the market for infrastructure finance · the market for infrastructure finance a navigational aide...

The Market for Infrastructure FinanceA Navigational Aide

Jan Martin Witte, KfW Office Kampala

Presentation at East African Power Industry Convention

31 August 2010, Nairobi

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60 years of KfWFinancing with a public mission

● Promotional bank of the Federal Republic of Germany

● Founded in 1948 asKreditanstalt für Wiederaufbau

● Shareholders: 80% Federal Republic,20% federal states

● Headquarters: Frankfurt am Main

● Around 60 offices worldwide

● Balance sheet total at end-2008: EUR 395 billion

● Around 4,200 employees (2008)

● Best rating: AAA/Aaa/AAA

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Financial Cooperation with Developing CountriesKfW Entwicklungsbank and DEG

● KfW Entwicklungsbank finances (infrastructure) investments and accompanying advisory services in developing countries

Target group

Task

● To sustainably improve the economic and social conditions of the people in developing countries

● To reduce poverty

● To protect the natural resources

● To secure peace worldwide

Objectives

● Governments and state institutions in developing countries (Entwicklungsbank)

● Private sector (DEG)

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Highlights KfW Infrastructure Portfolio

Project: HPP Bujagali (250MW)Client: Bujagali Energy Limited

● Largest hydropower IPP in SSA● Total investment volume: US$ 870

Mio.● Will increase Uganda‘s installed

generation capacity by almost 50%

● Commissioning in April 2012● KfW/ DEG debt of US$15 Mio./

US$ 30 Mio.● Additional financing of training

programs

Country: Uganda

Key Metrics

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Highlights KfW Infrastructure Portfolio

Project: HPP KindarumaClient: KenGen

● Rehabilitation and extension of existing plant to 75MW

● Total investment volume: US$55 Mio.

● Construction to start in 2010 ● KfW debt of US$37,5 Mio.

Country: Kenya

Key Metrics

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Highlights KfW Infrastructure Portfolio

Project: West Nile ElectrificationClient: WENRECO/ GoU

● Private concessionaire for island network in rural area of Uganda

● Total investment volume: US$50 Mio.● 2 small hydro plants and

refurbishment of transmission + distribution system

● KfW grant (Government of Germany) of US$ 30 Mio.

Country: Uganda

Key Metrics

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Agenda

● The Challenge: Africa‘s Infrastructure Finance Gap

● Where‘s the Money? Sources of Infrastructure Finance

● The role of DFIs in Infrastructure Finance

● After the Credit Crunch: Perceived or Real Risks?

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The Challenge: Africa‘s Infrastructure Finance GapAfrica is starved of power

● Generation capacity inadequate and has been stagnant for 20 years

� 48 countries have combined capacity equal to Spain

● Only one in four Africans has access to power

�Most countries will fail to have universal access by 2050

● Power consumption pitifully low and falling

�Enough to power one light bulb per person for 3 hrs/day

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The Challenge: Africa‘s Infrastructure Finance GapAfrica increasingly relies on emergency thermal power

Emergency Generation

Capacity

Emergency Generation Capacity

as % of Total

Cost of Emergency

Generation as % GDP

Angola 150 18.1% 1.0%

Gabon 14 3.4% 0.5%

Ghana 80 5.4% 1.9%

Kenya 100 8.3% 1.5%

Madagascar 50 35.7% 2.8%

Rwanda 15 48.4% 1.8%

Senegal 40 16.5% 1.4%

Sierra Leone 20 133.3% 4.3%

Tanzania 40 4.5% 1.0%

Uganda 100 41.7% 3.3%

Source: Africa Infrastructure Country Diagnostic

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The Challenge: Africa‘s Infrastructure Finance GapAfrica’s power is very expensive

Source: Africa Infrastructure Country Diagnostic

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The Challenge: Africa‘s Infrastructure Finance GapPower shortages have a significant negative impact on growth

