Download x - World Bank

Mobilising finance for infrastructure:
a study for the Department for International
Development (DFID)
Summary of findings
Mark Cockburn, CEPA Director
Michael Obanubi, CEPA Principal Consultant
15th September 2015
Introduction: research brief
CEPA commissioned to complete year-long study on the following research brief:
Summary of research brief
Is the main blockage to increased private infrastructure investment in DFID focus countries in SSA attributable to
the lack of a pipeline of bankable projects and/or a lack of available finance?
A.
On bankable projects
i.
What are the main blockages to developing a pipeline of bankable projects? Are the principal barriers
due to upstream or downstream issues?
ii.
B.
What are the policy interventions to address the constraints?
On access to finance
i.
What are the main types/ sources of finance for projects reaching close?
ii.
What are the principal barriers to increasing the provision of finance to infrastructure projects from
both local and international financial institutions?
iii.
C.
Could the provision of public subsidies support the increased provision of finance?
We also considered the extent to which above questions differ in the case of regional projects.
This presentation summarises the main findings on these research questions.
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Introduction: focus of research
The focus has been on the mobilisation of debt and equity finance from the private
sector for the traditional economic infrastructure sectors in DFID-focus countries
Our research has therefore been on:
•
The role of the private sector in financing projects through the establishment of public private partnerships
(PPPs) which include at least some private sector equity finance. Pure public financed projects have been
excluded from the research.
•
DFID-focus countries in SSA and with the exception of India, a more limited focus on South Asia.
•
The traditional economic infrastructure sectors: energy; telecommunications; transportation; and water and
sanitation. Private sector projects which provide a public service have also been included.
•
Projects of a reasonable scale. Small local community infrastructure such as off-grid generation have been
excluded.
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Introduction: research completed in past-year
The research has included a number of components
Individual research studies will be publicly available on CEPA’s website www.cepa.co.uk .
Research component
Summary of research
Literature review
A systematic literature review was undertaken to identify the main existing research
findings on the topic.
Data collection
Building on the World Bank PPI database, we collected publicly available data and
information from the Infrastructure Journal on projects reaching financial close in SSA
between 2010 and 2014.
Country case studies
Detailed case studies of the constraints to the provision of private finance in Nigeria,
Kenya, Ghana and Mozambique.
Comparator case studies
We reviewed the market for private finance for infrastructure in both South Africa and
India.
International financial flows
The barriers to the provision of private finance from OECD countries to infrastructure
projects in SSA were assessed.
Regional infrastructure
A review of barriers specific to regional infrastructure projects in SSA.
Policy options
A summary of the policy options to address the constraints identified.
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A: Bankable projects
Annual flows have reduced over time, but with greater balance across sectors
Project transactions in DFID focus countries in SSA
•
Prior to 2005, projects that had attracted private finance
were largely in the telecoms sector
•
Since 2005 there has been a large increase in energy sector
transactions, but with over close 95% of capital flowing to
IPPs.
•
Renewable IPPs have attracted finance across the continent,
particularly in South Africa as a result of its REIPPP
programme.
Source: World Bank PPI Database; CEPA Analysis
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A: Bankable projects
Outside of South Africa and non-energy transactions, Nigeria dominates
Country shares in value of transport projects in DFID
For transport, Nigerian projects accounted for 88% of total
focus countries in SSA (2010-14)
value in DFID focus countries in SSA for 2010-2014, all of which
were in its ports sector, building on the earlier successes
Country shares in value of telecoms projects in DFID
focus countries in SSA (2010-14)
Source: World Bank PPI Database; CEPA Analysis
In telecoms, Nigeria accounted for 67% of transaction values for
2010-14, which has included large corporate finance transactions.
Other countries with a relatively high amount of activity include
Malawi, Mozambique and Zambia, who have been slower to
Source: World Bank PPI Database; CEPA Analysis
reform.
