# **<u>Box 4.2: Local Currency Loans Using Derivatives: The Case of Hygeia Nigeria</u>**

IFC offers local currency loans in any country where it is possible to hedge its resulting currency exposure from the local currency loan. It uses long-term derivatives or swaps to synthetically transform the cash flows from a local currency loan into dollar cash flows. In addition to the development impact of the projects they finance, local currency loans also help improve the client’s currency risk management and develop financial markets in other countries.

Hygeia Nigeria Limited, a private sector provider of hospitals and Health Maintenance Organization (HMO) services in Nigeria, was founded in 1984 as a multispecialty hospital in Lagos. The company has evolved into an integrated health care services group with an HMO, three hospitals in Lagos, 25 worksite clinics, and a network of more than 200 clinics across the country. In 2006, Hygeia was interested in borrowing money to finance an expansion and renovation of its hospitals and to improve its HMO business. Historically, Hygeia has borrowed in dollars and was exposed to significant currency risk.

From 2000 to 2003, the Nigerian naira depreciated by more than 40 percent relative to the U.S. dollar. Then, from 2003 to 2008, the currency appreciated more than 15 percent relative to the U.S. dollar, only to depreciate again 15 percent. This extreme volatility in currency markets demonstrates the importance of linking a company’s revenues and liabilities to the same currency. Hygeia was seeking long-term local currency debt in a market where any kind of long term debt financing is limited.

Using derivatives, IFC provided Hygeia with a loan of 390 million Nigerian naira (US$3 million). The swap used to fund this loan was the longest maturity currency swap in the Nigerian naira market to date. It is expected to pave the way for more long-term naira/dollar swaps, leading to more local currency investment in Nigeria.

_Source:_ IFC 4.25 **<u>Output-Based Aid</u> (OBA)—a form of public-private partnerships—involves contracting arrangements with the private sector that tie the disbursement of public funding or “subsidies” to the achievement of specific service delivery results.** First introduced in 2000, OBA schemes compensate service providers (usually the private sector but in some cases also community or nongovernmental organizations or public sector utilities) with subsidies upon delivery of a specified output, such as water connections of a specified quality, to a targeted beneficiary. Subsidies, provided in the form of payments for the provision of services to targeted groups, cover the gap between the cost of provision and the user’s ability to pay.

4.26 **Of the total 159 OBA projects identified around the world, 123 are supported by the World Bank Group, totaling US$3.8 billion in investments** (US$2.6 billion Bank and US$1.1 billion government).<sup>33</sup> The plurality of these schemes was focused in the water and energy sectors, followed by health and other social services. However, in terms of funding volumes, the transportation sector represented about half of OBA-related flows. While a third of OBA projects were in Africa, in volume terms those in Latin America were largest. Of the 123 OBA projects, more than 60 percent (75 projects) are in IDA countries, 33 are in IBRD countries, and 15 are in IDA/IBRD blend countries. Increasingly, OBA schemes are being mainstreamed into the design of IBRD and IDA lending operations.

> 33 A handful of projects involve well-functioning public sector service providers and involve partnerships between public institutions.

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