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1 Title of presentation An Absa Capital Presentation - Financing Power in Africa Anand Naidoo - Head : Power & Energy, Absa Capital 1

2 Table of contents Electricity and the Economy World Capacity Requirements The African Context Specific Issues in Power Projects Financing Options Mitigating Political Risk Other Financing Options Risk Management Conclusion

3 Electricity and the Economy MACRO ECONOMY (various sectors of the national economy) Interaction between energy and other sectors of the economy ENERGY SECTOR regional & global interactions (mostly trade & environmental) COAL BIOMASS ELECTRICITY ENERGY OIL&GAS OTHER Electricity Supply Investment planning Reliability considerations Environmental considerations Planning of operations Competition & IPPs Technology change Electricity Demand Economic prospects and growth of demand Pricing policy Interaction with consumers Competition with other energy forms Rural electrification Cross-boundary electricity trade Source: DME

4 Electricity and the Economy US & Canada 61,800MW load loss, affecting 55 million people - took up to 4 days to restore power - total cost to the economy was $5 billion Italy 25,000MW load loss, affecting 56 million people. - Italy is in process to build 20 generators to overcome crisis

5 Electricity and the Economy If we had to Blackout South Africa for a working day, the economic cost could be R10 15 billion!!!

6 Capacity and Investment Required over next 25 years World Total 4,784GW $9,798b North America 842GW $1,827b Latin America 373GW $708b Europe 801GW $1,399b Africa 269GW $563b 5.8% Middle East 195GW $272b Russia 154GW $256b China 860GW $2,063b South Asia 349GW $801b OECD Pacific 332GW East $714b Asia 391GW $798b

7 Capacity Requirements - Progress Indonesia Brazil Middle East Other Latin America India Africa OECD Pacific Transition Economies Other Asia Europe North America China GW Under Construction Planned Additions needed by 2030

8 Africa Electricity Generation Marocco Tunisia 1 South Africa billion kwh Sahara Algeria Libya Egypt 2 Egypt billion kwh Mauritania 3 Algeria billion kwh Senegal Guinea Mali Burkina Faso Sierra Leone Ivory Coast Liberia Ghana Benin Togo Equit. Guinea Sao Tome & Principe Niger Nigeria Chad Central African Rep. Cameroon Congo Gabon DRC Sudan R. B. Uganda Tanzania Eritrea Ethiopia Kenya Djibouti Somalia 4 Libya billion kwh 5 Nigeria billion kwh 6 Morocco billion kwh 7 Tunisia billion kwh 8 Ghana billion kwh Angola Namibia Botswana Zambia Zimbabwe Malawi Mozambique Comores Madagascar Mauritius 9 Zambia billion kwh 10 Mozambique billion kwh Source : Nation Master Swaziland South Africa Lesotho

9 Africa Power Generation Mix Nuclear 0% Hydro 24% Other 0% Nuclear 2% Hydro 15% Other 1% Coal 47% Gas 1% Oil 12% Coal 63% Gas 22% Oil 13% 90 TWh 480 TWh Nuclear 1% Gas 52% Hydro 7% Other 2% TWh Coal 29% Oil 9% S / thousand cubic feet Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Source : IEA

10 Africa has more than 200 projects in the pipeline, some of which are Bujagali, 250MW, $870m Takoradi II Ibom 142MW, $140.8m Alscon 300MW AES Sonnel, $634m Inga 1&2, 1,200MW, $180m Westcor: Grand Inga, 40,000MW Westcor: Inga 3, 3600 MW, $5.2 bn Kudu, 800MW, $400m Mmamabula coal fired station, 3,600MW, $10 bn Morupule Power Station expansion, 600MW $1.4bn KenGen Geothermal, 64MW Ruhudji Hydro, 358MW. Rumakali Hydro, 220MW. Iteshi Teshi Tedzani 1&2 Cahora Bassa sale, $750 m HCB North Bank, $400 m Moatize, $1.5 bn Temane Gas Power, $1.3 bn Mphanda Nkuwa, $3.1 bn Kafue Lower Gorge, 600MW, $600m Kariba North and South, 660MW Hwange, Kariba, 660MW, $575m

