mirreia mitigating risk and strengthening capacity for...

MIRREIA

Mitigating Risk and Strengthening Capacity for Rural Electricity Investment in Africa

Deliverable 4.3 FINANCE AND INVESTMENT WORKSHOP

PROCEEDINGS

July 2006

Supported By:

MITIGATING RISK AND STRENGTHENING CAPACITY FOR RURAL ELECTRICITY

INVESTMENT IN AFRICA

MIRREIA

FINANCE AND INVESTMENT WORKSHOP PROCEEDINGS

18th and 19th July 2006,

Grand Regency Hotel, Nairobi Kenya. LIST OF ACRONYMS ADB African Development Bank ESD Energy for Sustainable Development ESDA Energy for Sustainable Development Africa IPP Independent Power Producer RE Rural Electrification SSA Sub Saharan Africa REA Rural Electrification Agency

MIRREIA: Mitigation Risk and Strengthening Capacity for Rural Electricity Investment in Africa Finance and Investment Workshop Proceedings

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REF Rural Electrification Fund REP Rural Electrification Program MEP Mpeketoni Electrification Project Kshs Kenya Shillings US $ US Dollars CBO Community Based Organization NGO Non Governmental Organization KPLC Kenya Power and Lighting Company GHG Green House Gas CDM Clean Development Mechanism IRR Internal Rate of Return NPV Net Present Value IFC International Finance Corporation PPA Power Purchase Agreement UNFCCC United Nation Convention on Climate Change CER Certified Emissions Reductions JI Joint Implementation EU European Union EU ETS European Union Emissions Trading Scheme CHP Combined Heat and Power CO2 Carbon dioxide MW Mega Watts KVA Kilovolt Ampere GTZ German Technical Cooperation CDC Commonwealth Development Corporation IPO Initial Public Offer PV Photo voltaic GOT Government of Tanzania GOK Government of Kenya TABLE OF CONTENTS

LIST OF ACRONYMS.............................................................................................................2

TABLE OF CONTENTS ..........................................................................................................3

INTRODUCTION.....................................................................................................................4

1.0 WELCOME AND INTRODUCTION .........................................................................5

2.0 MIRREIA FORUM OBJECTIVES.............................................................................6

3.0 CHALLENGES OF FINANCING RENEWABLES ...................................................7


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4.0 ELEMENTS OF FINANCE FOR PROJECTS I.........................................................8

5.0 ELEMENTS OF FINANCE FOR PROJECTS II .....................................................12

6.0 OVERVIEW OF CARBON OFFSETS .....................................................................14

7.0 PROJECT CASE STUDY..........................................................................................16

8.0 PROVIDING EQUITY INVESTMENT....................................................................17

9.0 MICRO-FINANCE AND THE RE SECTOR ...........................................................19

10.0 CDC INVESTMENT IN EAST AFRICA..................................................................21

11.O LEASING OPTIONS FOR ENERGY PROJECTS ..............................................22

12.0 RURAL ENERGY AND ELECTRIFICATION FUND/AGENCIES.......................23

APPENDIX 1: WORKSHOP PROGRAM ............................................................................25

APPENDIX 2: LIST OF PARTICIPANTS............................................................................28

INTRODUCTION Mitigating Risk and Strengthening Capacity for Rural Electricity Investment in Africa (MIRREIA) project seeks to identify and mitigate the risks associated with investment in renewable energy projects for rural electrification. The project’s goal is to develop and support the efforts of independent power producers, public private partnerships, and rural electricity suppliers in Kenya, Uganda, and Tanzania to deploy renewable energy for development and poverty alleviation. The European Commission’s Intelligent Energy for Europe (IIE) programme is supporting MIRREIA, which UK-based Energy for Sustainable Development is implementing with project partners in Uganda (Power Networks), Tanzania (TRCL), and Kenya (Energy for Sustainable Development Africa).


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At present, ESD and MIRREIA partners are assisting project developers in Uganda, Kenya, and Tanzania who are developing small hydro, bagasse cogeneration, and wind projects. Through on-going MIRREIA work, ESD and partners have identified project developers’ limited familiarity with project finance as a major constraint. In order to address this barrier, ESD and MIRREIA partners planned this two-day training workshop on project finance and investment. This forum provided hands-on training to project developers to enable them to package their projects more effectively and to approach financial institutions with greater confidence and success. The workshop also offered project developers an opportunity to hear directly from financial institutions regarding the kinds of projects they are seeking to fund. Participants included project developers (those currently being assisted by MIRREIA as well as others), representatives from financial institutions, and government officials involved directly in rural electrification. The workshop was facilitated by project finance experts from ESD, including Mike Bess, ESD’s International Division Director and focused on the finance barriers that renewable electricity projects continue to face. On the first day emphasis was placed on providing project developers with guidance on how to structure projects to attract investment. Farid Mohammed, a financing and investment expert took lead in the presentations. The second day brought together project developers and representatives of finance agencies to discuss what financiers are looking for, and how developers can access development and commercial funds. Presenters included Patrick Oketa of Actis, Felistas Couninho of Tujijenga Afrika, Richard Onyango of Globeleq and Robert Nyasimi of Rentworks. 1.0 WELCOME AND INTRODUCTION ESD’s Director Mr. Mike Bess began by welcoming the participants after which he opened the floor for a self-introduction session. In addition, the participants made brief statements about their work and expectation of the workshop. He then proceeded to invite

MIRREIA FINANCE AND INVESTMENT WORKSHOP, NAIROBI DAY ONE (1)


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Ms. Shalini Ramanathan to share the objectives of the training workshop and MIRREIA project. 2.0 MIRREIA FORUM OBJECTIVES Introduction to MIRREIA Mitigating Risk and Strengthening Capacity for Rural Electricity Investment in Africa (MIRREIA) is a project supported by the European Commission intelligent Energy for Europe program and is led by Energy for Sustainable Development (ESD). Other implementing partners include Energy for Sustainable Development Africa (ESDA) of Kenya, Power Networks of Uganda and TRCL of Tanzania. The goal of the project is to develop and support the efforts of independent power producers (IPP), public private partnerships, and rural electricity suppliers in the Kenya, Tanzania and Uganda to deploy renewable energy for development and poverty alleviation. This goal is broken down into four specific objectives: • Identify and define means to mitigate the major financial, policy and regulatory risks

to private sector investment in Rural Electrification (RE) • Assist key stakeholders to improve market conditions and set the framework to assist

project developers invest in renewable RE projects • Promote activities that lead to improved energy efficiency, both on the supply and the

demand side • Encourage the use of renewable energy as a means to alleviating poverty in sub-

