1 LEVERAGING PRIVATE CAPITAL FOR INFRASTRUCTURE FINANCE Zoubida Allaoua Director of the Finance, Economics and Urban Development Department The World Bank November 21 st, 2011
Infrastructure investment needs are huge 2 Source: AICD 2010
What is the value of private involvement? PPPs are an important part in providing infrastructure Leverage private funds and pool them with public resources Better value for money efficiency and innovation Spread financing over the lifetime of the asset relieving public budgets Improve risk sharing between public and private parties Boost sustainability and innovation PPPs force governments to look at life-cycle costs for services, and ensure long term sustainability and maintenance of assets 3
Why private participation in infrastructure is a growing engagement area for the Bank? How is infrastructure financed 70% 8% 22% ODA Private sector Public sector Private investment in infrastructure may free resources for social agenda Improvement in quality and efficiency Funding gap for most governments is more than the Bank can finance Debt capacity of governments is limited Limited leverage possible via typical IFI instrument Transfer of expertise and innovation in service provision Extension of private capital 4 4
FEU - Bringing the agenda together. with a diverse toolbox 5 Infrastructure Financing Infrastructure Economics PPP FEU Sector Reform & Regulation Subnational Financing Output Based Financing 5
6 FEU Activities FEU can provide support at all levels of Infrastructure Finance Level Country and/or Local/Sector framework Activities Technical Assistance PPP legal framework Infrastructure regulation Institutional framework and capacity (e.g. PPP units, contracting authority, guidance to line ministries) Infrastructure financing facilities / funds to develop local markets Federal /Central Government Sub-national Line Ministries Transactions Project implementation Financing strategy (e.g. public, private or both) Financing structure Attracting commercial debt to support public & private projects Applying Bank instruments to support PPP Leveraging Bank s capital via Bank Guarantees SOEs Project
Facilitating Public Private Partnerships in Infrastructure 6 FEU provides expertise, innovation, policy support and transaction assistance on PPP projects Infrastructure Development Strategy Legal/ Institutional Reforms Local PPP Capacity Building Develop Propoor PPP Develop Bidding Documents PPP Procurement PPP Closing/ Signing Inception of PPP Concept PPP Private Operator Selected Building Consensus Funding for Project Preparation Assess PPP Options Define Transaction Structure Market to Investors Output Based Subsidies Investment Climate Reform Support for Transactions Partial Risk Guarantees Financing Facilities
8 FEU Core Areas of Expertise Leveraging WBG capital and knowledge to attract private sector investment (debt & equity) Knowledge of Bank instruments and their application Specific sector knowledge; Strategic local understanding Global transaction expertise; Strong execution skills Efficient design of financing structures attractive to private market players Strategic Project Finance Advisory Project assessment; Implementation strategy; Public impact assessment (Government support, contingent liabilities) Project Risk Allocation; Diagnostic of Financing Options & Bankability; PPP Transaction Structuring; Design of financing structure including credit enhancements; Implementation transaction & process support 8
The New Paradigm 9 Leveraging Bank s Experience in Mobilizing Private and Public Capital is becoming critical to our engagements Lending and Guarantees flexible instruments to directly or indirectly leverage participations Global Experience different structures and deep sectoral experience Financial Leverage: Small financial participation towards financing plan Demonstrated outcomes Incentives to developing PPPs in the Bank
What is IBRD/IDA value-added? 10 Innovative approaches for financing of infrastructure projects Additional sources of financing Flexible applications of traditional financing instruments Public sector direct financing Backstopping contractual obligations to mobilize private debt to public and private projects Flexible Repayment profiles and Contingent Loans for providing halo effect Optimization of Balance sheet Financing of large infrastructure projects on non-recourse project finance basis Attracting international equity and debt investors for greenfield, brownfield & privatization projects.
