Innovative financing instruments to fund municipalities infrastructure projects #MondeEnCommun AGENCE FRANÇAISE DE DÉVELOPPEMENT
Agenda 1. AFD s strategy and intervention in the municipal space 2. The context of the Municipal Borrowing Policy 3. Pooled funding 4. Off-take Guarantee 5. Bond Emission Garantee 6. Cityriz Guarantee for LG Financing #MondeEnCommun AGENCE FRANÇAISE DE DÉVELOPPEMENT
1.1 AFD s 2016-2020 Strategy in South Africa 3
1.2 AFD IN SOUTH AFRICA 1.8 Billion granted since AFD started its operations in South Africa in 1994. An outstanding portfolio of 0,8bn. A strong and long-standing focus on urban development & municipal financing. 4
1.3 AFD Urban Development Strategy Promoting a sustainable and inclusive urban and territorial development Fostering public service delivery and spatial transformation Contributing to fill the gap in Social Housing Engaging in long term policy dialogue Reaching out secondary cities Diversifying approach and financial tools 5
1.4 AFD and SA municipalities Providing direct financing or credit line in a context of declining trends in external (and internal?) funding Via financial institutions to reach secondary municipalities o Since 1994: 6 credit lines to DBSA (2 Bn ZAR) o Since 1997: 3 credit lines to INCA (1,2 Bn ZAR) 6
1.4 AFD and SA municipalities Providing direct financing or credit line in a context of declining trends in external (and internal?) funding Directly to Metros: non-sovereign loans based on creditworthiness and technical cooperation grants aligned on IDP objectives o 2004: ethewkini Waste to electricity project (70 M ZAR) o 2005-2011: Joburg water conservation and adaptation project (900 M ZAR) o 2013: Cape Town budget support for sustainable urban infrastructure (2,3 Bn ZAR) o 2015: Joburg budget support for spatial transformation (1.5 Bn ZAR) o 2016: Ethekwini aqueducts project co-financing (350 M ZAR) 7
2.1 The Municipal Borrowing Policy As a DFI, AFD strongly supports key principles of the policy o No state or provincial guarantee nor bail-out; o Systemic discipline and limited implicit/contingent liabilities; o Pricing based on debt risk assessment; o Concessionality consistent with development impacts o Long-term, participatory strategic and financial planning processes as critical as financial availability; o DFIs potential role in catalyzing funding to secondary and rural municipalities. Commitment to strenghten our role as market enabler o Financial schemes to facilitate longer terms lending o DFIs seek to crowd-in and leverage private sector funding o DFIs are willing to stimulate financial innovation to promote alternative funding 8
3.1 Pooled Funding Characteristics o Public entity that pools investments project for financing o Allowing larger debt issues with better credit ratings o Each member provides a share of capital o Mutual guarantee o No explicit credit enhancement by national governement o The public entity provides adapted lending to its LG members Challenges o Upfront structuring costs o Not providing debt to non-credit worthy municipalities o Shared responsibility over another municipality o Princing 9
4.1 Off-take Guarantee: Introduction Off-take Guarantee What is it? Types of guarantees A guarantee that provides cover against public sector s defaults on its obligation in a given project Global Context Addis Ababa Action Agenda (diversification of financing solutions) Types of Contracts Covered Concessions Power Purchase Agreements (PPA) Supply of goods and services Direct Guarantee AFD directly guarantees private sector entity Guarantee L/C AFD guarantees the bank issuing a letter of credit (L/C) to the private sector entity Objectives and Benefits Enhance Gov s credit quality Derisk projects and enable bankability Extension of debt tenor to better meet project needs 10
4.2 Off-take Guarantee Structure Ø Direct Guarantee 2 Project company calls the guarantee in the event of default by Public sector Off-taker, after calling other liquid payment guarantees Guarantee is structured as follows: 4 3 1 (1) Public entity enters in a PPA with private sector (IPP) (2) AFD (Guarantor) enters into an Indemnity Agreement with the Host Government (3) AFD enters into a Project Agreement with the Public Entity (Off-taker) (4) AFD enters into a guarantee Agreement with Private Sector (IPP) 11
4.2 Off-take Guarantee Structure Ø Guarantee to the Issuing Bank The issuing Bank calls the guarantee after: (1) LC is issued to Project company upon Buyer s request (2) Buyer has defaulted on its payment obligations to the issuing Bank 12
4.3 Off-take Guarantee: Key Terms Target ü Public Sector s obligations in projects Term of guarantee ü ü ü Any sector that is eligible for AFD support Maturity equal to the financing of the project: up to 20 years Last resort guarantee Amount of portfolio guarantee ü Guarantee designed to cover many months of payments (3 to 12 months to be defined on a case by case basis) as indicated in the contract Size of the loans ü Between 5 m and 50m Quota ü Amounts invoiced and not contested are covered Extent of risk covered ü Public Sector s payment defaults regardless of causes 13
5.1 Bond issuance guarantee o Guarantee to the investors of bonds issued by SOE, public bank or municipality, with final recourse to the Governement o Guarantee to the investors of bonds issued by SOE, public bank or municipality, without final recourse to the Governement Partial guarantee on First Loss, allowing for credit enhancement AFD could provide technical assistance to structure a green / social bond issuance 14
6.1 Cityriz: AFD s approach on LG s access to finance Large cities as well as secondary municipalities need financial and technical support to face the huge needs for infrastructure catch up in many countries Donors, including AFD, are limited in their lending activity : difficulty in reaching secondary municipalities, impact of currency risk, and often regulatory frameworks don t allow direct lending to LGs. AFD is willing to diversify LGs access to finance and thus encourage the structuring of domestic borrowing markets o with loans in local currency and of longer maturities adapted to the needs of LGs investments o reach a broad and diverse target of LGs (in terms of size, financial strength, etc.) o convince commercial banks that local public sector is a low-risk market segment 15
6.2 Cityriz: Main Guidelines A specific tool for sub-participation in risk of loans to local authorities Risk coverage priced and passed on to the final clients (LGs) as follows : Cost of the resource + overheads + margin for risk (partial reduction of the cost of risk (guarantee) but increased by AFD s risk margin) Guarantee will be partial (cover 50% of the risk of default, to limit moral hazard) Guarantee must be used as a sub-participation and as a guarantee for final loss (ie all recovery procedures prior to the implementation of the guarantee must be carried out by the lending bank) It should ideally, through the substitution of domestic pricing of risk by AFD, lower the borrowing rates for LGs Pricing will be difficult to standardize like Ariz, as the default rates track record for LGs are partial, and thus will be individual 16
5. Contacts AFD South-Africa Carl Bernadac Deputy Director bernadacc@afd.fr Tel: +27 (0)11 540 7121 Anne Gautier Senior Investment Officer gautiera@afd.fr Tel: +27 (0)11 540 7107 afd.fr A WORLD IN COMMON 17