Saharan Africa and protecting the local and global environment. Project Background Economies of the three East African countries of Kenya, Tanzania and Uganda have been growing rapidly translating into a growing demand for modern energy, both in the urban and especially in the rural areas where the majority of the populace reside. RE has remained a great challenge to governments in the region evidenced by the low penetration rates of the conventional grid electricity to these areas. The demand, willingness and ability to pay for the energy services to be utilized in productive uses and in improving social service delivery exist and governments, with the assistance of donors are working towards addressing this. The cost of setting up the infrastructure for RE remains the greatest challenge requiring the participation of both the private and public sector partners. MIRREIA is in place to support these partners achieve this with the focus of poverty alleviation. Workshop Rationale and Objectives Interaction and discussions with RE project developers has revealed the need to align their motivation and drive with the interests and expectations of financiers. Therefore the workshop will aim at: • Providing information on “elements of finance” to project developers • Helping project developers to be better consumers of financial services • Creating forum for developers and financiers to identify barriers to finance for RE

projects and discuss solutions • Discussing how projects can be structured and packaged in order to attract investment


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3.0 CHALLENGES OF FINANCING RENEWABLES Challenges and Opportunities Rural finance has proven very difficult to provide in all sectors in all countries throughout history and therefore this challenge is not unique to RE. The lack of banking infrastructure in these areas, difficulty in appraising projects and obtaining collateral/security have been the major barriers of rural financing as all these factors enhance the overall investment/lending risk. Many of the rural areas, due to their location and settlement patterns are more vulnerable to security risk relative to urban areas. The situation is made worse by their marginalization as a result of dilapidated or non-existence transport and communication infrastructure isolating them from financial services. This not only limits the ability of financiers to carry out due diligence but also increases their operating costs which are then transferred to the client resulting prohibitive higher equity requirements and major risk premiums. Between 70% to 80% of the population in Sub-Saharan Africa (SSA) live in rural areas and have been the silent drivers of the economic growth, which has been above 4.5% per annum for the last 15 years. With this growth, demand for RE in rural areas continues to grow. The move to add value to primary good, which are mostly produced in rural areas, has increased this demand even further. The key sectors driving this demand being the agro-processing sector, tourism, mining and excavation. Rural Finance: Key players and the new game Tradition financiers have kept off these perceived high-risk areas. Emerging “new finance” seeks to work in rural areas through the existing formal and informal structures. More commercial banks have extended their coverage to these areas, starting with the most productive areas. The key to encouraging this spread is to create mechanism that cover or reduce investment risk by educating borrowers, bundling and working through existing unions and cooperatives. Less than 10% of SSA has access to grid electricity. Rural financing is extremely important in promoting RE, as this cannot be achieved without it. The governments should take up the mitigating role and develop new frameworks for modern rural energy development, as the existing structures have failed to achieve any significant outcomes. Through out the developing countries governments have realized this need and have set up ‘rural electricity/agencies (REA)’ with ‘rural electricity/energy funds (REF)’ to tackle the problem. The emergence of these REA/F will be discussed later in detail. Lessons learnt Several lessons can be extracted from the hit and miss RE experiences in many SSA countries. • No single ‘solution’ exists to mitigating risk in all countries, with all players • Important for all players to understand private sector’s perception of risk and work

with them towards neutralising it • Key for private sector to understand government’s perception of risk • Essential to develop working partnerships to engage in dialogue, translate into policy

& translate into real actions and real projects.


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The governments of Uganda, Tanzania and Kenya have realized the urgency of stimulating RE evidenced by the REF, REA, and REP. Open Discussion I The other obvious impediment to rural is the economies of scale. For example, the cost of carrying out due diligence and subsequent monitoring for a US $ 10,000 loan could be the same as that of a US $ 100,000. As financial institutions are driven by profits, they will then concentrate in areas that have individuals seeking these larger amounts or areas that have a high concentration of people seeking lower amounts. Such are the characteristics of urban areas. Few rural communities have the financial capacity and/or collateral to secure larger amounts. Some of the participants also felt that the REA/Fs should work within an agreed timeframe and with clear goals. This will ensure that the boards that will manage the fund and agencies have motivation to look out for RE ideas and projects. In addition, as much as the focus has been on powering productive uses, the social amenities and domestic uses should not be overlooked. The question of whether rural households have the ability to pay for periodic electricity/energy charge was raised and discussed. Some rural areas, especially the agricultural rich areas can pay. Mpeketoni Electrification Project (MEP) representative Mr. Ibrahim Kamau explained that the residents Mpeketoni village near Lamu at Kenya’s coastal area pay Kshs 30 (US $ 0.42) per kilowatt hour generated from an isolated diesel generator set which is 300% of what Kenya Power & Lighting Company (KPLC) charges its customers on average. This demonstrates the willingness in pay in some rural areas. In areas where the residents cannot pay as much, there are other strategies that can ensure that the cost is evenly distributed amongst them. Mr. Robert Mutsaerts of Green power explained that they were working with community-based organization (CBO) in Kenya’s Kirinyaga district to set up 17 Micro-hydro projects which will power adjacent households paying a flat rate of Kshs 400 (US $ 5.5) per month. Demonstrating that various models can be used to soften the cost of electricity. Mr. Mfite Basaza of Rural Electrification company also shared with the group their experience in South West Uganda which has involved transferring power from the main grid to rural areas giving priorities to hospitals, clinics, schools, agro-businesses and other institutions. They are creating public-private sector partnerships with the aim of mainstreaming RE into the district’s planning process. Mr. Kofi Nketsia of E + Co explained that there is a shift from the tradition rigorous lending requirements and some of the financial institutions are working within the existing system. This is evidenced by the simplified start up system in some institutions. The fact that most financiers are not technical experts has complicated the problem further as well as the few examples of profitable RE projects. 4.0 ELEMENTS OF FINANCE FOR PROJECTS I Steps to getting the finance (5 step standard)


