Aga Khan Fund for Economic Development June 2006 AKFED Copyright © October 2007 Aga Khan Fund for...

Aga Khan Fund for Economic Development

June 2006AKFED Copyright © October 2007

Aga Khan Fund for Economic DevelopmentAga Khan Fund for Economic Development

January 2006

•AKFED & IPS - overview of global activities

•IPS Infrastructure portfolio – a brief overview

•Case Studies – small scale energy projects

Small Scale Infrastructure – Presentation overview




EXISTING PRESENCE AND NEW REGIONAL INITIATIVES

East Africa& Indian OceanKenyaUgandaTanzaniaRwandaMozambiqueMadagascar

Middle EastSyria

South AsiaPakistanBangladesh

Central AsiaTajikistanAfghanistanKyrgyzstan

Canada West AfricaCôte d’IvoireSénégalMaliBurkina Faso

Central AfricaDem. Rep. of the Congo




About AKFED For-profit agency involved in long-term

investments Difference from typical commercial investor

Over 90 project companies in: Financial Services Tourism Media Aviation Industry and Infrastructure

More than 30,000 employees 16 countries in East, West and

Central Africa; South and Central Asia

KEY STATISTICS : AKFED

Industrial Promotion Services

Tourism Promotion Services

Media ServicesFinancial Services

Aviation Services



Aga Khan Fund for Economic DevelopmentAKFED Worldwide…



Aga Khan Fund for Economic DevelopmentAKFED’S APPROACH TO DEVELOPMENT

Entrepreneurship promoted with economically sound enterprises in the developing world

Long-term investments with Strong equity positions Provision of management expertise

Investments in fragile and complex environments Prospects of improving the lives of people

Profits entirely reinvested in further development initiatives



Aga Khan Fund for Economic DevelopmentINDUSTRIAL PROMOTION SERVICES (IPS)

Infrastructure (existing projects) Power/Water

Azito Energie (Côte d’Ivoire) IPP, 290 MW gas turbines; Tsavo Power (Kenya) IPP, 75 MW HFO. Energie du Mali (Mali) water & power concession, 185 MW hydro

+ diesel; PamirEnergy (Tajikistan GBAO) power concession,

43 MW hydro. West Nile Rural Electrification Co (Uganda) 2 MW hydro. Bujagali Energy (Uganda) 250 MW hydro, $860 million

investment.

Telecommunications Roshan (Afghanistan), 1.6 million subscribers, market leader. CATD/Indigo/Somoncom (Tajikistan) 500,000 subscribers,

market leader. Seacom – Sub marine cable along Southern African coast to

Europe and India

Ports Mombasa Container Terminal (Kenya) for consolidated cargo.




PamirEnergy – Key Facts Location: Tajikistan

Customer Base: 28,000 (> 95% residential)

Residential Tariff (2007): 0.25 US cents (≤200 kWh)1.7 US cents

Project costs: US$27 million

Tariff subsidies: US$8.8 million (customer orientated)

Installed capacity: 42 MW

Carbon Credits: 300,000 VERs

Khorog receives 24h/7 power in winter (10 hours/day in rest of country)




GoT willingness and flexibility to support this project

GoT created enabling environment and facilitating the way for private investors

First and only privatization of a state utility in Central Asia

Collaboration of private and public, Government and multilaterals bodies

Creative project financing and innovative use of subsidies for a commercial investment with social orientation

Unique model for replication worldwide (India, Brazil etc.)

First Public Private Partnership in the region




KEY CHALLENGES

Harsh mountainous environment (logistics, etc.)

