The Market for Infrastructure Finance A Navigational Aide

Transcription

1 The Market for Infrastructure Finance A Navigational Aide Jan Martin Witte, KfW Office Kampala Presentation at East African Power Industry Convention 31 August 2010, Nairobi

2 60 years of KfW Financing with a public mission Promotional bank of the Federal Republic of Germany Founded in 1948 as Kreditanstalt 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 2

3 Financial Cooperation with Developing Countries KfW Entwicklungsbank and DEG Target group Governments and state institutions in developing countries (Entwicklungsbank) Private sector (DEG) Task KfW Entwicklungsbank finances (infrastructure) investments and accompanying advisory services in developing countries Objectives 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 3

4 Highlights KfW Infrastructure Portfolio Country: Uganda Project: HPP Bujagali (250MW) Client: Bujagali Energy Limited Key Metrics 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 4

5 Highlights KfW Infrastructure Portfolio Country: Kenya Project: HPP Kindaruma Client: KenGen Key Metrics 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. 5

6 Highlights KfW Infrastructure Portfolio Country: Uganda Project: West Nile Electrification Client: WENRECO/ GoU Key Metrics 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. 6

7 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? 7

8 The Challenge: Africa s Infrastructure Finance Gap Africa 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 8

9 The Challenge: Africa s Infrastructure Finance Gap Africa increasingly relies on emergency thermal power Emergency Generation Capacity Emergency Generation Capacity as % of Total Cost of Emergency Generation as % GDP Angola % 1.0% Gabon % 0.5% Ghana % 1.9% Kenya % 1.5% Madagascar % 2.8% Rwanda % 1.8% Senegal % 1.4% Sierra Leone % 4.3% Tanzania % 1.0% Uganda % 3.3% Source: Africa Infrastructure Country Diagnostic 9

10 The Challenge: Africa s Infrastructure Finance Gap Africa s power is very expensive Source: Africa Infrastructure Country Diagnostic 10 Chad Cape Verde Madagascar Uganda Burkina Faso Senegal Kenya Rwanda Cameroon Niger Benin Côte d'ivoire Namibia Ghana Lesotho South Africa Mozambique Tanzania Ethiopia Congo Malawi Nigeria Zambia US cents

11 The Challenge: Africa s Infrastructure Finance Gap Power shortages have a significant negative impact on growth Source: Africa Infrastructure Country Diagnostic 11

12 The Challenge: Africa s Infrastructure Finance Gap The 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 Source: Africa Infrastructure Country Diagnostic 12

13 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? 13

14 Where s the Money? Sources of Infrastructure Finance Special 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 real returns can tend towards zero However, returns are unlikely to be negative 14

15 Where s the Money? Sources of Infrastructure Finance Main sources of finance Public Finance ODA New Donors Private 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 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 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 resourcerich economies (exchange deals and strings attached ) 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 15

16 Where s the Money? Sources of Infrastructure Finance Cost of capital by funding source Source: Foster and Briceno-Garmendia (2010), Africa s Infrastructure (Washington, DC: World Bank), p.83 16

17 Where s the Money? Sources of Infrastructure Finance Local 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) 17

18 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? 18

19 The Role of DFIs in Infrastructure Financing Development 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. 19

20 The Role of DFIs in Infrastructure Financing Development Finance Institutions are an important source of infrastructure finance (II) Bilateral DFIs: Principal 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 20

21 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) 21

22 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 22

23 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 23

24 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? 24

25 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 25

26 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 26

27 Contact Details Jan Martin Witte Division Energy, Transport and Telecommunication / Africa KfW Kampala Office Plot 23 Nakasero Road Kampala (Uganda) Phone: janmartin.witte@kfw.de