t11 :-, : Sept. Iqqb t1 i t L E S S O N S O F E X p E R1 I N C E 1 F INANCINE COPORAIVAT . v ..L~ LNFRA --CTURE .. ..s . ...~~~~~~~~~~* , _ INTERNATIONAL~~~~~~~ ~r is FINANCE~~~~~~~t ,; CORPORATION~~! , , , 0; 3'', ,,- .'~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~I ? . ,,. - , ,, ;~~~~~~~~~~~4 15^ l TA 'I Sr :::~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~IS INFRAJCTURE___________________- ___ __ L E S S O N S O F X P E R I E N C E I N T E R N AT I O N A L F I N A N C E C O R P O RAT I O N A M e m b e r o f t h e W o r I d B a n k G r o u p ,fT Ai FINANCING - P RIVAT E ! 01 INFRASTRUCTURE Copyright © 1996 The World Bank and Intemational Finance Corporation 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. All rights reserved Manufactured in the United States of America First printing September 1996 The Intemational Finance Corporation (IFC), an affiliate of the World Bank, promotes the economic development of its member countries through investment in the private sector. It is the world's largest multilateral organization providing financial assistance directly in the form of loans and equity to private enterprises in developing countries. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors and should not be attributed in any manner to the IFC or the World Bank or to members of their Board of Executive Directors or the countries they represent. The World Bank does not guarantee the accuracy of the data included in this publication and accepts no responsibility whatsoever for any consequence of their use. Some sources cited in this paper may be informal documents that are not readily available. The material in this publication is copyrighted. Requests for permission to reproduce portions of it should be sent to Director, Corporate Planning Department, IFC, at the address shown in the copyright notice above. The IFC encourages dissemination of its work and will normally give permission promptly and, when the reproduction is for noncommercial purposes, without asking a fee. Permission to copy portions for classroom use is granted through the Copyright Clearance Center, Inc., Suite 910, 222 Rosewood Drive, Danvers, Massachusetts 01923, U.S.A. The complete backlist of publications from the World Bank, including those of the IFC, is shown in the annual Index of Publica- tions, which contains an alphabetical title list (with full ordering information) and indexes of subjects, authors, and countries and regions. The latest edition is available free of charge from the Distribution Unit, Office of the Publisher, The World Bank, 1818 H Street, N.W., Washington, D.C. 20433, U.S.A., or from Publications, The World Bank, 66 Avenue d'Iena, 75116 Paris, France. Laurence W. Carter and Gary Bond are senior policy analysts in the Corporate Planning Department of IFC. This serial publication has been cataloged by the Library of Congress. ISBN 0-8213-3822-6 Contents Preface Executive Summary I 1 Introduction 9 2 IFC's Evolving Experience 3 Project Performance 25 4 Achieving Financial Closure 37 5 Improving the Policy Framework 43 6 Mobilizing Finance 7 Managing Project Risks 7 8 Environmental Management ''77? 9 Conclusions and Future Directions 83 Appendix Tables 87 Bibliography 7 Glossary ADB Asian Development Bank ADR American Depositary Receipt BNP Banque Nationale de Paris BOO build-own-operate BOT build-operate-transfer CAMENA Central Asia, Middle East, and North Africa CDC Commonwealth Development Corporation CESCE European Committee for Consultant Services CFA the African Franc CFD Caisse fran,aise de developpement CGIC Comite general interprofessionnel chanvrier COFIDES Compafnia Espauiola de Financiaci6n del Desarrollo (Spain) CTC Compafiia de Telecommunicaciones de Chile DEG Deutsche Entwicklungs Gesellschaft DSCR debt service coverage ratio EBRD European Bank for Reconstruction and Development ECA export credit agency ECGD Export Credit Guarantee Department (U.K.) EIB European Investment Bank EID/MITI Export Insurance Division of the Ministry of International Trade and Industry (Japan) FDI foreign direct investment FIAS Foreign Investment Advisory Service FMO Netherlands Development Finance Company GDP gross domestic product GDR global depositary receipt HSBC Hongkong and Shanghai Banking Corporation Limited IBRD International Bank for Reconstruction and Development ICC International Chamber of Commerce IDB Inter-American Development Bank IFC International Finance Corporation IFU Industrialization Fund for Developing Countries IIC Inter-American Investment Corporation (affiliated with the IDB) IPP independent power project IPR initial project review JEXIM Japan Export Import Bank LAC Latin America and the Caribbean MARAD United States Maritime Administration MIGA Multilateral Investment Guarantee Agency NORAD Norwegian Agency for International Development OPIC Overseas Private Investment Corporation PE public enterprise PPA power purchase agreement PPI private participation in infrastructure UBS Union Bank of Switzerland USEXIM United States Export Import Bank Preface Infrastructure is one of the fastest growing sectors in the world in