59391 Financial Solutions: Partial Credit Guarantee Finance, Economics & Urban Development Department March 2010 Sustainable Development Network Vice-Presidency IBRD Partial Credit Guarantee (PCG) to advance Botswana power sector development IBRD provided its Partial Credit Guarantee selected through competitive international (PCG) for Botswana in support of the Morupule bidding, launched by BPC in 2007. B power generation project, a public power project, in collaboration with China's bilateral Project Background agency, China Export & Credit Insurance Corporation (Sinosure). This PCG marks the Botswana, like many other Southern African Bank's first co-guarantee operation, and comes at countries, has long relied on abundant and the time when Botswana power sector is in dire inexpensive electricity supplies from South need for new investment, requiring a great Africa. In 2008, about 70 percent of Botswana's amount of financing. power requirements were met through imports from Eskom, the South African utility. However, The Project Eskom has indicated that it can no longer provide African Power Deal sufficient power and that it will reduce supply The Morupule B Power Station project is a 600- through 2012, and will stop altogether from 2013 of the Year 2009 MW coal-fired power station to be implemented onwards. Energy deficits would not only hurt by Botswana Power Corporation (BPC), a state- economic growth in Botswana and economic owned utility company. The new power station diversification efforts, but also pose a threat of Project Finance is the largest subcomponent of the World Bank's economic contraction in an already serious International Morupule B Generation and Transmission Project economic crisis situation. As Botswana for Botswana.1 The Bank's project comprises possesses large coal reserves, mostly three components: the construction of the undeveloped, it was assessed that utilizing these Morupule B Power Station, new 400-kV resources is the least-cost option, the fastest, and transmission lines to accommodate increased also the only certain option to timely replace the generation capacity, as well as components to imports from Eskom and meet Botswana's base- support alternative energy development and load power generation needs. institutional capacity building in Botswana's energy sector. The new Morupule B Power Botswana Power Sector Station will be located adjacent to the existing Morupule A Power Station, near the town of The electricity sector in Botswana is dominated Palapye, and it will be used to supply domestic by BPC, a vertically integrated electricity utility, needs for electricity. It will utilize circulating which owns and operates substantially all of the fluidized bed technology, which is a readily electricity generation, transmission, and available and proven technology, consisting of distribution assets, and serves a customer base of 4x150MW units to be operated by BPC. The more than 190,000. The total installed generation coal will be sourced from the Morupule coal capacity is 132MW, which comes from Morupule mine, the only major operating coal mine in A, the only power station in the country. In Botswana, operated by Morupule Colliery 2008, the total electricity demand was about Limited, a subsidiary of Debswana Diamond 2,937 GWh (peak load of about 500MW). The Company. The construction of the new power mining sector accounts for about 45 percent of station will be carried out under an engineering, the demand, the commercial sector and the procurement, and construction (EPC) contract residential sector account for about 23 percent with a consortium led by China National Electric each, and government at about 9 percent. Equipment Corporation (CNEEC). CNEEC was According to BPC projections, the electricity demand is expected to grow at about 4 percent 1 from 2009 onward, compared to 6.7 percent For details, please refer to World Bank's Project during the last five years. Bulk supply tariffs are Appraisal Document (Report No.49183-BW) 1 increasing throughout the region, and Botswana Government Guarantee between ICBC as is no exception. Agent Bank and the Government, whereby the Government guarantees the timely payment of all Financing scheduled and unpaid principal and interest payable by the Borrower. The total financing requirement of BPC for the new power station is estimated at US$1.21 billion IBRD documentation for the PCG includes: (including contingencies and duties), which is The Guarantee Agreement between IBRD being debt financed with a US$825 million and ICBC as Agent Bank acting on behalf of the commercial bank loan. The other components of lenders defining the terms and conditions of the the Bank's project are being debt financed with a PCG. US$136.4 million IBRD direct loan, a US$202.5 