HomeRegional NewsAfricaAssessing the impact of ATI’s Regional Liquidity Support Facility

Assessing the impact of ATI’s Regional Liquidity Support Facility

By Obbie Banda, Underwriter, African Trade Insurance Agency (ATI)

Assessing ATI’s Regional Liquidity Support Facility (RLSF) and its impact four years on from its launch shows evidence that mobilising financing for small- and medium-sized renewable energy projects is possible and attainable for African countries.

Obbie Banda, underwriter at African Trade Insurance Agency (ATI) writes about the lessons learned, digitalisation, COVID-19 impact, and a new structure for RLSF.

ATI and KfW Development Bank jointly launched the Regional Liquidity Support Facility in November 2017 – a guarantee instrument designed to address the short-term liquidity risk faced by Independent Power Producers (IPPs) that sell electricity to state-owned power utilities across sub-Saharan Africa.

In setting up the Regional Liquidity Support Facility, ATI and KfW were looking to create a lasting and sustainable guarantee product for the benefit of small- and medium-sized renewable energy projects, building on their respective experiences in supporting IPPs via insurance products and procurement initiatives for such projects.

Besides the Regional Liquidity Support Facility, ATI had previously provided a bespoke liquidity instrument for the 100MW Kipeto Wind Farm in Kenya whilst KfW was the initiator of the successful GET FiT programme in Uganda.

KfW’s total funding commitment of €32.9m for the Regional Liquidity Support Facility (RLSF), split across Technical Assistance for its implementation and cash collateral that underpins the unique product structure, was provided by the German Federal Ministry of Economic Cooperation and Development (BMZ).

While liquidity instruments are imperative … they do not serve as magic wands

Kipeto wind farm
ATI provided a bespoke liquidity instrument for the 100MW Kipeto Wind Farm in Kenya.

Working with the Regional Liquidity Support Facility

RLSF comprises cash collateral and guarantees worth up to €63.2m, made available to Absa South Africa, which in turn issues Standby Letters of Credit (SBLCs) for the benefit of IPPs. The SBLCs cover up to six (6) months’ worth of revenue for the IPP and can be issued for tenors of up to 10 years – with the option to renew thereafter. Some of the unique features of RLSF is that it allows the IPPs to submit multiple claims over the 10 year period owing to its revolving nature, and that the host government is not required to provide counter-guarantees prior to the policy issuance.

ATI has issued & finalised three RLSF guarantees in support of landmark solar projects in Burundi & Malawi

Having entered into Memoranda of Understanding with ATI, projects in the following countries can benefit from RLSF; Benin, Burundi, Côte d’Ivoire, Madagascar, Malawi, Uganda and Zambia with the expectation that more of ATI’s nineteen member countries will sign up. As of November 2021, ATI has issued and finalised three RLSF guarantees in support of landmark solar projects in Burundi and Malawi – the very first solar IPPs in these countries. Two additional guarantees are on track to be issued by the end of Q1 2022.

At the time of its launch, the assumption was that the availability of such a guarantee product would lead to more renewable energy projects reaching financial close and that the timelines faced by such projects in achieving this milestone would be greatly reduced – the former has been largely achieved, the latter not so much.

Whilst RLSF and similar liquidity instruments are imperative in addressing bankability gaps for grid-connected power projects, they do not serve as magic wands! Wider macro-economic, sector and project-specific challenges need to be adequately addressed within each country for projects to advance at a faster pace.

Spotlight on the transactions supported

The first RLSF policy was issued in January 2020 in support of the 7.5MW Mubuga solar PV in Burundi, a project developed by Gigawatt Global, with the financial support of a consortium of 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 in support of the 21MW Nkhotakota solar plant and the 60MW Salima solar PV plant in Malawi; these two projects are owned by Serengeti Energy (formerly responsAbility Renewable Energy Holding (rAREH)) / Phanes Group and JCM Power/ InfraCo Africa Limited, respectively.

The three projects will cumulatively add 88.5MW to the grid, in turn providing access to electricity for over 1 million people. The RLSF guarantees, worth a total of $7.8m across the 3 projects, have enabled $119.4m in total project financing. The first two RLSF policies were jointly recognised as the Deal of the Year – Energy at the 2021 African Banker Awards – illustrating the impact and positive recognition of RLSF.

Using the lessons learnt

A lot has changed in the power sector in sub-Saharan Africa since 2017 – the need for liquidity guarantees and political risk insurance has evolved. As off-takers increasingly perform well on their obligations to operational IPPs and investors gain a better understanding of the real political risk in some countries (correcting previously held perceptions), the demand for guarantee products has gradually reduced (bad news for Political Risk Insurance Underwriters but overall a good sign!).

RLSF has not been an exception to this trend

Good examples are markets such as Kenya and Uganda where developers are increasingly comfortable with not only the country risk but the liquidity risk on off-takers in those countries.

RLSF has not been an exception to this trend. While there remains consistent demand for such liquidity instruments, particularly in markets at a nascent stage in attracting IPPs, there has been a notable change in some more developed renewable energy markets.