terms of private participation and financing. The generally poor performance of state-owned monopolies, combined with the rapid globalization of world economies, has brought into sharp focus the economic costs of inadequate infrastructure and prompted a growing number of developing countries to take active steps to promote competition, private entry, and foreign investment in the sector. In recent years, IFC has become one of the major financiers of private infrastructure projects in the developing world. It has been involved in the financing to date of more than 115 infrastructure projects, and has played an active role in promoting the spread of private participation in the sector. In 1994, in an effort to disseminate some of the lessons of this experience, IFC released an initial paper on the financing of infrastructure projects based on its project data up to the end of June 1994. The paper provided insights into key issues of risk assessment, regulatory structures, and debt and equity mobilization faced by IFC in its infrastructure investments. This report, coming relatively quickly after the 1994 report, is a reflection of the rapid developments that have taken place in the sector worldwide. Important among these is that the pace of progress has been somewhat uneven. Rapid changes have taken place in some countries where there have been major policy breakthroughs, but changes have been much slower in those countries that have experienced political and other constraints. Private participation, which initially focused on the power and telecoms sub-sectors, has been successfully extended to other sub-sectors such as ports, water supply, and roads and railways, often with substantial benefits to consumers. However, inves- tors have found that project risk, particularly in difficult environments, has been more real than might have been anticipated, with obvious implications on the speed of implementation. In addition to greenfield projects, govern- ments have also begun to focus on privatizing existing assets, generating demand for technical and advisory assis- tance in this area. IFC has continued to play an important role in supporting these various trends in its member countries, on both transactional and advisory issues. This report articulates the lessons of IFC's experience in mobilizing financing for the sector. It discusses the issues involved in arriving at workable project structures, the approaches available to countries wanting to pursue this route, and some of the pitfalls involved. The report also illustrates the Corporation's development role through the promotion of a more rapid and visible private sector investment response to policy and regulatory changes in its developing member countries. The report was prepared in IFC's Corporate Planning Department by Laurence Carter and Gary Bond, with research support from Tracy Rahn, and under the overall direction of Dileep Wagle. Jennifer Wishart coordinated on behalf of IFC's Infrastructure Department, which was closely involved with the work. It has benefited considerably from input and comments by investment staff throughout the Corporation, as well as from staff in the World Bank. An earlier version of the report was discussed by IFC's Board of Directors in May 1996; data reflect IFC's operational position up to the end of June 1996. Jannik Lindbaek September 1996 Executive Vice President International Finance Corporation Executive Summary 0 [ i Results on the Ground Five examples illustrate the magnitude and breadth of the changes affecting infrastructure services in many countries today: * In 1996 a U.S.-based insurance company, Prudential Power, signed one of the first loans by an insurer to a private infrastructure project in a developing country. The sixteen-year, US$40 million loan was made under IFC's syndicated loan umbrella to an unrated, greenfield project: the US$1.4 billion Sual power plant in the Philippines. * In August 1994 the government of C6te d'lvoire signed a nineteen-year agree- ment to purchase power from the first private power project in Sub-Saharan Africa. Financing closed five months later. The 100 MW plant was generating power by April 1995, achieving 83 percent availability in its first six months against an 80 percent target. * In 1993. IFC helped finance a power plant innovatively structured to reduce country risk: the generators in Guatemala's first private power plant were installed on a barge. which could be towed away in the event of nonpayment. The demonstration impact was rapid: by 1996 most other Central American countries had independent private power plants. I* n the 1993 privatization of a 30 percent stake in Hungary's telecoms company the government stipulated that the network be expanded by 15 percent per annum, to reach 35 lines per 100 population by 2002. The company is investing rapidly to meet this target: nearly US$1 billion in 1995-96 alone. In December 1995 the govemnent sold another 37 percent to the strategic investors for US$852 million. Infrastructure privatization partly explains why Hungary received over ten times the average foreign