Funding Opportunities in Renewable Energy Projects in Sri Lanka

Funding Opportunities in Renewable Energy Projects in Sri Lanka

Contents Funding Opportunities in Renewable Energy Projects in Sri Lanka... 1 Objective... 3 1. Why Sri Lanka?... 3 1.1 Quality of Life... 3 1.2 Economic Freedom... 5 1.3 Business Environment... 6 1.4 Highly Literate & Cost Competitive Labor Force... 6 1.5 Attractive & Transparent Laws... 7 1.5.1 Constitutional Guarantee for Investments... 7 2. Funding Renewable Energy Projects in Sri Lanka... 9 2.1 Stages of a Renewable Energy Project... 9 2.2 Funding Process... 10 4.1 Available Projects for Funding... 10 3. Next Step... 11 Page 2

Objective The objective of this document is to provide an overview of the economic landscape and funding opportunities in power and energy projects in Sri Lanka. This document will provide a summary of funding requirements of each project. Funders can contact us to obtain in-depth details of each project. 1. Why Sri Lanka? Today, Sri Lanka is ranked as the most liberalized economy in South Asia. Investors and funders are provided with preferential tax rates, constitutional guarantees on investment agreements, exemptions from exchange control and 100% repatriation of profits. Total foreign ownership is welcome in almost all areas of the economy. 1.1 Quality of Life Sri Lanka leads the South Asian region in terms of human development indicators, with its high literacy rate of 91% placing it way ahead of other South Asian nations & on par with those of South East Asia. Its national health indicators are comparable with those of the developed world. Sri Lanka was placed 91st (Medium Human Development Category) out of 182 countries in the Human Development Indicators constructed in 2010, ahead of Philippines (97th), Vietnam (131st), Indonesia (108th), India (119th), Pakistan (125th) & Bangladesh (129th). The Human Development Index (HDI) measures a country's achievements in three areas of human development viz: longevity, knowledge & a decent standard of living. Longevity is measured by life expectancy at birth. A combination of adult literacy & the combined primary, secondary & tertiary gross enrolment ratio is used as a measure of knowledge while GDP per capita (PPP) is used to measure the standard of living. Page 3

Human Development Index of some selected Asian countries Country HDI Rank GDP Per Capita(PPP US$) Life Expectancy at Birth(Years) Adult Literacy Rate (%) Malaysia 57 14,603 74.2 88.7 Thailand 92 8,643 70.6 92.6 Philippines 97 3,725 71.09 92.6 Sri Lanka 91 5,103 72.4 90.4 China 89 7,518 73.47 93.5 Vietnam 131 3,123 71.58 90.3 Indonesia 108 4,380 70.76 87.9 India 119 3.176 64.7 61.0 Pakistan 125 2,713 65.5 48.7 Bangladesh 129 1,566 64.1 41.1 Page 4

1.2 Economic Freedom The 2010 Index of Economic Freedom published by the Heritage Foundation has ranked Sri Lanka 107th out of 179 developed & developing countries, in terms of its "economic freedom" & the quality of its overall policy environment. Index of Economic Freedom Rankings South & South East Asia 2010 (Selected Countries) Country World Ranking Singapore 2 South Korea 35 Thailand 62 Philippines 115 Sri Lanka 107 Malaysia 53 Pakistan 123 India 124 China 135 Bangladesh 130 Indonesia 116 Vietnam 139 Source: 2010 Index of Economic Freedom The Index, published since 1995, includes a broad spectrum of institutional factors that determine the extent of economic freedom in a country. Page 5

The economic variables used to measure the level of economic freedom are grouped into 10 broad categories :- Trade policy, Fiscal burden of government, Government intervention in the economy, Monetary policy, Capital flows and foreign investment, Banking & finance Wages and prices Property rights, Regulation, and Informal Market 1.3 Business Environment In the EIU's country forecast, Sri Lanka's overall score in the business environment rankings improves from 5.39 for the historical period (2004-2008) to 5.59 for the forecast period (2009-2013). The country's global ranking changed from 63rd to 66th and its regional ranking moves from 13th to 15th in comparison to the historical period. The higher rankings are indicative of the more attractive investment climate in the country, with Sri Lanka's score in most of the categories used to evaluate the business environment improving significantly. For instance, Sri Lanka is ranked highly for its liberal approach to foreign investment, with its global & regional rankings moving from 36th to 27th (out of 60 countries) and 8th to 4th (out of 16 countries) respectively. From a regional perspective, the country's main advantages centre on its open foreign investment regime, its commitment to private enterprise & competition & its liberalized trading environment (where it is ranked 5th). 1.4 Highly Literate & Cost Competitive Labor Force The Sri Lankan work force accounts for 35% of the total population. Sri Lanka boasts high levels of education. We have the highest literacy rate in South Asia (92%) and approximately 50% of the students who have completed their higher education are trained in technical and business disciplines. English is widely spoken in the country and is the main language used by the business community. Page 6