Source: Africa Infrastructure Country Diagnostic

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The Challenge: Africa‘s Infrastructure Finance GapThe infrastructure financing gap in Africa is enormous

Source: Africa Infrastructure Country Diagnostic

● To remedy this situation Africa needs to build

� 7,000 MW of generation capacity per year

�More than five million new power connections per year

�An extensive transmission network

● The annual financing requirements are staggering

�Spending needs: US$40.6 bn/yr

�Existing spending: US$11.6 bn/yr

�Efficiency gap: US$5.9 bn/yr

�Financing gap: US$23.6 bn/yr

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Agenda

● The Challenge: Africa‘s Infrastructure Finance Gap

● Where‘s the Money? Sources of Infrastructure Finance

● The role of DFIs in Infrastructure Finance

● After the Credit Crunch: Perceived or Real Risks?

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Where’s the Money? Sources of Infrastructure FinanceSpecial characteristics of infrastructure finance

Longer maturity● Maturities between 5 and 40 years

● Reflects length of construction period and life of underlying asset

Larger amounts● Infrastructure requires bulky investments.

● E.g., costs per installed MW of hydropower ranges between US$2 Mio. and US$ 4 Mio.

Higher risk● Demand uncertainty

● Technological obsolescence

● Political uncertainties

Fixed and low (but positive)

returns

● Given the significance of investments to national economies realreturns can tend towards zero

● However, returns are unlikely to be negative

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Where’s the Money? Sources of Infrastructure FinanceMain sources of finance

Public Finance

● Weak tax revenue (15%-23%/ GDP) and low (and costly) borrowing capacity (esp. HIPIC countries)

● Even with positive macroeconomic development public funding committed to infrastructure has remained stagnant

● Financial crisis will affect infrastructure spending in a disproportionate way

Private

● Private finance to infrastructure has tripled since 1990s, today around US$10 bn./yr � more than ODA

● But so far little into power in SSA; demands clear regulatory/ legal environment

● Financial crisis may affect ongoing transactions and new commitments

“New Donors”

● New and potentially significant source of financing (China, India, Gulf States)

● Since 2001, more than US$1 bn./yr committed to hydropower

● Focused so far primarily on resource-rich economies (exchange deals and “strings attached”)

ODA

● 1990s/ early 2000s infrastructure not on ODA agenda (<US2$ bn./ yr)

● Reemergence of infrastructure, rise of commitments to US$4.1 bn. in 2004 and to US$8.1 bn. in 2008

● Financial crisis has diverted some funding into emergency fiscal support

● ODA commitments may decline in years ahead

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Where’s the Money? Sources of Infrastructure FinanceCost of capital by funding source

Source: Foster and Briceno-Garmendia (2010), Africa‘s Infrastructure (Washington, DC: World Bank), p.83

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Where’s the Money? Sources of Infrastructure FinanceLocal capital markets remain underdeveloped, shallow and small

● Local capital markets could be a potential additional source of infrastructure financing in Africa

● However, with the exception of South Africa local capital market remain underdeveloped, focusing on

�Commercial bank lending (usually at very unfavorable conditions)

�Corporate bonds (few)

�Stock exchange issues (very few)

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Agenda

● The Challenge: Africa‘s Infrastructure Finance Gap

● Where‘s the Money? Sources of Infrastructure Finance

● The role of DFIs in Infrastructure Finance

● After the Credit Crunch: Perceived or Real Risks?

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The Role of DFIs in Infrastructure FinancingDevelopment Finance Institutions are an important source of infrastructure finance (I)

● Development Finance Instiutions (DFIs) have a general mandate to provide finance to the public and/ or private sectors for investments that promote development

● DFIs are supposed to invest in areas where otherwise the market fails to invest sufficiently

● DFIs provide credit in the form of

● Higher risk loans

● Equity positions

● Risk guarantees

● DFIs backed by states in developed economies

● Total commitment of DFIs on infrastructure in Africa currently <US$4bn./ yr. Total capital expenditures are about US$25bn./yr.