11 Specific Issues in Power Projects Key issues for consideration: Technology Risk Completion Risk Project Performance and Operations Market Risk Force Majeure Environmental

12 Projects in Africa Specific Issues Key Constraints Political risk Foreign currency convertibility/transferability Regulatory risk (enabling environment) Creditworthy off-takers Lack of long-term commercial debt Certain types of sponsors required Expensive importation of expert advice Real cost of debt Minimum local shareholders / minorities requirements on the rise Ring fenced revenue essential for success Lack of auxiliary infrastructure Limited options to replace original sponsors Drawn out implementation period Socio-political reaction to the private sector Risk Management

13 Financing Options Corporate Lending Project Finance Venture Capital Full recourse B/sheet lending Limited or nonrecourse Equity! REWARD Easier credit Lower risk Diversity Multiple site & revenue stream Off B/sheet Cash flow lending Complex credit Increased risk BFS PFS Exploratio n Prospectin g Single site RISK

14 Financing Options Myriad of debt financing sources: ECAs* MLAs*/ DFIs*/ BLAs* Offshore Banks Domestic Banks Capital Markets Project Company *Export Credit Agencies, Multilateral Agencies, Development Finance Institutions, Bilateral Agencies

15 Political Risk Profile Marocco Tunisia Sahara Algeria Libya Egypt Mauritania Medium Risk Medium High Risk Senegal Guinea Mali Burkina Faso Sierra Leone Ivory Coast Liberia Ghana Benin Togo Niger Nigeria Chad Central African Rep. Cameroon Sudan Eritrea Ethiopia Djibouti Somalia High Risk Equit. Guinea Sao Tome & Principe Gabon Congo DRC Uganda R. B. Kenya Tanzania Source: AON Political Risk Angola Zambia Zimbabwe Malawi Mozambique Comores Madagascar Namibia Botswana Mauritius Swaziland South Africa Lesotho

16 Mitigating Political Risks Export Credit Agencies - ECAs offer credit insurance to enable banks to lend for the tenors and price required by power projects Equipment Supplier (Exporter) Commercial Bank Equipment Funds Loan Guarantees Purchaser (Importer) ECA DFI s - IFC / World Bank / ADB / DBSA B-Loan Programme offered by IFC Partial Risk Guarantee Programme offered by World Bank (effective political risk mitigation) MIGA OPIC Private Political Risk Insurance

17 Other Financing Options Bonds, including high yield bonds Eskom, NamPower, CEB, project bonds Approach to a credit rating would involve an analysing both external and project level risk factors that would affect timely payment of interest and principal on the bond issue. External rating factors Project specific considerations Sovereign Risk Business, Legal & Institutional Development Force Majeure Risk Credit Enhancement Contractual Foundation / Legal Structure Technology, Construction & Operations Competitive Market Exposure Counterparty Exposure Financial Strength & Structure Source : S&P Accessing the ZAR debt capital markets - Recently enacted Bond Exchange of South Africa (BESA) legislation has opened up the ZAR Debt Capital markets to foreign sovereigns and corporations..

18 Other Financing Options Securitisation "Securitisation consists of the use of superior knowledge about expected behaviour of particular assets, as opposed to knowledge about the expected financial behaviour of the originator of the chosen assets, with the help of a structure to finance the assets more efficiently Pays excess cash flows Project Operating Company Cedes rights of Future Income Stream Pays for rights to Future Income Stream Issuer SPV Supply of Electricity Transfers Cash Received Pays Interest and Principal Offtaker of Electricity Pays for Electricity Collection Account Pays for Securities Issues Securities Investors

19 Conclusion Power projects are relatively the most attractive to fund Africa has its own set of challenges and these risks have to be mitigated Typical structures Proven track record even in Africa Growing investor base Alternate funding options % 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% International bank project financing by sector Pow er Telecoms Oil & Gas Infrastructure Industrial Mining Leisure Sector Source : Project Finance International

20 An Absa Capital Presentation Financing Power in Africa Anand Naidoo Head : Power & Energy Tel : Mobile : anandn@absa.co.za