The European Investment Bank:

Funding Public Private Partnerships

Competitveness ForumKampala, 25 September 2008

Carmelo Cocuzza – EIB East & Central Africa Representation

EIB : The EU’s Long Term Financing Institution

Created in 1958 the EIB has a traditionally been a major source of long-term finance particularly in infrastructure development

Eg. the UK-France Channel Tunnel, the trans European railway networks, power stations..

In Africa infrastructure is the largest single sector of EIB finance representing one third of total investments financed

Heavy concentration in the energy sector

EIB’s Infrastructure Financing

EIB has traditionally funded Infrastructure projects through:

• Government LoansGovernment Loans:

Ethiopia : Gigel Gibe II Hydropower Plant (EUR 50m)

• Corporate Loans to Commercially Viable ParastatalsCorporate Loans to Commercially Viable Parastatals:

KenGEN: Olkaria II Geothermal Power Plant (EUR 35.2m)

• now the emphasis is on project financenow the emphasis is on project finance:

- SPVs (East Africa - EAssY Project) and

- PPPs (Uganda - Bujagali)

PPPs in Infrastructure

EIB has funded some 140 Public-Private Partnerships (PPPs) projects worldwide, mostly in Europe, (total exposure of over EUR 20 bn covering most sectors).

PPPs in Africa:

Recent success stories: energy, Bujagali (Uganda), AES Sonel (Cameroon); transport, N3 Toll Road in S.Africa

But there have been failures, notably in the water sector, as well as operations cancelled or rejected

African Infrastructure / PPPs

Reason why PPPs are preferred to public service:

insufficient public funding for large projects

insufficient public sector capacity to manage additional, large investment

difficulty in risk management – uncertainty about demand, outputs, forex exposure, etc.

Conclusion:

PPPs can play a role in Africa’s infrastructure development….

…… but there are prerequisites to their success.

PREREQUISITES TO PPP SUCCESS: Project must be economically well-justified Public sector must play its role in the partnership and ensure commercial viability

There has to be an acceptable legal framework for the project for all the parties involved

Payments mechanisms are devised in a way that motivates private operators to provide both

quality service and value-for-money

Accountability : Transparent procedures and due regard for the public interest

All social and environmental impacts must be dealt with

PREREQUISITES TO PPP SUCCESS

Striking the right balance between, WHAT’S IN IT FOR US vs. WHAT’S IN IT FOR THEM:- Government requirement for clear economic benefits for the public, but also

Provision of legal and institutional framework Transparent and fair procurement process Realistic approach to risk sharing

-Private sector requirement for appropriate profits (ROE) but subject to acceptable performance levels

ie. maximise public benefits vs. ensuring that the project is “bankable”

African Infrastructure / PPPs

Value added of EIB lending (1)

Provision of long term funding (up to 25 yrs)

Non-recourse lending, or lending with credit enhancement

Assumption of risks - e.g., political risk - commercial lenders do not normally take, hence

Catalytic effect on mobilising commercial bank loans for project finance

(Eg: Bujagali:13% commercial funding)

African Infrastructure / PPPs

Value added of EIB lending (2)

• All projects are subject to a thorough technical, economic and financial review

• Analysis of technical and legal aspects of the concession• Ensure compliance with international social and

environmental standardsand

Balance the risk between public and private sectors

250 MW of power desperately needed by Uganda

Project had stalled and had come under criticism from NGOs and civil society

Huge Investment Requirement of USD 875m: could the Government really afford to finance, build and operate such a massive infrastructure undertaking?

PPP: An example –

The Bujagali Hydropower project

An ideal WIN WIN situation with a tailored partnership between GOU and Private Sector was negotiated:

Funding was provided through non recourse project finance from multilateral, bilateral and commercial banks

Public Sector : bears some of the major risks, but NOT the debt burden of the project (opportunity cost)

Private Sector: makes an adequate ROE based on performance, BUT offers electricity generation at affordable rates – with added incentives for operating efficiencies

Rigorous Environmental and Social mitigants

The Bujagali Hydropower project

b

Value Added from EIB and other financiers:

Long term Funding : 20 years, cashflow impact Project Finance Catalyst: (8 DFI’s and 2 commercial

banks) Transparent Procurement: a) in the selection of the private sponsor; and

b) in the selection of the civil works contractor Implementation of appropiate due diligence on:

- Environmental Impact (1 year)

- Social Aspects and Compensation (Riparian water use issues and regular reporting on water levels)

The Bujagali Hydropower project

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…and the rest is history:

2007 AFRICAN POWER DEAL OF THE YEAR

(PF Magazine)

Without the Government of Uganda’s strong commitment in ensuring fast-track financing arrangements and a

fair and mutually beneficial legal framework, the project would never have been realized .

The Bujagali Hydropower project

The success of PPPs largely depends on thorough due diligence and negotiations between Government and its private sector partners

A Win-Win situation can only be achieved if the project pre-requisite conditions are met to the satisfaction of both parties involved,

The involvement of external financiers helps mitigate risks, ensures transparency in the procurement processes, catalyses commercial funding and ensures a rigorous environmental and social scrutiny to optimise the interests of all the stakeholders in the project.

….to Conclude

Thank you.www.eib.or

gContact:

EIB Eastern and Central Africa Regional Representation 5th Floor, Africa Re Centre, Hospital Road, Nairobi, Kenya

Carmelo Cocuzza, cocuzza@eib.org