Water Security and Dams Rehab. Workshop

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1 Water Security and Dams Rehab. Workshop Dam Rehabilitation: Financial Instruments, O&M and Sustainability 19 September 2017

2 PRESENTATION OUTLINE The financial instruments, PPP and new instruments and approaches developed by the Bank applicable to large dams rehab and construction considering the context of ECA countries and Bulgaria in particular; World Bank s «cascade approach»; Examples of private financing of dam rehabilitation. 2

Value of dams as collateral Like all immoveable assets, dams are worthless as collateral without an enforceable contract that provides for a secure stream of revenues.

3 Value of dams as collateral Like all immoveable assets, dams are worthless as collateral without an enforceable contract that provides for a secure stream of revenues. It is necessary to take security over them, mostly as a defensive measure. This can be difficult under the laws of most countries because under the laws of most countries it is not possible to transfer the ownership interest in a riverbed / dam. Instead, the government issues a license or in the case of the Republic of Georgia, for example a right to build. Local law governing the transfer of such licenses or rights to build is critical. Lenders address these issues in the Direct Agreement. 3

4 Benefits, issues Potential benefits Additional power Additional energy / water Life extension. Issues Interruption of generation / production 4

5 Cash-flow considerations t 5

6 World Bank Group s cascade approach (1/3) a cascade approach to investment decision-making to encourage private sector participation, while leveraging and preserving scarce public dollars for critical public investments. If commercial financing is available, that is the preferred course. If it is absent, we try to address market failures. If those efforts are unsuccessful, we use utilize risk instruments and our own matching capital to try to encourage private investment. Finally, if absolutely necessary, then public and concessional financing will be used. 6

7 World Bank Group s cascade approach (2/3) Project is economically viable and a government priority? Yes Financially Viable? Yes Political Yes Commercial Yes Project Risk Yes Risk Ok? Risk Ok? Ok? Private Sector Project Overt subsidy? No Yes No Yes No Yes No Yes Partial risk Guarantees Government Guarantees? Mitigate / Insure? No No No No PPP Public Sector Project 7

8 8 World Bank Group s cascade approach (3/3)

9 Overview of financial products Types of Finance Source Interest Tenor Concessionary finance grants or soft loans Bilateral sources or multilateral development agencies; carbon credits Very low interest rates Long term Public equity Public investment (Government supported). At times public equity is indirectly funded through bilateral/multilateral development banks Dividends cans start low and increase over time Indefinite Public debt Loans from the Government, public bonds or multilateral development banks Low; interest rate set by Government or Development Banks Medium to long-term with optional grace period Export credit Finance through Export Credit Agencies Medium to high Variable but commonly short to medium term Private commercial debt Private banks, commercial arm of Development Banks High interest (may be lower in presence of a guarantee) Short to medium term (possibly extended with guarantees) Private equity Private sponsors, private investors, commercial arm of Development Banks High dividends are expect for risk compensation Depends on length of concession 9

10 World Bank Group offers a wide range of financial products Sovereign loans Political insurance guarantees Partial risk / credit guarantees Subnational loans Corporate Debt Equity Project Debt 10

11 Subnational and Private-sector financial products Subnational Finance Banks lend to state-owned corporations (SOEs) / subnational entity which will implement the hydro project: they will be responsible for debt service SOEs need to be operated at arm s length. Credit assessment focused on the borrower s ability to service the interest: credit rating, assessment of cash flows (e.g. local tax revenue). Corporate Finance Banks lend to private project companies which will implement the project Project company is responsible for debt service (multiple revenue streams?) Credit Assessment is not focused on what the debt will be used for but rather on the overall project company s ability to service the interest and to repay the debt. Project Finance 11 Focus on bankability rather than the collateral of the investor Project Company repays the interest and capital from the free cash available to service the debt Project Company assets may serve as collateral to reduce the risk of the sponsor (e.g. proceeds of sales agreements (off-take agreements), a pledge of shares in the project company ).

12 Financing decision key risks (1/2) Hydrological risk: most sensitive issue determines the income generated / availability payments reliable data basis is highly important risk mitigation through long-term time series of daily hydrological data and a sound methodology for the determination of the expected flow at the potential site still uncertainties due to climate change can be simulated with a financial model Permitting risk/political risk: inefficient administration/changes in legal framework might seriously hamper the project development process liaison with responsible administrative body can mitigate this risk Payment default: 12 off-taker (utility) might not be able to hold payment obligations Escrow account with a minimum holding or Government guarantees can mitigate this risk

13 Financing decision key risks (2/2) Local currency devaluation: If the financial market is not developed enough to provide for formal hedging, the risk has to be borne by the project company. Affordability of local domestic tariffs: debt service is highest during initial years grace periods and tenors need to be maximized and the government may defer its dividends, royalties or taxes to mitigate this risk Cost overrun: 30+% risks for HPPs exposure to external factors makes these costs very difficult to predict Seasonality dynamics: Resource / demand risk 13

Energy generation : Water value: 0.002 0.

