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Concept Paper – Micro-Hydropower Debt Fund
To expand reliance of off-grid electricity supply in rural areas, GTZ intends to create a EUR 500,000 micro-hydro debt fund (MHDF) for the purpose of extending credit on 7-10 year terms, for up to 40% of the project cost of AEPC-supported, off-grid, micro hydropower stations (MHPS) which are part of either the REDP or MGSP/ESAP initiatives of the AEPC. The government subsidy for such MHPS covers at present around 33-50% of the installation cost with the average being around 45%. The community, or developer interested in implementing a system, has to make up most of the difference (in cash or in kind). The MHDF would help such communities (or developers) to finance the required equity contribution as otherwise a number of AEPC approved MHPS could not be built due to lack of finance.
The banking has - in the past - been reluctant to provide such finance but a number of commercial banks have in recent times shown interest in venturing into the micro hydropower sector. GTZ intends to support such banks through capacity development support and the creation of this fund, to strengthen private sector participation in hydropower development. Within the month of September, GTZ would invite banks which have a) a sound financial standing and b) (first) experiences in the hydropower sector to apply for becoming the administrator of such a micro-hydropower debt fund. Interested banks are requested to provide a proposal which should:
- Provide an assessment of the (micro) hydropower sector;
- Provide an overview of the bank’s experiences in this sector and the bank’s plan for their hydropower portfolio;
- Outline the bank’s strategy on how to administer and implement the MHDF;
- Show what fees the bank would charge for administering the MHDF.
Based on the proposal provided by the banks, GTZ would select a debt administrator by mid October.
After selection of a suitable debt fund administrator, GTZ would enter into a financing agreement with the AEPC through which the title of the funds would be transferred to AEPC. Subsequently, AEPC would conclude a contract with the selected bank for administration of the fund. For an initial period of one year GTZ would play a supervisory role to ensure that the MHDF is administered in the spirit of the agreement between AEPC and GTZ. The fund should become operational by January 2009.
The monies for the fund will come from a partnership between Netherlands’ Directorate-General-Directorate of Development Cooperation (DGIS) and GTZ under the Energizing Development (EnDev) initiative. The agreement for the second phase of this initiative (EnDev II) which is scheduled to start from January 2009 has still to be finalized and, thus, the establishment of this fund is conditional on the signing of this agreement. However, both sides have already in principle agreed on the continuation of the EnDev initiative.
Annex 1: Design of the MHDF
To expand reliance of off-grid electricity supply in rural areas, GTZ will create a EUR 500,000 micro-hydro debt fund (MHDF or more simply, the ‘Fund’) for the purpose of extending credit on 7-10 year terms, for up to 40% of the project cost of an AEPC-supported, off-grid, MHPS. Sponsors of such projects are expected to provide a minimum of 20%, as an equity contribution. GTZ will transfer title to the Fund to AEPC based on a separate agreement concluded by the two parties before implementation of this project. GTZ will act as supervisory body during the first disbursement cycle for the first year of operation (until 12/2009).
The MHDF is to be held as Nepalese current account denominated in Nepalese Rupees under the control of AEPC. Once the funds are totally committed, the Debt Administrator will be solely responsible for their collection and, subject to agreement with AEPC, for the management of the reflows. The relationship between AEPC (as employer), GTZ (as supervisor) and the Debt Administrator (as agent of AEPC) will be formalized in a tri-partite Agreement.
AEPC will hold title to the Fund pending its disbursement and the Debt Administrator will act as agent of AEPC, responsible for observing operating and lending guidelines in placing debt and collecting reflows, until such time as a final decision is arrived at regarding the disposition of the monies in the Fund.
The Debt Administrator may require technical assistance over the first months of operation in understanding and evaluating the (i) technical configurations of MHPS, (ii) portfolio risk management; and (iii) reporting (best practice) standards for Investment Funds. This technical assistance may be provided in one of two ways: (a) classroom instruction, (b) on-the-job training, or (c), some combination. Such technical assistance shall be provided by GTZ directly.
The following paragraphs outline the MHDF Mission, its Operational Objectives, Top Management, Highlights of the Administration Agreement (between AEPC, GTZ and the Debt Administrator) and Lending Policies:
- MHDF Mission: The mission of the Fund is to accelerate the dissemination in Nepal of access to electricity through the development of AEPC-sponsored, MHPS-driven, mini-grids as well as assist in closing the financing gap of such projects through the wider availability of project finance in rural areas.
