Risk management

instruments to mobilize
private finance
 Outline

 The implications of risk

 The different types of risk
 Risk mitigation instruments
 Risk coverage gaps
 AfDB experience
The implications of risk
• Risk is the most important factor which prevents
projects from finding financial investors;
• Risk is the most important factor which prevents
investors from raising the returns investors
demand;
• Higher financial returns are required to cover
higher risks;
• Risk and risk perceptions vary from project to
project, technology to technology, industry to
industry, and country to country;
• Low carbon/ climate resilient (green/clean
investments) can suffer higher risk perceptions
due to their dependence on public policy and,
often, relative immaturity of technologies,
markets, and industries;
(Reference: CPI, 2013)
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The different types of risk
Political, policy and social risk (PPS-risk):

(Reference: CPI, 2013)

 The different types of risk
Technical and physical risk (TP-Risk)

Reference (CPI, 2013)

The different types of risk
Commercial and market risk (CM-risk)

(Reference: CPI, 2013)

The different types of risk – I am not
convinced by this category – suggest you drop this slide

Outcome risk (O-risk)

Reference: CIP, 2013

Risk mitigation instruments

(Reference:CPI, 2013)
Risk mitigation instruments

(Reference: CPI,2013)
Risk coverage gaps
• In Africa the level of perceived risk is high across
most risk categories:

• Political, policy and social risk: Political

instability, poorly designed and implemented policies

• Physical and technical risk: harsh working

environments, access to technology, equipment,
skilled labour

• Commercial and market risk: perceived weakness

of domestic financial markets
MDB role
 MDBs play a vital role by providing concessional
resources from donor funds to improve access to
capital
 In the process, MDBs implement checks and balances to
ensure donor funds do not create adverse impacts
 MDBs promote correct risk allocation – objective is to
allocate risks to those entities best able to manage
specific risk
 Hence, MDBs can leverage private finance through
instruments such as Public Private Partnerships,
apportioning and reducing risk to private sector
 Scale matters: Programmatic level interventions are
preferred to Project level interventions and give
more opportunity to manage risk
 AfDB experience
• For large scale projects, risk transfer approach is
adopted most frequently (instruments include loan
guarantees, political risk insurance and public co-
investments);
• Targeted lines of credit and the Sustainable Energy
Fund for Africa (SEFA) provide examples of how
small-to-medium scale green projects can be
supported and new sources of capital attracted;
• Other programmatic instruments being deployed
include providing concessionary finance linked with
technical assistance, to commercial banks to
incentivize them to lend to renewable energy and
energy efficiency opportunities, especially small to
medium scale opportunities. (e.g Bank is in
discussion with two Nigerian banks to extend lines of
credit - which blend concessional climate finance - to
incentivize the banks to take on additional risk)
Case study 1: Morocco’s Ouarzazate I
Concentrated Solar Power (CSP) Project
($1.3B)
Strong public support
• A favorable regulatory and renewable energy policy framework
established to encourage private sector engagement
• A special­ized entity (MASEN) set-up to manage CSP projects.
• A purchasing power agreement drawn up between MASEN and the
Power Utility.

Significant IFI contribu­tion

IFIs provided significant concessional financing, which contributed to
driving down the levelized cost of energy by approximately a quarter. The
IFI financing also included resources from climate funds (CTF). In
addition, IFIs provided institutional and specialized technical
support.

Well-designed public private partnership

MASEN’s role in the public-private partnership is innovative: It acts as
both equity investor and power purchaser (off-taker) and thus has the
ability to align public and private objectives. The risk allocation is also
appropriate: the private developer bears construction and operational risk
while the Government of Morocco bears electricity market (revenue) risk.
Case study: Menengai Geothermal
Development Project
 Kenya recognized that investors are reluctant to take geothermal exploration
risk (and in the event investors take the risk the tariff becomes high). Hence,
considering the country’s well-developed energy policy, including feed-in
tariffs, Kenya established the Geothermal Development Company (GDC)
which is responsible for the developing geothermal fields, in specific steam
production – which the private sector will subsequently use to produce
electricity.

