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ATI Regional Liquidity Support Facility (RLSF) – Assessing its impact four years after its launch (by Obbie Banda)

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  It has largely contributed to further illustrate ATI s role as a valuable partner in supporting renewable energy projects across the African continent NAIROBI Kenya November 17 2021 APO Group By Obbie Banda Underwriter African Trade Insurance Agency ATI www ATI aca org In November 2017 the African Trade Insurance Agency ATI and the KfW Development Bank https bit ly 3HnDYkC jointly launched the Regional Liquidity Support Facility RLSF https bit ly 3kKn6La a collateral instrument designed to address the short term liquidity risk faced by independent power producers IPPs who sell electricity to electric utilities through Sub Saharan Africa By creating RLSF ATI and KfW sought to create a long lasting and sustainable guarantee product for the benefit of small and medium sized renewable energy projects drawing on their respective experiences in supporting PPIs through insurance products and procurement initiatives for such projects In addition to RLSF ATI had previously provided a tailor made liquidity instrument for the 100 MW Kipeto Wind Farm https bit ly 3Flo6gM in Kenya while KfW was the initiator of the successful GET FiT program in Uganda KfW s total funding commitment of 32 9 million for RLSF split between technical assistance for its implementation and cash guarantees that underpin the unique structure of the product was provided by the German Federal Ministry for Economic Cooperation and Development BMZ How it works and general expectations at the start RLSF comprises cash collateral and guarantees up to a value of 63 2 million made available to Absa South Africa which in turn issues stand by letters of credit SBLC to the profit from PPIs SBLCs cover up to six 6 months of income for the IPP and can be issued for terms of up to 10 years with the option to renew afterwards Some of the unique features of the RLSF are that it allows PPIs to submit multiple claims over a 10 year period due to its renewable nature and the host government is not required to provide any counter guarantees prior to issuance of the police After entering into Memorandums of Understanding with ATI projects in the following countries may benefit from the RLSF Benin Burundi Ivory Coast Madagascar Malawi Uganda and Zambia in the hope that more of ATI s nineteen member countries will sign up In November 2021 ATI issued and finalized three RLSF guarantees in support of flagship solar projects in Burundi and Malawi the very first solar PPIs in these countries Two additional guarantees are expected to be issued by the end of the first quarter of 2022 At the time of its launch the assumption was that the availability of such a guarantee product would lead to a greater number of renewable energy projects reaching financial close and that the deadlines that these projects had to face to reach this milestone would be considerably reduced the former has been largely achieved the latter not so much While the RLSF and similar liquidity instruments are imperative in addressing the bankability gaps of grid connected power projects they do not serve as a magic wand Larger macroeconomic sectoral and project specific challenges need to be adequately addressed in each country for projects to move forward more quickly Supported transactions The first RLSF policy was issued in January 2020 to support the 7 5 MW solar photovoltaic system at Mubuga in Burundi https bit ly 3qMdCmn a project developed by Gigawatt Global with the financial support of a consortium lenders including the Renewable Energy Performance Platform REPP the United States International Development Finance Corporation DFC formerly OPIC and the Inspired Evolution II Fund The second and third RLSF policies were issued in November 2020 to support the 21MW Nkhotakota https bit ly 3oEYXXw and the 60MW Salima solar PV https bit ly 3wWBOU9 in Malawi these two projects are owned respectively by Serengeti Energy formerly responsAbility Renewable Energy Holding rAREH Phanes Group and JCM Power InfraCo Africa Limited The three projects will cumulatively add 88 5 MW to the grid in turn giving access to electricity to more than one million people The RLSF guarantees with a total value of US 7 8 million on the 3 projects made it possible to finance a total of US 119 4 million The first two RLSF policies were jointly recognized as Business of the Year Energy https bit ly 3oAMXqe at the African Banker Awards 2021 illustrating the impact and positive recognition of RLSF Lessons learned Much has changed in the electricity sector in Sub Saharan Africa since 2017 the need for liquidity guarantees and political risk insurance has evolved As buyers meet their obligations to operational PPIs increasingly well and investors gain a better understanding of the real political risk in some countries correcting past perceptions the demand for guarantee products has gradually declined bad news for political risk insurance underwriters but overall a good sign Good examples are markets such as Kenya and Uganda where