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A: Bankable projects
External donor support still required, particularly in countries without a track
record
• The best results seem to be where programmes of activity have occurred which have involved government
origination of projects. Lessons can be drawn from South African renewables, Nigerian ports and recent
developments in Kenya’s IPP sector.
• These programmes often relied significantly on project preparation support, including from donors such as the World
Bank (Nigerian ports, Kenya IPP transactions) and AfDB (Kenya’s geothermal IPPs).
• In addition to project preparation support, many successful transactions have relied on Partial Risk Guarantees
(PRGs), even in relatively advanced countries. This includes five out of seven IPPs in Kenya and four out of four
energy sector projects in Nigeria since 2010.
South Africa Renewables
Nigeria ports concessions
Under the REIPPP, private sector commitments of US$14bn
Since the sector reforms in 2004, over US$7.2bn of
were made in 64 projects, which are expected to generate
investment has been made. Recent investments include the
3,922MW of power.
Lekki Seaport (US$1.5bn) and Onne expansion (US$2.9bn).
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A (i): Upstream constraints to bankable projects
The key challenge is gaining acceptance that users need to pay for infrastructure
services if they are to be provided at the volume and scale required
•
The challenge in SSA has been to gain broad-based acceptance of the need to pay for infrastructure services,
whether publicly or privately provided. The implications of the absence of cost-reflective tariffs is profound:
•
For instance, many publicly-owned off-takers are close to insolvency: lenders are understandably
unwilling to provide finance to such borrowers (at least without a government guarantee).
•
Where PPP arrangements have been agreed, such as the Lekki-Epe expressway concession, they have
been unsustainable because of the inability to apply cost-reflective tolls.
•
Given increased economic growth in SSA, affordability is becoming less of a problem. Without a greater
willingness to pay, however, the desired quantum and quality cannot be delivered. At its heart therefore, the
question is as much one of infrastructure funding as financing.
•
Political economy barriers to PPPs are much more wide-ranging than just issues of securing cost-reflective
payment for services. Governments may wish to hold on to state assets for either revenue or political reasons.
•
In most countries, network power infrastructure has not been opened up to private investment, and too often
the private sector is seen as a last resort when government cannot find another way of delivering projects.
•
Unlike introducing legal frameworks and creating institutions, these problems are far less amenable to donor
interventions.
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A (i): Downstream constraints to bankable projects
Key downstream constraints relate to the challenge of improving the capacity of
public sector to develop projects and respond to unsolicited proposals
•
Our findings suggest that a key constraint is the availability of appropriate technical, legal, and financial skills both
inside and external to government to support the necessary processes to facilitate project development. This
needs proper resourcing.
•
Government originated projects are often inadequately prepared, failing to offer investors and lenders a fully
bankable package, complete with appropriate risk mitigation / security requirements.
•
The lack of capacity within government leads to a reliance on unsolicited proposals (USPs). These are projects
identified and promoted by the private sector, which can be opaque arrangements, not least in terms of how
project rights – often worth millions of dollars – are acquired.
•
The lack of transparency makes it more challenging for donors to participate in their funding and financing. At a
minimum this tends to delay project timelines, and at best the approach can produce one-off successes.
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A (ii): Policy options to develop bankable projects
In the short-term PPPs need the protection of guarantees to attract private capital.
In the long-term a mix of policy reforms are required.
•
The likelihood is that most projects, particularly where there is not a track record of PPPs, will require guarantees.
•
PRGs are an effective tool as they allow specific risks to be targeted, which is not the case with credit guarantees.
•
They can also be used to support lower risk availability structures in more challenging transport sectors, where state
entities are the payee (as opposed to transferring traffic risk).
•
PRGs can often involve concessional IDA and ADF resources which can be a cost effective use of subsidies in
mobilising private resources.
•
In the longer term, governments need to implement a range of reforms to make the market more conducive for
private finance, this includes:
•
Full (or at least partial) divestments of existing assets, to open up the possibility for the provision of private
finance to existing assets with a track-record of performance (reducing greenfield risk).