direct investment per capita for Central and Eastern Europe in 1990-94. * The 1993 concession to manage water and sewerage services for six million people in Buenos Aires was awarded based on a 27 percent tariff reduction. Within two years 400,000 new water and 250,000 sewerage connections were made (many in low-income areas), drinking water quality improved, average repair response times fell from 180 hours to 48 hours and Buenos Aires experi- enced its first summer without water shortages in fifteen years. Ten years ago, none of these events might have been deemed remote]y possible. Today more countries than ever are introducing competition and private participation in infra- structure (PPI). IFC has helped to finance many of these pioneering projects, approving US$3.1 billion of financing to 148 projects worth US$29 billion in forty countries by June 1996. This report follows a paper published in September 1994' and draws some updated lessons from IFC's evolving financing and advisory experience with private participation in infrastructure. The Upside 1995 the same countries, plus Indonesia and Turkey, accounted for 97 percent of the total. Only ten to Three positive trends underlie recent experience with fifteen countries have so far made significant progress private infrastructure financing in developing coun- in privatizing and market restructuring. More have tries: started to liberalize infrastructure services but have made limited progress so far. And some countries are More volume, countries, and subsectors. Total still just talking about PPI. Why? Managing private estimated financing of new private infrastruc- entry to infrastructure is a complex, politically charged ture projects in developing countries doubled process. Furthermore, political costs may occur between 1993 and 1995, from about US$17 immediately, while the economic benefits of infra- billion to over US$35 billion. In the two years structure liberalization emerge with a lag. The uneven to June 1996, IFC financed projects for the record of progress reflects the differing degrees to first time in, among other countries, which governments have succeeded in overcoming Bangladesh, China, C6te d'lvoire, the Domini- these political hurdles. can Republic, Honduras, Jordan, Latvia, Panama, Tanzania, Uruguay and Vietnam. Private infrastructure projects differ from many other Sectoral firsts included an airport, a mass private investments in that governments are intimately transit project and several toll roads. involved, as regulators, buyers, or suppliers. Govern- ments thus need to help shape the conditions so that * More privatization of existing assets. In 1994, transactions can close successfully. Many approaches the latest date for which figures are available, to PPI are being used; these offer investors opportuni- governments sold US$10.1 billion worth of ties, but also pose risks. Some problems arise because infrastructure assets in seventy-five compa- all sides are relatively inexperienced. Governments nies in thirty countries. may have unrealistic expectations, or mismanage the difficult process of awarding concessions. Delays in * Newfinancing sources. Insurance companies securing government commitments may prevent are starting to finance PPI projects in develop- projects from achieving financial closure. Or, follow- ing countries. And official financing agencies, ing successful financing, political pressures may lead including export credit agencies, have set up governments to revoke concessions, fail to adjust programs to provide financing or guarantees to tariffs, or restrict access to foreign exchange. Accord- private infrastructure projects. Commercial ingly, risk management of PPI projects has both bank financing has expanded in the last two to technical and political dimensions: even well-struc- three years as more banks become familiar tured PPI projects may fail without government with PPI; IFC's expanding syndicated loan commitment. The importance of political commitment program is one indicator. Local financing is means that what is achievable varies enormously expanding in some countries, although slowly between countries and over time. and from a low base. Some sizeable domesti- cally owned infrastructure companies are Successful transactions help policies to beginning to emerge and invest substantial evolve sums. Political commitment differentiates the PPI leaders from other countries. But policy changes need to be Progress Is Uneven translated into new investments and improved services if they are to gamer broad support. IFC's experience Much of this activityremainsconcentratedinafesuggests that well-structured PPI projects undertaken Muchofnthies activitye p eremains tlconentratedrn a r ftransparently create local constituencies for further countries and i the power and telecoms sectors. For liberalization. Many countries where early PPI projects example, in 1993 just nine countries (Argentina, eefnne w otreyasaohv ic Cooba Hugr,Ida'aasa eio ai were financed two to three years ago have since Colombia, Hungary, India, Malaysia, Mexico. Paki- liberalized infrastructure