African Trade Insurance Agency and Kenya sign RLSF MoU: Why this matters
Sponsored by African Trade Insurance Agency
ATIDI’s Acting Chief Risk Officer, Kefa Muga (left), alongside Prof Njuguna Ndung’u, Kenya’s Cabinet Secretary, The National Treasury (centre); and Mr Davis Chirchir, Kenya’s Cabinet Secretary for Energy and Petroleum, at the Regional Liquidity Support Facility MoU signing ceremony held on February 28, 2024.
By Obbie Banda
On February 28, 2024, the African Trade Insurance Agency (ATIDI) signed the Regional Liquidity Support Facility Memorandum of Understanding (the “RLSF MoU”) with the Government of Kenya. The purpose of the RLSF MoU is to supplement existing membership agreements entered into between ATIDI and the Government of Kenya.
Parties to the RLSF MoU are the National Treasury, the Ministry of Energy and Petroleum, Geothermal Development Company (GDC), Kenya Electricity Transmission Company Limited (KETRACO), and Kenya Power and Lighting Company (KPLC).
As part of the RLSF MoU, the Government of Kenya and ATIDI will collaborate to identify, develop, and implement renewable energy projects across Kenya, leveraging the country’s abundant natural resources to generate clean and sustainable energy and reinforce its power generation and transmission capacity. The RLSF MoU will also encourage private sector participation in Kenya’s efforts to meet its goal of transitioning to 100 percent clean energy by 2030.
Who is ATIDI?
ATIDI is a multilateral financial institution founded in 2001 by African states to mitigate trade and investment risks of companies doing business in Africa. Today, ATIDI has 24 African member states and 13 institutional shareholders and non-African. It predominantly provides Political Risk, Credit Insurance, and Surety Insurance in member states.
Since inception, ATIDI has supported $85 billion worth of investments and cross-border trade across Africa. For over a decade, ATIDI has maintained an ‘A/Stable’ rating for Financial Strength and Counterparty Credit by Standard & Poor’s (S&P). In 2019, ATIDI obtained an A3/Stable rating from Moody’s, which has now been revised to A3/Positive.
What is the Regional Liquidity Support Facility (RLSF)?
RLSF is a liquidity instrument offered by ATIDI to eligible renewable energy and privately financed transmission projects in ATIDI member states that have signed the RLSF MoU. This facility was launched in 2017 as a joint initiative of ATIDI and the KfW Development Bank, courtesy of financing from the German Federal Ministry for Economic Cooperation and Development (BMZ). In 2022, the Norwegian Agency for Development Cooperation (Norad) committed additional funding towards the continued implementation of RLSF.
RLSF has a capacity of $150 million (being the current maximum possible portfolio size) and supports small and mid-scale renewable energy projects with an installed capacity of up to 100MW (larger projects can be considered on a case-by-case basis) by protecting the projects against the risk of delayed payments by public offtakers; in turn improving project bankability and ensuring that more projects reach financial close.
Parties present at the RLSF MoU signing ceremony were, from left to right: Dr Eng Joseph Siror, CEO, KPLC; Kefa Muga, Acting Chief Risk Officer, ATIDI; Prof Njuguna Ndung’u, Kenya’s Cabinet Secretary, The National Treasury; Obbie Banda, Underwriter and Acting RLSF Coordinator, ATIDI; Dr Stephen Ikikii, Senior Economist, National Treasury; Mr Davis Chirchir, Kenya’s Cabinet Secretary for Energy and Petroleum; Paul Ngugi, CEO, GDC; and Dr Eng John Mativo, CEO, KETRACO.
Why is the RLSF MoU necessary?
When African sovereigns complete their membership in ATIDI, they ratify and/ or enter into the following legally binding agreements: The ATIDI Treaty and the Participation Agreement. In addition, each member state pays equity into ATIDI. Once this process has been finalised, ATIDI deploys credit enhancement instruments in support of various transactions across a number of economic sectors.
As part of the membership process, member states commit to reimburse ATIDI for any claims paid following defaults by the sovereign or state-owned entities on transactions supported. Whilst these agreements have worked well in the past, with ATIDI experiencing only a handful of defaults across its member states (with full recoveries being made), the RLSF MoU is required to ensure alignment between ATIDI and host governments on the implementation of RLSF.
In addition, the RLSF MoU provides an opportunity for entities that may not have directly interacted with ATIDI as part of the membership process, to better appreciate the instrument and allow for closer coordination. It’s for this reason that the RLSF MoU is entered into by the Ministry of Energy and state-owned power utilities that enter into agreements with private investors; these signatories being in addition to the Ministry of Finance (or the National Treasury and Economic Planning in Kenya).
How does RLSF work?
ATIDI issues short term liquidity instruments to Independent Power Producers (IPPs) and/ or Independent Transmission Companies, that have entered into Power Purchase Agreements (PPAs) or similar contracts with state-owned power utilities. In Kenya such contracts are entered into with GDC, KPLC and potentially KETRACO.
Each “RLSF Policy” can cover up to 12 months’ worth of revenue for the project and be in place for a duration of up to 15 years. Should claim payments be made under these RLSF policies, ATIDI relies on the existing agreements with the respective host government (being the ATIDI Treaty, the Participation Agreement, and the RLSF MoU) to make recoveries and thereafter re-instate the instrument.
Why are credit enhancement instruments such as RLSF important?
Credit enhancement instruments are important tools in facilitating financial flows in developing countries, as they address risks (both actual and perceived) anticipated by investors. The provision of these tools helps catalyse private financing. In the energy sector, this will mean increased private sector financing of new generation and transmission projects.
With increased private sector participation for such key infrastructure, it frees the government to apply its resources towards other sectors that may not be as attractive to private sector participation such as the provision of healthcare and sanitation services. Courtesy of such instruments and better risk sharing between various stakeholders, the private sector will continue to play an important role in the supply of electricity to the population by supplementing government efforts to increase access to electricity.
What does the signing of the RLSF MoU mean for Kenya’s Energy Sector?
Across sub-Saharan Africa, Kenya’s energy sector is viewed as being mature, well-established, and well-managed. However, there remains room for additional investments in generation and transmission assets if the existing infrastructure will keep up with the increasing demand due to a growing population and more industrialised economy.
Gigawatt Global’s 7.5MW Mubuga Solar PV in Burundi, the first project to benefit from RLSF support.
The availability of RLSF to eligible projects within Kenya will provide an additional incentive to investors; such incentive being made available by ATIDI without creating any new financial burden on the National Treasury. It is anticipated that this should allow for increased financial flows into new projects, in turn resulting in greater security of supply in Kenya and lower end user tariffs for consumers. Such lower tariffs achieved as a result of using credit enhancement instruments will result in greater financial flexibility for the power utility and lower costs for consumers.
How can those developing projects access additional information on RLSF and potentially apply for support from ATIDI?
Additional information can be accessed via our website https://www.atidi.africa/ For those looking to engage further with ATIDI and explore possible support, you can engage the team via [email protected].
__________
Obbie Banda is an Underwriter and the Acting RLSF Coordinator with the ATIDI. A Zambian citizen, Obbie joined ATIDI in June 2018 and is responsible for the organisation’s renewable energy sector initiatives and portfolio.