•
Increasing tariffs to cost recovery levels (whilst focusing subsidies on the poor).
•
Sub-sector specific reform to develop structures that make the provision of private finance possible. For
instance, the development of full power markets, which reduces single-off-taker payment risks.
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B (i): Main type of finance for projects
Research suggests a reliance on project finance approaches, with debt held to
term. Also reliance on foreign exchange debt, creating exchange rate risk
Projects in DFID focus countries 2010-14 (excluding South Africa and
Telecoms)
Total
Finance category
(US$m)
Share of
financing
category
Share of
total
financing
•
countries is dominated by project financing approaches, rather
than corporate finance, reflecting the sub-sectors open to PPPs
Debt
DFI
1,800
47%
Banks
1,892
49%
Other
146
4%
Sub-total
3,838
such as IPPs
•
70%
199
14%
1,255
86%
1,454
Participants in transactions are largely project sponsors (equity);
DFIs providing debt but increasingly commercial banks.
Equity
DFI
Equity from private
sources
Sub-total
Outside of telecoms, private infrastructure investment in focus
•
Most infrastructure projects in the case study countries have
sought long term FX debt. This provides longer tenor, more
competitive pricing and greater ability to fix rates than local
currencies.
27%
Mezzanine
DFI
107
65%
Other
58
35%
Sub-total
165
3%
Source: IJGlobal, World Bank PPI database, CEPA analysis
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B (i): Main sources of finance for projects (2010-14)
Banks from South Africa and Nigeria are playing an increasing role in financings
Bank debt has
been
increasing
African-based
banks have
provided the
majority of
debt
Source: IJGlobal, World Bank PPI database, CEPA analysis
DFI debt comes
from a range of
sources
Source: IJGlobal, World Bank PPI database, CEPA analysis
Source: IJGlobal, World Bank PPI database, CEPA analysis
Mainly South
African and
Nigerian banks
involved
Source: IJGlobal, World Bank PPI database, CEPA analysis
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B (ii): Barriers to increasing the provision of finance
Limited evidence that access to long-term FX is a constraint, but there are
constraints relating to the provision of long-term local currency debt
•
Given that many African banks have been able to access long-term US$ finance and the significant resources of DFIs
relative to the number of project opportunities, access to long term FX finance is not a constraint for creditworthy
projects.
•
However, there is an absence of longer term local currency finance. With the exception of some very rare examples,
such as the Lekki toll-road in Nigeria, long term (> seven years) local currency financing has not been involved in
transactions (although many telecoms projects have been part-financed with five to seven year local currency debt).
•
Commercial banks are heavily reliant on their short term deposits for their funding rather than longer term
wholesale funding available in FX markets, creating a tenor mismatch with infrastructure loans. Shorter tenor finance
also creates refinancing risks for projects with longer tenor requirements. Local currency is also typically more
expensive than FX, due to higher prevailing interest rates in SSA countries.
•
In addition, the absence of term interest rate hedging markets means that projects are at risk from interest rate
movements.
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B (iii): Mobilising international institutional finance
The current project financing model does not create many opportunities for
institutional investors to provide finance
•
The types of infrastructure sub-sectors open to private investment, such as electricity generation, tend to be suitable
for project financing approaches, which lock out opportunities for most equity and debt institutional investors.
•
This is because apart from in the case of highly specialised investors, institutional investors such as pension funds
require operational and liquid assets, not greenfield, illiquid ones. This is not just the case in DFID’s focus countries,
but also in developed countries.
•
If institutional investment is to be sought, particularly for larger projects, its requirements need to be built into
financing approaches, which ideally will provide for a partial or full refinancing by institutional investors, once the
project is operational.
•
The potential for this could be enhanced if DFIs were able to adapt more of a recycling of capital approach rather
than one of coming in at financial close and holding to term. The former is the approach adopted by project finance
banks internationally.
