20 January 2013

Ethiopia: Bank to Lend to Businesses in Renewable, Efficient Energy

The Development Bank of Ethiopia (DBE) is availing 20 million dollars (370 million Br) of World Bank (WB) funds, to be loaned to private businesses, with a focus on renewable energy and energy efficient products.

The money is part of a 200 million dollars loan facility, extended by the World Bank in May 2012, to the Ministry of Finance & Economic Development (MoFED). It is planned to finance the energy industry; three quarters of which will go towards transmission and distribution of electricity by the Ethiopian Electric Power Corporation (EEPCo), with five percent reserved for general use.

Of the 40 million dollars allotted to encouraging private sector investment in renewable energy, half is yet to be released, and it is to be done so based on how well the initial 20 million dollars is utilised, according to senior managers at the DBE.

Such loans were previously availed through the Ministry of Water & Energy (MoWE), but later the World Bank released the sum to MoFED.

The DBE and MoWE put forward a joint proposal to the World Bank for the DBE to manage the money and MoWE to provide technical assistance with loan requests; this arrangement was accepted.

The World Bank approved DBE's involvement because of its prior experience in financing renewable energy projects on behalf of the MoWE, according to Eyob Aguma, assistant project coordinator of the Rural Electrification Managed Fund, at the DBE.

The DBE will start making loans over the coming five months, according to officials, but it will first sit with beneficiaries, including the private sector, micro-finance institutions, and representatives of the World Bank fromWashingtonDC, to discuss the interest rates it intends to charge.

The DBE itself will return the money to the MoFED, with the addition of a 1.5pc interest, according to an agreement signed in July 2012. The DBE intends to charge 8.5pc and six pc to individual borrowers and microfinance institutions, respectively.

Anyone seeking loans of 50,000 Br or less will go directly to the micro-finance institutions, which will distribute the money in the specified sectors, in order to reach those who want to use, or trade in, renewable energy at a grassroots level.

"It is a very good deal for people like us, because interest rates are lower than most banks, which currently have an interest rate of around 12pc for loans," Dereje Walelegn, (Eng) general manager of Lydetco, one of the more prominent solar and thermal energy product providers in the country and president of the Ethiopia Solar Energy Association, told Fortune.

Further more, the money is provided in hard currency, avoiding the lag time in opening letters of credit, related to foreign currency shortages.

The loan will be used to inject 70pc of the working capital of private businesses, which will come up with 30pc of their own resources. It is a first for the DBE to provide loans for working capital, as previously its credit policy strictly focused on project financing in priority sectors, such as; agriculture, agro-processing and manufacturing industries.

The availed money was previously most often used to provide loans to farmers' cooperatives and individuals who wanted to install home solar systems. The MoWE used to approve these loans, with the DBE managing the money through an agency, and usually making purchases on behalf of those requesting the installation of home solar systems.

The beneficiaries could have made the purchases by themselves, but it was usually cheaper to buy in bulk from abroad, and therefore the procurement process was handled by the Ministry, according to Samson Mamo, technical officer for the rural electrification fund, under MoWE.

The DBE has been working on a financial and technical project operation manual since its agreement with the World Bank.

The World Bank has approved a total of a billion dollar in loans for the energy sector inEthiopia, back in 2007. The Eastern Africa Power Pool project alone, which makes it possible forEthiopiato export electricity toKenya, has benefited from 684 million dollars. Twenty-five thousand households are also being fitted with solar systems, with the Bank providing a 130 million dollar loan.

These loans are meant to help Ethiopia achieve its Growth and Transformation Plan (GTP) goals within the energy sector, which includes quadrupling power generation, from the current 2,000 Mw, by 2015, according to the World Bank.

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