2015/42 95785 k nKonw A A weldegdeg e ol n oNtoet e s eSrei r e ise s f ofro r p r&a c t hteh e nEenregryg y Etx itcrea c t i v e s G l o b a l P r a c t i c e The bottom line The Kribi Gas Power Project: Private, Local-Currency The Kribi Gas Power Project was the first infrastructure project Financing Made Possible through an IDA Guarantee to obtain long-term, local- currency commercial financing Background Project in Cameroon on a project In the late 1990s the government of Cameroon initiated a reform to The Kribi Power Project (“Kribi”) is owned by the Kribi Power finance basis. An innovative improve efficiency and increase private sector participation in the Development Company (KPDC), a public–private partnership created structure supported by an IDA country’s power sector. The reform included new legislation, a new in 2008 by AES (56 percent) and the government of Cameroon (44 guarantee made this possible by regulator, and privatization of SONEL, the state-owned integrated percent). AES formed KPDC when it was the majority shareholder of covering local lenders against power utility, which was transferred to private management under a ENEO in order to increase ENEO’s generating capacity up to the 1,000 defined government defaults. 20-year concession in 2001. The concessionaire, Energy of Cameroon MW allowed. By opening access to long-term (ENEO),1 was granted exclusivity over transmission and distribution Kribi consists of a new 216 MW natural gas–fired power plant and financing in local currency, of electricity and the right to develop and own up to 1,000 MW of an associated 100-kilometer transmission line. The total project cost the project reduced its foreign generating capacity. was $350 million. Kribi sells all its electricity output to ENEO through exchange risk. Most importantly, In the early 2000s the government of Cameroon decided to a 20-year power purchase agreement. Fuel is purchased under a it lowered end-user tariffs. pursue the exploitation of offshore gas reserves for, among other 20-year take-or-pay gas sales agreement from SNH, which in turn things, incremental power generation. As a result, in March 2006, procures the gas under another 20-year take-or-pay agreement with Perenco Cameroon, a subsidiary of French Perenco, signed a Perenco Cameroon. 25-year production-sharing agreement with Société Nationale des The government of Cameroon awarded Kribi to KPDC by virtue Hydrocarbures (SNH), the state-owned gas supplier, to exploit the of ENEO’s right to develop and own up to 1,000 MW of generating Sanaga South gas field. capacity. To ensure efficiency and least cost, the engineering, That agreement was the basis for the later development of the procurement, and construction contracts for the power plant and Clara Alvarez is a Kribi Gas Power Project. transmission line were selected through a competitive bidding pro- senior infrastructure finance specialist in the cess under the procurement rules and supervision of the European Financial Solutions Unit Investment Bank. of the World Bank’s Energy and Kribi was designed to satisfy base load for the time being and Extractives Global Practice. eventually, once additional hydropower is developed, to be used to Teuta Kaçaniku is an meet peak demand and as spinning reserve.2 The electricity supply infrastructure finance specialist in the same 1 Known as AES SONEL at the time the concession was awarded in 2001, the name changed to ENEO when Actis acquired AES’s assets in 2014. Actis owns 56 percent of ENEO; the 2 “Spinning reserves” are plants synchronized with the grid and kept ready to respond unit. government of Cameroon holds the remaining 44 percent. within a few minutes of a sudden need. 2 T h e K r ibi G a s P o w e r P r o j e ct: P r i vat e , L o cal - C u r r e n c y F i n a n ci n g M ad e P o s s ibl e t h r o u g h a n I D A G u a r a n t e e Figure 1.  Contractual structure of the Kribi Power Project Government Commitment Agreement Government of KPDC Licenses, GSA Cameroon (Borrower) (GOC) and/or “The Kribi Gas Power Local Loan Purchase Agreement AES Kribi Holdings • Local lenders each have a right to require GOC to purchase Project set a benchmark their promissory notes at year 7 if local loan cannot be extended by local lenders for local-currency private • at par, or fair market value if in default financing for infrastructure • void if accelerated or KPDC is bankrupt in Cameroon.” Indemnity Local Loan Agreement Agreement • 14-year amortization with balloon at year 7 • Pre-packaged extension terms to year 14 Project Agreement • Good-faith undertakings to extend or refinance • Representations and warranties by year 7 • Covenants • Good-faith obligation to extend or refinance local loan by year 7 to avoid GOC purchases under local loan purchase agreement IDA Guarantee Agreement IDA • Guarantee of payment by government of local loan’s share of specified Local lenders (Guarantor) government obligations under the government commitment agreement (Beneficiaries) and local loan purchase agreement • Eligible local lenders only (excludes GOC) Source: Authors. from Kribi allows ENEO to provide electricity equivalent to the which was financed on a project finance basis with private equity average consumption of about 163,000 households. and loans from DFIs denominated in foreign currency. Local and With a levelized tariff of $0.128 per kilowatt hour, Kribi provides international commercial banks had provided only short-term a relatively inexpensive thermal addition to Cameroon’s electricity corporate financing. system until additional hydropower resources can be developed. The The government of Cameroon had a strong interest in local average tariff at the time Kribi was designed and financed was $0.18 banks participating in the financing of Kribi. The government’s per kilowatt hour. objective was twofold: (i) to introduce a local-currency component into the financing package in order to mitigate foreign-exchange risk (which is passed through to the tariff), and (ii) to develop the capacity The challenge of the local lending market in long-term project finance. Until 2011, most of the infrastructure financing in Cameroon was While local lenders had liquidity and strong interest in participat- done on a corporate basis through equity and foreign-currency-de- ing in the financing of private projects, they suffered from structural nominated loans from international development finance institutions and regulatory constraints that limited maximum maturities of (DFIs). The only exception was the Dibamba thermal power plant, the loan to seven years, which was insufficient for long-term 3 T h e K r ibi G a s P o w e r P r o j e ct: P r i vat e , L o