Presentation Session 1: Luigi de Pierris ISMED Annual Conference, Defining a Way Forward for Infrastructure Investment in the Middle-East and North Africa (MENA) 4 December 2014 - Paris, France

1. Session 1: Fostering Infrastructure Investment
in the MENA Region
Luigi de Pierris, AfDB
Paris, December 4th/2014

2. Economic growth in North Africa has bounced back after the slow-down
evidenced in the wake of the events of the “Arab Spring”.
Infrastructures and Growth

3.  Inadequate infrastructure is a factor reducing the productivity of the
private sector enterprises and holding back economic growth.
 African Governments are increasingly turning to the private sector
through PPPs to provide a broad range of services previously delivered
by the public sector.
 This shift from traditional procurement methods places new demands
on Government agencies:
 Ability to assess the life-cycle cost of the project to taxpayers (more
difficult than in traditional projects).
 Capacity to structure projects with a profile of risks and incentives
that makes them attractive and bankable to the private sector.
 North African governments seem to have fully embraced this concept
and have shown political willingness to enhance their respective PPP
programs.
 PPP units have been created in Egypt (2008), Morocco (2011), and
Tunisia (2013).
Infrastructures and Growth

4. Promoting Private Sector Participation:
How to make the difference?
 Once the policy reform process is completed and the PPP
framework is in place, it is important to work at transaction level
 Select carefully the projects to be procured through PSP and
PPPs
 Improve the tendering processes to boost investors’
confidence
 Devise coherent risk-allocation models, applying the principle
that each risk should be allocated to the party that is in the
best position to control it
 Make use of the various risk mitigation instruments that are
available in the market

5. Multilateral Development Banks (MDBs):
how can they assist?
 MDBs are repositories of knowledge, with vast experience across
most sectors and jurisdictions.
 MDBs can actively support reform processes. For instance, AfDB
offered a technical assistance grant to operationalize the PPP law
in Tunisia through the set-up of a central unit and pipeline
development.
 MDBs can act as a partner, by sharing their technical expertise and
assisting in the various phases of the project cycle.
 Using their financial muscle (AAA rating), structuring skills and risk
management instruments, MDBs can get commercially viable
projects off the ground.
 Mitigate political risks: MDBs can play the role of “honest broker
role”, leveraging on their relationships with the host governments.
 Capacity building and advisory services. The AfDB is in the process
of creating a regional PPP hub within North Africa with the goal to
foster and accelerate the conduct of successful PPPs in the region.

6. Capacity building: AfDB has launched
important initiatives in RSA and Nigeria

7. Risk Mitigation Instruments
Local Currency Loans

8. Syndicated Loans and Co-financing
DESCRIPTION:
A loan that is provided by a group of financial institutions / lenders
(syndicate) and is structured, arranged, and administered by one or several
arranging financial institutions
Financing structure
(i) parallel co-financing
(ii) the A/ B-loan structure
RATIONALE:
To provide mitigation against political risk through the Bank’s Preferred
Creditor Status
To attract private capital to the continent by acting as lender-of-record and
co-financier
To maximize the development impact of capital resources

9. Syndicated loans and Co-financing:
the A-loan / B-loan Structure

10. Syndicated loans and Co-financing:
the A-loan / B-loan Structure

11. DO MORE WITH
LESS
CROWDING IN
RISK SHARING
 Attracting private investors to Africa
 Greater amount of capital, enabling
governments to share risks/financing
with the private sector
 Leverage the Bank’s risk capital to
avail more funds to projects
 In comparison to loans, guarantees
tie up resources for a shorter period
of time and improve commitment
capacity
 Opportunity to cooperate with other
private and public risk mitigation
providers as well as sister institutions
through the sharing of risks,
knowledge, and due diligence.
Credit Enhancement: Guarantees

12.  A PRG is a financial guarantee for lenders to a project, covering debt
service defaults that result from the non-performance of a government
or a government owned entity on its obligations with respect to the
specific project.
 These obligations are usually defined in contracts between the
government and the private sponsor responsible for the
implementation of the project, which can be a green-field investment
project, an expansion or rehabilitation of an existing project, or a
privatization project.
 The PRG is available to cover private lenders or investors in both the
countries eligible to borrow from the ADB window and those eligible to
access the concessional ADF window.
The AfDB Guarantee Platform
Partial Risk Guarantees (PRGs)

13. 1. Currency inconvertibility and non-transferability
 Protects against losses arising from inability to:
 Convert local currency into foreign exchange within host country
 Transfer funds out of the host country
 Currency depreciation and devaluation not covered
 Pre-existing restrictions on conversion or transfer not covered (unless
government has expressed to undertake cover)
 Conversion / transfer has to be lawful in host country at time when
coverage is issued
2. Expropriation
 Including confiscation, nationalization, and deprivation (referred to as
CEND), or other acts by the host government which may interfere with a
foreign investor’s fundamental ownership rights
Partial Risk Guarantees – Covered Risks

