Service delivery in the energy sector: Increasing private sector investment in generation & access PPPs in energy sector in Africa: Best practices and emerging trends Addis Ababa, June 30-July 1, 2011 UNECA-KEEI High Level Workshop

Summary  Presentation discusses approaches and instruments to support significantly increased private sector investment in generation and access.  For delivering generation  Project preparation issues  Project structuring and risk mitigation  Delivering access  Funding/risk mitigation mechanism 2

Delivering generation: key issues  Project leadership  Sector and project preparation  Project structuring/risk mitigation 3

Preparing bankable project packages requires significant preparation activities/funds  Policy & regulatory support  Project specific preparation  Definition of project package goals  Project design  Feasibility studies: social, economic, financial, technical, environmental and administrative.  Cost benefit analysis  selection of sponsor  transaction advisors – legal, financial, technical (to help deliver fair & equitable deal) 4

Currently significant fragmentation in project preparation funding sources  For key projects in Africa, estimated need for c. USD 1.3bn (ranging from USD10-200m per project).  Size limits of preparation funds from each facility tend to be low in comparison with project needs.  Need for significant extra funds.  Need for coordination and consolidation between sources of project preparation funds. 5

MDBs work to deliver financial closure and project implementation  Specific financing instruments to support transaction:  Loan to government creating government equity contribution to PPPs  Loans to private sector  Partial Risk Guarantees  Political Risk Insurance 6

Partial Risk Guarantee structure 7 Partial Risk Guarantee Indemnity agreement Loan Agreement Implementation Agreement Government Commercial Lender Government Utility PPA payments Project Company Project Agreement

PRGs are instrumental for leveraging in private sector on large projects  For the Lao PDR Hydropower project (Nam Theun 2):  private sector indicated that project only possible with a risk mitigation package backed by the World Bank.  Package needed to mitigate the political and regulatory risks of investing in the power sector in Laos and dependency on revenues from neighboring Thailand (due to exports of power).  The World Bank provided an IDA PRG of USD42m, a MIGA debt guarantee of USD91m and a MIGA equity guarantee of USD150m.  USD1.17bn of private capital was mobilized. 8

Delivering access: key issues  Institutional arrangements  Funding/risk mitigation mechanism 9

Mechanism to encourage private sector Service Providers: Output-based Aid 10 Municipality Provider Poor Communities not yet connected OBA Fund Financial Intermediary Subsidy (4) Output Delivered = Connections Installed, service delivered (2) Greenfield or Incumbent Provider (private or public) Water, Sanitation, Electricity, Telecoms or Transport Services Concession contract or other form of Legal mandate Verification Agent (3) One-off connection subsidy Consumption Transitional subsidy Consumption subsidy Pre-finance (1)

OBA supports the delivery of access  Determine the service to be provided (the output)  End recipients are targeted (low income)  Subsidies set at an efficient level  Designed on case-by-case basis with sustainability in mind. Process for determining what the level of subsidy should be.  Based on competitive process or efficient unit price discovery – not actual cost.  Design appropriate institutional arrangements – independent verification  Projects continually monitored and regularly improved upon.  Everything is designed up front & can be monitored 11

Significant experience with OBA  2002: 32 projects identified - $1.5 billion WBG funding  2010: 131 projects identified - $3.5 billion WBG funding (excl. $2.8 bn government financing)  66 projects identified outside the WBG  51 Global Partnership on Output-Based Aid (GPOBA) projects, mainly in water, health and energy, of US$153 m value (committed)  Evidence base is increasing (34 projects closed, 78 under implementation)  So far $1 of subsidy has leveraged $2 of private financing; varies by sector and region 12

Mustafa Zakir Hussain Senior Infrastructure Finance Specialist The World Bank More info on Guarantees: More info on Output-based Aid: 13

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