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Aga Khan Fund for Economic Development June 2006 AKFED Copyright © October 2007 Aga Khan Fund for Economic Development January 2006 AKFED & IPS - overview.

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Presentation on theme: "Aga Khan Fund for Economic Development June 2006 AKFED Copyright © October 2007 Aga Khan Fund for Economic Development January 2006 AKFED & IPS - overview."— Presentation transcript:

1 Aga Khan Fund for Economic Development June 2006 AKFED Copyright © October 2007 Aga Khan Fund for Economic Development January 2006 AKFED & IPS - overview of global activities IPS Infrastructure portfolio – a brief overview Case Studies – small scale energy projects Small Scale Infrastructure – Presentation overview

2 Aga Khan Fund for Economic Development June 2006 AKFED Copyright © October 2007 Aga Khan Fund for Economic Development EXISTING PRESENCE AND NEW REGIONAL INITIATIVES East Africa & Indian Ocean Kenya Uganda Tanzania Rwanda Mozambique Madagascar Middle East Syria South Asia Pakistan Bangladesh Central Asia Tajikistan Afghanistan Kyrgyzstan Canada West Africa Côte dIvoire Sénégal Mali Burkina Faso Central Africa Dem. Rep. of the Congo

3 Aga Khan Fund for Economic Development June 2006 AKFED Copyright © October 2007 Aga Khan Fund for Economic Development About AKFED For-profit agency involved in long-term investments Difference from typical commercial investor Over 90 project companies in : Financial Services Tourism Media Aviation Industry and Infrastructure More than 30,000 employees 16 countries in East, West and Central Africa; South and Central Asia KEY STATISTICS : AKFED Industrial Promotion Services Tourism Promotion Services Media Services Financial Services Aviation Services

4 Aga Khan Fund for Economic Development June 2006 AKFED Copyright © October 2007 Aga Khan Fund for Economic Development AKFED Worldwide…

5 Aga Khan Fund for Economic Development June 2006 AKFED Copyright © October 2007 Aga Khan Fund for Economic Development AKFEDS APPROACH TO DEVELOPMENT Entrepreneurship promoted with economically sound enterprises in the developing world Long-term investments with Strong equity positions Provision of management expertise Investments in fragile and complex environments Prospects of improving the lives of people Profits entirely reinvested in further development initiatives

6 Aga Khan Fund for Economic Development June 2006 AKFED Copyright © October 2007 Aga Khan Fund for Economic Development INDUSTRIAL PROMOTION SERVICES (IPS) Infrastructure (existing projects) Power/Water Azito Energie (Côte dIvoire) IPP, 290 MW gas turbines; Azito Energie Tsavo Power (Kenya) IPP, 75 MW HFO. Energie du Mali (Mali) water & power concession, 185 MW hydro + diesel; PamirEnergy (Tajikistan GBAO) power concession, 43 MW hydro. PamirEnergy West Nile Rural Electrification Co (Uganda) 2 MW hydro. Bujagali Energy (Uganda) 250 MW hydro, $860 million investment. Bujagali Energy Telecommunications Roshan (Afghanistan), 1.6 million subscribers, market leader. CATD/Indigo/Somoncom (Tajikistan) 500,000 subscribers, market leader. Seacom – Sub marine cable along Southern African coast to Europe and India Ports Mombasa Container Terminal (Kenya) for consolidated cargo.

7 Aga Khan Fund for Economic Development June 2006 AKFED Copyright © October 2007 Aga Khan Fund for Economic Development SMALL SCALE ENERGY PROJECTS CASE STUDIES PamirEnergy – Tajikistan West Nile Rural Electrification Company - Uganda

8 Aga Khan Fund for Economic Development June 2006 AKFED Copyright © October 2007 Aga Khan Fund for Economic Development A pioneering financing scheme makes the power affordable to the poor people of this remote mountainous area through tariff subsidies (provided by the Tajik Government, IDA and the Swiss Government) over a transitionary period 42 MW hydro-power project First privatisation of a state utility in Central Asia Initial expansion and rehabilitation completed during 2005 Project cost: US$27 million Co-investors: IFC and IDA Project under re-evaluation to consolidate long term viability building on experience acquired PAMIR ENERGY PAMIR ENERGY - TAJIKISTAN

9 Aga Khan Fund for Economic Development June 2006 AKFED Copyright © October 2007 Aga Khan Fund for Economic Development PamirEnergy – Key Facts Location: Tajikistan Customer Base:28,000 (> 95% residential) Residential Tariff (2007):0.25 US cents (200 kWh) 1.7 US cents Project costs:US$27 million Tariff subsidies:US$8.8 million (customer orientated) Installed capacity:42 MW Carbon Credits:300,000 VERs Khorog receives 24h/7 power in winter (10 hours/day in rest of country)

10 Aga Khan Fund for Economic Development June 2006 AKFED Copyright © October 2007 Aga Khan Fund for Economic Development GoT willingness and flexibility to support this project GoT created enabling environment and facilitating the way for private investors First and only privatization of a state utility in Central Asia Collaboration of private and public, Government and multilaterals bodies Creative project financing and innovative use of subsidies for a commercial investment with social orientation Unique model for replication worldwide (India, Brazil etc.) First Public Private Partnership in the region

11 Aga Khan Fund for Economic Development June 2006 AKFED Copyright © October 2007 Aga Khan Fund for Economic Development KEY CHALLENGES Harsh mountainous environment (logistics, etc.) Significant investment yet affordable tariffs High winter energy consumption yet lowest available energy Scarcity of affordable alternative energy sources Extensive area but dispersed and small population Culture transition towards a modern utility Strong support required from authorities to implement change No prior culture of payment for utilities Very high levels of losses (both technical and commercial)

