1. Mozambique FACILITATING PRIVATE SECTOR FINANCING FOR INFRASTRUCTURE INVESTMENTS THE WORLD BANK Future Economic Policies and Non-Traditional Sources of Finance Maputo, March 22-25, 2010

2. Regional and Sectoral Concentration of Private Flows in Infrastructure (1990-2008) 2 Total: $1,640 bn (4,251 projects) By region By sector Source: World Bank

3. 3 Factors that could affect Borrowings of Public Sector Entities State of Finance of the SOEState of Finance of the SOE Stage of development of the relevant sector and the Regulatory environmentStage of development of the relevant sector and the Regulatory environment Credit HistoryCredit History Credit RatingCredit Rating Source of revenues (generally local currency)Source of revenues (generally local currency) Limited to access to local marketsLimited to access to local markets

4. 4 Factors that could affect State Entities Access to International Financing Limited financing capacity of local marketsLimited financing capacity of local markets Recourse to international markets to fund infrastructure investments in foreign currencyRecourse to international markets to fund infrastructure investments in foreign currency Repayment obligations in foreign currency require access to foreign exchange which often necessitates Sovereign GuaranteesRepayment obligations in foreign currency require access to foreign exchange which often necessitates Sovereign Guarantees

5. 5 Sovereign Guarantees Guarantee provided by the Government to backstop a public entity’s payment or performance obligations in the context of public sector borrowings or PPPsGuarantee provided by the Government to backstop a public entity’s payment or performance obligations in the context of public sector borrowings or PPPs Pros: Pros: –Facilitates access to international debt and capital markets –Enables better terms of financing from commercial markets –Endorsement of Government of the Financing/Project

6. 6 Sovereign Guarantees Cons: Cons: –Creates contingent liability for the Government which may require budgetary allocation –Impacts on borrowing capacity of Government and its debt profile –Involves assumption of the underlying risk by the Government Contd.

7. 7 Third Party Guarantees In addition to Sovereign Guarantees third party Guarantees may be required in support of financings because of:In addition to Sovereign Guarantees third party Guarantees may be required in support of financings because of: Perception of political risk resulting fromPerception of political risk resulting from –Possibility of Reversal in Government Policy –Changes in Government that could lead to a reneging of previous Government’s contractual undertakings

8. 8 Third Party Guarantees –Private Insurance Market –Export Credit Agencies –Bilateral Institutions –Multilateral Institutions

9. 9 The World Bank Guarantee Program Leveraging Bank resourcesLeveraging Bank resources Catalyzing private sector finance in support of developmental objectivesCatalyzing private sector finance in support of developmental objectives Facilitating member countries access to the international debt and capital marketsFacilitating member countries access to the international debt and capital markets

10. 10 Partial Risk Guarantees Rationale: Promotes privatization by catalyzing private sector interest through political risk mitigationRationale: Promotes privatization by catalyzing private sector interest through political risk mitigation Purpose: Supports debt financing in the form of commercial debt or shareholder loans or provides cash flow supportPurpose: Supports debt financing in the form of commercial debt or shareholder loans or provides cash flow support Guarantee coverage: Critical sovereign risks related to Government commitments under the relevant Contractual AgreementsGuarantee coverage: Critical sovereign risks related to Government commitments under the relevant Contractual Agreements Modality: For Privatization, Concessions, or other PPP structures, or for Greenfield ProjectsModality: For Privatization, Concessions, or other PPP structures, or for Greenfield Projects

11. 11 Partial Credit Guarantees Partial Credit (PCG)Partial Credit (PCG) –Generally for public sector projects/entities –Covers debt service default for specified payments –Alternative structures developed for different credits and market conditions Policy Based Guarantees (PBG)Policy Based Guarantees (PBG) –For Sovereign or Sub Sovereign entities –With DPO IDA Credits or on a ‘stand alone’ basis under the DPO framework –For fiscal support –To improve debt terms for government borrowings * Expected to be made available to IDA countries this year. * *

12. 12 IBRD Enclave Guarantees for IDA-only Countries IBRD Enclave Loans can support public and private projectsIBRD Enclave Loans can support public and private projects IBRD Enclave Partial Risk Guarantees (PRG) support private projectsIBRD Enclave Partial Risk Guarantees (PRG) support private projects ‘Enclave Structure’ in support of foreign exchange generating projects that rely primarily on acceptable credit enhancements to IBRD (e.g. through offshore escrow accounts funded by foreign exchange (FX) revenues, strong third party guarantee) in addition to host country government counter-guarantee‘Enclave Structure’ in support of foreign exchange generating projects that rely primarily on acceptable credit enhancements to IBRD (e.g. through offshore escrow accounts funded by foreign exchange (FX) revenues, strong third party guarantee) in addition to host country government counter-guarantee