developers are increasingly comfortable with not only country risk but also liquidity risk on buyers in these countries RLSF was no exception to this trend While there remains a constant demand for such liquidity instruments especially in markets at an early stage to attract PPIs there has been a noticeable shift in some more developed renewable energy markets In order for ATI to continue to respond effectively to this demand improvements to the RLSF have been identified to make its contractual structure simpler less expensive and to make the product easily deployed With alternative liquidity instruments under development and likely to become available in the coming years these envisaged changes will ensure that RLSF continues to be competitive relevant and responsive to market needs A new RLSF structure The existing structure of the RLSF operates as follows ATI and KfW jointly provide guarantees to Absa South Africa Absa then issues SBLC to beneficiary IPPs ATI working closely with KfW as well as other donors who are on track to provide additional funding will make fundamental changes going forward instead of providing a guarantee to an LC issuing bank ATI will potentially also be able to provide renewable guarantees directly to beneficiary RRIs The guarantees will be for an extended period of up to 15 years and potentially cover up to 12 months of income The additional funding will also extend the eligibility criteria to larger projects up to 100 MW from 50 MW These new changes are quite exciting for ATI and should be for all stakeholders The new structure will allow IPPs to benefit from ATI s positive credit rating of A A3 S P and Moody s respectively an improvement over any current limitation due to ratings of most African banks which is capped at the rating of their sovereign The new contracts to be signed between ATI and the IPPs will be simpler reducing the existing delays in negotiating such agreements In addition the cost of RLSF coverage will become more affordable as the fees currently charged by the SBLC issuing bank will no longer be taken into account This new structure will be in place from January 2022 Impact of Covid 19 The Covid 19 pandemic has had a huge effect on every country in the world The effect of the pandemic on people s lives and livelihoods has already strained health infrastructure and the economy has been devastating Its effect on the electricity sector has also been evident although the full impact may not be fully appreciated for a year or two Electric utilities faced greater financial hardship due to a combination of factors such as reduced demand as economies slowed and lockdowns were put in place and collections increased low among end users as amnesties were introduced by various governments All of this means that the solvency of several utilities has been strongly affected given that the starting point before the start of the pandemic was not very positive As a result of these negative effects of the pandemic the need for additional liquidity and insurance instruments against political risks that can cover the risk of termination should continue in the years to come Digitization and the role of the transparency tool The RLSF MoUs signed between ATI and African States allow ATI to collect information on buyer s payment behavior and share this information with other participating PPIs in each country from time to time the information will be made available to the public through aggregated reports The information collected is recorded and accessed through the Transparency Tool https bit ly 3DrvMxx a digital platform launched by ATI in 2019 Over time the hope is that the availability of such trends verified and reliable payments will help align the risk of perceived mispayment of electric utilities with reality The first report of the transparency tool was published in April 2021 showing that Malawi s electricity utility ESCOM was meeting its payment obligations to the country s only PPI on time Conclusion By all accounts RLSF has been a success since its launch 4 years ago it has come a long way to further illustrate ATI s role as a valuable partner in supporting renewable energy projects in across the African continent However we will not rest on our laurels and continue to innovate ensuring that RLSF evolves in tandem with the broader changes in the market With ATI s growing expertise in this unique guarantee space the aim is that such success will enable the development of additional guarantee instruments that can also stimulate and encourage private sector financing towards a just energy transition potentially supporting commercial and industrial power projects mini grids and other off grid initiatives The relative success of RLSF has shown that mobilizing finance for small and medium sized renewable energy projects is possible and achievable and that while the challenge of electrifying the entire African continent is enormous cooperation ongoing between governments multilateral institutions donor agencies and the private sector can have a significant and lasting impact
ATI Regional Liquidity Support Facility (RLSF) – Assessing its impact four years after its launch (by Obbie Banda)

