WBSDI-NAMIBIA INTERNATIONAL INVESTMENT CONFERENCE 31 0ct - 1 Nov 2007 Where next for Infrastructure Project Finance: “A prognosis” By Alwyn Coetzee, Country Manager: International Finance, DBSA

Contents of the Presentation The macro environment: Opportunities Strategic Investment Goals for SADC Key Focus Sectors, “A Prognosis” Potential sources for financing “Project Finance” Typical Risks and Mitigations Limited Recourse Project Financing Conclusion

Macro Environment: Opportunities Large infrastructure spending – ASGI- SA, 2010 World Cup BEE Sector Charters – incorporating broad-based empowerment, lack of equity and security Opportunities to use PPPs by local government to accelerate infrastructure development and service delivery Increasing appetite of private sector banks/institutions and private equity to fund infrastructure (selectively) including social infrastructure Regulatory and policy frameworks well-established but trap of over- regulation! Short term and medium term action plans of NEPAD supported by the Infrastructure Consortium Funding for integration in SADC and surrounding RECs Funding for capacity building, project preparation and investments Issue: Insufficient bankable projects, and weak sponsors Acceptance of PPPs/Project Finance principles and role of private sector High prices for commodities and resources (mining, oil/gas, etc) have boosted currency reserves and stabilised macro-economic fundamentals Increased collaboration with BRIC (Brazil, Russia, India, China) South AfricaSADC

Strategic Goals for SADC: Where next for infrastructure finance. Give priority to infrastructure that promotes regional integration Form strategic partnerships on regional and domestic investments Strengthen leadership by partnering with local expertise through empowerment Focus on financially viable public and private sector investments Develop local capital markets to support domestic mobilisation and local currency funding Select projects in key economic sectors that will grow the economy

Key Focus Sectors, “A Prognosis”. Number of projects identified across sectors, but lack preparation for funding i.e. –Preparation of the transaction for investment, i.e. Analyses of investment risks and proposed mitigations Viability analysis and proposed funding plan; To attract investment, the project needs: –Strong Sponsor (s) –Experienced operator –Competitive EPC contract –Reputable off-taker Sponsor can expect favourable terms.

A Regional Perspective: Key Focus Sectors: Energy Abundant energy sources: –Hydro, coal, oil and gas and solar –Oil & gas sector is one of the largest growing sectors in Africa –Major investments required in generation, transmission and distribution Major sector reform: –Various forms of privatisation/commercialisation are taking place –Tariff rationalisation leading to more cost-reflective pricing –Introduction of independent regulators e.g. Namibia, Zambia, Malawi, Mauritius, Zimbabwe, Angola Regional integration: –Southern African Power Pool, interconnections allowing for regional trade to take place and eventual competition.

Key Focus Sectors - Mining Africa holds 30% of the world’s mineral reserves Significant untapped resources Major employer and earner of foreign exchange for many countries High returns (also high risk) Large demand coming from China will boost this sector

Focus Sectors - Telecommunications Rapid growth in both fixed and mobile telephony –Private sector investment in the ICT sector is significant and growing rapidly –Penetration Rates increased from 1% in 1990 to over 10% recently Low teledensity indicating further room for growth in mobile services and introduction of next generation technologies at lower cost Competition –Second and third operator licenses on offer in many countries –80% of countries have full competition in mobile services Development of an integrated telecoms market –SADC Regional Information Infrastructure (SRII) project –East African Submarine System (EASSy) –West African Submarine Cable

Key Focus Sectors – Logistics and Transportation Commercialisation/Privatisation of ports and harbors –Private concessioning of cargo handling and container terminals in Mauritius, Mozambique, Tanzania & Namibia (?) –Development of freeports in Mauritius providing duty-free access to the region and preferential access to the US and EU Liberalisation of the airline sector –Partnerships with international carriers Major growth in seaborne trade Development Corridors –National and regional corridors, e.g WBSDI, Tazara, Nacala, Benguela, –Requires strong partnership between public and private sector

Key Focus Sectors - Tourism Tourism –Growth in Africa outstripping world growth with southern Africa fast becoming a preferred destination –Most of the growth intra-continental –9 out of 53 countries considered significant of which 5 are in SADC – Namibia, Botswana, Mauritius, Tanzania and SA

Key Focus Sectors – Manufacturing and Agri-Business Light manufacturing –Development of export processing zones to take advantage of Preferential Trade Agreements –Focus on value addition of local raw material, e.g. textile and garment industry Agro-processing –Sector reform to take advantage of preferential trade agreements

Potential sources of financing for Infrastructure Lenders: (DFIs, Commercial banks and other FIs) –Lenders bank on projected cash-flows and must be sufficient to make debt repayments with safety margins –Sufficient equity stake by sponsors to demonstrate commitment and provide cushion –Require some recourse to the sponsors in certain conditions e.g. cost overruns –Covenants to ensure operational and management performance Equity providers: –Sponsors must believe in Long Term returns of the project –Will look for appropriate exit/liquidity event

Potential sources of financing (continue) Subordinated Loans: Rank between senior debt and equity –Will require higher return than senior debt and/or some upside potential –Often provided by PPP sponsors Supplier credit: –Long term loans provided by project equipment suppliers to cover the purchase of their equipment by the project company. Export Credit Agency (ECA) Facility: –Loan, guarantee or insurance facility provided by an ECA to boost their countries exports. –May require host country counter-guarantee

“Project Finance” Typical Risks and Mitigations Bankable License Sponsor’s ability to structure and package projects Added value by PPP partner –Supplement public sector expertise Mobilizing sufficient equity –Mobilize equity by e.g. PPP structure Country Risk and political interference –Political stability and committed government Appropriate security package by Sponsors –Completion –Financial

Limited Recourse Project Financing Permits lenders some recourse to the PPP sponsors e.g. pre- completion guarantee Lenders bank on project cash-flows as their primary source of repayment and the assets as security Project Finance enable the sponsors to: –When well structured, have access to funding sources and or guarantees –Projects can be structured as separate entities –Need risks to be shared amongst different parties –Are large projects (hence worth the structuring effort) –Revenue streams can be defined and easily secured

Summary The investment needs for infrastructure are high and need to mobilise capital on a project finance basis and structure on a PPP, SPV etc basis; Need to prepare and structure projects to attract private capital; Increased appetite from DFIs, Commercial Banks and Institutional Investors to invest project finance structure; Manage and mitigation of investment risks

Contact Details Development Bank of Southern Africa Registered officePostal AddressTelephone 1258 Lever Road Headway Hill Halfway House South Africa 1685 PO Box 1234 Halfway House Midrand South Africa Fax WEBSITE ADDRESS: Alwyn CoetzeeThe Country Manger: International Finance, DBSA