What are Client Government s main concerns related to infrastructure development? 11 Issues Possible solutions How can I minimize the counting of Bank resources against my designated allocation? How can I finance this project without taking on more debt? How can I match the maturity of my debt liability to the life of underlying asset? How can I mitigate the risks so that the market is willing to provide loans and equity investment in my country? How can I minimize the contingent liability on my balance sheet from PPPs? Introduce PPPs to mobilize public sector money Use guarantees to leverage Bank and public resources Use PCGs/PBGs for leverage impact and stretch maturity of commercial debt Use PRGs to reduce risk levels of private sector Use results-based financing to incentivize service providers Introduce optimal PPP structure to minimize public financing 1
Case Studies 12 Demonstrated leverage in mobilizing private sector long term debt for public and private sector projects On Average Financial Leverage of 4:1 using guarantees, ranging from 1.2 to 7 depending upon the project and level of support provided from the Bank. Many other structures are possible Back-ended Loans for indirect political and credit risk mitigation First loss structures using loans and guarantees Take out financing to mitigate refinancing risk
13 Loans in support of high impact public and private projects: matching project economics Issue: Limited resources from both public and private; limited client capacity, e.g. Chad Cameroon pipeline Songo Songo Gas to Power Project Rockfort power plant for Jamaica Solution: Bank adapted its loan structure to support these projects IBRD Loan as equity and subordinated debt to private project IBRD Contingent Loan as Take Out to a Bond Issuance Bank lending supported the project and financing structure Sent a strong signal of support to the project Small intervention had a big impact
14 Case study: Chad-Cameroon Oil Development and Pipeline Project Chad: Credit Enhancement with Offshore Escrow Account Project: Development and export of oil from Chad s Doba oil fields Financing: 13 year IBRD enclave loan for US$39.5 million to Chad. Loan is repaid directly from Chad s escrow account where all royalty revenues are deposited by off-takers Cameroon: Credit Enhancements with Risk Premium Project: Transportation of oil from Chad to Cameroon s Atlantic Coast at Kribi, and installation of an offshore offloading vessel Financing: 15 year IBRD enclave loan for US$53.4 million to Cameroon. Cameroon is committed to pay a 10% non-refundable risk premium to support debt service Field Facilities Corporate Structure Pipeline Facilities IBRD Loans for Equity to Chad and Cameroon Exxon/Petronas/Chevron Chad Cameroon Field Production Joint-Venture Cameroon Pipeline Co. (COTCO) Total Project Cost - ~ US$4 Billion Chad Pipeline Co. (TOTCO)
15 Case study: Rockfort Power project in Jamaica Project: USD 144 million, 60MW power project in Jamaica Financing: USD 81 million, 5 year bonds were issued to raise debt backed by a line of credit from Deutsche Bank, which in turn was backed by take-out commitments of USD 40.5 million each from WB and Inter-American Development Bank Letter of Credit Commercial Banks $81 million letter of credit repayment guarantee World Bank and Inter-American Development Bank $81 million (Year 5 17) Private Sector Energy Fund NlBj is Fund Manager Counter guarantee Government of Jamaica Puerto Rico 936 bond market $122 million 5 year bonds ($81 million) 2 year bonds ($41 million) CARIFA Jamaica Private Power Company $19.8 million CDC base and standby facility $41 million (Year 2) $2.2 million (Standby) Underwritten by First Boston Project sponsors and other equity investors Cash flows Guarantees/security Equity and debt coverage MIGA
Innovative approaches to finance private projects: reinforcing public commitment 16 Issue: Private sector reluctant to develop and finance projects; risk from government s non-performance of it s contractual obligations Nam Theun 2 for Lao PDR Traditional Project Financing for Large Renewables West Africa Gas Pipeline project for Ghana All Equity Financing for Cross Border Gas Transmission Railway concession in Kenya/Uganda Project Financing for Cross Border Freight Rail Solution: Bank s adapted its PRG to leverage it s expertise and capital to finance private projects by backstopping governments /parastatal s obligations to Private Project Partial Risk Guarantee structures PRGs backstopped agreed sovereign obligations in project agreements and provided comfort to commercial lenders: Coverage included termination payments, timely issuance and renewal of permits, licenses, land use rights, regulatory authority approval, expropriation etc.