13. 13 IBRD Enclave Guarantees for IDA-only Countries Alternative ‘Enclave Structure’ in support of projects in relatively high-rated IDA countries (i) that have clear economic benefits (e.g. import substitution) but do not themselves generate foreign exchange; and (ii) projects that have clear economic benefits with strong financial flows in local currency through an offtake to a stronger creditworthy partyAlternative ‘Enclave Structure’ in support of projects in relatively high-rated IDA countries (i) that have clear economic benefits (e.g. import substitution) but do not themselves generate foreign exchange; and (ii) projects that have clear economic benefits with strong financial flows in local currency through an offtake to a stronger creditworthy party IBRD Enclave support would be additional to IDA’s Country EnvelopeIBRD Enclave support would be additional to IDA’s Country Envelope Contd.

14. Guarantees help Extend Maturities... 77 3 5 5 7 0 1 5 1 5 151515 10 15 1010 12 10 14 16 0 2 4 6 8 10 12 14 16 18 China Philippines Pakistan Lebanon Morocco Russia/Ukraine Thailand Cote d'Ivoire Colombia Bangladesh Vietnam Maturity (years) without Guarantee with Guarantee 0 16.5 Laos 16 Uganda 2 14

15. … at the same time Reduce Spreads3.0% 4.5% 3.0% 3.4% 8.5% 6.5% 3.0% 5.0% 0.6% 2.0% 2.8% 0.75% 3.0% 2.0% 2.0% 2.9% 2.0% 2.5% 5.0% 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% China Philippines Pakistan Uganda Morocco Thailand Cote d'Ivoire Colombia Bangladesh Vietnam Interest Spreads over UST/Libor without Guarantee with Guarantee 2.25% Laos 2.25% 15

16. 16 Partial Risk Guarantee for PPPs Limited Recourse Structure A Partial Risk Guarantee (PRG) can cover lenders in support of Public Sector contractual commitments Commercial Lenders Project Company Government Guarantee Indemnity Agreement Contractual Government Undertakings IA PPA GSA Loans World Bank

17. 17 Partial Risk Guarantee for Power Distribution Privatization Letter of Credit Structure

18. 18 Guarantee Coverage Breach of Contract (e.g.):Breach of Contract (e.g.): –Power Purchase Agreements –Supply of gas or water Licensing ArrangementsLicensing Arrangements Regulatory RiskRegulatory Risk Foreign exchange availability & convertibilityForeign exchange availability & convertibility Changes in lawChanges in law Political force majeurePolitical force majeure Natural force majeure events limited to government obligationsNatural force majeure events limited to government obligations Frustration of ArbitrationFrustration of Arbitration Environmental liabilitiesEnvironmental liabilities Government/Public Sector payment obligationsGovernment/Public Sector payment obligations

19. 19 Partial Credit Guarantees can help in the following situations Government or State Owned Enterprise (SOEs) access to capital or the bank marketsGovernment or State Owned Enterprise (SOEs) access to capital or the bank markets Bond issues or commercial loans by public intermediaries, or public entitiesBond issues or commercial loans by public intermediaries, or public entities Pre-Privatization support for public entities through convertible BondsPre-Privatization support for public entities through convertible Bonds

20. 20 Partial Credit Guarantees can help finance Long Term Public Investments01015 $100 m WB Support for Principal Bullet Repayment Pricing (250 bp* ) (250 bp* ) * Above US Treasuries Philippines: Leyte-Luzon Power Project Bond Structure Longest Term Available to the Philippines without WB Support Additional term provided by WB provided by WB Support Support

21. 21 Partial Credit Guarantees can help access the loan market01520 World Bank exposure under the PCG is $120m (present value of the PCG) World Bank exposure under the PCG is $120m (present value of the PCG) Only $30m (25% of $120m) to be charged to country exposure limit Only $30m (25% of $120m) to be charged to country exposure limit Botswana Power Corporation (guaranteed by the government) Morupule B Power Generation Project (2009) World Bank PCG helped mobilize $825 million commercial loan with 20-year maturity World Bank Guarantees $243 m (29% of $825m) principal payments (plus one accrued interest payment ) callable on and after year 15+ 1 day Risk assumed by commercial lenders World Bank guaranteed Risk assumed by commercial lenders World Bank guaranteed

22. IBRD “Enclave” Support for Projects in IDA Countries 22 Limited Government Obligations: Permits/consents Permits/consents Change in law Change in law Political events Political events Expropriation Expropriation “Off Shore” Lenders Guarantee CounterGuarantee LoanAgreement CreditworthyPurchaser Enclave Project PPAExport Guarantee Fee ConcessionContract FX Government Reserve Account

