Financing Infrastructure Development

1. Financing Infrastructure Development African Capital Markets Conference 29th & 30th April 2008 Chris Vermont Head of Debt Capital Markets

4. Emerging Africa Infrastructure Fund - EAIF • First dedicated debt fund for sub-Saharan Africa • Size: Currently US$365m. Approval to increase to US$600 m • Original sponsor: UK Government – DFID • 3 other European Governments joined (Sweden, Netherlands, Switzerland) • Debt from three development finance institutions and three private sector international banks • Public/private sector partnership leveraging private sector capital for development purposes • First multi-donor initiative by the Private Infrastructure Development Group (PIDG)

6. GuarantCo • GuarantCo’s business is: “Credit enhancement of local currency debt issuance by the private, municipal and parastatal infrastructure sectors in lower income countries” An additional objective, over the medium term, is to help build capacity in domestic capital markets through deal flow, product innovation and risk sharing.

7. Private sector investment in infrastructure by region, 1990 - 2006 • Statistics relate to low and middle income countries • Spending in Africa is dwarfed by other regions • Private sector more entrenched in Latin America / Caribbean and East Asia Source: World Bank

8. Number of countries by region • Africa must compete with other low income countries for investment • Sub Saharan countries in the data total 41 (33% of the World’s low and middle income countries) • Small countries • Small individual requirement • Few projects of international scale

9. Infrastructure finance – hierarchy of difficulty Easy • Telecoms • Energy / Power • Transport • Water NB GuarantCo and EAIF finance a broader definition of infrastructure which includes basic industries and infrastructure aspects of mining & Agribusiness Difficult

10. Sector breakdown of private investment in infrastructure, 1990 – 2006, SSA Vs rest of the developing world • Telecoms a success story • Energy / Power has been constrained at roughly half the developing world average • Water virtually non existent

11. Investment by country (US$ mn), 2000 - 2006 • By far the most investment has been in Nigeria and South Africa with 66% of the total, followed by Mozambique, Cameroon, Benin and Tanzania • Within “other” the largest destinations have been Angola, Benin, Ghana, Kenya, Madagascar and Somalia

12. Mobile phone penetration rates in % (August 2004) • Snapshot of mobile phone penetration in 2004 • From 2001 to 2006 fixed line penetration increased from 4.4% to 4.7% • During the same period mobile phone penetration went from 6.5% to 16.3%

13. Infrastructure finance – Future requirements • Predictions are difficult. US$30.4 bn invested during 2000 to 2006 • The Banker magazine predicts US$26.4 bn in the next 5 years. This compares with a target of US$500m for India over the same period! • A big gap between ambition and reality • e.g Grand Inga project 55,000 MW & US$50 billion

14. Infrastructure finance - Sources • International Commercial Banks – short tenors • Domestic Banks – short tenors some hard currency • ECA’s – some appetite up to 15 years • DFIs – 15 years • Private Equity, Hedge Funds – equity with exit • International Bonds – limited but may pick up again • Local Bonds – good potential but little track record

15. Infrastructure finance – Attitude of Banks • Country Risk Capacity • Tenor Limits • Lending US$ against Local Currency cash flows • Availability of insurance – ECA, MIGA, Private Sector • Sectoral Appetite • Strategic Considerations • Current liquidity crisis

16. Project Level: Matching currency of project revenue with currency of debt service reduces project risk for both developers and lenders: more efficient – no need for currency swaps which are often expensive in illiquid markets lowers financing risk by avoiding devaluation and convertibility risks involvement of local lenders on the ground may also improve monitoring and reduce risk of discriminatory action by host government Why Local Currency Guarantees? Country level: Reducing reliance on offshore finance and minimising hard currency debt service (unlike local currency loans from offshore providers) • more sustainable – helps build capacity within country’s own financial sector • recycles internal savings, via pension funds, life assurance and banks, for productive use in the economy • flexibility – can provide as much or as little support as is required to enable local financing

17. Guarantees covering default risk on underlying debt service - partial credit guarantees Guarantees covering default risk due to specific events - partial risk guarantees Cover for senior, mezzanine or sub debt; maturity, coupon or principal strips, monetisation of carbon credits Other methods of risk transference (e.g. insurance / reinsurance or CDS / derivatives) Preference for risk sharing (defined on a case-by-case basis) GuarantCo’s Products

18. Private sector project companies undertaking greenfield projects or expanding existing facilities Municipal infrastructure if funded largely through user fees (or ring-fenced structure providing satisfactory security) Parastatals if privatisation is planned (or case by case if operations are along commercial lines) Refinancing of existing projects if cross-border financing is substituted by local currency debt Eligible Clients

19. Participation per project $5m - 20m (initial period) For larger requirements, GuarantCo can syndicate risk to other investors if requested (up to $100m) Portfolio targeted at $300 - 500m in the medium term Technical Assistance funds eg. up to $500k per initiative / project but most are likely to be $25 – 100k Transaction tenor up to 15 years Guarantee pricing will vary according to risk but unlikely to be below 2%pa (do not wish to displace commercial risk takers) Resources

20. Tenor of local bank lending often constrained due to absence of longer tenor deposits (asset / liability mismatch) Either internal treasury or external regulator constraint GuarantCo is prepared to offer “put” options to local lenders: guarantee can be called for liquidity reasons (as well as credit reasons) Could cover funding risk beyond a certain date or during times of unusual volatility Only offered in conjunction with partial risk or credit guarantees (ie not standalone) Funding Tenor Extension

21. Frontier Markets Fund Managers Team www.emergingafricafund.com