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Most financiers are trained in the areas of finance and management having little or no technical training. This creates a ‘communication hitch’ between them and project developers. The onus is therefore on RE project developer to learn the financial procedures and requirements of securing financial services. In finance, the ability to use tangible figures to quantify various aspects of any proposed project is of great importance and is a skill that can be learned. Various institutions have different standard of processing application for financial services. However, it is useful to understand the five basic steps of project analysis. The first step is to design an energy project model after pre-feasibility and feasibility studies. This is followed by a cost analysis of the project. Green house gas (GHG) analysis should be integrated into the project analysis as it is a potential source of finance under the various carbon credits trading scheme, with Clean Development Mechanism (CDM) being applicable in Africa and other developing countries. This should be done alongside a financial summary demonstrating the projects financial viability. Finally a sensitivity and risk analysis completes the basis for a decision-making. Free software is available outlining this process in detail on http://www.retscreen.net Energy Project Implementation Process For RE projects four steps mark the implementation process. Pre-feasibility and feasibility studies are useful not only for the potential financiers but also the project developers as its draws out crucial aspects of the project. Proper execution of this stage will provide useful planning information although the downside is that only few financial services can cover the cost of these studies. There have been cases where capital-intensive projects have stalled after the commissioning due to hitches that could have been avoided if proper pre-feasibility and feasibility studies were carried out. The development and engineering stage follows after securing the finances and the implementation concluded by the construction and commissioning stage. Case for discussion: Viability of a wind project For example, the project analysis of a wind power generation project would ideally capture the following aspects.


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• Energy resources available at the project site: wind speeds, wind consistency, seasonal fluctuations, impact assessments (environmental & social) etc

• Equipment performance: wind power curve and efficiency • Initial project cost: Wind turbines, engineering, towers, distribution • Base case studies: diesel generators for remote areas • On-going and periodic project costs: maintenance etc • Avoided cost of Energy • Financing: Debt ratio and length, interest rates, taxes on equipment and taxes • Environmental consideration: impact assessment (environmental and social), benefits

of displacements, carbon credits, subsidies • Decision maker’s outlook and definition of cost-effective: IRR, NPV, pay back period

and energy production costs Cash Flow Calculations The basic component of the cash flow calculations should show the cash inflows (fuel savings, other savings, incentives, production certificates, cash outflows (equity investment, annual debt payment, other payments and periodic costs), cumulative cash flow and the indicators (NPV, IRR, simple payback, and debt service coverage). Simple Payback Net Present Value

(NPV) Internal rate of return (IRR)

Definition Number of years to recoup additional cost

Total value of project in today’s dollars

Interest yield of the project during its lifetime

Example 3 years simple payback $ 1.5 Million 17% Criteria Payback < n years Positive indicates

profitable project IRR> hurdle rate

Comment • Misleading • Ignore financing &

long-term cash flows • Use when cash flow

is tight

• Good measure • User must specify

discount rate

• Can be fooled when cash flow goes positive-negative-positive

Sensitivity & Risk Analysis Sensitivity analysis shows how the profitability of project changes when two key input parameters vary simultaneous while the risk analysis evaluates parameters that may have swing between uncertainties and how this affects the overall project profitability. This is measured using probable ranges. Risk analysis seeks to identify the sources of risk, measure the risk, and therefore creating an opportunity to plan on how to address them. This analysis looks at how low one can go while the project remains viable (determining the minimal rate of return). For example, how does one ascertain the future demand for electric power in a locality with certainty? Does one look at the current amounts being spend on energy per household or institution? However, will this translate into the same demand for electricity


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especially since electricity is consumed using various electrical gadgets? So does one ask who will be interested in connecting and how much they will pay then use this information to make projections? The price will also affect the usage. Future changes, like a government move to subsidize certain types of energy sources therefore affecting existing investments. All these variables are brought out using the risk and sensitivity analysis. Contractual Arrangements Contracts can be prepared for each segment of the project development process highlighted earlier on or be compiled into one turnkey all inclusive document. In the middle of the project development is the project company dealing with, for example, government, equity company, project lenders, power purchasers on one hand while on the other with the contractors, operator, fuel supplier and insurance underwriters. All these working relationship requires clear terms of operation and these are stipulated in the contractual arrangements. Open Discussion II Mr. Peter Omukaga of Craftskills explained how the financing systems, for example in Kenya, has been rigorous, almost intimidating. The financiers have stood aloof as far as RE projects are concerned. The very small number of RE projects has not improved the situation as this limits the number of reference points when presenting a business proposal. Banks have displayed a pessimistic relationship with the RE project developers many of whom have limited skills in making business cases but have brilliant project ideas. The situation is even worse for project developers in the rural areas. Besides the reasons mentioned above; lack of banking infrastructure, economies of scale, higher risk perceptions, et cetera, and the other reason is a lack of necessary competition. Although this is quickly changing, it has been a major stumbling block for a very long time. For example, in Kenya there are 45 banks but only four hold over 70% of all the banking clients in the country! 40% of all the finances lent in the country go into government securities. This put the main banks in a very comfortable position making them focus on the traditional forms of lending and less adventurous. This is also the reason for the high interest rates in the country (besides the fact that the interest rates are pegged onto the lending currency). To change the relationship between RE project developers and financiers, the former have to develop the necessary skills in the business proposal design and presentation. Participants also discussed the notion of risk further. Mr. Farid Mohammed explained ‘risk’ is mostly a perception issues and different institutions differ in the perception. While some institutions are more open, others are more risk averse, for example, insurance companies. Mr. Mike Bess also mentioned that the most of the RE projects in terms of technology have been done elsewhere. It is therefore important to adapt existing models and avoid creating a ‘uniqueness’ scenario. The more unique relative to existing successful projects the more it is viewed as being risky. Ms Shalini Ramanathan added that the process of securing finance should be persistent and well thought out before hand. Prior planning always save resources including time. Project development should be a systematic build-up process.


