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PRIVATE SECTOR DEVELOPMENT & FINANCING OF (POWER) PROJECTS & TECHNOLOGY TRANSFER

UNFCCC MONTREAL WORKSHOP Innovative Options for Financing the Development & Transfer of Technologies. PRIVATE SECTOR DEVELOPMENT & FINANCING OF (POWER) PROJECTS & TECHNOLOGY TRANSFER Practical Experiences of Project Pre-Development & Financing in Sub-Saharan Africa. HERA.

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PRIVATE SECTOR DEVELOPMENT & FINANCING OF (POWER) PROJECTS & TECHNOLOGY TRANSFER

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  1. UNFCCC MONTREAL WORKSHOPInnovative Options for Financing the Development & Transfer of Technologies PRIVATE SECTOR DEVELOPMENT & FINANCING OF (POWER) PROJECTS & TECHNOLOGY TRANSFER Practical Experiences of Project Pre-Development & Financing in Sub-Saharan Africa HERA I N T E R N A T I O N A L SEPTEMBER 2004

  2. CONTENTS The Project Development Cycle Pre-Development Phase • Options • Tools & Techniques • Example • Barriers Development Phase & Financing • Barriers • Tools & Techniques • Cost Issues Integration as a Possible Response • Possibilities of using Integration for financing Wind Power in Africa

  3. WHAT IS PRE-DEVELOPMENT? THE PROJECT DEVELOPMENT CYCLE DEVELOPMENT IMPLEMENT PRE-DEVELOPMENT Project Idea Pre Feasibility Project Dvpt. Feasibility Project Dvpt. Imple- mentation • Need • Vision • Can it work? • What conditions? • Which Partners? • Estimated Cost? • Refinancing Sources? • Initial Structuring • Business Plan / Bankable Feasibility • Technical Design & Specification • Scope of Work • Project Structure • Investment Consortium • Contractors & Suppliers

  4. Pre-Development Phase PRE-DEVELOPMENT ISSUES Pre-Development Costs need to be financed • ca. 2% of total project costs • Total Development Costs 5 % – 7 % No Guarantee that Project will be implemented Relatively high risk • Return still uncertain Venture Capital / Development Capital nature of investment Long Term Project Development Horizon • 2 – 5 Years

  5. Pre-Development Phase PRE-DEVELOPMENT OPTIONS Sponsor‘s Perspective / i.e. Government Public Sector Route • Government / Donor funding of studies and initial development • Public Procurement Processes (Tender) • Time Scale / Efficiency • Alternatives? Private Sector Route • Private Sector Developer Hybrid Routes • In practice most (power sector) projects are hybrids

  6. Pre-Development Phase PRE-DEVELOPMENT TOOLS Usual Suspects • Development Funds (Multilaterals) • Grants & Subsidies • Facilitators / Networks Development Consortium • Spread & Diversify Risk • Public & Private Sector Partners • Avoid Equipment Suppliers / Contractors if possible Initial Analysis: Identification of strategic / special interests in the Project • Who are the Stakeholders & Benefactors? What can be done to make project more viable / attractive? • Integration • Linkage • Increased value to Benefactors and Stakeholders

  7. Pre-Development Phase HOW DOES IT LOOK IN PRACTICE? Zambezi Valley Development Scheme Multi-faceted Integrated Project • Coal Mining & Export • Railway Rehabilitation for Transport • Coal Fired Power Generation at Mine Head • Coal Terminal Upgrade What were the Goals? • Private Sector Financed Solution • Participation of MZ Public & Private sectors • Lowest possible burden on MZ PSB • Maximum impact on connected sectors & local economy

  8. PRE-DEVELOPMENT PHASE • Collation and Transfer of Deliverables • Attendance in Task Force Activities / Meetings • Participation in Sectorial Activities-- Coal Mining-- Railway / Port Operations-- Energy and Industrial Outlets-- Forestry & Agriculture PUBLIC SECTOR Involved Ministries Authorities & Agencies Parastatals • HEADS OF AGREEMENT • incorporating: • Objectives • Warranties / Guarantees / Exclusivity • Channels of Communications / Task Force • Development Programme • Deliverables • Confidentiality / Non-Disclosure FEASIBILITY REPORT AND IMPLEMENTATION PLAN DEVELOPMENT CONSORTIUM Developer / Investors Operators Contractor • Preparation of Feasibility Report and Implementation Plan • Pursue discussions with IFC / Multi-lateral and Private Funding Agencies

