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

2© KfW • EAPIC Presentation • Jan Martin Witte 22

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

3© KfW • EAPIC Presentation • Jan Martin Witte 33

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)

4© KfW • EAPIC Presentation • Jan Martin Witte

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



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



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


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?


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


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


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


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



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


● 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


Agenda






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


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


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


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)


Agenda






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.


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


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)


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


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…


Agenda






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


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: [email protected]

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