Infrastructure Project Finance Prognosis

1. WBSDI-NAMIBIA INTERNATIONAL INVESTMENT CONFERENCE31 0ct - 1 Nov 2007 Where next for Infrastructure Project Finance: “A prognosis” By Alwyn Coetzee, Country Manager: International Finance, DBSA

2. Contents of the Presentation • The macro environment: Opportunities • Strategic Investment Goals for SADC • Key Focus Sectors, “A Prognosis” • Potential sources for financing • “Project Finance” Typical Risks and Mitigations • Limited Recourse Project Financing • Conclusion

3. Macro Environment: Opportunities South Africa SADC • Large infrastructure spending – ASGI-SA, 2010 World Cup • BEE Sector Charters – incorporating broad-based empowerment, lack of equity and security • Opportunities to use PPPs by local government to accelerate infrastructure development and service delivery • Increasing appetite of private sector banks/institutions and private equity to fund infrastructure (selectively) including social infrastructure • Regulatory and policy frameworks well-established but trap of over-regulation! • Short term and medium term action plans of NEPAD supported by the Infrastructure Consortium • Funding for integration in SADC and surrounding RECs • Funding for capacity building, project preparation and investments • Issue: Insufficient bankable projects, and weak sponsors • Acceptance of PPPs/Project Finance principles and role of private sector • High prices for commodities and resources (mining, oil/gas, etc) have boosted currency reserves and stabilised macro-economic fundamentals • Increased collaboration with BRIC (Brazil, Russia, India, China)

4. Strategic Goals for SADC: Where next for infrastructure finance. • Give priority to infrastructure that promotes regional integration • Form strategic partnerships on regional and domestic investments • Strengthen leadership by partnering with local expertise through empowerment • Focus on financially viable public and private sector investments • Develop local capital markets to support domestic mobilisation and local currency funding • Select projects in key economic sectors that will grow the economy

5. Key Focus Sectors, “A Prognosis”. • Number of projects identified across sectors, but lack preparation for funding i.e. • Preparation of the transaction for investment, i.e. • Analyses of investment risks and proposed mitigations • Viability analysis and proposed funding plan; • To attract investment, the project needs: • Strong Sponsor (s) • Experienced operator • Competitive EPC contract • Reputable off-taker • Sponsor can expect favourable terms.

6. A Regional Perspective: Key Focus Sectors: Energy • Abundant energy sources: • Hydro, coal, oil and gas and solar • Oil & gas sector is one of the largest growing sectors in Africa • Major investments required in generation, transmission and distribution • Major sector reform: • Various forms of privatisation/commercialisation are taking place • Tariff rationalisation leading to more cost-reflective pricing • Introduction of independent regulators e.g. Namibia, Zambia, Malawi, Mauritius, Zimbabwe, Angola • Regional integration: • Southern African Power Pool , interconnections allowing for regional trade to take place and eventual competition.

7. Key Focus Sectors - Mining • Africa holds 30% of the world’s mineral reserves • Significant untapped resources • Major employer and earner of foreign exchange for many countries • High returns (also high risk) • Large demand coming from China will boost this sector

8. Focus Sectors - Telecommunications • Rapid growth in both fixed and mobile telephony • Private sector investment in the ICT sector is significant and growing rapidly • Penetration Rates increased from 1% in 1990 to over 10% recently • Low teledensity indicating further room for growth in mobile services and introduction of next generation technologies at lower cost • Competition • Second and third operator licenses on offer in many countries • 80% of countries have full competition in mobile services • Development of an integrated telecoms market • SADC Regional Information Infrastructure (SRII) project • East African Submarine System (EASSy) • West African Submarine Cable

9. Key Focus Sectors – Logistics and Transportation Commercialisation/Privatisation of ports and harbors • Private concessioning of cargo handling and container terminals in Mauritius, Mozambique, Tanzania & Namibia (?) • Development of freeports in Mauritius providing duty-free access to the region and preferential access to the US and EU • Liberalisation of the airline sector • Partnerships with international carriers • Major growth in seaborne trade • Development Corridors • National and regional corridors , e.g WBSDI, Tazara, Nacala, Benguela, • Requires strong partnership between public and private sector

10. Key Focus Sectors - Tourism • Tourism • Growth in Africa outstripping world growth with southern Africa fast becoming a preferred destination • Most of the growth intra-continental • 9 out of 53 countries considered significant of which 5 are in SADC – Namibia, Botswana, Mauritius, Tanzania and SA

11. Key Focus Sectors – Manufacturing and Agri-Business • Light manufacturing • Development of export processing zones to take advantage of Preferential Trade Agreements • Focus on value addition of local raw material, e.g. textile and garment industry • Agro-processing • Sector reform to take advantage of preferential trade agreements

12. Potential sources of financing for Infrastructure • Lenders: (DFIs, Commercial banks and other FIs) • Lenders bank on projected cash-flows and must be sufficient to make debt repayments with safety margins • Sufficient equity stake by sponsors to demonstrate commitment and provide cushion • Require some recourse to the sponsors in certain conditions e.g. cost overruns • Covenants to ensure operational and management performance • Equity providers: • Sponsors must believe in Long Term returns of the project • Will look for appropriate exit/liquidity event

13. Potential sources of financing (continue) • Subordinated Loans: Rank between senior debt and equity • Will require higher return than senior debt and/or some upside potential • Often provided by PPP sponsors • Supplier credit: • Long term loans provided by project equipment suppliers to cover the purchase of their equipment by the project company. • Export Credit Agency (ECA) Facility: • Loan, guarantee or insurance facility provided by an ECA to boost their countries exports. • May require host country counter-guarantee

14. “Project Finance” Typical Risks and Mitigations • Bankable License • Sponsor’s ability to structure and package projects • Added value by PPP partner • Supplement public sector expertise • Mobilizing sufficient equity • Mobilize equity by e.g. PPP structure • Country Risk and political interference • Political stability and committed government • Appropriate security package by Sponsors • Completion • Financial

15. Limited Recourse Project Financing • Permits lenders some recourse to the PPP sponsors e.g. pre-completion guarantee • Lenders bank on project cash-flows as their primary source of repayment and the assets as security • Project Finance enable the sponsors to: • When well structured, have access to funding sources and or guarantees • Projects can be structured as separate entities • Need risks to be shared amongst different parties • Are large projects (hence worth the structuring effort) • Revenue streams can be defined and easily secured

16. Summary • The investment needs for infrastructure are high and need to mobilise capital on a project finance basis and structure on a PPP, SPV etc basis; • Need to prepare and structure projects to attract private capital; • Increased appetite from DFIs, Commercial Banks and Institutional Investors to invest project finance structure; • Manage and mitigation of investment risks

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