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Mr. Jem Rigall of Mikumi Milling sought to know whether financiers could cater for the pre-feasibility and feasibility study. Most financiers will not as information from these studies are used when presenting the business case for RE projects. Often the project developer will cater for these studies and convert the cost as equity into the company. Financiers are more encouraged to invest in projects, which already have substantial investment; the motivation is “if the project developers can invest in it, then it means they believe in it” and therefore it appears more doable. It is notable thought that; projects heavy on social benefits can secure finances for study from development assistance organizations or governments. Cyril Batalia of TRCL Tanzania made it clear that there are no silver bullets or quick fix solutions to financing RE project in the region. What exists needs to be built on and skills learnt transferred to others as widely and as far as possible. Functioning agencies, which can promote this need, should be established and called into action. The biggest impediment to RE has been the state owned and managed monopolies, be it in generation of power or distribution. These corporations are a source of political influence to governments, which have been reluctant to let them go. Little progress has been done to address this and more needs to be done. Competition not only controls prices but also insures better service delivery. For example, RE funds have been set up in Uganda and yet to finance a sizeable number of projects- none in promoting the viable biogas projects. The same applies to REF set up in Ethiopia. 5.0 ELEMENTS OF FINANCE FOR PROJECTS II Financial Requirement & stages of project finance There are four broad requirements for financing a RE project:

• Pre-Feasibility / Feasibility • Project Development / Structuring

o Technical consultants o Financial consultants o Legal Advice

• Project Implementation o Equipment purchase o Construction

• Pre-operating costs The first stage is always the pre-feasibility study, which determines the design and scope of the feasibility study both technical and financial. An information memorandum is then generated together with exhaustive documentation is given onto which decision is made. If positive, then the approval is given and disbursement follows. Based on the financial arrangement, reporting will be done hand in hand with repayment. Sources of Finance Essentially there are four sources of financing: Equity, debt, mezzanine finance and grants. Equity is obtainable from private investors, institutional investors (pension funds, insurance companies), private equity funds and development finance banks. Examples include, friends and relatives, International Finance Corporation (IFC), Grofin, Acacia


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fund, Actis, Orios et cetera. Most of the institutional investors would ask for relatively higher rates of return. Debt is can be sourced from commercial banks, development banks, Micro-finance institutions (MFI), corporate bonds, individuals. Commercial banks in the regions will lend for 3 to 5 years some requiring interest paid back even before the project moves into the profitability stage. Development banks can lend for longer period up to 10 years and can lend in local currencies. Micro-finance has higher interest mostly because they borrow their funds from commercial banks and so transfer this to the clients. Mezzanine finance is a mix of both debt and equity. Mostly facilitated through preference shares. Mezzanine capital is a more expensive source of finance because of the increased credit risk, i.e. in the event of default; mezzanine debt is less likely to be repaid in full. It is only secured by the equity of the company, and not the company's tangible assets (e.g., property, cash or accounts receivable). Grants are monies given to an individual or an organization that does not hold an obligation of repayment. This can be from development agencies, non-governmental organizations (NGO), private individuals and are often tied to specific non-commercial goals, for example social goals (health, education, civil rights, infrastructure), environmental goals et cetera. Terms of Finance-Debts Currency: Currency in which gains/losses from operating an international portfolio are measured. Tenor: Maturity of a loan Grace period: A period in which debt may be paid without accruing further interest Interest rate (fixed/floating): The price paid for borrowing money. It is expressed as a percentage rate over a period of time and reflects the rate of exchange of present consumption for future consumption. Security: Something given to guarantee the repayment of a loan or the fulfillment of an obligation. Often this is property that your creditor can claim in case you default on your obligation Covenant (positive/negative): An agreement, contract, or written promise between two individuals that frequently constitutes a pledge to do or refrain from doing something. Boilerplate: A description of uniform language used normally in legal documents that has a definite, unvarying meaning in the same context that denotes that the words have not been individually fashioned to address the legal issue presented. An example would be a bank having a standard contract for everyone who applies for a home loan. Valuation: The process of determining the current worth of a portfolio, company, investment, or balance sheet item. The tools used for asset valuation include quantitative methods and statistics, financial statement analysis, ratio analysis, fundamental analysis, and valuation economics. This is very contentious variable especially in new businesses. Appraisal process Often this is a slow process, which has to get approval from several systems, boards or individuals. Normally ‘points’ are awarded for proposals and those that meet a bare minimum are approved. Those rejected can be resubmitted after clarification or changes.


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The process is never quick and the bigger the institution the longer the process. Project developers should not underestimate the bureaucracy. Open Discussion III Mr. Jem Rigall was interested in finding out whether Power purchase agreements (PPA) had to be paid off in local currencies. PPAs form part of the contractual web and is made between the power producer and the distributor. There are no fixed terms stating the type of currencies to be used, it all depends on the negotiations. As much as the principle remains constant, there are several variable towards negotiating PPAs. In case payments will be made in local currencies, there will be clauses to cater for inflation and exchange rate valuation. Mr. Mike Bess explained that consumer finance is one type of finance that has been overlooked by RE projects. This basically refers to any form of lending to consumers, in this case energy consumers. Consumer finance covers a wide range of activities, including loans from banks and indirect finance such as hire-purchase agreements. RE projects can factor in this while structuring their product package, especially in acquiring gadget or equipment that will tap into the power being provided. Currently, the drive has been towards financing RE that have productive uses. As much as this makes economic sense, RE project developers should not overlook the households and social institutions like hospitals and schools. Mr. Robert Matsaerts of Green power explained how they are setting up small hydro projects in rural Kenya (Kirinyaga districts) serving mainly households. All pay a fixed rate of Kshs 400 (US $ 5.5) per month. Mr. Farid Mohammed mentioned that identifying anchor consumers, for example, factories and other commercial enterprises, weigh in positively on the viability of a RE project. There are several rural areas in East Africa where households can pay for electricity, especially high potential areas. The failure of governments in the regions to come up with differential tariffs has hindered the spread of RE. While factories and other commercial institutes can pay more per unit, this has not been taken advantage off fully. There needs to be peak and off-peak power consumptions hours to help distribute the load as evenly as possible through the day. 6.0 OVERVIEW OF CARBON OFFSETS Introduction The Kyoto protocol of the United Nations Framework Convention on Climate Change (UNFCCC) puts in place ‘mechanisms’ to support clean energy initiatives with the overall goal of reducing green house gas (GHG) emissions. The most important mechanism for Sub-Saharan Africa and the developing countries in general is the Clean Development Mechanism (CDM). Operating under the CDM mechanisms, investors in this region can get monetary valued carbon credits from this venture as long as the investment demonstrates that it reduces the levels of GHG in the atmosphere. If one invests in a project that reduces GHG that ‘would have been’, this also qualifies under the mechanism. CDM allows anyone to take those reductions and sell them to buyers in Europe, Japan and Canada who have to meet set targets of reduction. These carbon credits proved new revenue for RE projects and this is called carbon trading or carbon financing.