services further. stan, Philippines and Thailand) accounted for 99 percent of international private infrastructure loans. In 2 FINANCING PRIVATE INFRASTRUCTURE IFC Approvals in Infrastructure, 1966-June 1996 No. of Total project cost IFC net IFC syndications FY projects (US$m) (US$m) (US$m) 1967-87 7 517 78 4 1988 2 409 54 0 1989 6 704 109 40 1990 7 1,613 197 72 1991 6 876 102 60 1992 9 1,396 115 147 1993 17 3,737 372 309 1994 30 5,495 585 699 1995 32 8,190 734 1,001 1996 32 5,712 727 1,527 Total 148 28,648 3,072 3,857 Source: IFC. IFC's Recent Experience and policymakers on policy and regulatory obstacles to private infrastructure. In 1996 the round tables were In the two years to June 1996. IFC's Board approved held in central and eastern Europe and southern and nearly US$1.5 billion of financing to sixty-four eastern Africa. projects costing US$13.8 billion. Fifteen projects were approved in Argentina alone, reflecting the breadth of the country's infrastructure liberalization and privatiza- Experience In Low-income and tion efforts. Other highlights include five power Risky Environments projects approved in Pakistan, reflecting a strong policy framework; a water and sewerage concession in Low income Brazil; a Chilean railroad; regional basic telecoms networks in Bangladesh and Indonesia; cellular Over 60 percent of IFC's PPI approvals have been in networks in Jordan and Bolivia: and ports in Panama, low or lower-middle income countries. Thirty-five Vietnam, and China. projects costing US$6 billion have been financed in C8te d'Ivoire, Tanzania, Uganda, Zaire. Zimbabwe, PPI advisory work to governments on divestiture has Bangladesh, China, India, Nepal, Pakistan, Sri Lanka, expanded sharply. Between fiscal 1993 and 1995, IFC Vietnam, and Honduras. started nine PPI stand-alone advisory mandates; in fiscal 96 a further eight mandates were signed. The Country risk work has focused increasingly on the most politically sensitive transactions, where the value attributed to Financing PPI projects is difficult-but nevertheless IFC's neutrality as part of the World Bank Group is possible-in countries perceived by investors as risky. highest. Recently signed mandates have included Over a quarter of IFC's approvals have been in several in the water sector (Philippines, Gabon, and countries with little access to international private India), and countries where perceived risks are high capital, including Honduras, Latvia, Tanzania. (Haiti, Kenya, Ecuador, and Uganda). IFC has also Dominican Republic, Panama and C6te d'Ivoire. provided more general policy advice, often in conjunc- Investors have focused on projects offering short tion with the World Bank or the Foreign Investment payback periods (cellular), projects which generate Advisory Service (FIAS). FIAS has sponsored several foreign exchange revenues (ports), or projects with round tables to facilitate dialogue between investors strong sponsor and government support (for instance, some power plants). INTERNATIONAL FINANCE CORPORATION Project Performance . More projects are closing, but closure times show a mixed picture. Although average By early 1996, forty-eight IFC-financed projects had closure periods fell from seventeen months in completed construction and started operating. Al- fiscal 94 to eleven months in fiscal 96, this though this sample is still small and new (especially in hides wide disparities at the project level. the context of the fifteen- to thirty-year agreements Several high-profile projects have failed to common in such projects), the evidence suggests that close. PPI projects yield operational efficiencies and good construction performance: * Varying svpeeds. Closure has been faster for smaller projects, in countries with prior PPI Construction. On average the projects were 3 experience or strong political commitment, in percent under budget and five months late (22 projects with experienced sponsors providing percent of the expected period). Although they strong support, and in projects generating are not directly comparable, a much larger foreign exchange revenues. sample of publicly financed infrastructure projects had cost overruns of 10-23 percent * Delays have resulted from difficulties in and time overruns of 54-68 percent. resolving issues of risk allocation among project participants. This has taken longer * Good early operational per(ormance. For where: investors, lenders, or government example, several power projects have ex- officials were inexperienced; political changes ceeded the performance targets in their affected government's commitment: anti-PPI contracts. interests were stronger than anticipated; or noncreditworthy buyers or suppliers were * Positive stakeholders. Successfully financed involved. PPI projects have usually been followed by more infrastructure deregulation and privati- zation, suggesting that initial PPI projects are Improving the Policy Framework meeting consumer and government expecta- tions. These "demonstration effects" are There is no single blueprint for improving infrastruc- working across countries as well as between ture services. PPI options are