1.5 Attractive & Transparent Laws When you sign an agreement with the BOI, the specific incentives granted to an eligible company, which may include tax holidays or preferential tax rates, exemptions from customs duty and foreign exchange controls, remain valid for the entire life of the enterprise. 1.5.1 Constitutional Guarantee for Investments Sri Lanka has an enviable record of political credibility in the international arena. All major political parties are committed to free enterprise and individual freedom. The government has never defaulted nor requested rescheduling of any of its international obligations. Significantly this protection extends to foreign investors. Bilateral investment agreements supported by a constitutional guarantee, provides strong protection for foreign investment for Sri Lanka. The safety of foreign investment is guaranteed through the acceptance by two third majority of Parliament of the Constitutional Guarantee of Investment Protection Agreements. Under article 157 of the country's constitution, the agreement enjoys the force of law and no legislative, executive or administrative action can be taken to contravene the provisions of a bilateral investment agreement otherwise than in the interests of national security. Bilateral investment agreements are valid for 10 years, and are extended automatically unless terminated by either party. If the agreement is terminated investments already made are protected for another 10 years. A clause in the Sri Lankan constitution ensures the sanctity of the agreements. These agreements provide the following: Protection against nationalization. Prompt and adequate compensation if required. Free remittance of earnings, capital and business fees. Settlement of disputes under the International Convention for the Settlement of Investment Disputes (ICSID). Page 7

Bilateral Investment Protection Agreements exist between Sri Lanka and the following countries: Belgium/ Luxembourg, Canada, China, Denmark, Egypt, Finland, France, Germany, Iran, India, Italy, Indonesia, Japan, The Republic of Korea, Luxembourg, Malaysia, The Netherlands, Norway, Pakistan, Romania, Singapore, Sweden, Switzerland, Thailand, the United Kingdom and the United States of America. Sri Lanka is also a founder member of the Multilateral Investment Guarantee Agency (MIGA). This provides further safeguards against expropriation and non-commercial risk. Investors may also refer disputes for arbitration under the rules of the International Chamber of Commerce. Property Insurance can be obtained in foreign currency through domestic or foreign insurers. Page 8

2. Funding Renewable Energy Projects in Sri Lanka Due to high interest rates of local banks, project developers are seeking funds from overseas funders for renewable energy projects. Renewable Energy projects falls in to high profitable investments in Sri Lanka. Average return on investment of this segment is about 25% - 35% PA. Renewable Energy is a form of energy resource that is replaced by a natural process at a rate that is equal to or faster than the rate at which that resource is being consumed. There are four types of renewable energy projects in Sri Lanka. Mini Hydropower Wind power Solar Power Biomass The government of Sri Lanka signs a 20-year power purchase agreement with project owners for a flat or variable tariff. 2.1 Stages of a Renewable Energy Project It is very important to understand the process and stages of renewable energy projects. Funders will have to fund projects in various stages. Following are the main stages of a typical project. Stage Details Approx. Duration 1 Obtain site ownership 2 months 2 Provisional Approval 6 months from above 3 Other Approvals 8 10 months from above 4 Energy Permit 2 months from above 5 Sign a 20-year Power Purchase agreement with the government 2 months from above 6 Construction 12 24 months (depending on the capacity and geographical location) Operation Table 2.1 Page 9

2.2 Funding Process Funders are expected to fund around 80% of the total project cost on installment basis. Project owner funds the remaining portion. Approximately US$ 200,000 per MW is required to complete stage 1-5 (please refer to table 2.1 above). However, the amount varies depending on the actual stage of the project. Renewable Energy projects are owned by limited liability companies. Company shares will be transferred to funders as security. Average funding period is 8 10 years. Investment recovery The total investment can be recovered within 4 7 years from the starting date of operations. Below is the process to be followed by funders. 1. Select suitable projects from below available projects (table 2.2). 2. Contact us for project details and detailed funding requirements. 3. Sign an agreement with the project owner. 4. Transfer funds and obtain shares for the amount transferred. 4.1 Available Projects for Funding Following funding opportunities are available for potential investors. Code Capacity Type Location Stage (Table 2.1) & Time to live operation Total Funding (US$) MHP01 700KW Mini hydro Balangoda (175Km from Colombo) MHP02 1.4MW Mini hydro Balangoda (175Km from Colombo) MHP03 2MW Mini hydro Balangoda (175Km from Colombo) MHP04 2MW Mini hydro Balangoda (175Km from Colombo) MHP05 2.5MW Mini Hydro Matale (165Km from Colombo) MHP06 1.25MW Mini Hydro Matale (165Km from Colombo) MHP07 800KW Mini Hydro Ginigathhena (100Km from Colombo) Table 2.2 Stage 4 completed 15 months Processing stage 2 28 months Processing stage 3 20 months Processing stage 3 25 months Processing stage 2 28 months Processing stage 2 28 months Stage 6 - Construction (40% completed) 1.2 million 2.5 million 3.5 million 4.7 million 4.7 million 2.7 million 900,000 Page 10

3. Next Step This proposal has provided only limited information about projects and terms and conditions in funding. Please visit evokestech.com and contact us for more details or ask any questions. Page 11