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There are two methods of qualifying the credits for sale. One is to go through the ‘formal’ UNFCCC CDM procedures and the other is to go through the ‘informal/voluntary’ arrangements through institutions that can certify the credits. Whereas the former is a rigorous process with payments made after the reductions have been achieved, the latter is less bureaucratic but fetches lower prices on the carbon market. Initially there were only two Certified Emission Reduction (CER) buyers; the Dutch government (ERUPT & CERUPT) and the World Bank (Prototype Carbon Fund). Eventually the Swedish, Danish and Finish governments began to buy. Then the Austrian JI/CDM program became major buyers. Currently, other nations have joined in including the Spanish, Belgium, several institutions including the IFC, IBRD, ADB plus other private buyers. Additional reductions, in both cases, must be independently validated at the beginning, then verified each year the credits are issued. There reductions can only be qualified if it is demonstrated that without the interventions it would not have happened on its own. The increasing demand for CER are driven by the fact that European Union Emissions Trading Scheme (EU ETS) has finished its pilot phase and that governments are now enforcing Kyoto protocol targets. Examples of projects taking advantage of CDM and carbon trade are highlighted in the following case studies. Case Study 1: East African Sugar Waste Energy A leading sugar factory is doubling its cane production and processing capacity and as a result the potential exists to invest in a new combined heat and power (CHP) unit. This will generate sufficient waste (bagasse) to sell 10 MW into the grid and provide the factory with all the needed electricity. Electricity sales to the grid will displace 80,000 tonnes of CO2 providing additional revenues of US $ 600,000 to US $ 700,000 per year. This aspect will increase the CHP project profitability by up to 20%.


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Case Study 2: Southern Africa Pulp & Paper A large pulp and paper mill is currently using coal to generate heat and produces over 200,000 tonnes of wood waste every year. Wood waste generates Methane, which is over 20 times more potent than CO2. Potential to invest in a CHP unit exists as the waste can produce about 20 MW of electricity to the grid while supplying all the electricity needed at the plant. Electricity to the grid will displace 150,000 tonnes of CO2 per year while the use of waste will reduce 100,000 tonnes of CO2 equivalent per year (total of 250,000 tonnes of CO2). Carbon credits will provide additional revenues of US $ 1.5 Million per year for 5 years. Case Study 3: East Africa Wind Energy A project to install wind turbines capable to generate 30MW of electricity in a remote location, which will displace 100,000 tonnes of CO2 per year with sales to the main grid. Carbon credits will provide additional revenue of Euros 700,000 to 800,000 per year for 10 years. This will improves the projects IRR. Case Study 4: Southern Africa landfill Gas A project to generate 10MW electricity from methane capture will reduce the emissions equivalent to 100,000 tonnes of CO2 per year. Electricity sales to the grid will displace 50,000 tonnes CO2 per year (wind for coal). The carbon credits will provide additional revenues of US $ 1 Million per year for 5 years (2008-2012) with a payback investment time of less than 2 years. Open Discussion IV Mr. Mfite Basaza sought to establish how the cost of carbon offsets is calculated. Calculations for carbon offsets fluctuates as it is in any open market. However, there is a set project base price. It also depends on the market, whether formal (e.g. CDM) or the informal market, which fetches relatively lower prices. There are arrangements on how carbon offsets bought outside the European Union can be traded within the union (over 30,000 companies are participating in the trading scheme). The EU carbon has evolved into a real market complete with brokers and clear regulation. All arrangements have to go through certified registries. Finances for CDM projects are released only after verification. 7.0 PROJECT CASE STUDY To demonstrate how the information shared can be translated on the group, the participants were asked to share any project ideas in the pipelines, which could act as a study case. Mpeketoni electrification project (MEP) was brought forward for discussion. Mpeketoni is a remote rural setting off the Kenyan coast 40 Km from the historical Lamu town. Electricity generation began in Mpeketoni through a joint venture of donors (GTZ)


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and the local communities. The Mpeketoni electricity company was set up in 1989 to power a youth technical training institute involved in crafts. A 60 kVA diesel generator set was installed to meet the institutions electricity requirements. The electricity was extended to the rest of the settlement at a cost and the consumers have grown to about 2000. Due to the rising cost of fuel, the project is quickly moving towards being unsustainable. There have been efforts to upgrade the generator system to a hybrid wind-diesel genset. Pre-feasibility studies and feasibility studies were done, but unfortunately the wind speeds were insufficient averaging 5.0 m/s. The community is looking at the options available to ensure the project is not ground to a halt as a result of the high fuel prices. Several options were suggested by the participants. First, the community could look at extending their customer base to adjacent towns and households. The economies of scale will reduce the cost per unit. Secondly, MEP can evaluate the efficiencies of power production and distribution and cut off any leakages, which bears on the cost of power. Third, the option of introducing differential tariffs and peak consumption hours will distribute the load evenly and reduce the need to generate excessive power, which is not utilized fully. Fourth, the project can explore the possibility of switching to biodiesel, which can be generated locally. Based on the ideas given, MEP can look at ways of redesigning their RE project taking advantage of the existing finance packages. 8.0 PROVIDING EQUITY INVESTMENT

MIRREIA FINANCE AND INVESTMENT WORKSHOP, NAIROBI DAY TWO (2)


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Introduction: ACTIS Actis was established following a management buy out from CDC group plc in the year 2004 taking on CDC’s 55 years of experience in investing in emerging markets. It has over 100 professionals in 16offices across Asia, Africa and Latin America and currently managing funds worth US $ 30 Billion. Actis is committed to private equity in Africa demonstrated by the new Africa private equity fund of US $ 550 Million, the empowerment fund of US $ 50 Million, real estate fund of US $ 100 Million and the agribusiness fund worth US $ 100 Million. Fund by Actis have up to 10 years tenure then exit through various methods. In case where Actis has over 50%of the shares then it take up the leading role in management. Private Equity Private equity funds provide capital generally to businesses not quoted on the stock exchange. There are several categories of equity including the angel investing, venture capital, leverage buyouts, growth capital, mezzanine capital and others. Private equity investors become shareholders of the company and carry the same business risk long with the other shareholders. They not only provide financing but also continue to provide strategic support. Private equity partners always have a clear exit options including initial public offers (IPO), strategic sales, financial sale and sale to owner. Investment Criteria In the decision making process of a private equity company there are several aspects of the proposed business that are scrutinized to establish a project’s attractiveness and therefore any project developer should ask themselves the following questions about the proposed undertaking: • Will it have a fully commercial return on capital? • What is its comparative advantage? • Does it have an attractive value/entry price proposition? • Is there critical alignment amongst management, shareholders and other

stakeholders? • Does it have the ability to use gearing to enhance returns? • Are there clear opportunities for business/operational improvement, competitive

advantage, ability for Actis to add value? • Does it demonstrate high growth potential? • Are there well-defined exit alternatives?

