ATI’s Regional Liquidity Support Facility (RLSF) – Assessing its Impact Four Years on from Its Launch (By Obbie Banda)
In setting up RLSF, ATI and KfW were looking to create a lasting and sustainable guarantee product for the benefit of small and medium sized renewable energy projects
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
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 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 RLSF, 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 RLSF, ATI had previously provided a bespoke liquidity instrument for the 100 MW Kipeto Windfarm (https://bit.ly/3Flo6gM) in Kenya whilst KfW was the initiator of the successful GET FiT program in Uganda.
KfW’s total funding commitment of EUR 32.9m for 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).
How it works and the General Expectations at Inception
RLSF comprises of cash collateral and guarantees worth up to EUR 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.
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 finalized 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.
The Transactions Supported
The first RLSF policy was issued in January 2020 in support of the 7.5 MW Mubuga solar PV in Burundi (https://bit.ly/3qMdCmn), a project developed by Gigawatt Global with 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 polices were issued in November 2020 in support of the 21MW Nkhotakota (https://bit.ly/3oEYXXw) and the 60MW Salima solar PV (https://bit.ly/3wWBOU9) 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 88.5 MW to the grid, in turn providing access to electricity for over 1 million people. The RLSF guarantees, worth a total of USD 7.8m across the 3 projects, have enabled USD 119.4m in total project financing. The first two RLSF policies were jointly recognized as the Deal of the Year – Energy (https://bit.ly/3oAMXqe) at the 2021 African Banker Awards - illustrating the impact and positive recognition of RLSF!
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 offtakers 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!). 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 offtakers in those countries.
RLSF has not been an exception from this trend. Whilst 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 RLSF Structure
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. 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 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 & 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.
Impact of Covid-19
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 the Role of the Transparency Tool
The RLSF MoUs signed between ATI and African states allow ATI to collect information on the payment behavior of the offtaker 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 (https://bit.ly/3DrvMxx) – 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.
By all accounts, RLSF has been a success since its launch 4 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 power projects, mini-grids and other off-grid initiatives.
The relative success of RLSF has shown that mobilizing 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.
Distributed by APO Group on behalf of African Trade Insurance Agency (ATI).
About the Author:
Obbie Banda is an Underwriter with the African Trade Insurance Agency (ATI).
A Zambian citizen, Obbie joined ATI in June 2018 and is responsible for ATI’s renewable energy sector initiatives and portfolio.
In addition to RLSF, Obbie also 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 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 US$6.3 billion and a net profit of US$39.4 million, owing to a strong demand for ATI’s insurance solutions from the international financial sector and from African governments. Since inception, ATI has supported US$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.