For ATI to continue effectively serving this demand, improvements to RLSF have been identified – to make its contractual structure simpler, cheaper and for the product to be easily deployed. With alternative liquidity instruments being developed and likely to become available in the coming years, these envisioned changes will ensure that RLSF continues to be competitive, relevant and responsive to market needs.

A new path and structure for RLSF unfolds January 2022

The existing RLSF structure works as follows: ATI and KfW jointly provide collateral to Absa South Africa; Absa then issues SBLCs 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 – in lieu of providing collateral to an LC Issuing bank, ATI will potentially also be able to provide revolving guarantees directly to beneficiary IPPs.

New contracts between ATI and IPPs will be simpler – cutting turnaround times

The guarantees will be for an increased tenor of up to 15 years and potentially cover up to 12 months’ worth of revenue. The additional funding will also extend the eligibility criteria to larger projects of up to 100MW (from 50MW).

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 & Moody’s respectively), an improvement from any current limitation owing to the ratings of most African banks, which is capped at their sovereign’s rating.

The new contracts to be signed between ATI and the IPPs will be simpler – cutting the existing turnaround times in negotiating such agreements. Additionally, the cost of RLSF cover will become more affordable as any fees currently charged by the bank issuing the SBLCs will no longer be considered. This new structure will be in place from January 2022.

Effects of the pandemic to continue

The COVID-19 pandemic has had a huge effect on each and every country globally. The pandemic’s effect on people lives and livelihoods already stretched healthcare infrastructure and the economy has been devastating. Its effect on the power sector has equally been evident albeit the full impact may not be fully appreciated for another year or two.

Power utilities have faced greater financial difficulties due to a combination of factors such as reduced demand as economies slowed down and lockdown measures were rolled out, and lower collections from end-users as amnesties were introduced by various governments. All this has meant that the creditworthiness of several utilities have been greatly affected – bearing in mind that the starting point prior to the onset of the pandemic was not very positive.

As a result of these negative effects of the pandemic, the need for liquidity instruments and complementary political risk insurance that can cover the risk of termination is expected to continue in the coming years.

Digitalisation and transparency

The RLSF MoUs signed between ATI and African states allow ATI to collect information on the payment behaviour of the off-taker and share such information with other participating IPPs within each country.

From time to time, the information will be made available to the public via aggregated reports. The information collected is recorded and can be accessed via the Transparency Tool – a digital platform launched by ATI in 2019. With time, the hope is that the availability of such verified and reliable payment trends will help align the perceived poor payment risk of power utilities with reality. The first report from the Transparency Tool was published in April 2021 – showing that the Malawian power utility, ESCOM, was meeting its payment obligations to the country’s sole IPP on time.

The way forward for the Regional Liquidity Support Facility

By all accounts, RLSF has been a success since its launch four years ago – it has gone a long way towards further illustrating ATI’s role as a valuable partner in supporting renewable energy projects across the African continent.

However, we will not rest on our laurels and will continue to innovate, ensuring that RLSF evolves alongside wider market changes. With ATI’s growing expertise in this unique guarantee space, the goal is that such success will allow for the development of additional guarantee instruments that can equally spur and encourage private sector funding towards a just energy transition – potentially supporting commercial and industrial (C&I) power projects, mini-grids and other off-grid initiatives.

The relative success of RLSF has shown that mobilising financing for small and medium-sized renewable energy projects is possible and attainable, and that, even though the challenge of electrifying the entire African continent is huge, continued cooperation between governments, multilateral institutions, donor agencies and the private sector can make a meaningful and lasting impact.

About the author

Obbie Banda is an Underwriter with the African Trade Insurance Agency (ATI).
A Zambian citizen, Banda joined ATI in June 2018 and is responsible for the company’s renewable energy sector initiatives and portfolio.

In addition to RLSF, Banda manages the African Energy Guarantee Facility (AEGF), an initiative of the European Investment Bank, KfW, Munich Re and ATI, that provides ATI with access to a large pool of insurance capacity thus providing proper risk mitigation and credit enhancement solutions to facilitate and increase private sector involvement in the African energy sector.

About the African Trade Insurance Agency

ATI was founded in 2001 by African States to cover the trade and investment risks of companies doing business in Africa. ATI predominantly provides Political Risk, Credit Insurance and, Surety Insurance. In 2020, ATI closed the year with a gross exposure of $6.3 billion and a net profit of $39.4 million, owing to strong demand for the company’s insurance solutions from the international financial sector and from African governments.

Since its inception, ATI has supported $70 billion worth of investments and trade into Africa. For over a decade, ATI has maintained an ‘A/Stable’ rating for Financial Strength and Counterparty Credit by Standard & Poor’s, and in 2019, ATI obtained an A3/Stable rating from Moody’s.
www.ati-aca.org

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The views expressed in this article by the author are not necessarily those of the publishers and/or association partners. While every effort is made to ensure accuracy, the publisher and editors cannot be held responsible for any inaccurate information supplied and/or published.

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