Over the past few years, biofuels and forestry have been vibrant sub-sectors. The rise of crude oil above USD $ 40 per barrel open up the viability of investing in biofuels. In addition, regulatory forces in the EU (EU fuel mix must be 20% biofuel by 2020), the energy insecurity have all be drivers increasing demand for the product. Demand for forestry products has also been on the increase with the advent of the carbon trading mechanisms. Advantages of Private Equity Actis in one of the leading private equity investment firms in the region and partnering with them has the following advantages:


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• Leverage global contacts with operators, vendors, government and regulators to help

business grow • Leverage office network for cost effective market intelligence and business

development • Able to make follow on investments • Leverage contacts with lenders and equity investors • Bridge financing to future successful IPO • Strategic direction • Operational improvement • Appoint industry experts to the board • Participate in building effective strategy • Access to networks of managers who can assist e.g. in recruitment • Maximize shareholder and exit values • Introduce high standards of corporate governance and financial management Open Discussion V Actis and other private equity funds are also relevant in refinancing existing businesses. In all businesses, the initial growth always accelerates until it reaches a plateau stage after which the growth will dive into the negative unless the company reengineers its offering. It is at this point that refinancing is critical. Actis has a sister company, Orios which is also a private equity investor. Mr., Murefu Barasa sought to find out how this company was different from Actis. Orios provides equity investment of less than US $ 4 Million and therefore focuses on medium size business as opposed to Actis. Ms Shalini Ramanathan sough to know whether Actis can link potential project developers with soft loans from CDC and whether a minimum share percentage is required before investing into a company. There are no minimum requirements to invest but Actis will seek to have some management leverage in any company they invest in. CDC pulled out of investing in projects. Investments can also be made in new companies as long the technology or business practice is proven. All forms of business as covered under Actis as long as they are lawful. An investment thesis has to be designed to show the value of the business, IRR, projected cash flows, risk and mitigation et cetera. It has to show the viable exit and entry strategies. A business thesis should also be presented showing the business concept, comparative advantage, demand, supply as well as existing competition and impediments. Once all the required documents are available, a decision is made expediently. 9.0 MICRO-FINANCE AND THE RE SECTOR Introduction Micro finance is the provision of financial services to clients who are unable to access traditional financing on account of their lower economic status. These financial services will most commonly take the form of loans or savings, though some microfinance


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institutions will offer other services such as insurance and payment services. The crux if microfinance is the "joint liability" concept where loans and other financial services are guaranteed by a group as opposed to an individual. Small-scale businesspersons for example charcoal sellers, vegetable vendor, small kiosk owner, subsistence farmers et cetera are targeted for such financing. Products provided by MFI include group loans, individual loans, savings, training on basic business skills, loan insurance and limited asset lending. Impacts & Rationale MFI gives loans to clients with the aim of empowering them financially. It has a positive impact on families by improving access to finances and hence opportunities to better the livelihoods of poor communities. It has been noted that this causes families to have a less financial burden, less fights, improve nutrition and health. Communities grow as clients buy goods and services from local suppliers, creating jobs and injecting cash into the local economy. The clients also gain confidence to participate more actively in community projects and financial management. Example of RE Microfinance lending: Solar PV FINCA Tanzania set up a micro financing project to assist households and individuals purchase solar panels for productive and other uses. FINCA paid upfront for all the solar panels and the beneficiaries paid in 6 to 12 months installments. Six loans were given for the purchase of PV systems over a period of 18 months. Some of this risks identified include: • Wide geographical coverage for poor people which translated into high monitoring

costs • Unreliable cash flow which limit as most of the income is agriculture based • Lack of traditional collateral to guarantee the finance • Weak human resource to support sale of the product Lessons learnt • High level of discipline from all staff is required, good systems and policies must be

put in place and enforced • The economically disadvantaged appreciate good service and are willing to pay for it • It is helpful to provide an array of finance options and not limited to only one type of

micro credit • Marketing in microfinance is very important • Listening to clients is very important Open Discussion VI Most MFI would not lend above US $ 10,000 and the same applies to FINCA and Tujijenge Afrika. As all microfinance sources, the interest rates are higher than the traditional lenders ranging between 2% to 4% per month on a flat basis. In cases of individual loans, then collateral is needed normally worth 125% the loan given. Micro finance is most useful in biogas, solar, micro hydro (generation-dams and penstock, but the distribution may need more cash which can be obtained from loans). This all depends on how attractive the business is and the productive uses from the project


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10.0 CDC INVESTMENT IN EAST AFRICA Introduction Globeleq is a power company with a regional focus on emerging markets of Africa, America and Asia. CDC group plc is the sole shareholder of the company. Globeleq’s strategy is based on the drive to establish a leading position in the target markets, acquire assets and buildup scale, develop new generation projects and transform portfolio of minority investments. Currently, the company has 21 assets in 16 countries with a total worth of US$ 1.5 B with a gross power generating capacity of 5000 MW employing nearly 2000 staff worldwide. Globeleq power generation as at March 2005 was 11% hydroelectric, 1% geothermal, 55% natural gas, 20% coal and 14% fuel oil. Current Africa Portfolio In Africa, Globeleq has shares in the following energy facilities across Africa: • Songas, Tanzania

o Gas processing, pipe-line and power plant o Largest private supplier in Tanzania

