Financing Infrastructure Development

African Capital Markets Conference29th & 30th April 2008

Chris Vermont

Head of Debt Capital Markets

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)

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.

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

23%

19%

39%

5%

9%

5%

East Asia and Pacific

Europe and Central Asia

Latin America and the Carribean

Middle East and North Africa

South Asia

Sub-Saharan Africa

Source: World Bank

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

16%

17%

20%9%

5%

33%

East Asia and Pacific

Europe and Central Asia

Latin America and the Carribean

Middle East and North Africa

South Asia

Sub-Saharan Africa

Infrastructure finance – hierarchy of difficulty

Easy

Difficult

• 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

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

16%

64%

20%

0%

Energy Telecoms Transport Water and sewerage

30%

49%

16%

5%

Sub Saharan Africa All Regions

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

Nigeria S. Africa Moz'bique Cameroon Benin Tanzania Other TotalTelecoms 9,263 1,123 139 348 134 311 2,680 13,997Energy 1,920 1,261 1,206 532 590 376 2,059 7,945Transport 2,618 3,988 335 0 0 28 1,491 8,458Water 0 31 0 0 0 9 3 43Total 13,800 6,403 1,679 880 724 723 6,234 30,443% of total 45% 21% 6% 3% 2% 2% 20% 100%

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%

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

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

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

Why Local Currency Guarantees?

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

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

GuarantCo’s Products

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)

Eligible Clients

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

Resources

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)

Funding Tenor Extension

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)

Frontier Markets Fund Managers Team

   Direct Tel Number Email Address

    +44 (0)20 7815- @frontiermarketsfm.com

Nick Rouse Managing Director 2780 nick.rouse

Chris VermontHead of Debt Capital Markets 2950 chris.vermont

Douglas BennetSenior Guarantees Executive 2786 douglas.bennet

Orli Arav Director 2782 orli.arav

Roland Janssens Senior Investment Adviser 2926 roland.janssens

Tarun Brahma Investment Adviser 2951 tarun.brahma

Benito Grimaudo Investment Adviser 2784 benito.grimaudo

www.emergingafricafund.com