defined by the extent of sectors. political commitment, the strength of opposing groups, and investor interest. Successful early transactions can U Unexpected events have (mostly) not been create a positive dynamic of more investor interest, serious enough to derail projects. Although consumer support, and further government liberaliza- unexpected events have affected several tion. For sustainable transactions to take place, the projects, a combination of good project policy framework must meet the interests of govern- structuring, adjustments by investors, and ments (acting on behalf of the public), sponsors, and flexibility by lenders and governments means lenders. that nearly all projects have remained opera- tional. Nevertheless, concessions were IFC's experience suggests that private entry is more disputed in two projects and the government likely to be successful and sustainable if governments is paying its utility's obligations in another use experienced and impartial advisors, and if transac- project. The financial performance of IFC's tions are transparent. Transparency involves: PPI portfolio has been satisfactory. Clarity. Governments that adopt clear proce- dures for awarding and operating concessions Achieving Financial Closure are likely to get a strong investor response. Pakistan's policy framework for power Financial closure is important because it allows generation projects is one example. investment to proceed and encourages further policy changes. IFC's experience suggests: FINANCING PRIVATE INFRASTRUCTURE * Predictability. The government's role in Long-term agreements are bound to face unforeseen implementing its commitments predictably is events and changing circumstances. Although it is too important. This might include, for example, early to draw on experience yet, mechanisms such as undertaking tariff adjustments, meeting fuel dispute procedures in contracts or regulatory appeal supply commitments, or purchasing land. procedures may be important in helping sponsors. governments, and lenders to maintain viable contracts * Conmpetitiveness. Project fundamentals need to over long periods. be able to withstand public scrutiny. This applies in the longer term, not simply at the time of the transaction. Equally, however, Financing Patterns governments need to recognize that sponsors of early projects may demand a premium for Two financing structure parameters identified in the the costs and risks of being first. 1994 IFC infrastructure report remain broadly the same in this updated sample: While fully functioning regulatory frameworks and international competitive bidding are desirable, they * An average debt-equitv r atio of 58:42 suggests may not always be possible, particularly in the early that substantial equity commitments are being stages of promoting PPI. In certain circumstances- made to attract debt, or lenders are ensuring the first project in a country with higher risk, or a that projects are not overleveraged. Projects small project where there is urgency or limited where market risk is not a major issue, such as knowledge of the market-directly negotiated projects power generation projects backed by power may be appropriate. IFC has financed several such purchase agreements. are generally more projects. highly leveraged. Transition Paths in Infrastructure Privatization Political costs of adjustment / Low regulatory effort High Low iZMIR owned regulated monopoly Unbundling & L No unbundling, Unbundling & deregulation divestiture only privatization Economic Private entry allowed efficiency of provision Divestiture of SOE Unbundling I I demonopolization Competitive / contestable private infrastructure provision High INTERNATIONAL FINANCE CORPORATION * About two-thirds of project costs arefinanced liberalization in the sector. Soundly structured from foreign sources. Why isn't this ratio investment opportunities have attracted private falling, given increased local financing in financing. some countries? Simply, IFC continues to finance projects in risky countries, where * Private entry and competition in infrastructure access to domestic long-term finance is are yielding significant gains in construction normally very limited and reliance is heavier and operational efficiency. on foreign financing. There is no single PPI method, although economic benefits generally increase with the Managing Project Risks volume of assets under private control and the extent of competition. The options depend on Efficient risk allocation and mitigation is central to a country's creditworthiness, the extent of bringing infrastructure projects to financial closure and political commitment, and investor interest. to providing appropriate incentives during construction Nevertheless transactions are more likely to and operation. Efficient risk allocation occurs where achieve financial closure and be sustainable if risks are assumed by the party best able to manage they are transparent in the broadest sense: them. Projects may still be financeable if some risks clear, predictable, and competitive. are not allocated according to this principle, but