19 September 2017

Dam Rehabilitation:

Financial Instruments, O&M and Sustainability

Water Security and Dams Rehab. Workshop

• The financial instruments, PPP and new instruments and approaches developed by the

Bank applicable to large dams rehab and construction considering the context of ECA

countries and Bulgaria in particular;

• World Bank’s «cascade approach»;

• Examples of private financing of dam rehabilitation.

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PRESENTATION OUTLINE

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Value of dams as “collateral”

➢ Like all immoveable assets, dams are … worthless as collateral without an enforceable contract

that provides for a secure stream of revenues.

➢ It is necessary to take security over them, mostly as a defensive measure.

• This can be difficult under the laws of most countries because under the laws of most countries it is

not possible to transfer the ownership interest in a riverbed / dam.

• Instead, the government issues a license or – in the case of the Republic of Georgia, for example – a

right to build. Local law governing the transfer of such licenses or rights to build is critical.

➢ Lenders address these issues in the Direct Agreement.

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Benefits, issues

➢ Potential benefits

• Additional power

• Additional energy / water

• Life extension.

➢ Issues

• Interruption of generation / production

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Cash-flow considerations

€

t

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World Bank Group’s “cascade approach” (1/3)

➢ a “cascade approach” to investment decision-making to encourage private sector participation,

while leveraging and preserving scarce public dollars for critical public investments.

➢ If commercial financing is available, that is the preferred course.

➢ If it is absent, we try to address market failures.

➢ If those efforts are unsuccessful, we use utilize risk instruments and our own matching capital to

try to encourage private investment.

➢ Finally, if absolutely necessary, then public and concessional financing will be used.

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World Bank Group’s “cascade approach” (2/3)

Project is economically

viable and a government

priority?

Financially

Viable?

Political

Risk Ok?

Commercial

Risk Ok?

Project Risk

Ok?

Overt

subsidy?

Partial risk

Guarantees

Government

Guarantees?Mitigate /

Insure?

Public Sector

Project

Private Sector

Project

PPP

Yes

Yes Yes Yes Yes

No No No No

No No No No

Yes Yes Yes Yes

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World Bank Group’s “cascade approach” (3/3)

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Overview of financial products

Types of Finance Source Interest Tenor

Concessionary finance grants or soft loans

Bilateral sources or multilateral development agencies; carbon credits

Very low interest rates Long term

Public equity

Public investment (Government supported). At times public equity is indirectly funded through bilateral/multilateral development banks

Dividends cans start low and increase over time

Indefinite

Public debtLoans from the Government, public bonds or multilateral development banks

Low; interest rate set by Government or Development Banks

Medium to long-term with optional grace period

Export credit Finance through Export Credit Agencies Medium to high Variable but commonly short to medium term

Private commercial debtPrivate banks, commercial arm of Development Banks

High interest (may be lower in presence of a guarantee)

Short to medium term (possibly extended with guarantees)

Private equityPrivate sponsors, private investors, commercial arm of Development Banks

High dividends are expect for risk compensation

Depends on length of concession

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World Bank Group offers a wide range of financial products

➢ Sovereign loans

➢ Political insurance guarantees

➢ Partial risk / credit guarantees

➢ …

➢ Subnational loans

➢ Corporate Debt

➢ Equity

➢ Project Debt

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Subnational and “Private-sector” financial products

➢ Subnational Finance

• Banks lend to state-owned corporations (SOEs) / subnational entity which will

implement the hydro project: they will be responsible for debt service

• SOEs need to be operated at “arm’s length”.

• Credit assessment focused on the borrower’s ability to service the interest: credit rating,

assessment of cash flows (e.g. local tax revenue).

➢ Corporate Finance

• Banks lend to private project companies which will implement the project

• Project company is responsible for debt service (multiple revenue streams?)

• Credit Assessment is not focused on what the debt will be used for but rather on the overall project

company’s ability to service the interest and to repay the debt.

➢ Project Finance

• Focus on bankability rather than the collateral of the investor

• Project Company repays the interest and capital from the free cash available to service the debt

• Project Company assets may serve as collateral to reduce the risk of the sponsor (e.g. proceeds of

sales agreements (off-take agreements), a pledge of shares in the project company…).

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Financing decision – key risks (1/2)

➢ Hydrological risk:

• most sensitive issue

• determines the income generated / availability payments

• reliable data basis is highly important

• risk mitigation through long-term time series of daily hydrological data and a sound

methodology for the determination of the expected flow at the potential site

• still uncertainties due to climate change

• can be simulated with a financial model

➢ Permitting risk/Political risk:

• inefficient administration/changes in legal framework might seriously hamper the project

development process

• liaison with responsible administrative body can mitigate this risk

➢ Payment default:

• off-taker (utility) might not be able to hold payment obligations

• Escrow account with a minimum holding or Government guarantees can mitigate this

risk

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Financing decision – key risks (2/2)

➢ Local currency devaluation:

• If the financial market is not developed enough to provide for formal hedging, the risk

has to be borne by the project company.