It has largely contributed to further illustrate ATI‘s role as a valuable partner in supporting renewable energy projects across the African continent.

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NAIROBI, Kenya, November 17, 2021 / APO Group / –

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Obbie Banda

By Obbie Banda, Underwriter, African Trade Insurance Agency (ATI) (www.ATI-aca.org)

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African Trade Insurance Agency

In November 2017, the African Trade Insurance Agency (ATI) and the KfW Development Bank (https://bit.ly/3HnDYkC) jointly launched the Regional Liquidity Support Facility (RLSF) (https: //bit.ly/3kKn6La) – a collateral instrument designed to address the short-term liquidity risk faced by independent power producers (IPPs) who sell electricity to electric utilities through Sub-Saharan Africa. By creating RLSF, ATI and KfW sought to create a long-lasting and sustainable guarantee product for the benefit of small and medium-sized renewable energy projects, drawing on their respective experiences in supporting PPIs through insurance products. and procurement initiatives for such projects. In addition to RLSF, ATI had previously provided a tailor-made liquidity instrument for the 100 MW Kipeto Wind Farm (https://bit.ly/3Flo6gM) in Kenya, while KfW was the initiator of the successful GET FiT program in Uganda. .

German Federal Ministry for Economic Cooperation and Development

KfW’s total funding commitment of € 32.9 million for RLSF, split between technical assistance for its implementation and cash guarantees that underpin the unique structure of the product, was provided by the German Federal Ministry for Economic Cooperation and Development (BMZ).

How it works and general expectations at the start

South Africa

RLSF comprises cash collateral and guarantees up to a value of € 63.2 million, made available to Absa South Africa which in turn issues stand-by letters of credit (SBLC) to the profit from PPIs. SBLCs cover up to six (6) months of income for the IPP and can be issued for terms of up to 10 years – with the option to renew afterwards. Some of the unique features of the RLSF are that it allows PPIs to submit multiple claims over a 10-year period due to its renewable nature, and the host government is not required to provide any counter-guarantees prior to issuance. of the police.

Memorandums of Understanding

After entering into Memorandums of Understanding with ATI, projects in the following countries may benefit from the RLSF; Benin, Burundi, Ivory Coast, Madagascar, Malawi, Uganda and Zambia in the hope that more of ATI’s nineteen member countries will sign up. In November 2021, ATI issued and finalized three RLSF guarantees in support of flagship solar projects in Burundi and Malawi – the very first solar PPIs in these countries. Two additional guarantees are expected to be issued by the end of the first quarter of 2022.

At the time of its launch, the assumption was that the availability of such a guarantee product would lead to a greater number of renewable energy projects reaching financial close and that the deadlines that these projects had to face to reach this milestone. would be considerably reduced – the former has been largely achieved, the latter not so much. While the RLSF and similar liquidity instruments are imperative in addressing the bankability gaps of grid-connected power projects, they do not serve as a magic wand! Larger macroeconomic, sectoral and project specific challenges need to be adequately addressed in each country for projects to move forward more quickly.

Supported transactions

Mubuga in Burundi

The first RLSF policy was issued in January 2020 to support the 7.5 MW solar photovoltaic system at Mubuga in Burundi (https://bit.ly/3qMdCmn), a project developed by Gigawatt Global with the financial support of a consortium lenders including the Renewable Energy Performance Platform (REPP), the United States International Development Finance Corporation (DFC) (formerly OPIC) and the Inspired Evolution II Fund. The second and third RLSF policies were issued in November 2020 to support the 21MW Nkhotakota (https://bit.ly/3oEYXXw) and the 60MW Salima solar PV (https://bit.ly/3wWBOU9) in Malawi; these two projects are owned respectively by Serengeti Energy (formerly responsAbility Renewable Energy Holding (rAREH)) / Phanes Group and JCM Power / InfraCo Africa Limited.

Business of the Year

The three projects will cumulatively add 88.5 MW to the grid, in turn giving access to electricity to more than one million people. The RLSF guarantees, with a total value of US $ 7.8 million on the 3 projects, made it possible to finance a total of US $ 119.4 million. The first two RLSF policies were jointly recognized as Business of the Year – Energy (https://bit.ly/3oAMXqe) at the African Banker Awards 2021 – illustrating the impact and positive recognition of RLSF!