million loan from African Development Bank The Project Agreement between IBRD and (AfDB), and US$498 million financed by BPC BPC, which contains undertakings of BPC to the and the Government of Botswana. Debt World Bank with respect to matters of particular borrowing by BPC carries the full credit concern, such as the use of proceeds of IBRD- guarantee of Botswana. guaranteed debt, consent requirements for changes to project documentation, compliance IBRD Partial Credit Guarantee with World Bank environment and social safeguards policies, and assignment of rights. The IBRD PCG guarantees commercial lenders of the US$825 million twenty-year commercial The Indemnity Agreement between IBRD bank loan arranged by the Industrial and and Botswana, under which the state indemnifies Commercial Bank of China Limited (ICBC), a IBRD in the event it makes payments made under commercial bank based in China, as to the the Guarantee Agreement. payments of the scheduled outstanding principal amount and one accrued interest payment falling Benefits of the Guarantee due and payable after the fifteenth year. The PCG covers debt service default regardless the The IBRD guarantee improved the terms of reason of default. The maximum guaranteed the commercial bank loan to BPC, by extending Financing Plan ­ all components principal amount thus would be US$242.7 maturity from fifteen to twenty years. The longer US$ million million, or 10/34th (29%) of the loan facility maturity significantly lowers BPC's revenue Debt amount. The guarantee is callable only during requirements, benefitting power consumers and Commercial bank loan the economy in general. (Sinosure/ IBRD PCG) 825.0 the last five years ("IBRD Callable Period"); and IBRD Loan 136.4 is accelerable during such a callable period. That It helped mobilize a substantial amount of AfDB Loan 202.5 is, even if the loan is accelerated during the first long-term debt despite the financial crisis. This Total Debt 1,163.9 15 years, IBRD guarantee can be called only is the first commercial borrowing by BPC of this upon the commencement of the IBRD Callable size and would provide opportunities to Equity Period. BPC/Government of Botswana 498.4 commercial lenders to learn about the BPC credit, Insurance from China Export & Credit Insurance which would in turn enhance the future market Total Sources 1,662.3 Corporation (Sinosure), whose participation is access of the state-owned utility. based on Chinese content in the EPC Contract, The PCG leveraged IBRD resources covers 95 percent of scheduled and unpaid substantially. IBRD's initial exposure under the principal and interest amount during the first PCG (i.e., the present value of the guarantee) is fifteen years of the ICBC loan. Both the IBRD about $121 million, which represents a leverage PCG and Sinosure insurance are callable upon of some 7:1 against the commercial debt debt service default by BPC and upon mobilized of US$825 million. nonpayment by the Government under its guarantee. For more information on the project, please Agreements for the debt financing of the new contact: Varadarajan Atur, Lead Energy power station are: Specialist, (vatur@worldbank.org) AFTEG; Export Credit Facility Agreement between on IBRD PCG, please contact: Scott Sinclair, BPC as borrower and ICBC and Standard Bank Lead Financial Officer, of South Africa as lead arrangers; ICBC as Agent (ssinclair@worldbank.org ), AFTEG Bank; and ICBC as the initial lender.2 or Tomoko Matsukawa, Senior Financial Officer, (tmatsukawa@worldbank.org), Finance and Guarantees/FEU 2 ICBC intends to syndicate the loan after financial closing. 2 IBRD Partial Credit Guarantee for Botswana: Morupule B Power Station Contractual Structure Loan Amortization Chart Republic Equity Botswana 900 of Government Power Botswana Corporation 800 Guarantee (Guarantor) · guarantee of 100% of (Borrower) BPC's principal and 700 interest payments to ICBC Export Loan 600 Indemnity · use of proceeds is Project restricted to 85% of (in million) payments under the EPC Agreement Contract only 500 · reps & warranties · covenants 400 World IBRD Guarantee · guarantee of 100% of Bank BPC's principal payments Industrial and 300 (Guarantor) for last 5 years, plus one interest payment Commerical Bank of China 200 China Export & Sinosure Guarantee (ICBC) · guarantee of 95% of (Beneficiary) 100 Credit Insurance BPC's principal and Corporation interest payments for first 15 years (Guarantor) 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Years PCG Callable Period For more information on the World Bank Guarantee program please visit our web site www.worldbank.org/guarantees or contact: Upali Perera at (202) 458-2801, by email at uperera@worldbank.org or Chalida Chararnsuk at (202) 458-8111, by email at cchararnsuk@worldbank.org 3