan Fund for Economic Development
June 2006AKFED Copyright © October 2007
Aga Khan Fund for Economic DevelopmentAKFED Worldwide…
Aga Khan Fund for Economic Development
June 2006AKFED Copyright © October 2007
Aga Khan Fund for Economic DevelopmentAKFED’S APPROACH TO DEVELOPMENT
Entrepreneurship promoted with economically sound enterprises in the developing world
Long-term investments with Strong equity positions Provision of management expertise
Investments in fragile and complex environments Prospects of improving the lives of people
Profits entirely reinvested in further development initiatives
Aga Khan Fund for Economic Development
June 2006AKFED Copyright © October 2007
Aga Khan Fund for Economic DevelopmentINDUSTRIAL PROMOTION SERVICES (IPS)
Infrastructure (existing projects) Power/Water
Azito Energie (Côte d’Ivoire) IPP, 290 MW gas turbines; Tsavo Power (Kenya) IPP, 75 MW HFO. Energie du Mali (Mali) water & power concession, 185 MW hydro
+ diesel; PamirEnergy (Tajikistan GBAO) power concession,
43 MW hydro. West Nile Rural Electrification Co (Uganda) 2 MW hydro. Bujagali Energy (Uganda) 250 MW hydro, $860 million
investment.
Telecommunications Roshan (Afghanistan), 1.6 million subscribers, market leader. CATD/Indigo/Somoncom (Tajikistan) 500,000 subscribers,
market leader. Seacom – Sub marine cable along Southern African coast to
Europe and India
Ports Mombasa Container Terminal (Kenya) for consolidated cargo.
Aga Khan Fund for Economic Development
June 2006AKFED Copyright © October 2007
Aga Khan Fund for Economic Development
PamirEnergy – Key Facts Location: Tajikistan
Customer Base: 28,000 (> 95% residential)
Residential Tariff (2007): 0.25 US cents (≤200 kWh)1.7 US cents
Project costs: US$27 million
Tariff subsidies: US$8.8 million (customer orientated)
Installed capacity: 42 MW
Carbon Credits: 300,000 VERs
Khorog receives 24h/7 power in winter (10 hours/day in rest of country)
Aga Khan Fund for Economic Development
June 2006AKFED Copyright © October 2007
Aga Khan Fund for Economic Development
GoT willingness and flexibility to support this project
GoT created enabling environment and facilitating the way for private investors
First and only privatization of a state utility in Central Asia
Collaboration of private and public, Government and multilaterals bodies
Creative project financing and innovative use of subsidies for a commercial investment with social orientation
Unique model for replication worldwide (India, Brazil etc.)
First Public Private Partnership in the region
Aga Khan Fund for Economic Development
June 2006AKFED Copyright © October 2007
Aga Khan Fund for Economic Development
KEY CHALLENGES
Harsh mountainous environment (logistics, etc.)
Significant investment yet affordable tariffs
High winter energy consumption yet lowest available energy
Scarcity of affordable alternative energy sources
Extensive area but dispersed and small population
Culture transition towards a ‘modern’ utility
Strong support required from authorities to implement change
No prior culture of payment for utilities
Very high levels of losses (both technical and commercial)
Aga Khan Fund for Economic Development
June 2006AKFED Copyright © October 2007
Aga Khan Fund for Economic DevelopmentUGANDA – West Nile Rural Electrification Co. Ltd
Innovative structure for rural electrification
20-year concession Affordable & Sustainable tariffs
through 50% upfront grant to offset investment
Impacts to date
• Significant reduction in monthly energy costs
• Over 600 new connections
• Cleaner and safer sources of energy
• Improved education and health
• Increased commercial/industrial activities
Aga Khan Fund for Economic Development
June 2006AKFED Copyright © October 2007
Aga Khan Fund for Economic Development
West Nile – Key facts Location: North Uganda
Customer Base: 5,000 (mainly residential)
Residential Tariff: 13.1 US cents
Additional Generation: 3.5 MW Hydro
Project cost: $14.75 million
Capital grant: $8.2 million (reduces tariff to affordable level
based on IRR of 15%)
Carbon Credits: 443,000 CERs
Customers now receive power 18 hrs/day (compared with around 12 hours throughout the rest of Uganda)
Aga Khan Fund for Economic Development
June 2006AKFED Copyright © October 2007
Aga Khan Fund for Economic Development
Challenges with Small Infrastructure Projects
• Lack of critical mass leads to financial imbalance in the following areas:
Tariffs
Operating costs
Development costs
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Aga Khan Fund for Economic Development
Mitigation Measures
• Acceptance of lower hurdle returns.