 For GDC’s development of the Menengai Field, the government of Kenya

provided USD 247 m while the African Development Fund provided USD
125m blended with USD 25m from the Scaling-up Renewable Energy
Program – one of the Climate Investment Funds – alongside other IFI
funding (AFD USD 72 m, EIB USD 38 m, IDA being finalized).

 This investment in drilling and steam production laid the foundation for
private sector investment in (Independent Power Producers) IPPs. The
procurement for the IPP projects (capacity of approximately 400 MW) is
currently underway.

 Going forward, in 2014, as the IPPs are established, African Development

Fund Partial Risk Guarantees of approximately USD 100 m are also
envisaged to provide investors with comfort on the steam supply by GDC to
the IPPs under the aegis of the steam supply agreements.
Thank you
 Climate Finance Facilities – the Goals
The Environment and Climate Division managed 94% of the climate
finance flows channeled by the Bank in 2013.

The Division mobilizes innovative environmental mechanisms and

currently manages and oversees the implementation of several
climate finance instruments including:

Enabling Environment
They are used for
Co-financing during project development phase

Piloting low emissions

and climate resilient
Unlocking private sector
development solutions
investments in small and
while scaling up
medium sized clean energy
and energy efficiency renewable energy.
projects. Greening Bank projects
and programs through co-
financing.
 Sustainable Energy Fund for
Africa ( SEFA)
SEFA is an AfDB-managed Multi-donor Trust Fund (~USD 75m) designed
to unlock private sector investments in Renewable Energy (RE) and
Energy Efficiency (EE) projects.

Key features:

 Pan-African mandate with no regional or technology constraints

 Promotion of private sector participation (IPPs or PPPs)
 Targeting the missing-middle (small / medium sized projects USD 10 –
200m)
 Early stage advisory to project developers to bring projects to
bankability
 Strong origination and due diligence capacity anchored in dedicated
team
 Ability to support upstream activities (policy, regulatory, capacity,
knowledge)
Through 3 areas of focus / financing
• Project preparation – TA grants & in-house (Secretariat) advisory
• Equity investments – through PE Fund (AREF managed by Berkeley
Energy)

• Enabling environment – TA grants & in-house (Secretariat) advisory

Summary of Typical Risks and Mitigating Factors
Risks Mitigants
Sponsor’
 Equity paid-in before debt; KYC,
financial
seasoned management
strength
Fuel, Raw
 Long-term supply contract
Material
Management
 O&M agreement
Capacity
Market Risk  Off-take contract / minimum revenues
/Demand risk guarantees
Cash Flow  Loan/Equity ratio / debt structuring
(stable/risky) (step-ups, cash sweeps)
Interest Rate  Hedging methodologies, derivatives,
Risk fixed rates
Environmental &  E&S action plan ; community outreach ;
Social social programs, communications
Political Risk GUARANTEES!

The Partial Risk Guarantee

Private Sector Window – Financial Products and Services

1 2 3 4

LENDING GUARANTEES EQUITY RISK MANAGEMENT

INSTRUMENTS Partial Credit Guarantee Direct/Indirect PRODUCTS
Fixed Spread Loans Subordinated Debt
Interest Rate Swaps
Including local Mezzanine Debt
Cross Currency Swaps
currency Convertible Debt
Commodity Indexed
Swaps

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TRADE FINANCE TECHNICAL AFFILIATED

PROGRAM ASSISTANCE FUNDS PARTNERS
Lines of Credit African Legal Support Fund Africa Guarantee Fund
Risk Participation Fund for African Private GuarantCo
Agreements Sector Assistance African Export-Import Bank
Soft Commodity Finance African Water Facility
Facility Clean Technology Fund

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