The African Trade Insurance Agency (ATI)
The RLSF Initiative
In 2017, KfW, the German development bank and the African Trade Insurance Agency (ATI) launched a guarantee facility for Independent Power Producers (IPPs) with renewable energy projects operating in Africa. The Facility known as the RLSF (Regional Liquidity Support Facility), aims to fill a current gap in the market.
IPPs face a number of challenges before they reach financial close and have to address a number of key risks. One of the most challenging risks to address is the off-take risk: the risk of not being paid in time by the off-taker – typically a public utility.
For a project finance project, cash flow is key. Lenders will ask for various guarantees and buffers to ensure that the IPP can continue to operate and service its debt even if there are payment defaults by the off-taker.
The standard solution is to obtain a stand-by letter of credit that can be called if the off-taker does not pay on time. However, in most cases the bank providing the L/C will ask for up to 100% cash collateral, and usually this has to be provided by the utility. Most utilities are unable to provide this collateral, and thus many power projects don’t reach financial close because the liquidity risk cannot be mitigated.
The Regional Liquidity Support Facility (“RLSF”) has been specifically designed to address this problem. It provides the L/C bank with cash collateral and additional guarantees that will give it enough comfort to issue the L/C at a reasonable cost, so that the IPP can continue to operate for at least 6 months in the event of off-taker default.
ATI and KfW’s Role
ATI will implement the RLSF based on its existing on-the-ground expertise, its relationships with African member countries and its preferred creditor status. ATI is a multilateral investment insurer of credit and political risks with a paid up capital in excess of USD200 million. The company has been profitable for the last 6 consecutive years and has an A rating from S&P. Its main shareholders include 14 African member countries as well as the African Development Bank.
KFW initiated the RLSF. Funds for the cash component and to set up the RLSF have been provided by the German Federal Ministry for Economic Cooperation and Development (BMZ). In December 2016 the BMZ approved a total investment grant amounting EUR 31.6 million as well as a grant TA component amounting EUR 1.3 million.