- Operational Objectives:
- Demonstrate that lending to the micro-hydro sub-sector can be profitable and managed by interested financial institutions into a commercially sustainable business;
- Enable, as well as ensure, the faster capture of donor resources that, in the absence of the MHDF, would delay (if not deny) the drawdown of such resources to the sub-sector;
- Increase the pace of electrification in the rural areas and, in this way, stimulate the development of productive agro-processing and other income generating enterprises - thereby improving job opportunity and livelihood creation;
- Accelerate the delivery and sale of CER to the Carbon Community Development Fund and the capture of additional monetary resources by AEPC for technical assistance or subsidy usage;
- Top Management:
- Debt Administration Agreement: Among other matters, the debt administration agreement (the ‘Agreement’) to be entered into between AEPC, GTZ and the Debt Administrator will cover such matters as: term of engagement; size of the fund; policies of the fund; procedures for commitment and disbursement; MHDF lending policies; credit write-offs; risk sharing in loan write-offs; cause for termination and other such matters.
- The fee to be paid to the Debt Administrator would have the following structure:
Following the effective date of the Agreement, at each 6-month interval, the Debt Administrator will be paid:
a)x % flat fee (e.g. 1%) calculated on average undisbursed balances available in the MHDF over the previous 6-month interval; and
b)x % flat fee (e.g. 2%) on average disbursed principal balances of performing loans.
For purposes of calculating item (b), performing and non-performing loan will take on the same definition and require the same reporting treatment as that provided under existing guidelines issued by the Central Bank of Nepal (NRB).
Similarly, Debt Administrator will be expected to follow the existing guidelines issued by the Reserve Bank of Nepal for writing off bad loans and will be expected to assume 25% of all credit write-offs. (All recoveries of principal realized after write-offs have been taken will be shared on a 25/75 basis between the Debt Administrator and the Fund)
- Lending Policies of the MHDF: Unless otherwise agreed by its Board of Trustees, MHDF will act as a complementary participant in the financing of MHDF, by lending up to a maximum of 40 percent of the total project cost to a project vehicle that implements an eligible project, as defined below, provided that at least 20 percent of the project cost is delivered in the form of sponsor equity:
- Priority: Projects must qualify as an AEPC-sponsored, micro hydroelectric facility with a capacity of 5-100 kW installed;
- Ownership: The project must be sponsored (majority-owned), preferably, by a private village cooperative or, in exceptional cases, by an institution or private developer. As a matter of policy, the latter must pledge to hold at least 100% of the project's equity for 10-years, or over the life of the loan, whichever is longer;
- Limited Recourse:
- Environment and Social Framework: Projects should meet GON environmental and social assessment criteria; and
- Economic Rate of Return:
- Associated Fees & Charges:
a)Non-refundable Application Fee
b)Non-refundable Project Appraisal Fee
c)Documentation fee, payable at the time of execution of loan documents.
d)Commitment charges at the rate of [0.X] % per annum payable quarterly, and calculated on unutilized amounts of the financial assistance effective from [60 days] from the date of Facility Agreement.
e)Monitoring fee of [0.Y] % per annum payable quarterly, on the financial assistance, disbursed and outstanding.
f)All costs/fees and reasonable level of expenses for the Debt Administrator in executing its appraisal and/or carrying out its due diligence etc.
g)Cost incurred in connection with Debt Administrator’s visits in relation to negotiations, meetings, monitoring etc.
h)All other fees and charges as may be applicable including insurance premiums for ‘all risk’ insurance, etc.
- Commercial Terms & Conditions:
- 'Interest rates: 'MHDF may participate in a project's financing plan with either fixed or floating rate. In any case, MHDF interest rates will be set at prevailing market rates to avoid market distortions. Interest rate policy will be reviewed and approved at the beginning of each calendar quarter by the Board of Trustees to take effect over the following quarter;
- 'Currencies: 'The MHDF will denominate all of its loans in Nepali Rupees (NPR).
- 'Tenor: 'Loan tenor depends on the nature of the specific project and the life of the assets financed. Within this constraint, the final maturity of a senior loan may be for up to 15 years;
- 'Repayment: 'Repayment will normally be made on equal monthly installments of principal plus unpaid balances, or on an annuity structure i.e., equal installments of principal plus interest with a suitable grace period on repayment during the construction period. A maximum grace period of 2 years is permitted and the construction period of the project will be part of the allowed grace period;
Depending upon project needs, the borrower has the option of using its equity resources to fund the interest due during construction or, otherwise, rolling this the interest during construction and capitalizing it upon commissioning of the MHPS;
- 'Security: 'MHDF requires appropriate security, as the Board of Trustees may dictate, for each of its loans that may include, inter alia:
a)Pledge of shares in the project company and creation of a voting trust permitting lenders to vote the shares of the company in times of distress;
b)Direct agreements with key project participants that allow lenders to "step in" and take over the project when it is in trouble, without affecting the legality and validity of project agreements;
c)First priority legal mortgage on all immovable assets as well as first priority hypothecation on all movable assets of the project company;
d)Assignment to the extent possible of all contractors' and manufacturers' warranties;
e)Completion guarantee and other similar support from sponsors;
f)First loss payee on insurance policies on project assets or interruption against natural Force Majeure as well as for business interruption or delayed start-up; and
g)Lien on project accounts.
Document in Spanish from EnDev Honduras: