Mitigating Risk in Infrastructure and Development Financing in the Philippines Susan Z. Prado Executive Vice President & Chief Finance Officer Development Bank of the Philippines
DBP is a 100% Philippine Government owned universal bank that is a pillar in both platforms of developmental and commercial banking. Direct Lending Nation-building thru funding of priority sectors such as infrastructure and logistics, social services, environment, and Micro, Small and Medium Enterprises ( MSMEs ) On-lending of Official Development Assistance ( ODA ) funds Primary on-lender of ODA funds from international development agencies to finance medium to long-term projects in priority sectors
Active participant in PPP and Infrastructure projects Arranger and/or Lender (sample projects): DepEd PPP for School Infrastructure Project I Tarlac-Pangasinan-La Union Expressway Boracay Water Supply and Wastewater Project Mactan-Cebu International Airport El Nido (LGU) Water Supply, Sewage and Wastewater Treatment Systems 300MW Therma SouthCoal Power Plant in Davao 54MW Trans-Asia Wind Power Plant in Guimaras 3MW Hydro Plant in Benguet and 8WM Hydro Plant in Agusan del Norte
RISK ANALYSIS AND MITIGANTS
Typical Infrastructure Financing is through the use of Project Finance structures 5
Project Finance Risk Matrix Risk Type Mitigant/s Pre completion Post completion Cost overruns Schedule Delays Revenue forecasts Revenue build up Operating Costs Management Failure Fixed price turnkey contracts Warranties / penalties Financially strong and technically capable contractors Review of schedule by Independent engineer Supply contracts Offtake contracts Market analysis Strong operator/o&m partner Performance guarantees
Project Finance Risk Matrix Technical Risk Type Mitigant/s Performance Environmental Safety Warranties / Incentives Proven technologies Experienced contractor / operator Periodic reviews by Independent Technical Consultant Equipment performance guarantees Public consultation and approval
Project Finance Risk Matrix Financial Risk Type Mitigant/s Structure: D/E ratio Structure: risk/reward ratio Foreign Exchange Interest rates Debt Service Cover Cashflow Equitable ROE Acceptable cover ratios (DSCR) Escrow and reserve accounts Dividend restrictions Loan syndication Insurance Financial derivatives / swaps Standby funding arrangements Offtake / Supply Agreements
Project Finance Risk Matrix Legal Political / Country Risk Type Mitigant/s Regulatory Framework Concession Agreement Political stability Change in law / regulations Expropriation Civil Unrest War Work Stoppages Force Majeure Political Intervention Currency Controls Experienced legal counsel Experienced transaction advisors Clear documentation Local knowledge particularly on the political environment Clear regulatory regime Flexible tariff arrangements that incorporate adjustments for these types of events Involvement of multilateral / bilateral agencies (Extended) political risk insurance
Risk Allocation Matrix (for PPPs) Risk Private Sector Government Construction Liable for completion Liable for delivery of required ROW Market/ Revenue Expense Material Adverse Gov t Action Volume risk; has flexibility to adjust fares/fees up to a cap Controls efficiency and optimization of operations/ maintenance Burden of proof; subject to a materiality threshold Ensures implementation of fare/fee increases per contract; non-implementation of increase = payment of difference Contractual adjustment of fares/fees typically tied to CPI; Government ready to provide relief for extra-ordinary movements in major cost items (ex. power) via adjustments in fees/fares or through other forms Provides relief/compensation due to a MAGA event
Alternative Financing Structures: Corporate lending via bonds/notes: EDC Fixed Rate Bonds (for 87MW Burgos Wind Farm) Citicore-Megawide Fixed Rate Notes (for the DepEd PPP for School Infrastructure Project I) First Gen Corp. Fixed Rate Notes (various power projects and general corporate purposes) 11
Key Issues in PPP Concessions Clear delineation of obligations for both Government (ex. ROW delivery) and the Concessionaire Reasonable timetable for delivery of obligations Material Adverse Government Action provision does it adequately protect the Concessionaire? Termination payment provisions are lenders protected? Is there a haircut? Provision for delayed Government payment? issue of appropriations risk (ex. 2yr payment provision subject to interest)
IN CLOSING
Parting Thoughts Financing infrastructure development Contributes greatly to national development Requires proper understanding and allocation of the risks and issues DBP can play key roles throughout the project lifecycle
Infrastructure - Connecting Rural Urban Intermodal Systems Efficiently (CRUISE) Program JICA - Logistics Infrastructure Development Project (LIDP) Bulk/cold chain and packaging, transport and distribution facility Road RORO Vessels & Terminal Facilities Toll/access/LGU Roads and maintenance equipment Airports Public Market Private corporations, LGUs, GOCCs, Cooperatives tenor up to 20 years/ 5 years grace
Infrastructure - Financing Program for the Water Sectors JICA Environmental Development Program Philippine Water Revolving Fund Water Supply system Private Corporation, LGUs, Water Districts (WD), PFIs tenor up to 20 years/ 3 years grace
Infrastructure Financing Program for Water Sectors JICA - Environmental Infrastructure Support Credit Program I and II Water supply system Private Corporation, LGUs, PFIs tenor up to 15 years/ 5 years grace
Infrastructure - Financing Utilities for Sustainable Energy Development (FUSED) JICA - Environmental Development Project (EDP) Non Water Power generation and distribution (renewable energy) Private Corporations, LGUs, GOCCs, Cooperatives tenor up to 20 years/ 5 years grace
Environment - Green Financing Program JICA - Environmental Development Project (EDP) Non Water Solid/Hazardous/Health Waste Management Industrial Pollution Control Projects Private Corporations, LGUs, GOCCs, Cooperatives tenor up to 20 years/ 5 years grace
Environment - Green Financing Program JICA - Environmental Infrastructure Support Credit Program I and II Waste water treatment and sanitation Solid/healthcare/ hazardous waste management Industrial Pollution control Cleaner production waste minimization/recycling Private Corporation, LGUs, PFIs tenor up to 15 years/ 5 years grace
Environment - Green Financing Program KfW Credit Line for Solid Waste Management Solid waste management Private Corporations, LGUs tenor up to 12 years/ 3 years grace
Environment - Green Financing Program KfW Industrial Pollution Control Loan I and II Industrial pollution control projects msmes tenor up to 10 years/ 2 years grace
Retail Lending Program for msmes JICA - Industrial and Support Services Expansion Program II (ISSEP II) Manufacturing and support services Education strongly linked to SMEs Working capital <P200 M asset size before financing with loan limit of P100 M tenor up to 15 years/ 5 years grace (for working capital up to 7 years/ 3 years grace)
Contact Information: Susan Z. Prado Executive Vice President & Chief Financial Officer Development Bank of the Philippines szprado@dbp.ph +63.2.818.9511 (trunkline)