Significant investment yet affordable tariffs

High winter energy consumption yet lowest available energy

Scarcity of affordable alternative energy sources

Extensive area but dispersed and small population

Culture transition towards a ‘modern’ utility

Strong support required from authorities to implement change

No prior culture of payment for utilities

Very high levels of losses (both technical and commercial)



Aga Khan Fund for Economic DevelopmentUGANDA – West Nile Rural Electrification Co. Ltd

Innovative structure for rural electrification

20-year concession Affordable & Sustainable tariffs

through 50% upfront grant to offset investment

Impacts to date

• Significant reduction in monthly energy costs

• Over 600 new connections

• Cleaner and safer sources of energy

• Improved education and health

• Increased commercial/industrial activities




West Nile – Key facts Location: North Uganda

Customer Base: 5,000 (mainly residential)

Residential Tariff: 13.1 US cents

Additional Generation: 3.5 MW Hydro

Project cost: $14.75 million

Capital grant: $8.2 million (reduces tariff to affordable level

based on IRR of 15%)

Carbon Credits: 443,000 CERs

Customers now receive power 18 hrs/day (compared with around 12 hours throughout the rest of Uganda)




Challenges with Small Infrastructure Projects

• Lack of critical mass leads to financial imbalance in the following areas:

Tariffs

Operating costs

Development costs




Mitigation Measures

• Acceptance of lower hurdle returns.

• Utilisation of “soft-funds through grants, donations, etc.

• Use of carbon credits where possible.




Use of soft funds

• The use of ‘soft’ funds for projects can allow the project to achieve the following objectives:

become financially sustainable for shareholders;

allow affordable tariffs for the customers;

mitigate development risk (development/early stage costs);

Donors often have restrictions in providing grants to private entities eg off grid remote/rural small HPPs at PamirEnergy.




Subsidy Mechanism – linked to consumption

• Subsidy delivered at time of consumption (e.g. Pamir Energy) so becomes part of operating revenue:

Customer invoiced net amount (i.e. before subsidies)

Company receives gross amount (customer payment + subsidy)




Subsidy Mechanism – offset initial investment

• Reduce initial capex and hence investment cost to allow net effective tariff to the customer to be set at an appropriate level e.g. West Nile.

• Tariffs reduced to an affordable level, hence achieves same objective.




Pros and Cons of Different Mechanisms

Capex Offset vs Consumption linked delivery mechanisms

• Consumption linked subsidy is direct to customers, not to company and is provided only upon delivery to customer.

• Consumption linked delivery means that the gross investment cost of the project needs to be financed from “commercial” channels.

• Variances in levels of energy consumed compared with projections will inevitably lead to the need for subsequent tariff adjustments (operationally and politically difficult).

• Consumption orientated subsidies need to be socially orientated or targeted towards the customers who need it most (i.e. the poorest) and not to all customers.




Use of Carbon Credits

• Functions as an effective additional tier of subsidy and/or revenue enhancer.

• Possible in both compliance and voluntary markets.

• Ensure focus (where possible) on renewable energy.




Pamir Energy – Carbon Credits

• Originally incorporated within the Concession Agreement in 2002, so met the “additionality” test.

• Originally developed for compliance market as small hydro project, but host country has not yet ratified “Kyoto”.

• Strong growth in voluntary market has allowed company to benefit and find counterpart for 2008-2012 delivery.




West Nile - Carbon Credits

• One of the early (2002) CDM projects.

• World Bank Prototype Carbon Fund – buyer.

• Provides valuable (guaranteed) cash flows that can be incorporated into projections => facilitates financing, enhancing returns and achieving financial close.




Small Infrastructure – Way forward

• Build on lessons learned in terms of structure and mechanisms.

• Apply solutions to non-energy sectors e.g. rural telephony, roads.

• Establish a vehicle/structure on a regional basis to enable efficient and accelerated replication of such projects on a “standardised or modular” basis.

• Merger of philosophies/skills and closer working practices between donors and non profit agencies as commercial know-how and funding structures are incorporated into projects previously exclusively donor/grant funded.




Conclusions

• Success depends on: patient capital accepting sub-commercial

returns availability of soft / donor money carbon credits increasingly play a key role politically receptive host governments

• Projects that have historically been funded by state/donors can be financed through introduction of commercial project finance techniques.

• With appropriate structure and support, such projects can be sustainable and not a drain on state funds.

Aga Khan Fund for Economic Development June 2006 AKFED Copyright © October 2007 Aga Khan Fund for...

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