• Tsavo, Kenya

o Diesel power plant, largest IPP in Kenya • Umeme, Uganda

o Uganda’s distribution system o Dominating private player in Uganda

• Azito, Ivory Coast

o 320MW open cycle gas turbine • Sidi Krir, Egypt

o 685MW natural gas-fired generating plant The strategy for Africa includes and operational focus on existing assets, additional acquisitions and pursuing green-field development around existing regional business units. Finance Globeleq has invested US $ 300 Million in 2 years and successfully gained approval from 5 lender groups in 5 different countries within the same time. The company’s philosophy is to manage day-to-day operations in-house, but to outsource major works this has created a lean focused organization. As much as unnecessary layers of management are avoided, a tight management discipline via corporate policies and guidelines is maintained. The core competencies include:

• Project and construction management • Environmental health & safety compliance • Plant performance monitoring


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Open Discussion VII Further clarification was sought on the actual functions of Songas and it’s contractual agreement with the government of Tanzania (GoT). Songas is a gas transportation company and does not own the Songa songa gas fields; therefore the rights to the gas fields remain with the government. The World Bank plays a role in ensuring that the GoT by providing a guarantee for the financing and periodical repayment. In Uganda, the main challenges is the maintenance of an acceptable safety standards and losses through illegal connections (35% of the power transmitted is lost through these connections). Globeleq in Kenya through the IPP Tsavo power produces power at Kshs 3.70 per unit due to the economies of scale (large scale production) and also since the government of Kenya (GoK) provides the HFO 11.O LEASING OPTIONS FOR ENERGY PROJECTS Introduction: Rentworks Rentworks was established in Australia in 1988and now has offices internationally. In Kenya, operations began in April 2004. Current overall portfolio of assets managed is worth over US $ 2 Billion and serving over 5000 customers in diverse industries as banking, energy, manufacturing, health, education, hospitality et cetera. Some of the local clients include Nakumatt, Stanbic, K-Rep Bank, Bamburi cement, Tusker mattress, Magadi soda, Crown distributors, East Africa Brewery Limited, BMW, Nestle, Shell, Siemens, Coca cola, DHL. Rentworks is not a bank or a supplier but a residual value partner. Rental Solution With Rentworks there are no large up-front capital outlays and the costs are spread over the useful life of the equipment. All kinds of equipment, machines, tools et cetera can be acquired through this arrangement. However, this definition excludes buildings and land. The representation of this expense is reflected as an ‘off the balance sheet’ operation expense. Traditional finance will often provide 100% of the asset financing at a 10% variable but with Rentworks, the rentals are calculated on the equipment cost less the residual investment. Finance rate can be between –10% and 5%. Rentworks also provides an exchange plan and this is the backbone of its operation. This gives allowance for early replacement throughout the term, flexible upgrade allowances with no additional capital outlays. Existing owned assets can be purchased by Rentworks at book value, or full purchase price (if less that 6 months old) this translates to a cash injection to the business. With this, uniformity within the fleet is ensured and done more quickly efficiently. This also means assets are taken off the balance sheet improving financial rations. At the end, there are several options of exit. The client can return the equipment and replace with a new rental contract or continue to the rent the same equipment, either for a further agreed period on re-negotiated terms and on a casual basis at the same rate. Alternatively, the equipment can be handed back without further obligations


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Open Discussion VIII Building structures that are part of equipment can be acquired though Rentworks, although building structures (offices, houses, schools etc) that stand on their own cannot. During the rental period, the client pays for any breakages and maintenance. The fundamental difference between this and purchasing equipment using loans is that the client does not own the equipment but rather rents it from Rentworks thus avoiding the capital investments while benefiting from the use. The value of the balance sheet is reflected as a recurring expense and not as an asset and therefore cannot be used as security. Depending on the tax policies with a country, equipment can be bought by the clients eventually. For example, in Kenya due to the tax benefits during the rental period, this is not possible. Penalties are set in case of deferred payment. Rentwork takes on the equipment risk and this is repackaged through insurance. The repayment time is fixed/limited and often between 1-7 years. During processing requests there are no negotiation fees, no commitment fee and often no legal fees as the standard documents already exist. Thorough due diligence is done and so far out of about 5000 clients only 2 have defaulted. 12.0 RURAL ENERGY AND ELECTRIFICATION FUND/AGENCIES Why new frameworks? Traditionally rural electrification was expanding the gird by and through the national distribution monopoly, often fully owned by the government. Simplistically driven but the need to ‘put light in every house’. Save for South Africa and Ghana, this has failed miserably across SSA. There is a need to focus on rural areas especially to promote productive uses of energy and increased access to modern social services (health, education, access to water et cetera). A new framework and institutions were needed to rapidly scale up RE. REA/F Goal and structure The goal of REA/F is to improve the livelihoods of rural people by increasing access to modern energy for all while the key objective is to make modern energy available for rural productive uses (to stimulate the rural economy generate employment, attract investment et cetera) and to increase access to modern services (education, health, clean water et cetera) to all in the rural areas. A deliberate feature of the operational framework is the inclusion of key stakeholders to form strategic partnerships and to establish contracts, relationships that will enable the REA/F to reach as many the rural areas as is possible. The composition of the REA remains lean and mean. The vision of the new REA/F is energy becoming a driver for economic development and supporter of key social services in rural areas taking on a multi-technology approach. Facilitation of energy development projects remains the mandate of the REA although the projects can be owned by the private sector, private-public partnerships, NGO, CBO et cetera. REA undertakes the promotion, project development, technical assistance, appraisal and evaluation while working with potential project supporters. The REF is


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mandated to provide the capital subsidies, reduce price to end consumers and risks to project developers. It is important to note that REA/F does not implement but only facilitates, its does not provide traditional finance but ‘smart subsidies’. Functions of the REA/F The REA is charged with the following functions:

• Promote, stimulate and facilitate development of rural energy supplies • Promote the rational and efficient use of energy in rural areas, esp. for productive

applications • Utilize the REF to finance eligible rural energy projects • Facilitate the activities of key stakeholders with interest in rural energy • Monitor and evaluate progress