➢ Affordability of local domestic tariffs:

• debt service is highest during initial years

• grace periods and tenors need to be maximized and the government may defer its

dividends, royalties or taxes to mitigate this risk

➢ Cost overrun:

• 30+% risks for HPPs

• exposure to external factors makes these costs very difficult to predict

➢ Seasonality dynamics:

• Resource / demand risk

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Sector considerations

➢ Irrigation water :

• Water value: < 0.01 €/m3.

➢ Energy generation :

• Water value: 0.002 – 0.11 €/m3.

➢ Bulk potable water supply:

• Water value: 0.10 – 0.50 €/m3.

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Example project financed expansion: Bumbuna Phase II

➢ The Bumbuna II hydropower project, located on the Upper Seli River in North East Sierra Leone,

is the country's largest infrastructure project and is a key part of the Government of Sierra Leone’s

long term Energy Plan.

➢ The project involves building an extension to the existing 50 MW Bumbuna I facility. When

complete, Bumbuna II will add 143MW of new capacity and, critically, will provide Sierra Leone

with a minimum of 80MW of reliable, all-year round affordable electricity.

➢ Construction on Bumbuna II is anticipated to start by mid-2018 with operations forecast to start

four years later. Seli Hydropower, the local project company jointly owned by Joule Africa and its

local partner Energy Services Company (ESCO,) will be responsible for building, owning and

operating Bumbuna II.

➢ In August 2017, Joule Africa signed a 25 year Power Purchase Agreement (PPA) with the

Government of Sierra Leone, marking an important milestone in the development of the project.

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Example of corporate-financed rehabilitation: Binga (1/2)

➢ A recent refurbishment project has transformed Binga – among the oldest hydroelectric facilities in

the Philippines – into a modern, state of the art plant.

➢ The 100MW power plant is connected to a zoned earth, rockfill embankment dam with an inclined

clay core. The facility began commercial operation in 1960 - four years after construction began by

the Philippine government for the purposes of power generation and flood control.

➢ In 2001, the government restructured the power industry and a component of this initiative was the

privatisation of state-owned power facilities. SN Aboitiz Power (SNAP, a joint venture between SN

Power of Norway and local company Aboitiz Power Corporation) won the public bid in 2007 for the

Binga power plant, which was sold as a package with nearby Ambuklao hydro facility. Even as

SNAP took over operations the following year, the dam remained government-owned.

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Example (rehabilitation): Binga (2/2)

➢ Three-year rehabilitation project.

• Civil works for the new headrace and intake began in May 2010. Due to silt accumulation, the new

intake would be 15m higher than the old one. A 240m access tunnel was built to connect the new

160m headrace and intake to a part of the existing headrace. This phase was completed in

September 2011.

• The next step was replacing the electrical and mechanical components. Each of the four units was

taken down and replaced with new turbines, generators, transformers and main inlet valves. To keep

the plant in operation, unit rehabilitation was done one at a time.

• Rehabilitation of the first unit (Unit 4) commenced in April 2011, followed by Unit 1 in January 2012

and Unit 3 in July 2012. Work on the final unit (Unit 2) was completed in July 2013. The 50-year old

plant was transformed into a modern, state-of-the-art facility: new transformers were installed at the

switchyard and the powerhouse buildings also underwent repairs.

• Although its nameplate capacity is 125MW, the plant is actually capable of generating up to 132MW

and potentially even more. Binga now generates additional capacity, which is being traded at the

Wholesale Electricity Spot Market, and supplies ancillary services for grid stability. Its expected

annual output is about 426GWh.

Example of project-financed bulk water supply project: Lima OCC (1/3)

Rímac riverPomacocha

Reservoir

Río Blanco river

reservoirs

(future)

South

branch

(future)

PTA

Huachipa

1st stage

(existing)

PTA

Huachipa

2nd stage

(future)

Lima

Huarochirí

Yauli

Huallacocha

Bajo

Reservoir

Trans-Andean

tunnel (future)North

branch

(existing)

Left Bank Canal

Right Bank

Canal

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Example (expansion): Lima OCC (2/3)

➢ .

LEFT BANK CANAL

POMACOCHA DAM ELEVATION

HUALLACOCHA BAJO DAM

ELEVATION OR CONDITIONING

EXIT GATEWAY

00RIGHT BANK CANAL

Pomacocha Dam (Today)

24.4 MMC at 4262 masl

Huallacocha Dam (Today)

11.7 MMC at 4345 masl

90 MMC

Example (expansion): Lima OCC (3/3)

➢ US$ 600m expansion project.

➢ Long term bulk water purchase agreement with SEDAPAL (public water utility of Lima)

➢ 15% “average” total tariff increase.

➢ Will eliminate summer water deficit.

➢ Least cost solution

➢ Low NRW (29%)

➢ SEDAPAL is financially solid (no need for sovereign guarantee)

➢ Possible credit enhancement: escrow of receivables (outsourced).

Nicola Saporiti

Senior Investment Officer

+1 (202) 250 4079

NSaporiti@ifc.org

www.ifc.org