In the last 15 years, countries in the MENA region have increasingly shifted to Independent Power Producers (IPP) and Independent Water and Power Producers (IWPP) for generating power and desalinate water. With one of the fastest growing markets in MENA, and growing electricity demand, the IPP market is all set to play an important role in the power generation in Middle East.
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cc Cristian Bortes
How to attract IPP investment into new projectsprojects
Lower average maturity of loansand increase in interest rates:leading to refinancing risks as theproject duration is notcommensurate with the loanfunding, and hence there is aneed to seek alternate sources offunding
Source: Frost & Sullivan
Rising Interest Rates
2.0 1.0 1.0
1.8 1.5 2.6
1.7 2.0 2.8
3.7 3.4
1.8 2.4
3.3 4.3
3.0
1.0
4.1 3.7
6.4 6.1
2.3
4.1
7.5
5.3
12.0 13.0
11.4
7.7
9.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
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Trends in average number of book runners and tier 1 agents of loans In power financing
A marginal revival is noted in2010 compared to 2009 in thenumber of book runners and Tier1 agents. US Dollar is the mostpreferred currency amonglenders. Hence the initialpreference should be for USdollar based tranches
Currency
1996-2010
Average number of book runners
Average number of Tier 1 Agents
Euro 1.5 2.4
Moroccan Dirham 2.0 2.0
Saudi Riyal 1.5 3.8
US Dollar 2.7 9.2
UAE Dirham 1.2 5.0
Average 2.5 8.1 Source: Frost & Sullivan
Algeria2%
Bahrain1%
Egypt4%
Iran1%
Israel1%
Jordan0%
Morocco0%Oman
6%
Qatar11%
UAE44%
Total Loan Amount Borrowed By Countries during 1996-2010
Overcoming Political Unrest in
Middle East
• Need for faster growth and employment opportunities.• Need for faster growth and employment opportunities.
Project finance markets for power wereimproving late 2010, however in 2011, thepolitical crisis again resulted in uncertaintydue to fears of contagion effect.
2011
Addressing obstacles to securing financing
12
11%
Saudi Arabia29%
Tunisia1%
44%• Need for faster growth and employment opportunities.• Improved infrastructure (access to electricity and
water)• Lack of trust of people in the Government‘s ability to
address the issues and hecnce confidence buildingmeasures vital
• Need for faster growth and employment opportunities.• Improved infrastructure (access to electricity and
water)• Lack of trust of people in the Government‘s ability to
address the issues and hecnce confidence buildingmeasures vital
Direct Fallout on Project Funding is higher cost of
capital and increasing penetration of the local
population in the workforce
United Arab Emirates, Saudi Arabia and Qatar are most successful in implementation of IPP models. Abu Dhabi’s IPP model is the most bankable.
Source: Frost & Sullivan
Overcoming obstacles for
Support
Finance
Why project is undertaken, why project finance? Simplicity of contracts is important.
Demonstrate government supports and public commitment.
Incentivise private sector to share risks and returns
Before bidding for the project, the investors and equity providers should be able to identify risks, sensitivity of investment metrics under several scenarios of capital expenditure, operations. Clarity on this vital aspect will improve bidding.
Before bidding for the project, the investors and equity providers should be able to identify risks, sensitivity of investment metrics under several scenarios of capital expenditure, operations. Clarity on this vital aspect will improve bidding.
Addressing obstacles to securing financing
13
obstacles for securing financing Allocation
and
Assessment
Framework
Risk allocation to the party which can best most mitigate, manage individual risks
Create bankable projects which minimizes downside risk to project sponsor andmaximises certainty to project lenders
Clarity on framework (implementation agreement, PPA agreement, fuel supply agreement, water supply agreement, land lease agreement, technical service provider agreement, engineering procurement and construction contract, financing agreement, guarantees from multilaterals)
Clarity on framework (implementation agreement, PPA agreement, fuel supply agreement, water supply agreement, land lease agreement, technical service provider agreement, engineering procurement and construction contract, financing agreement, guarantees from multilaterals)
Type of Funding
Outlook for 2011
Key Trends expected in 2011PoliticalStability
Political Instability
International Commercial Banks
In regions where political and economic stability is high, growth in mini perm based loans, improvement in tenors, and stabilized margins, growth in syndicated loans, increased interest in renewable energy investments. In regions where instability is prevalent, it is difficult to predict.
Export Credit Agencies
ECA is likely to play a vital role in IPP especially in Egypt, Tunisia, Jordan, Lebanon, and Yemen. Competitive interest rates (Commercial Interest Reference Rate) is expected to lower the cost of capital
Addressing obstacles to securing financing
14
International FinancialInstitutions (IFI)
IFI is expected to be active in 2011 as they guarantee products (covering specific political and non-political risks) and insurance to underwrite risk in medium long term . Expected to help in mobilizing of the funds for project completion for longer duration at low interest rates.
Sovereign Wealth FundsExpected to show greater interest in the investment of domestic power projects. Matches the long term investment horizon objectives.
Islamic FundsSukuks (Shariah-compliant bonds) is expected to complement other funding. However, competitive rates compared to commercial banks, and quicker execution of the project considered important to strengthen its role.
Domestic Commercial Banks
Increasingly participating in loan syndication.
International Project Bond Market
May play a minor role
Decrease Same LevelsIncrease
Compared to 2010 Prediction for 2011
Agenda for Presentation
• Determining and evaluating sources of equity
• Incentives for facilitating private interest
• Addressing obstacles to securing financing
• Offering low-risk, profitable opportunities
• Implementing strategies for mitigating risk
15
Offering low-risk, profitable opportunities
Managing Managing
Government Perspectives :• Quicker execution of projects• Setting performance & operational
benchmarks for power plants
• Redirecting public money for development
• Improve quality of service & access • Tariff management & power reforms• Encouring private sector participation in
power sector & transfer of risks• Perception of International community &