www.IFC.org/ThoughtLeadership Note 20 | September 2016 MITIGATING PRIVATE INFRASTRUCTURE PROJECT RISKS Private sector financing is essential to bridging the infrastructure gap between emerging markets and developed countries. Given the risk profiles of many of these projects, however, private investors are reluctant to help finance important infrastructure investments. Now, new packages of financial and advisory products offered by development finance institutions are substantially improving these risk profiles, making them viable for private investment even in very challenging environments. Emerging markets lag developed countries in terms of reliable d’Ivoire demonstrate how appropriately structured and access to electricity, sanitation facilities, water resources, and implemented investment and de-risking techniques can meet paved roads. Because the necessary infrastructure investments private investors’ needs even in challenging environments. pose too large a burden for African governments and development institutions alone, the time is right for expanded private sector Azura Edo: A New Template for Power Projects participation. A weak electricity grid and insufficient power generation cause widespread and regular blackouts in Nigeria, forcing millions of Private enterprise investments are dependent on risk people to rely on costly and polluting diesel generators to keep on considerations. As a result, many important infrastructure lights, refrigerators, and computers. An estimated 42 percent of investments that are critical to Africa’s development will not be Nigeria’s 180 million residents lack access to electricity. made in the current environment unless there are substantial improvements to their risk profiles. Thus a central theme of the Solving this perennial power shortage has been among the biggest recent development agenda (the Addis Ababa Action Agenda of development challenges for successive governments in Nigeria, the third Financing for Development conference) was the role that Africa’s most populous country. Available electricity capacity is public sector institutions can play to mitigate risks for private less than 5,000 megawatts, yet demand is estimated to be several investors interested in emerging market infrastructure projects. If orders of magnitude higher. done successfully, such risk mitigation can go a long way to “crowd-in” the private finance needed to complement public In 2010 the government of Nigeria embarked on a comprehensive spending on infrastructure. power sector reform to liberalize the electricity sector, increase private participation, and improve efficiency. In support of the Such risk mitigation is not reliant on a single approach, however. reform process, the World Bank Group developed the Nigeria Instead, development finance institutions offer an array of Energy Business Plan, bringing together the resources of IFC, financial and advisory products—including co-financing, along with the International Bank of Reconstruction and guarantees, hedging instruments, credit enhancements, and Development (IBRD) and the Multilateral Investment Guarantee regulatory reforms—that can make emerging market Agency (MIGA), to attract private investment in the sector. infrastructure projects viable for private investors. Combining the efforts of World Bank Group members—the World Bank, IFC, The World Bank Group worked with nearly fifteen financial and the Multilateral Investment Guarantee Agency—and other institutions, including commercial banks and development development finance institutions, the Azura-Edo Power Project in finance institutions, to support Azura, a greenfield gas-fired Nigeria and the Azito Power Plant Expansion Project in Cote power plant that will provide electricity to an estimated 14 million people in the West African country. Azura is Nigeria’s first AZURA-EDO: privately-financed independent power project and draws from the PROJECT IMPACT AND RISK MITIGANTS country’s reserves of natural gas, a clean-burning transition fuel, to address critical electricity needs and move toward a less Impact carbon-intensive economy. • Increasing power supply by 459 megawatts by year 2018, an increase of 10 percent over current national available generation capacity The new 459 megawatt plant near Benin City, about 300 • Providing electricity to an estimated additional 14 million kilometers east of Lagos, is the start of a two-phase project that residents will ultimately generate about 1,000 megawatts of additional • Creating new project document templates for privately financed power projects power for the country. Commercial operation is expected to begin in mid-2018. Market/Off-Taker Risk Mitigants • A ‘Put-Call Option Agreement’ between the company and The approximately $876 million financing package signed in the off-taker backstopping the off-taker payments • Credit enhancements through a World Bank Partial Risk December 2015 was a breakthrough for power generation in Guarantee and the MIGA political risk insurance Nigeria, and received a stamp of approval from the World Bank • World Bank Group participation through multiple Group as well as financing partners including Standard Chartered instruments providing comfort to other investors Bank, Siemens Bank, Rand Merchant Bank, KfW, Proparco, Construction/Operational Risk Mitigants Swedfund, and the Overseas Private Investment Corporation, • Standard project finance structure among others. • Fixed-price turn-key contract with Nigerian and international entities with strong operational track-record An array of World Bank Group instruments was used to structure Gas Supply Risk Mitigants the financing, including partial risk guarantees from IBRD as well • Strong contractual arrangements with the gas supplier as political risk insurance cover for equity, swaps, and (Seplat – coupled with strong operational track record) and with the off-taker under the power purchase agreement commercial debt from MIGA. IFC provided $50 million in debt and $30 million in subordinated debt and mobilized $267.5 million of senior debt alongside the Netherlands Development Finance Company, and an additional $35 million of subordinated The gap between supply and demand is growing. Because new debt. household connections in many countries are not keeping pace with population growth, the electrification rate, already low, is The transaction introduced almost 20 investors, between actually declining. At the same time, the high penetration of diesel shareholders and lenders, with no previous experience in Nigeria, generators across the continent—with prices three to six times to the