14. 3. Political Force Majeure Risks
 Such as - damages to assets resulting from politically motivated strikes,
riots, civil commotion, terrorism, sabotage, war and / or civil war
4. Breach of contract
 including government contractual payment obligations, such as:
 Termination payments;
 Contractual performance of public counterparties such as failure by
state-owned entities to make payment under an off-take agreement
or an input supply agreement;
 Regulatory risk and change of law such as negation or cancellation of
license and approval or non-allowance for agreed tariff adjustment
formula or regime;
 Frustration of arbitration.
Partial Risk Guarantees – Covered Risks

15. AfDB Role
• AfDB Long-term Loan
• Lead Arranger of DFI’s participation
Key Figures
Total Project Cost USD 585 million
Debt / Equity 70% / 30%
ADB Senior Loan USD 100 million
The Project
Development of a 300 MW wind farm in
the north west part of Kenya
• Will consist of 365 wind turbines of 850
KW capacities
• Adds clean energy to the power grid
• Increases Kenya’s national installed
power by 25%
• Project Sponsor(s): Aldwych, KP&P, IDC,
Norfund, Vestas, IFU
15
LTWP – Lake Turkana Wind Power Project

16. 16
 Simultaneously with the Lake Turkana Wind project, a
400kV transmission line extending from Loyngalani to the
Suswa substation (428km) is being commissioned.
 The line will serve as a major backbone of Kenya’s
transmission system allowing the 300MW LTWP plant and
future geothermal power plants to deliver low cost,
renewable power to the nation.
 The Kenya Electricity Transmission Company (KETRACO),
KETRACO will own the transmission line and have a tolling
arrangement with the off-taker Kenya Power.
 The works for the transmission line will be funded by the
Spanish Government and by commercial banks on the
basis of a guarantee issued by the Spanish Export Credit
Agency CESCE.
 Construction works will be undertaken by Spanish
contractor Isolux.
LTWP – Lake Turkana Wind Power Project

17. Partial Risk Guarantees - Extent of Coverage
 Loans and other forms of debt instruments
 Guarantee maturity is dependent on the financing terms that the Host
country would be eligible to obtain from the Bank/Fund
 All or part of the outstanding debt service obligations to a lender
 May include principal and/or interest payment obligations
 Equity investments are not eligible for coverage

18. Partial Risk Guarantees - Counter Indemnity
 An AfDB PRG cannot be extended unless the member country in whose
territory the investment project is located or who is benefiting from the
guarantee provides an indemnity under which the member country
agrees to reimburse the Bank/Fund for any payments the Bank/Fund
would make under the guarantee.
 Any payment made by the Bank/Fund is immediately due and payable
by the country providing the counter indemnity.
 Failure to pay can lead to arrears, similar to failure to make timely debt
repayment of a Bank/Fund loan and will trigger the sanction policy and
cross default provisions as appropriate.
 However, the Bank/Fund, in its own right and at its sole discretion, may
amortize the amount to be paid in the form of a loan over a period of
time.

19. Partial Risk Guarantees - Transaction Diagram

20. IRMA - Initiative for Risk Mitigation in Africa

21. IRMA - Initiative for Risk Mitigation in Africa
 In the face of the growing needs for risk mitigation in the African
continent, the African Development Bank has devised a range of
financial instruments intended to offer risk mitigation solutions to
various stakeholders and investors.
 The Initiative for Risk Mitigation in Africa (IRMA) - a program promoted
by the OECD with financing provided by a Trust Fund established by the
Italian government – has the objective of supporting the effective use of
the Bank’s risk mitigation platform.
 Interacting with the various departments of the Bank, IRMA ensures
that the best and most cost-effective risk mitigation solutions are
implemented.
 By paying specific attention to the different layers of risk involved in a
transaction, deals can be structured in a coherent and cost efficient way.

22. IRMA - Initiative for Risk Mitigation in Africa
IRMA is carrying out a far-reaching capacity building programme in the
Continent to increase awareness and capacity in governments on risk
mitigation issues

23. Wrap-up
 Investment needs in North African infrastructure are huge. Private
Sector Participation and PPPs remain an attractive option
 Governments are improving policies and processes to encourage private
investment in infrastructure
 Risk perception remains high among international investors. MDBs and
other providers have developed a panoply of instruments aimed at
mitigating business risks
 Optimal usage of the available instruments can make the difference in
attracting private investment

24. Luigi de Pierris
Private Sector Operations
IRMA - Initiative for Risk Mitigation in Africa
CCIA Building, Office 7R
01 BP 1387, Avenue Jean-Paul II
Abidjan 01
Côte d’Ivoire
Tel: (+225) 21261244
Mobile: (+225) 06125347
E-mail: l.depierris@afdb.org
www.afdb.org