12 Aga Khan Fund for Economic Development June 2006 AKFED Copyright © October 2007 Aga Khan Fund for Economic Development UGANDA – West Nile Rural Electrification Co. Ltd Innovative structure for rural electrification 20-year concession Affordable & Sustainable tariffs through 50% upfront grant to offset investment Impacts to date Significant reduction in monthly energy costs Over 600 new connections Cleaner and safer sources of energy Improved education and health Increased commercial/industrial activities

13 Aga Khan Fund for Economic Development June 2006 AKFED Copyright © October 2007 Aga Khan Fund for Economic Development West Nile – Key facts Location: North Uganda Customer Base:5,000 (mainly residential) Residential Tariff:13.1 US cents Additional Generation:3.5 MW Hydro Project cost:$14.75 million Capital grant:$8.2 million (reduces tariff to affordable level based on IRR of 15%) Carbon Credits:443,000 CERs Customers now receive power 18 hrs/day (compared with around 12 hours throughout the rest of Uganda)

14 Aga Khan Fund for Economic Development June 2006 AKFED Copyright © October 2007 Aga Khan Fund for Economic Development Challenges with Small Infrastructure Projects Lack of critical mass leads to financial imbalance in the following areas: Tariffs Operating costs Development costs

15 Aga Khan Fund for Economic Development June 2006 AKFED Copyright © October 2007 Aga Khan Fund for Economic Development Mitigation Measures Acceptance of lower hurdle returns. Utilisation of soft-funds through grants, donations, etc. Use of carbon credits where possible.

16 Aga Khan Fund for Economic Development June 2006 AKFED Copyright © October 2007 Aga Khan Fund for Economic Development Use of soft funds The use of soft funds for projects can allow the project to achieve the following objectives: become financially sustainable for shareholders; allow affordable tariffs for the customers; mitigate development risk (development/early stage costs); Donors often have restrictions in providing grants to private entities eg off grid remote/rural small HPPs at PamirEnergy.

17 Aga Khan Fund for Economic Development June 2006 AKFED Copyright © October 2007 Aga Khan Fund for Economic Development Subsidy Mechanism – linked to consumption Subsidy delivered at time of consumption (e.g. Pamir Energy) so becomes part of operating revenue: Customer invoiced net amount (i.e. before subsidies) Company receives gross amount (customer payment + subsidy)

18 Aga Khan Fund for Economic Development June 2006 AKFED Copyright © October 2007 Aga Khan Fund for Economic Development Subsidy Mechanism – offset initial investment Reduce initial capex and hence investment cost to allow net effective tariff to the customer to be set at an appropriate level e.g. West Nile. Tariffs reduced to an affordable level, hence achieves same objective.

19 Aga Khan Fund for Economic Development June 2006 AKFED Copyright © October 2007 Aga Khan Fund for Economic Development Pros and Cons of Different Mechanisms Capex Offset vs Consumption linked delivery mechanisms Consumption linked subsidy is direct to customers, not to company and is provided only upon delivery to customer. Consumption linked delivery means that the gross investment cost of the project needs to be financed from commercial channels. Variances in levels of energy consumed compared with projections will inevitably lead to the need for subsequent tariff adjustments (operationally and politically difficult). Consumption orientated subsidies need to be socially orientated or targeted towards the customers who need it most (i.e. the poorest) and not to all customers.

20 Aga Khan Fund for Economic Development June 2006 AKFED Copyright © October 2007 Aga Khan Fund for Economic Development Use of Carbon Credits Functions as an effective additional tier of subsidy and/or revenue enhancer. Possible in both compliance and voluntary markets. Ensure focus (where possible) on renewable energy.

21 Aga Khan Fund for Economic Development June 2006 AKFED Copyright © October 2007 Aga Khan Fund for Economic Development Pamir Energy – Carbon Credits Originally incorporated within the Concession Agreement in 2002, so met the additionality test. Originally developed for compliance market as small hydro project, but host country has not yet ratified Kyoto. Strong growth in voluntary market has allowed company to benefit and find counterpart for 2008-2012 delivery.

22 Aga Khan Fund for Economic Development June 2006 AKFED Copyright © October 2007 Aga Khan Fund for Economic Development West Nile - Carbon Credits One of the early (2002) CDM projects. World Bank Prototype Carbon Fund – buyer. Provides valuable (guaranteed) cash flows that can be incorporated into projections => facilitates financing, enhancing returns and achieving financial close.

23 Aga Khan Fund for Economic Development June 2006 AKFED Copyright © October 2007 Aga Khan Fund for Economic Development Small Infrastructure – Way forward Build on lessons learned in terms of structure and mechanisms. Apply solutions to non-energy sectors e.g. rural telephony, roads. Establish a vehicle/structure on a regional basis to enable efficient and accelerated replication of such projects on a standardised or modular basis. Merger of philosophies/skills and closer working practices between donors and non profit agencies as commercial know-how and funding structures are incorporated into projects previously exclusively donor/grant funded.

24 Aga Khan Fund for Economic Development June 2006 AKFED Copyright © October 2007 Aga Khan Fund for Economic Development Conclusions Success depends on: patient capital accepting sub-commercial returns availability of soft / donor money carbon credits increasingly play a key role politically receptive host governments Projects that have historically been funded by state/donors can be financed through introduction of commercial project finance techniques. With appropriate structure and support, such projects can be sustainable and not a drain on state funds.


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