•
This could, however, represent a significant change to the DFI current operational approach, the consequences of
which would need to be explored more fully.
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B (iii): Mobilising local sources of finance
There is a strong policy rationale for supporting local currency financing solutions,
but it is challenging because of supply-side issues
•
Currency mismatches between a project’s receipts and out-goings – particularly between local currency revenues
and FX financing costs – can undermine creditworthiness. Ideally, a project’s mix of financing should be matched to
its revenues.
•
To increase the provision of local currency finance, as with FX lending, banks will need credit enhancements. In
addition, if the tenors of local currency financing solutions are to be extended, liquidity risks will also need to be
addressed.
•
Potential financing policy interventions include greater provision of liquidity instruments such as ‘put options’ by
DFIs, which enable banks and investors to exit performing investments, if they need liquidity. DFIs could also to use
their own balance sheets more to raise longer term local currency finance through local market issues, to on-lend
directly to projects or else to provide wholesale funding to local banks. Where this creates additional risks, donors
may need to risk share in this.
•
The other way to deal with currency mismatches is to utilise currency swaps, in which borrowers effectively borrow
in local currency, but investors have exposures in FX. There is the potential for the an institution like the Currency
Exchange Fund (TCX) to get more involved in infrastructure.
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C: Regional infrastructure projects
Regional projects face greater preparation challenges, but in some circumstances
this scale can be an opportunity
•
The constraints faced by regional projects are similar to national projects, but with added complexity caused by the
direct involvement/ interest of multiple stakeholders.
•
The number of stakeholders involved makes it more difficult to take a regional project to financial close, these are
typically better originated by the public sector.
•
Implementation capacity among responsible institutions, including RECs and their specialist agencies was highlighted
as a constraint, including requirements for both financial and human capital.
•
It is important that more political and financial investment is made up-front to support the development of the
prioritised projects. We carried out case studies on three multi-country regional projects which highlighted need to
create dedicated institutions with mandate to develop project.
•
Regional projects with a high-quality off-taker in place may provide greater opportunities for international
institutional finance.
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Conclusions
The main challenge to mobilizing private capital to finance projects is a shortage of
bankable projects
•
The projects that are developed are typically not creditworthy, first and foremost, due to the risk associated with
their own revenue streams, which is ultimately due mainly to a lack of willingness to pay cost reflective tariffs. To
deal with this issue projects need to be offered to the market with appropriate structures and support packages that
mitigate these risks.
•
An option is to pursue the PPP model in which government is the ultimate payee so that projects can access PRG
support.
•
Additional subsidies provided to fund MDB guarantee reserves so that they do not eat into IDA and ADF allocations
could be explored for increasing guarantee capacity. In any event, the presence of an MDB in a financing structure
helps to reduce the perceived risks to the project.
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Conclusions
Introducing more long-term debt from local and international institutions not only
requires new products, but also new approaches to development finance
•
Constraints to finance depend upon the nature of the financing being sought:
o
Greater use of local currency financing would provide more opportunities for local investors and lenders.
Moving towards greater corporate financing of existing assets would also open up opportunities (as has been
the case with telecoms).
o
o
Local currency debt financing helps mitigate exchange rate risk, but:
-
projects need to be able to accommodate any additional costs; and
-
banks may need liquidity support to extend tenors.
International institutional finance needs scale and ideally investment grade credit ratings. Larger projects
(including some regional) appear to be the most likely entry point; ideally through refinancing.
o
Investment in operational assets is the natural and more cost-effective entry point for institutional investors.
o
Recycling of capital approaches could help create more investment opportunities for institutional investors.
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Contact us
CAMBRIDGE ECONOMIC POLICY ASSOCIATES
Queens House, 55-56 Lincoln’s Inn Fields
London WC2A 3LJ
Tel: 020 7269 0210
Fax: 020 7405 4699
[email protected]
www.cepa.co.uk
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