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.
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!
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.
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.