Lessons learned

Sub-Saharan Africa

Much has changed in the electricity sector in Sub-Saharan Africa since 2017 – the need for liquidity guarantees and political risk insurance has evolved. As buyers meet their obligations to operational PPIs increasingly well and investors gain a better understanding of the real political risk in some countries (correcting past perceptions), the demand for guarantee products has gradually declined. (bad news for political risk insurance underwriters, but overall a good sign!). Good examples are markets such as Kenya and Uganda where developers are increasingly comfortable with not only country risk but also liquidity risk on buyers in these countries.

RLSF was no exception to this trend. While there remains a constant demand for such liquidity instruments, especially in markets at an early stage to attract PPIs, there has been a noticeable shift in some more developed renewable energy markets. In order for ATI to continue to respond effectively to this demand, improvements to the RLSF have been identified – to make its contractual structure simpler, less expensive and to make the product easily deployed. With alternative liquidity instruments under development and likely to become available in the coming years, these envisaged changes will ensure that RLSF continues to be competitive, relevant and responsive to market needs.

A new RLSF structure

ATI and KfW

The existing structure of the RLSF operates as follows: ATI and KfW jointly provide guarantees to Absa South Africa; Absa then issues SBLC to beneficiary IPPs. ATI, working closely with KfW (as well as other donors who are on track to provide additional funding), will make fundamental changes going forward – instead of providing a guarantee to an LC issuing bank. , ATI will potentially also be able to provide renewable guarantees directly. to beneficiary RRIs. The guarantees will be for an extended period of up to 15 years and potentially cover up to 12 months of income. The additional funding will also extend the eligibility criteria to larger projects up to 100 MW (from 50 MW).

These new changes are quite exciting for ATI and should be for all stakeholders! The new structure will allow IPPs to benefit from ATI’s positive credit rating of A / A3 (S&P and Moody’s respectively), an improvement over any current limitation due to ratings of most African banks, which is capped at the rating of their sovereign. The new contracts to be signed between ATI and the IPPs will be simpler – reducing the existing delays in negotiating such agreements. In addition, the cost of RLSF coverage will become more affordable, as the fees currently charged by the SBLC issuing bank will no longer be taken into account. This new structure will be in place from January 2022.

Impact of Covid-19

The Covid-19 pandemic has had a huge effect on every country in the world. The effect of the pandemic on people’s lives and livelihoods has already strained health infrastructure and the economy has been devastating. Its effect on the electricity sector has also been evident, although the full impact may not be fully appreciated for a year or two. Electric utilities faced greater financial hardship due to a combination of factors such as reduced demand as economies slowed and lockdowns were put in place, and collections increased. low among end users as amnesties were introduced by various governments. All of this means that the solvency of several utilities has been strongly affected – given that the starting point before the start of the pandemic was not very positive.

As a result of these negative effects of the pandemic, the need for additional liquidity and insurance instruments against political risks that can cover the risk of termination should continue in the years to come.

Digitization and the role of the transparency tool

RLSF MoUs

The RLSF MoUs signed between ATI and African States allow ATI to collect information on buyer’s payment behavior and share this information with other participating PPIs in each country – from time to time, the information will be made available to the public through aggregated reports. The information collected is recorded and accessed through the Transparency Tool (https://bit.ly/3DrvMxx) – a digital platform launched by ATI in 2019. Over time, the hope is that the availability of such trends verified and reliable payments will help align the risk of perceived mispayment of electric utilities with reality. The first report of the transparency tool was published in

April 2021 – showing that Malawi’s electricity utility, ESCOM, was meeting its payment obligations to the country’s only PPI on time.

Conclusion

With ATI

By all accounts, RLSF has been a success since its launch 4 years ago – it has come a long way to further illustrate ATI’s role as a valuable partner in supporting renewable energy projects in across the African continent. However, we will not rest on our laurels and continue to innovate, ensuring that RLSF evolves in tandem with the broader changes in the market. With ATI’s growing expertise in this unique guarantee space, the aim is that such success will enable the development of additional guarantee instruments that can also stimulate and encourage private sector financing towards a just energy transition – potentially supporting commercial and industrial power projects, mini-grids and other off-grid initiatives.

The relative success of RLSF has shown that mobilizing finance for small and medium-sized renewable energy projects is possible and achievable, and that while the challenge of electrifying the entire African continent is enormous, cooperation ongoing between governments, multilateral institutions, donor agencies and the private sector can have a significant and lasting impact.

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