6 August 2018 Bangkok, Thailand. Noritaka Akamatsu Senior Advisor (Financial Cooperation & Integration) Asian Development Bank

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1 6 August 2018 Bangkok, Thailand Noritaka Akamatsu Senior Advisor (Financial Cooperation & Integration) Asian Development Bank

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3 Instruments Indirect financing of public infrastructure In 2015, 25 DMCs (96% of population in ADB DMCs) invested $881 billion, or 5.5% of GDP ( requirement is estimated as $1.34 trillion required, or 7% of GDP). Without PRC, 24 DMCs invested $196 billion. Public sector financed infrastructure worth 5.1% of GDP, which was over 90% of total infrastructure when PRC is included (25 DMCs include PRC). Without PRC, 68%. A big chunk of infrastructure is indirectly financed with government bonds, SOE bonds, and SOB bonds as well as tax and other revenues. Direct, commercial financing of greenfield infrastructure projects with bank loans. Direct, commercial financing of brownfield projects with bank loans and project bonds. Difficult to directly finance a greenfield project with project bonds. Equity around 25% (anecdotal)

4 Sponsor Governments, construction firms, utilities/infrastructure operators (often stateowned, partially or wholly, major conglomerates Invest in the project company, provide guarantee or limited recourse as buffer for lenders or other investors. The credibility of the Sponsor is key to providing comfort for lenders / investors even if project finance is structured to be non-recourse.

5 Project company Minority subsidiary of the Sponsor which makes its obligations secure even if the Sponsor goes bankrupt, or vice versa. A legally and economically self-contained entity against which all contracts are written, Contracts dictate the distribution of risks and returns. A prerequisite to attract private finances. allows the contractual pledging of cash flows to creditors and the distribution of risks among the contract partners. limits agency problems The Sponsor or operator cannot divert revenues away from the project to other entities. replaces the government in traditional public procurement The government/sponsor can keep project debt and liabilities off-b/s and save fiscal space.

6 Typical project finance structure Case of power purchase agreement (PPA) Sponsor / Shareholders Bilateral donor Operator Lenders Loan agreement Operating agreement Shareholder agreement SPV Project company (IPP) Concession agreement Grantor (Government) Offtake purchase agreement (PPA) Offtake purchaser (State power company) Construction agreement Input supply agreement Construction Contractor Input Supplier (Fuel)

7 Typical infra. project finance structure Case of PPA Project Company with no previous business record and with a sole activity to carry out the project, subcontracting most aspects of the project, e.g., independent power producer (IPP); No revenue during the initial construction phase (high risk). Debt service starts only after the project completes the construction and reaches to the operations phase. Sole revenue stream comes from an off-take purchase agreement, e.g., power purchase agreement (PPA); Non-/Limited recourse to the Sponsor, e.g., liable only up to its equity in, supplementary equity or credit enhancement for the Project Company; Project remains off-balance-sheet for the Sponsor and for the host government.

8 Debt in a minority subsidiary is not consolidated in the B/S of the Sponsor, making non-/limited recourse possible. Reduces impacts on the Sponsor s cost of debt capital and debt capacity. Needs to be considered under applicable law and accounting rules of the host country. The government can keep project debt and liabilities off-b/s and save fiscal space. Off-B/S does not necessarily reduce actual liabilities for the government and may only disguise them. Need sound contingent liabilities management.

9 Limited recourse financing Project financing is limited recourse to the Sponsor / shareholders. Lenders' recourse will be limited to the assets of the Project Company (including completion and performance guarantees by the sponsor, etc.) in the case of default of the project company. Circumstances in which the lenders have recourse to the shareholders' assets Deliberate breach of covenant by the Sponsor / shareholders. Law may restrict the extent to which shareholder liability can be limited, e.g., liability for personal injury or death. Payment guarantee Termination sale against default Force majeure against the inability to continue the project due to political / natural disaster

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11 Credit guarantee Partial or full, to make private bank financing more attractive can reduce the cost of debt finance and enhance returns on equity (thus attract more equity investments) Broaden the potential investor base in debt, e.g., by attaining investment grade credit rating. Examples of guarantor: Regional: Credit Guarantee & Investment Facility (CGIF) of ASEAN+3 for LCY project bonds National: Governments; Indonesia Infrastructure Guarantee Facility (IIGF); Korea Infrastructure Credit Guarantee Fund (KICGF); Danajamin (Malaysia); Export credit agencies / Export-import banks Multilateral (ADB, IFC) / bilateral concessional guarantee for frontier markets, e.g., against host country government guarantee

12 Challenges with guarantee Guarantor must maintain very high creditworthiness. Strong capital, modest leverage (esp. in an early stage) but needs to diversify portfolio => Can grow only slowly Guarantor needs to charge sufficient guarantee fees to be viable / sustainable, while the fee charge should be affordable for the borrower to reduce the overall borrowing cost. Fiscal support to subsidize the guarantee for qualified projects => concessional finance Guarantor needs to have skill advantage over lenders in assessing and pricing the credit risk of the borrower / bond issuer, e.g., specialized infrastructure guarantee skills.

13 Construction period guarantee facility Support greenfield project bonds, which are otherwise difficult to issue. Project bonds are mostly used to finance brownfield projects Must develop expertise to assess construction period risks of various infrastructure projects.

14 Blended concessional finance (BCF) DFI Working Group on BCF for Private Sector Projects Combining concessional finance from donors or third parties alongside DFs normal own account finance and/or commercial finance from other investors, to develop private sector markets, address the SDGs, and mobilize private resources. Five principles Additionality/rationale for using BCF Crowding-in and minimum concessionality Commercial sustainability Reinforcing markets Promoting high standards Source: Kruskaia Sierra-Eskalante, IFC 2017

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17 Noritaka Akamatsu Senior Advisor (Financial Cooperation & Integration) Asian Development Bank