23. 23 Application of Guarantees Greenfield Projects/Privatizations/PPP StructuresGreenfield Projects/Privatizations/PPP Structures –Telecom –Power sector (Generation/Distribution/Environmental Retrofit) –Waste Water and Municipal services –Oil, Gas Pipelines –Transport (Railways/Ports/Airports)

24. 24 Mozambique’s Infrastructure Investment Requirement Investments in the Energy Sector (Power Generation/Transmission)Investments in the Energy Sector (Power Generation/Transmission) Investments in pipelinesInvestments in pipelines Investments in Water, Urban and Irrigation ProjectsInvestments in Water, Urban and Irrigation Projects Investments in the Transport Sector (Roads, Bridges, Ports, Air Ports and Railways)Investments in the Transport Sector (Roads, Bridges, Ports, Air Ports and Railways)

25. 25 Pre-Conditions for Use of Guarantees Subject to Bank appraisalSubject to Bank appraisal Counter-Guarantee from the GovernmentCounter-Guarantee from the Government

26. IDAIBRD Enclave Fee TypePRGsPCGsPRGs Upfront ChargesFront End FeeN/A 0.25% Initiation Fee0.15% on the guaranteed amount or USD 100,000 (whichever is higher) N/A0.15% on the guaranteed amount or USD 100,000 (whichever is higher) Processing FeeUp to 0.50% (for reimbursable expenses) N/AUp to 0.50% (for reimbursable expenses) Recurring charges Guarantee Fee0.75% per annum on guaranteed amount 0.50% per annum on guaranteed amount (in NPV terms) 200% per annum on guaranteed amount Standby FeeCurrently 0%N/A Payment of Fees(by the Private Sector)(by the Gov./ Public Entity) (by the Private Sector) Pricing for IDA and IBRD Enclave Guarantees * Expected to be extended to IDA countries from this year. Is determined by the IDA Board annually. 26 *

27. 27 Preferred Guarantee Modality Early involvement of the Bank may help to enhance investor interestEarly involvement of the Bank may help to enhance investor interest Guarantee structure to be incorporated in the Bid Documents as an optionGuarantee structure to be incorporated in the Bid Documents as an option Bids should demonstrate value added of the GuaranteeBids should demonstrate value added of the Guarantee Value added of the Guarantee to be a part of the Bid EvaluationValue added of the Guarantee to be a part of the Bid Evaluation

28. 28 Benefits of the Guarantee to the Government Catalyzes financing through market access, longer tenors and lower financings costsCatalyzes financing through market access, longer tenors and lower financings costs Facilitates privatization & PPPs by enhancing investor interestFacilitates privatization & PPPs by enhancing investor interest Accelerates the pace of new investment for expansion of relevant servicesAccelerates the pace of new investment for expansion of relevant services Sustains relatively more attractive retail tariff regimes by significantly improving the debt profile of financingsSustains relatively more attractive retail tariff regimes by significantly improving the debt profile of financings Enhances the potential “sale” value of existing assets or of the franchise for the GovernmentEnhances the potential “sale” value of existing assets or of the franchise for the Government

29. 29 Benefits of the Guarantee to the Government No additional contingent liabilityNo additional contingent liability Is additional to the country lending programIs additional to the country lending program Creates market confidence through Bank leverage and track recordCreates market confidence through Bank leverage and track record Provides for risk sharing with the private sectorProvides for risk sharing with the private sector No associated costs (guarantee fee would be payable by the investor as part of project costs)No associated costs (guarantee fee would be payable by the investor as part of project costs) Transitional - can be structured to fall awayTransitional - can be structured to fall away contd.

30. 30 Benefits of the Guarantee to the Private Sector Would help to mitigate critical perceived political risksWould help to mitigate critical perceived political risks Would help to make privatizations financeable through facilitating direct access to financial marketsWould help to make privatizations financeable through facilitating direct access to financial markets Would help to catalyze long term “non recourse” debt financing thereby reducing the risk profile of the investment and overall capital costsWould help to catalyze long term “non recourse” debt financing thereby reducing the risk profile of the investment and overall capital costs Associates the Bank with the project providing comfort on Government governance issuesAssociates the Bank with the project providing comfort on Government governance issues

31. CountryProjectProject Cost (Million) PRG Amount (Million) Date MoroccoJorf Lasfar Power$1,400$1801997 Cote d’IvoireAzito Power Project$223$301998 UgandaDistribution Concession$65$5.52005 Mozambique/South Africa The Sothern African Regional Gas Project R 3.692R 140m R 70m 2005 GhanaWest African Gas Pipeline $590$50m2005 UgandaBujagali Hydropower Project $799$1152007 KenyaRailway Concession$120$40m2007 UgandaRailway Concession$120$10m2007 NigeriaEnergy & Gas Improvement Project $4,000$400m2009 BotswanaMorupule B Power Project $825$243m2009 Completed PRG Operations in Africa 31