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The Role of DFIs in Infrastructure Financing Development Finance Institutions are an important source of infrastructure finance (II)

Principal DFIs

Bilateral DFIs:

CDC (UK) – KfW and DEG (Germany) – FMO (Netherlands) – Proparco (France) – OPIC (USA)

Regional DFIs

European Bank of Reconstruction and Development – African Development Bank – European Investment Bank – Asian Development Bank

Multilateral DFIs

World Bank – International Finance Corporation – Multilateral Investment Guarantee Agency

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The Role of DFIs in Infrastructure Financing DFIs utilize subsidies to make achieve sustainable development objectives

● Term subsidy applied in its broadest sense to include

�High levels of liquidity (large levels of paid-in stock, AAA rating, tax exemptions etc.) in DFIs that allow them to leverage “cheap” finance for infrastructure investment in developing economies

�Ability to access technical assistance funds (currently estimated at more than US$200 Mio./yr. across all DFIs globally)

�Subsidies directly passed on to clients in the form of partial credit risk guarantees and longer maturing loans (credit enhancement, e.g. infrastructure loans up to 25 years)

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The Role of DFIs in Infrastructure Financing But DFI engagement goes beyond just financing

Source: Dalberg Advisers (2010), The Growing Role of DFIs in International Development Policy (Brussels) p.24

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The Role of DFIs in Infrastructure Financing But DFI engagement goes beyond just financing

● To achieve these broader objectives, DFIs go beyond simple provision of financing instruments to also focus on:

� Improvement of enabling environment for infrastructure investment (through capacity building, advisory services, etc.

�Targeted use of grant funding (provided by bilateral or multilateral donors) to facilitate borderline investments (e.g. in rural electrification, risk mitigation funds, etc.)

�Early phase support for project pipeline development

…and much more…

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Agenda

● The Challenge: Africa‘s Infrastructure Finance Gap

● Where‘s the Money? Sources of Infrastructure Finance

● The role of DFIs in Infrastructure Finance

● After the Credit Crunch: Perceived or Real Risks?

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After the Credit Crunch: Real or Perceived Risks?The financial crisis has negatively impacted DFI lending to infrastructure projects in Africa

● The global financial crisis has increased resulted in more aggressive management of (real and perceived) risks through increased capital adequacy ratios and thus increased the cost of capital

● More careful risk assessment and increased cost of capital translates into smaller dealflow and thus fewer projects funded

● Special initiatives to address the negative impact of the financial crisis (e.g. the Joint IFI/DFI Action Plan to Respond to the Financial Crisis in Africa with additional funding commitment of US$15bn. for example through Infrastructure Crisis Facility) has brought some relief but the impact of the crisis will be felt for years ahead

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After the Credit Crunch: Real or Perceived Risks?But what about those subsidies?

● Even on the background of the financial crisis, are DFIs bearing an optimal level of risk? Are they living up to their mandate?

● Janus-Faced mandate of DFIs:

�Promote sustainable development by investing in markets and products commercial finance does not invest in AND

�Mobilize private capital and generate (close to) commercial returns

● Optimal level of risk: Balance cost of elevated levels of risk (e.g. loss provisions on loans) with need to maintain liquidity to ensure stable and high credit ratings to achieve low costs of borrowing

● Some evidence suggests that DFIs may take on less risk than optimal. Overall:

�Capital adequacy ratios are increasing

�Bad loan reserves are decreasing

�Portfolio shares particularly in Africa are not constant

● All of that may reflect better risk management but also scope for taking on additional risk

Contact Details

Jan Martin Witte

Division Energy, Transport and Telecommunication / Africa

KfW Kampala Office

Plot 23 Nakasero Road

Kampala (Uganda)

Phone: +256 414 348 860

Email: janmartin.witte@kfw.de