• Utilisation of “soft-funds through grants, donations, etc.
• Use of carbon credits where possible.
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June 2006AKFED Copyright © October 2007
Aga Khan Fund for Economic Development
Use of soft funds
• The use of ‘soft’ funds for projects can allow the project to achieve the following objectives:
become financially sustainable for shareholders;
allow affordable tariffs for the customers;
mitigate development risk (development/early stage costs);
Donors often have restrictions in providing grants to private entities eg off grid remote/rural small HPPs at PamirEnergy.
Aga Khan Fund for Economic Development
June 2006AKFED Copyright © October 2007
Aga Khan Fund for Economic Development
Subsidy Mechanism – linked to consumption
• Subsidy delivered at time of consumption (e.g. Pamir Energy) so becomes part of operating revenue:
Customer invoiced net amount (i.e. before subsidies)
Company receives gross amount (customer payment + subsidy)
Aga Khan Fund for Economic Development
June 2006AKFED Copyright © October 2007
Aga Khan Fund for Economic Development
Subsidy Mechanism – offset initial investment
• Reduce initial capex and hence investment cost to allow net effective tariff to the customer to be set at an appropriate level e.g. West Nile.
• Tariffs reduced to an affordable level, hence achieves same objective.
Aga Khan Fund for Economic Development
June 2006AKFED Copyright © October 2007
Aga Khan Fund for Economic Development
Pros and Cons of Different Mechanisms
Capex Offset vs Consumption linked delivery mechanisms
• Consumption linked subsidy is direct to customers, not to company and is provided only upon delivery to customer.
• Consumption linked delivery means that the gross investment cost of the project needs to be financed from “commercial” channels.
• Variances in levels of energy consumed compared with projections will inevitably lead to the need for subsequent tariff adjustments (operationally and politically difficult).
• Consumption orientated subsidies need to be socially orientated or targeted towards the customers who need it most (i.e. the poorest) and not to all customers.
Aga Khan Fund for Economic Development
June 2006AKFED Copyright © October 2007
Aga Khan Fund for Economic Development
Use of Carbon Credits
• Functions as an effective additional tier of subsidy and/or revenue enhancer.
• Possible in both compliance and voluntary markets.
• Ensure focus (where possible) on renewable energy.
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June 2006AKFED Copyright © October 2007
Aga Khan Fund for Economic Development
Pamir Energy – Carbon Credits
• Originally incorporated within the Concession Agreement in 2002, so met the “additionality” test.
• Originally developed for compliance market as small hydro project, but host country has not yet ratified “Kyoto”.
• Strong growth in voluntary market has allowed company to benefit and find counterpart for 2008-2012 delivery.
Aga Khan Fund for Economic Development
June 2006AKFED Copyright © October 2007
Aga Khan Fund for Economic Development
West Nile - Carbon Credits
• One of the early (2002) CDM projects.
• World Bank Prototype Carbon Fund – buyer.
• Provides valuable (guaranteed) cash flows that can be incorporated into projections => facilitates financing, enhancing returns and achieving financial close.
Aga Khan Fund for Economic Development
June 2006AKFED Copyright © October 2007
Aga Khan Fund for Economic Development
Small Infrastructure – Way forward
• Build on lessons learned in terms of structure and mechanisms.
• Apply solutions to non-energy sectors e.g. rural telephony, roads.
• Establish a vehicle/structure on a regional basis to enable efficient and accelerated replication of such projects on a “standardised or modular” basis.
• Merger of philosophies/skills and closer working practices between donors and non profit agencies as commercial know-how and funding structures are incorporated into projects previously exclusively donor/grant funded.
Aga Khan Fund for Economic Development
June 2006AKFED Copyright © October 2007
Aga Khan Fund for Economic Development
Conclusions
• Success depends on: patient capital accepting sub-commercial
returns availability of soft / donor money carbon credits increasingly play a key role politically receptive host governments
• Projects that have historically been funded by state/donors can be financed through introduction of commercial project finance techniques.
• With appropriate structure and support, such projects can be sustainable and not a drain on state funds.