  9. Pre-Development Phase GETTING OVER THE BARRIERS Development Consortium • Self Funding of Pre-Development Risk (part / majority) • Project Design & Specification • Commitment to provide equity at implementation phase Partnership with Public Sector Partners • Parastatals as members of Development Consortium (and later also the Implementation Consortia) Equipment Supply & Contracting put out to tender • Development Consortium retains operating responsibility, and control • Vital self-interest to ensure value for money • Bears economic risk and takes return Benchmarking

  10. Pre-Development Phase GETTING OVER THE BARRIERS (2) Independent Integrator / Developer • No vested interests - neither supplier, nor contractor nor investor • Only interest / goal is that the Project gets done • Mediates and co-ordinates • Brokers (forces) the compromises & the issues • Economic Logic & Project Success are sole drivers

  11. Pre-Development Phase THE BARRIERS Developer(s) / Consortium required comfort that they would take benefit out of the Project assuming positive feasibility • Return on investment in development costs & risks Pressure for an early decision Conflict with established procurement procedures Political Unease & Resistance because of Issues of • Control • Value for Money • Transparency All of which were however addressed by the Structure Project now being implemented in its constituent parts • No integration • Financed by PSB

  12. Development / Implementation Phase MAIN BARRIERS TO FINANCING Legislative & Regulatory Environment Economic & Commercial Risks Standard Tools are indispensable • Multilaterals • ECAs / Commercial Political Insurance • Hedging Identifying & Generating Secure Refinancing Streams • Off-takers • Integration

  13. IMPLEMENTATION PHASE Debt Financing - IFC - ECAs - Commercial banks IMPLEMENTATIONCONSORTIUM Developer Investors Operators Contractors CONCESSIONS& ASSETS SECTOR: MINING PRIVATE SECTOR $ Developer: Coal Miner (Commodities Trader) SECTOR: POWER SECTOR: TRANSPORTATION GENERATEDOPERATING INCOME Developer: Railway Operator Rehabilitation: Contractor Development: Utility Operator & Parastatal SPECIAL PURPOSE COMPANY MOZ. COMPANIES Interest $ PrincipalRepaymentof Debt PARASTATALS On-goingMaintenanceCosts $ EQUITYFUNDING PUBLIC SECTOR Dividends Global Scheme up to full Repayment of Debts and Return on Capital

  14. Development / Implementation Phase REVENUES ARE THE KEY Export of High Quality Coking Coal • Arms length long term off-taking contract with independent commodity trader • Indexed to market prices: Security of Revenues • Offshore Hard Currency Payments PPA / Off-taking Agreements • Industrial Users for base load • Local Utility and International Utility • Price was key (<2 cts / KWhr.) • Export into SAPP Operator Experience & Know-how • Guarantee of operating targets Equity Component

  15. Price Considerations in the Development Process PRICE ISSUES IN RELATION TO CHOICE OF TECHNOLOGY (1)

  16. Price Considerations in the Development Process PRICE ISSUES IN RELATION TO CHOICE OF TECHNOLOGY (2)

  17. Development / Implementation Phase INTEGRATION AS A TOOL TO ADDRESS PRICE ISSUES Wind Energy in RIM / MZ / ANG / TNZ € cents 5 - 9 / KWhr make Wind Energy an apparently unattractive commercial proposition in Africa Thermal Production Costs much lower (subsidy) Ideas for Integration: • Decentralised Locations (reduction of transmission costs) • Combination with Desalination • Combination with establishment of refrigerated processing & storage facilities for local fishing industries • Cooperation with white goods manufacturers for production of appliances with low voltage ratings

  18. Development / Implementation Phase EFFECTS OF INTEGRATION Diversification & Increase of Revenue Streams for Repayment of Financing Risk diversification (although increased in absolute terms) • Reduction of pure economic risks • Increased Revenue • Earnings diversification • Foreign Currency Potential Higher Added Value • Increased benefits to a wider community of stakeholders • Nominal high price is made more acceptable • Linkage Increased Complexity

  19. Price of (new) Renewables Technology is the chief barrier No need to buy a Rolls Royce if a 2 CV also gets you there External cost argument is only partially accepted in Africa Private Finance, Developers & Tools are available for pre-development phases of New Technology Projects Combination with existing tools and financing instruments Need for increased flexibility for dealing with parties able & willing to take development risk Development of appropriate control mechanism Transparent criteria for calculation of return Further third party funding sources / funds Potential of Project Integration to create Linkage and increase Stakeholder benefits Can be used to raise finance for a VW-Golf Conclusions CONCLUSIONS

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