14 Sector considerations Irrigation water : Water value: < 0.01 /m 3. Energy generation : Water value: /m 3. Bulk potable water supply: Water value: /m 3. 14

Example project financed expansion: Bumbuna Phase II The Bumbuna II hydropower project, located on the Upper Seli River in North East Sierra Leone, is the country's largest infrastructure project and

15 Example project financed expansion: Bumbuna Phase II The Bumbuna II hydropower project, located on the Upper Seli River in North East Sierra Leone, is the country's largest infrastructure project and is a key part of the Government of Sierra Leone s long term Energy Plan. The project involves building an extension to the existing 50 MW Bumbuna I facility. When complete, Bumbuna II will add 143MW of new capacity and, critically, will provide Sierra Leone with a minimum of 80MW of reliable, all-year round affordable electricity. Construction on Bumbuna II is anticipated to start by mid-2018 with operations forecast to start four years later. Seli Hydropower, the local project company jointly owned by Joule Africa and its local partner Energy Services Company (ESCO,) will be responsible for building, owning and operating Bumbuna II. In August 2017, Joule Africa signed a 25 year Power Purchase Agreement (PPA) with the Government of Sierra Leone, marking an important milestone in the development of the project. 15

Example of corporate-financed rehabilitation: Binga (1/2) A recent refurbishment project has transformed Binga among the oldest hydroelectric facilities in the Philippines into a modern, state of the

16 Example of corporate-financed rehabilitation: Binga (1/2) A recent refurbishment project has transformed Binga among the oldest hydroelectric facilities in the Philippines into a modern, state of the art plant. The 100MW power plant is connected to a zoned earth, rockfill embankment dam with an inclined clay core. The facility began commercial operation in four years after construction began by the Philippine government for the purposes of power generation and flood control. In 2001, the government restructured the power industry and a component of this initiative was the privatisation of state-owned power facilities. SN Aboitiz Power (SNAP, a joint venture between SN Power of Norway and local company Aboitiz Power Corporation) won the public bid in 2007 for the Binga power plant, which was sold as a package with nearby Ambuklao hydro facility. Even as SNAP took over operations the following year, the dam remained government-owned. 16

17 Example (rehabilitation): Binga (2/2) Three-year rehabilitation project. Civil works for the new headrace and intake began in May Due to silt accumulation, the new intake would be 15m higher than the old one. A 240m access tunnel was built to connect the new 160m headrace and intake to a part of the existing headrace. This phase was completed in September The next step was replacing the electrical and mechanical components. Each of the four units was taken down and replaced with new turbines, generators, transformers and main inlet valves. To keep the plant in operation, unit rehabilitation was done one at a time. Rehabilitation of the first unit (Unit 4) commenced in April 2011, followed by Unit 1 in January 2012 and Unit 3 in July Work on the final unit (Unit 2) was completed in July The 50-year old plant was transformed into a modern, state-of-the-art facility: new transformers were installed at the switchyard and the powerhouse buildings also underwent repairs. Although its nameplate capacity is 125MW, the plant is actually capable of generating up to 132MW and potentially even more. Binga now generates additional capacity, which is being traded at the Wholesale Electricity Spot Market, and supplies ancillary services for grid stability. Its expected annual output is about 426GWh. 17

Example of project-financed bulk water supply project: Lima

Pomacocha Reservoir North branch (existing) PTA Huachipa 1st

river Trans-Andean tunnel (future) Huallacocha Bajo

18 Example of project-financed bulk water supply project: Lima OCC (1/3) Left Bank Canal Yauli Right Bank Canal Rímac river Pomacocha Reservoir North branch (existing) PTA Huachipa 1st stage (existing) PTA Huachipa 2nd stage (future) Río Blanco river Trans-Andean tunnel (future) Huallacocha Bajo Reservoir Huarochirí Lima reservoirs (future) South branch (future)

19 Example (expansion): Lima OCC (2/3). LEFT BANK CANAL POMACOCHA DAM ELEVATION 00 RIGHT BANK CANAL 90 MMC Pomacocha Dam (Today) 24.4 MMC at 4262 masl HUALLACOCHA BAJO DAM ELEVATION OR CONDITIONING EXIT GATEWAY 19 Huallacocha Dam (Today) 11.7 MMC at 4345 masl

20 Example (expansion): Lima OCC (3/3) US$ 600m expansion project. Long term bulk water purchase agreement with SEDAPAL (public water utility of Lima) 15% average total tariff increase. Will eliminate summer water deficit. Least cost solution Low NRW (29%) SEDAPAL is financially solid (no need for sovereign guarantee) Possible credit enhancement: escrow of receivables (outsourced).

21 Nicola Saporiti Senior Investment Officer +1 (202)

9.0 FINANCIAL EVALUATION OF POWER PROJECTS

9.0 FINANCIAL EVALUATION OF POWER PROJECTS 9.1 Objectives of Financial Evaluations The financing of power projects in Asia and elsewhere has been undergoing a transition over the last decade as the participation