32. 32 Case Study Nigeria Energy and Gas Improvement Project (NEGIP) - 2009

33. 33 Nigeria Energy and Gas Improvement Project Sector Issues:Sector Issues: –Abundant gas resources yet shortage of gas for power –Pricing structure for gas –Contractual arrangements –Creditworthiness of the Power Utility

34. 34 Nigeria Energy and Gas Improvement Project Solutions: Sector ReformSector Reform –Pricing restructuring –Imposition of domestic gas obligations on International Oil Companies (IOC) –Change in existing contractual arrangements –Appointment of a Gas Regulator Risk MitigationRisk Mitigation –PRG to backstop the Power Utility‘s payment obligations under the Gas Supply and Aggregator Agreements with IOCs

35. PRG Contractual Structure in Support of Gas Supply and Aggregation Agreements IDA FGN L/C Bank PHCN Indemnity Agreement Guarantee Agreement PRG L/C Reimbursement & Credit Agreement JV Operator Standby L/C Project Agreement Contractual Agreements with no regular Payment flows Payment flows in the event of a Breach of the Gas Supply Agreement JV Agreement NNPC 60% IOC 40% Contractual Agreements & regular Project Payment flows PRG Support Agreement Gas Supply Agreement Escrow Account Aggregator 35

36. 36 Benefits of the PRG Underpinned market development for domestic gasUnderpinned market development for domestic gas Helped to create an enabling environment for sector reformHelped to create an enabling environment for sector reform Minimal risk mitigation of US$400m will help to catalyze around US$4 bn of gas flows for the priority power sectorMinimal risk mitigation of US$400m will help to catalyze around US$4 bn of gas flows for the priority power sector Will help to mobilize substantial investments in the sector from the private sectorWill help to mobilize substantial investments in the sector from the private sector

37. 37 Case Study Southern African Regional Gas Project Mozambique – South Africa

38. IBRD Enclave Partial Risk Guarantee for Southern Africa Regional Gas Project Key AgreementsKey Agreements –Petroleum Production Agreement: Govt of Mozambique granted exclusive rights for development of Pande and Temane gas fields to UJV comprising Sasol subsidiary SPT and CMH a subsidiary of the Mozambican oil co. –Pipeline Agreement: GoM authorized ROMPCO and other Sasol subsidiary to construct, own and operate the gas pipeline to transport gas to South Africa SponsorsSponsors –Gas fields: SPT (70%); CMH (25%); IFC (5%) –Pipeline: ROMPCO (100%) FinancingFinancing –ZAR3.7 bn ( US$490m) debt – full recourse with Sasol assuming all project risks under debt support agreement, except for Mozambican political risk IBRD Enclave PRGIBRD Enclave PRG –ZAR 140m for upstream; ZAR70m for downstream covering Mozambican political risks MIGA PRIMIGA PRI –ZAR820m including ZAR310m reinsured with SACE and EFIC under the PPA and PA 38

39. Enclave Guarantee StructureGOM SPT (Sasol owned, Moz company) ROMPCO (Sasol owned, RSA company) Commercial Lenders Petroleum Production Agreement Pipeline Agreement Project Agreement Indemnity Agreement Loan Agreement Guarantee Agreement SPT Guarantee Agreement ROMPCO 39

40. Example of Joint WBG Support Southern Africa Regional Gas Project IBRD Enclave PRG IBRD Enclave PRG Political Risk Cover for debt to SPT & Rompco including: Sovereign obligations (including protection against changes in laws; non-provision of permits/ approvals, etc.) expropriation Currency transferability as to funds located in Mozambique MIGA MIGA Political Risk Cover for equity and debt to SPT & Rompco including: Breach of contract Currency transferability Expropriation War & Civil Disturbance IFC IFC Investment and Advisory Role: Equity investment in Upstream Advisory assistance to CMH in mobilizing financing for the Upstream Facilitating local participation IBRD Enclave PRG was provided for local currency (ZAR) debt 40

41. For Further Information Contact: Farida Mazhar Lead Financial Officer Finance & Guarantees Group Finance, Economics & Urban Department The World Bank 1818 H Street, NW Washington, DC 20433 (USA) Ph: +1 (202) 473-1235 Fax: +1 (202) 522-0761 Email: fmazhar@worldbank.org or visit our web site: www.worldbank.org/guarantees