country’s power sector, many of whom are expected to what grid consumers generally pay—is a strong indication that pursue other opportunities in the country. As a result, the Azura African businesses and consumers are willing to pay for project’s documentation and financial structure are expected to electricity. McKinsey predicts a period of rapid electrification for become a template for future privately-financed power deals in Africa in coming decades. Nigeria, providing a model that could save time and cut costs— and attract additional investors. Yet in the immediate aftermath of a long civil war and a contested and violent election in Cote d’Ivoire, it seemed all but impossible In addition to delivering much needed electricity to millions of for a private entity to embark alone on a major power Nigerians, the Azura project demonstrates the ability of infrastructure project in 2012. The risks, from political volatility appropriately structured solutions to attract international to regulatory and currency risk to a lack of local expertise, among financing even in the most challenging investment environments. many others, were too daunting. That year, to enable such a project to go forward, nine development finance institutions teamed up to provide the long-term finance and design regulatory Azito Energy: Meeting Africa’s Power Needs reforms necessary to break ground on a 139 megawatt power plant Despite being blessed with a huge endowment of natural gas expansion in Cote d’Ivoire. reserves, hydro capacity, and other natural resources, Sub- Saharan Africa is massively underpowered. Generation capacity The power plant is located near Azito village in Cote d’Ivoire’s is lower than that of any other world region and is marked by Yopougon district, about six kilometers west of the port of unreliable supplies, high prices, and low rates of access. Some 600 Abidjan. It was initially built in 1998 when the International million Africans lack access to electricity, according to a 2015 Development Association (IDA), the World Bank’s fund for the report by McKinsey & Co. This publication may be reused for noncommercial purposes if the source is cited as IFC, a member of the World Bank Group. From IFC staff poorest, provided up to $30 million in partial risk guarantees. The A reliable supply of natural gas was organized among several IDA guarantees helped mobilize long-term finance substantially regional producers while the national government and the private beyond prevailing market terms for the country, allowing for the utility Cobalt International Energy were contracted to purchase completion of the initial project. Now, the power plant is majority and distribute the power produced. In addition, the World Bank owned by Globeleq Generation Holdings, a power generation worked with the Cote d’Ivoire government on energy sector developer focused on emerging markets. reform and financial management. An expansion and modernization of the existing Azito plant was As part of the expansion, the existing plant was fitted with two estimated to cost $430 million and would require financing and heat recovery steam generators, a 140 megawatt steam turbine technical expertise, currency hedges, interest rate swaps, generator, one steam condenser, and an air-cooled cooling water insurance against political risk, a reliable fuel supply, and end- system. Essentially, the technology makes use of waste heat user purchase agreements. It was a large and complex package to generated by the existing gas turbines to produce steam to drive pull together, beyond the scope of any private investor. another generator, thereby reducing the need for additional fuels to increase the plant’s capacity. Enter IFC. The development bank provided a $125 million anchor investment and arranged another $220 million in long-term loans The expanded facility will generate 50 percent more power with from eight other development banks. World class turbine no incremental gas consumption. It is expected to reach 2.3 technology was procured from General Electric, and experienced million additional customers and is a successful example of a contractors including Hyundai Engineering and Construction major investment in Cote d’Ivoire following the recent crisis. were brought in to build, operate, and maintain the facility. This publication may be reused for noncommercial purposes if the source is cited as IFC, a member of the World Bank Group. From IFC staff While opportunities to replicate the Azito plant’s successful power generating capacity over the next 25 years and an expansion are proliferating across Africa, there is still a large gap additional $345 billion for transmission and distribution, to fill. New private sector power capacity created from 2012 to McKinsey Reports. 2014 was just 6 percent of annual demand for new capacity across Africa. The continent could absorb $490 billion in capital for new Conclusion The revenue and risk profiles of emerging market infrastructure projects present major challenges to attracting much needed AZITO ENERGY: private investment. Without private financing, however, many of PROJECT IMPACT AND RISK MITIGANTS these infrastructure projects, which are critical to meeting development goals, will not be built. Recognizing this gap, Impact development institutions have created new financial products that • Creating power generation capacity for 2.3 million additional lower the risk of emerging market infrastructure projects for customers with no incremental fuel consumption private investors. As recent projects in Nigeria and Cote d’Ivoire Financing Risk Mitigants demonstrate, this new approach can help attract private • IFC long-term finance, providing comfort to other investors investment to even the most challenging environments.  • Strong financial standing of project sponsors • IFC swap, fixing interest rate on the debt for 15 years Ejura Phoebe Audu, Consultant, Sub-Saharan Africa Department, Operational Risk Mitigants Advisory Services Africa Leadership (eaudu@ifc.org). • Project sponsors very experienced in power sector Matthew Benjamin, Editor, Office of the Chief Economist – Thought • Experienced international contractors Leadership (fmoelders@ifc.org). Market/Off-Taker Risk Mitigants Lin Shi, Strategy Analyst, Office of the Chief Economist – Thought • MIGA equity guarantee on the concession contract and Leadership (lshi1@ifc.org). political and transfer risk • World Bank engagement in sector structural reforms and financial management This publication may be reused for noncommercial purposes if the source is cited as IFC, a member of the World Bank Group.