cal - C u r r e n c y F i n a n ci n g M ad e P o s s ibl e t h r o u g h a n I D A G u a r a n t e e Table 1. Financing of the Kribi Power Project (US$ million) Box 1. Cameroon Kribi Gas Project: IDA Guarantee Coverage Total, all sources 350 Debt 263 The IDA guarantee protects private lenders against debt-service IFC 86 default caused by a breach by the government of Cameroon of: “The challenge was to Other development finance institutions a 95 • Key contractual obligations under the Government Commitment Agreement (including political force majeure; breach of electricity create a financial structure Cameroon commercial banks (under IDA’s partial risk guarantee) 82 license agreements; termination of concession of the off-taker Equity 86 and equivalent replacement failure; and termination of gas supply that was attractive for agreement). local lenders with relatively Project sponsors 48 • The government’s payment obligations under the Local Loan little experience in project Cameroon government 38 Purchase Agreement (that is, payments under the put option). Source: World Bank Group. finance and that would Highlights of the local loan structure a. European Investment Bank, African Development Bank, Netherlands Development Finance overcome regulatory Company (FMO), Central African State Development Bank (BDEAC), and Proparco, an affiiliate The objective was to create a “synthetic” 14-year local currency loan of the French Development Agency. while respecting the regulation limiting loan maturity to 7-years and constraints on the tenor of eliminating refinancing risk. local lending.” • Seven-year loan with a 14-year amortization profile, with a balloon infrastructure financing needs. Moreover, the fact that the govern- payment at year seven corresponding to about 65 percent of the ment of Cameroon and associated entities (SNH and the national original amount. energy regulator) lacked a track record in private project financing • Prenegotiated extension option at year seven, allowing local created a high degree of uncertainty (perceived risk) among the local lenders to extend their loan for another seven years—and providing lenders. incentives to do so. Thus, the challenge was to create a financial structure that was • For local lenders who elect not to extend their participation, transfer of participation to the government of Cameroon upon payment of a attractive for local lenders with relatively little experience in project put fee. finance, and that would overcome the restrictions on the tenor of local lending. The solution tranche of 40 billion CFA francs, equivalent to $82 million, provided Kribi reached financial closing in August 2012. Its financing 3 by domestic commercial banks (the “local loan”). The local loan was structured with a debt-to-equity ratio of 75 to 25. To attract amounted to 31 percent of the overall project debt. local-currency-denominated debt from local commercial banks into The local loan has an innovative structure developed jointly by the structure, the package included, as a risk-mitigation instrument, the government of Cameroon, local banks, and IDA. The amortization an $82 million guarantee from the International Development profile of 14 years was achieved through a “put option” in favor of Association (IDA) of the World Bank. the local lenders, under which, at the end of 7 years, local lenders The debt has a 14-year maturity and consists of three tranches may exercise the option and sell their participation to the govern- (table 1): (i) $86 million from the International Finance Corporation ment at a price defined in the Local Loan Purchase Agreement (box (IFC); (ii) $95 million from other DFIs; and (iii) a local-currency 1). In this case, the government will hold the local loan until KPDC or the government find new commercial lenders to take it up. If the local lenders do not exercise their put option, the loan will be 3 The period of time after an agreement has been entered when all conditions for disburse- ment have been fulfilled (or waived) and all documents have been properly filed and executed. extended for a second 7-year term. Cameroon has no regulatory After financial closing, drawdowns are allowed. prohibition against extending a loan. 4 T h e K r ibi G a s P o w e r P r o j e ct: P r i vat e , L o cal - C u r r e n c y F i n a n ci n g M ad e P o s s ibl e t h r o u g h a n I D A G u a r a n t e e The makers of the local loan benefit from an $82 million–equiv- Kribi’s financing structure provides a novel way of addressing alent IDA guarantee that protects them against debt-service default three common problems of large infrastructure projects in low-in- triggered by a breach of the government’s contractual obligations come countries: currency mismatch, short loan tenor, and uncertain under the Commitment Agreement (including for reasons of political government creditworthiness. force majeure; breach of electricity license agreements; termination The World Bank Group’s involvement enabled Cameroon’s first of concession of the off-taker and equivalent replacement failure; long-term, local-currency loan for infrastructure and thus contributed “Since Kribi began and termination of the gas supply agreement), or of its payments to to building capacity within local banks for future development of commercial operation local lenders under the Local Loan Repurchase Agreement following both the financial and the infrastructure sectors. In addition, the local in 2013, Cameroon has lenders’ exercise of their put option. component in the financing package reduces foreign-exchange risks. The successful financing and implementation of Kribi sets an diversified its generation Benefits of World Bank Group support attractive precedent for future private investments in infrastructure mix and enhanced the in Cameroon, sending a clear message about the government’s World Bank Group support through the IDA guarantee and the IFC reliability and cost- commitment to developing large-scale infrastructure projects in a loan enabled the financing and construction of the Kribi power plant. effectiveness of its sustainable way. Since the plant began commercial operation in 2013, Cameroon energy supply, with an has diversified its generation mix and enhanced the reliability and The peer reviewers for this note were Clive Harris, who manages the Public– accompanying positive cost-effectiveness of its energy supply—with an accompanying Private Partnership Practice in the World Bank’s Cross-Cutting Solution Global positive social and economic impact. Practice, and Richard MacGeorge, a lead infrastructure finance specialist in social and economic the Bank’s Energy and Extractives Global Practice. impact.”