While the REF will: • Provide capital subsidies to rural energy projects to stimulate increased provision

of modern energy for productive and social purposes • Allocate resources to projects in a transparent manner according to well-defined

criteria • Minimize overhead costs by competitively selecting a Trust Agent to administer

payments Possible sources of funds for the REF includes the government, donor funds, levies from electricity generation and sales, interest from investments Project Finance and Activities Supported The REF can support pre-investment studies, rural energy capacity building, support program, investments in innovative pilot and demonstration projects. The REF meets overhead costs of the boards, REA and the trust agents. There are three main players in the project finance cycle: supporting institutions, financial institution the project investors. Often the supporting institutions come in the form of bilateral donors, multi-lateral organizations, levies and taxes. The financial institutions are in the form of REF subsidies, commercial finance and soft finance and micro finance while the project investors inject the equity finance. Government Arrangement The Ministry of finance works in relation with the Ministry (Department) of Energy who in turn work with the rural Energy board. The REA and REF both fall under this board. Again the Rural Energy board works with the trust partners and other supporter and donors as well as the stakeholders involved. REA board is autonomous in decision-making but is accountable to government with representative membership from government, NGO, private sector, consumers, donor observers. This board oversees operations and decides on the REF allocation while reporting to government and other stakeholders. Open Discussion IX


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Uganda has had the longest REA/F in the region. Previously, the main push has been grid expansion which has proven to be quite capital intensive costing approximately US $ 10,000-15,000 per kilometer of extension. This, on its own is not economically viable, as the end users often cannot meet the cost of the equipment even after several years of use. The constant shift to urban areas by rural populations also complicates the problem further. In spite of the challenges, RE still will remain crucial as a driver for rural development. This development is based on the domino effect of access to power. For example, teachers and doctors are attracted to urban areas where they can utilize the available amenities. Given the option of working in un-electrified rural areas and urban areas the choice would be obvious. This has repercussion in the terms of education and provision of health services, which in turn have impact on the overall productivity of an area. Therefore RE is not just about providing power to households and institutions but also has far reaching benefits to the general operation of an area. Two pillars hold up the place for RE: the need to promote productive uses of energy for economic growth and to improve the social well being of rural areas. This is not a 100% solution to the problem of RE but is indeed a step in the right direction. It is a known fact that the initial set up costs for RE project has been a leading constraint in achieving success and so the REF seeks to address this problem. All the workshop presentations can be downloaded from http://mirreia.energyprojects.net APPENDIX 1: WORKSHOP PROGRAM Day ONE

09:00-09:30 Welcome and Introductions Mike Bess, ESD

09:30-10:00 MIRREIA and Forum Objectives Shalini Ramanathan, ESDA

10:00-11:00 Challenges of Financing Renewably-Based Rural Energy Projects

Mike Bess

11:00-11:15 Tea/Coffee Break

11:15-12:15 Elements of Finance for Projects, Part 1 Farid Mohamed, Pipal

12:15-13:00 Questions and Discussion Facilitated by Mike Bess


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13:00-14:00 Lunch

14:00-15:00 Elements of Finance for Projects, Part II

Farid Mohamed

15:00-15:30 Questions and Discussion Facilitated by Mike Bess


15:45-16:15 Overview of Carbon Offset Finance Mike Bess

16:15-17:15 Project Case Study: Presentation and Discussion

Farid Mohamed

17:15-17:30 Close of Meeting Mike Bess

18:15 Depart in Group Vans for Dinner at Peppers Restaurant in Westlands


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Day TWO

09:00-09:15 Overview of Day 2’s Agenda Shalini Ramanathan

09:15-9:45 Providing Equity Investment in the Biofuels/Agribusiness Sector

Patrick Oketa, Actis

9:45-10:00 Questions and Group Discussions Facilitated by Mike Bess

10:00-10:30 Microfinance and the Rural Energy Sector

Felistas Coutinho, Tujijenge Africa

10:30-10:45 Questions and Group Discussion Facilitated by Mike Bess


11:00-11:30 CDC Investment in East Africa Richard Onyango, Globeleq


11:45-12:15 Leasing Options for Energy Projects Robert Nyasimi, Rentworks


12:30-13:00 Rural Electrification Fund/Rural Electrification Authority in Uganda and Tanzania

Mike Bess


13:15-13:30 Conclusions and Close of Workshop Shalini Ramanathan

13:30-14:30 Lunch


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APPENDIX 2: LIST OF PARTICIPANTS

Name/Country Organization Contact Info Shalini Ramanathan (Kenya) ESDA Tel: +254 20 3870127

Email: [email protected] Murefu Barasa (Kenya) ESDA Tel: +254 20 3870127

Email: [email protected] Mike Bess (UK) ESD Tel: +44 1225 816808

Email: [email protected] Cyril Batalia (TZ)

TRCL Tel: +255 0743215357 Email: [email protected]

Peter Omukag (Kenya)

Craftskills Tel: +254 20 3000722 Email: [email protected]

Robbert Mutsaerts (Kenya)

Green Power Tel: +254 0720863000 Email: [email protected]

Ibrahim Kamau

MEP Tel: +254 073580370 Email: [email protected]

Yese Mbungizi (UG)

Power Networks Tel: +256 772456229 Email: [email protected]

Patrick Wanyeraw Namawar (UG)

Mt. Elgon Hydropower

Email: [email protected] Tel: +2567526954480

Mfite Basaza (UG) Kilembe Investments

Tel: +256 772480682 Email: [email protected]

Elaine Kiew (UG)

China Shan Sheng

Tel: +256 782 622292 Email: [email protected]

Felistas Coutinho (TZ)

Tujijenge Africa Tel: +255 713232455 Email: [email protected]

Eline Blaubooer (Kenya)

African Grounds Tel: +254 0735901025 Email: [email protected]

Mr. J. Riggall (TZ)

Mikumi Milling Co.

Tel: +255 784507188 Email: [email protected]

Patrick Oketa (Kenya)

Actis Tel: +254 0721628889 Email: [email protected]

Kenneth Onyando (Kenya)

GroFin Tel: +254 20 2730280 Email: [email protected]

Farid Mohamed (Kenya)

Pipal Tel: +254 20 3742552 Email: [email protected]

Robert Nyasimi (Kenya)

Rentworks Tel: +254 20 2737126 Email: [email protected]

Richard Onyango (UK)

Globeleq Tel: +44 20 72345465 Email: [email protected]

Kofi Nketsia-Tabiri

E&Co. Tel: +27 126653454 Email: [email protected]

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