Case study: Nam Theun 2 Hydro in Lao PDR 17 Project: 1070 MW hydro power project in Lao PDR with 995MW of power for export to Thailand Bank s PRG of USD 45 million on a 16.5 years debt tranche leveraged USD 1.5 billion in limited recourse financing Lao PDR s 25% equity is funded partly by IDA grant, EIB, AFD, ADB Used of Environmental and Social Expenditures Funding structure matches the cost and revenue profiles (½ THB - ½ USD); 27 financial institutions: 5 MLAs, 4 ECAs, 2 BLAs, 16 Thai & international commercial banks Project was the largest cross border project financing in East Asia Ground breaking for harmonizing IFI safeguards for a project Private Equity GOL Equity EGAT (primary offtaker) SHA PPA NTPC (SPV) CTA Government of Laos (as concessionaire) CA IDA Project Agreement Limited GOL Performance Obligations Permits, Consents Change in Law Political FM Termination of the CA IDA Indemnity Agreement IDA Guarantee Agreement THB & non-wb Guaranteed US$ Commercial Debt WB Guaranteed US$ Debt
Case study: West Africa Gas Pipeline Project: 678 km new pipeline to transport natural gas from Nigeria to Ghana, Togo and Benin; gas sourced and transported by N-Gas (owned by Nigerian National Petroleum Corp, Chevron, Shell; Volta river Authority of Ghana (VRA) as anchor customer) Financing: Bank s PRG of USD 50million leveraged USD 800million of Private Equity Financing through direct equity and shareholder loans Republic of Ghana Indemnity IDA (Guarantor) VRA VRA Direct Agreement upon termination, N-Gas directs VRA to pay 'WAPCo Termination Payment' directly to WAPCo instead of to N-Gas Takoradi GSA upon termination, VRA owes (inter alia) 'WAPCo Termination Payment' to N-Gas Takoradi GTA upon termination, N-Gas owes 'WAPCo Termination Payment' to WAPCo Government Consent & Support Agreement guarantee of VRA's obligations under: Takoradi GSA VRA Direct Agreement N-Gas WAPCo (Beneficiary) IDA Project Agreements reps & warranties covenants IDA Guarantee guarantee of Government payment of IDA s share of 'WAPCo Termination Payment' 18
19 Case study: Railway Concession Kenya/Uganda [Revenue Guarantees] Project: Governments of Kenya and Uganda jointly granted two separate 25-year concession for respective railways Financing: 25 year USD 55million PRG leveraged USD 400million of limited recourse financing. Deemed loan structure (termination amount unpaid by the Government is to be a loan from the Project Company to the Government, which is covered by PRG)
Mobilizing commercial money for public sector projects: optimizing balance sheets 20 Issue: Public sector wants to match it s liabilities with the life of assets by borrowing longer term Investors are hesitant in buying public securities for longer term, primarily due to lack of established track record of payment which goes beyond the medium term, e.g. Public utility s investment program in Thailand Public financing of 3 power plants in China Solution: Bank adapted its Partial Credit Guarantee to backstop debt repayment obligations of public sector agencies to tap international markets International (US144a, private placements and Eurobond) bond issuances Tapping $-based syndicated loans for public sector investment projects Potentially, IBRD structures can also help raise money to finance operating deficits Under PCG, the Bank covered 100% credit risk of the issuing authority for a portion of financing Providing minimum coverage which gave enough comfort to the market in taking Public Entity s credit risk By doing so, public entity established a track record in the market for future issuances
21 Case study: EGAT public utility accessing international capital markets after crisis Project: Electricity Generating Authority of Thailand issued a USD 300million,10 year bond in the US144A market in 1998, after the 1997 Asian crisis. Funds were used to finance investment program in power sector. Financing: Bank guaranteed the principal and one coupon payment. Priced at 285bp/UST with 7% coupon payment was rated A-(S&P)/A3 (Moody s), above Thailand s BBB- and Ba1 USD 300 m PV=56% World Bank Support for Principal Repayment 0 10
22 Case study: China s public sector financing of hydros; transforming the future Project: Series of 3 public power projects; despite investment grade unable to raise financing longer than 6 years Financing: Bank guaranteed later maturities of debt tranches, Yangzhou (10.5-15), Zhejiang (11-15) and Ertan (12-15); progressively improving borrowing terms and transforming the power sector $150 million China: Ertan Hydro Power Project PV $50 million 0 3 6 9 12 15 Average financing term for China without World Bank Guarantee Additional uncovered risk taken by commercial banks World Bank Guaranteed Total risk assumed by commercial banks
23 Bringing international investors to invest in public assets: Privatization Issue: Early stages of sector reform; international investors are hesitant in buying public distribution assets, primarily due to tariffs not being adjusted towards cost-recovery in a timely manner, e.g. Power distribution in Albania - PRG Power distribution in Romania - PRG Power distribution in Uganda IDA credit structured to provide risk mitigation Solution: Bank adapted the PRG and/or the Bank Loan to specifically to support privatization by backstopping regulatory risk Letter of Credit structure Limited risks covered under PRG include: Non compliance by the Regulator and change or repeal by governments of pre-agreed framework, e.g. regarding distribution tariff formula, Retail Public Supply tariff formula and Compensation Mechanisms Timely approval of tariffs
24 Case: Albania OSSH Electricity Distribution Privatization Project: Privatization of power distribution to losses and improving collections Financing: A 6 year Bank PRG for 60 million line of credit backstops repayment of principal and interest by the Ministry of Finance to the L/C issuing bank with respect to any amounts drawn under the L/C Government of Albania (MOF) Indemnity Agreement Share Purchase Agreement Government Support Agreement ERE (Regulator) Regulatory Framework Reimbursement & Credit Agreement CEZ Equity Distribution System Operator OSSH Letter of Credit Citibank Hungary Guarantee Agreement Project Agreement
25 Energy Sector - Current and Potential Pipeline: AFR Developing IPP transactions Cameroon, Kenya, Ghana, Cote d Ivoire, Mauritania, Tanzania, Nigeria Distribution privatization Nigeria Gas Sector Investments - Nigeria Mobilizing private debt for public projects Ethiopia, Uganda PPP Transmission Lines Mozambique Ghana Gas Investments Enclave Loans AFR Regional Projects Large Hydropower Inga, Cameroon, Ethiopia Rift Valley Geothermal FIL South Africa What more can be done in AFR? Introduction of IDA PCGs Kenya, Ghana, Tanzania Financing Public Hydro projects with some private capital
Pipeline Cont d: 26 SAR Nepal Hydropower Development Enclave Loans, Enclave PRGs CASA Line Developing IPP transactions Bangladesh, Pakistan Mobilizing private debt for public projects Bangladesh, India Powergrid & Like PPP Transmission Lines India Bangladesh India - Nepal ECA Kosovo IPP Armenia HPP Georgia HPP Potential Utility Financings CASA 1000 LAC Dominican Republic IPP Honduras Small Hydros Carbon Market Development Guarantee new product
Pipeline Cont d (2): 27 EAP Laos Hydropower Development Enclave Loans, Enclave PRGs PNG HPP (domestic) PNG HPP (export) Solomon Islands (Tina Hydro) Indonesia debt fund & guarantee fund MNA Egypt gas and wind IPPs Jordan Gas IPPs x 2 Jordan Wind Egypt Wind Morocco Solar IPP What more can be done by Debt Mkts? Financing Sector Deficits Financing Public Sector Project through private loans
28 GUARANTEE STRUCTURES SDN Anchor, World Bank
IBRD co-financing instruments 29 IBRD Loans For public contribution Flexible application of Bank lending IBRD Partial Risk Guarantees (PRGs) To backstop public-sector contractual obligations Generally for private sector projects IBRD Partial Credit Guarantees (PCGs) For mobilizing private capital for public sector interventions. Flexible application to support extension of tenors and lowering spreads of private debt Traditionally used for mobilizing international capital for public sector utilities
Partial Risk Guarantee Structures 30 Lenders Guarantees Indemnity Indemnity World Bank Government Government World Bank Guarantee Project Contract/ Obligation Concession/BOT / Support Agreement etc. Guarantee Government Obligations Commercial Bank Project Loan Project Company (SPV) Private Investors Equity Project Company (SPV) Project Loan Commercial Bank
Partial Risk Guarantees Structures (contd.) 31 Project Company Guarantee Letter of Credit Structure Project Company Guarantee With Deemed Loan Structure Indemnity Indemnity World Bank Government World Bank Government Guarantee Covering L/C repayment L/C Repayment Project Contract/ Obligation * Guarantee *Deemed Loan Project Contract/ Obligation Commercial L/C Bank Project Letter of Credit Project Company (SPV) Private Investor Equity Project Company (SPV) * Unpaid amount upon guaranteed event (e.g. termination payment) is deemed to be a loan from the Project Company to the Government. Repayment of the Deemed Loan is Guaranteed by the PRG.
Partial Credit Guarantees Structure 32 Government Indemnity Agreement Government or Sub-sovereign Bonds or Bank Debt World Bank Repayment of Government Debt covered by PCG Bondholders or Commercial Bank