costs-and ultimately tariffs-will be higher. Sponsors * Well-structured PPI projects can be financed and lenders expect higher rewards for assuming higher in countries with low income or high risk, or risks. Mobilizing debt is particularly sensitive to both. Some projects are easier to finance in having adequate risk management mechanisms in such circumstances: smaller projects, those not place. With at-risk debt supplying over half of project facing severe market risk, those with strong costs, achieving financial closure can be stalled if the sponsor and government support arrange- risk mitigation requirements of lenders are not met. ments, and those earning foreign exchange. Project financing has hitherto been a fairly specialized * There is often a link between financed field. For PPI to continue spreading, more government transactions and further policy changes. These officials, investors, and lenders will need to become demonstration effects apply within and among familiar with the risk mitigation and management countries. techniques used in successfully closed projects. * Although it is early to conclude, most opera- IFC's approach to environmental risk management has tional projects have not been jeopardized by evolved over the past two years to encompass greater serious noncommercial risks. transparency and consultation in environmental assessment. IFC's experience shows that many PPI * There is some evidence of increased local sponsors-and their financiers-consider that sound financing, yet ngC's sample suggests that environmental management makes good business foreign financing continues to account for sense. ~~~~~~~~~~~~~over half of project costs in developing sense. countries. Conclusions and the Future Several fundamental changes appear likely in infra- structure services, particularly in the countries that have liberalized and privatized the furthest. Many of Several conclusions have emerged from IFC's experi- the projects being financed today reflect the transi- ence to date: tional state of partly reformed infrastructure sectors. They are likely to be quite different from the types of * The uneven pace of private infrastructure investments that will be occurring when reforms are growth in developing countries is due to complete. Three trends seem likely: varying degrees of political commitment to 6 FINANCING PRIVATE INFRASTRUCTURE * Stronger competition wiith in infrastructure mar-kets. This has happened already in telecoms and transportation services and is quickly spreading to other sectors such as power. Competitive infrastructure markets have many forms, but there are probably some common features that they will share. First, there will be a clear separation of the roles of regulator and operator. Second, project sponsors will increasingly be those willing to take both implementation and market risk. Third, governments who expose investors to market risks will come under pressure to reform markets that supply such projects, such as state-owned fuel supply monopolies. And fourth, local investors are likely to play a larger role in investments than at present. * More projects will he at the suhbationial level. If the privatization of transport. water, and waste sectors is to accelerate, the creditworthi- ness of municipal and provincial governments will need to be assured. Ultimately this requires the reform of local finances. In the meantime, there may be some scope to design credit enhancement and risk-sharing packages in the more attractive projects and regions. * Domestic savings are likely to play a bigger role in financing private infrastructuire projects. Developing domestic capabilities to manage, participate in, and finance private infrastructure projects is important to broaden the constituency of PPI. enlarge the pool of funding, and mitigate foreign exchange risk. In industrialized countries, and increasingly in the more mature reformed developing coun- tries. one of the largest sources of financing for investment is the utility's own cash flow. But additional funding will have to come from the domestic capital markets. This will require a strong macroeconomic framework and a solid financial infrastructure, as well as attractive investment opportunities. Notes 1. Financing Private Infrastructure Projec ts: Emerging Trends from IFC's Experience, IFC Discussion Paper No. 23 (1994). INTERNATIONAL FINANCE CORPORATION 0y1 Introduction The Context During the past five years many developing countries have started to liberalize markets for infrastructure services. Countries such as Chile. Argentina, Malaysia, Hungary. and the Philippines have promoted competition and private participation in infrastructure (PPI), a sector hitherto dominated by state-owned monopolies. Results have been dramatic in some countries, with development of a virtuous circle of policy changes. successful transactions. satisfied consumers, and further policy liberalization (see Figure 1.1): Since Chile's main local telecoms operator was privatized in 1988, the number of lines has trebled. The number of employees per 1.000 lines fell from 13.7 in 1989 to 4.3 in 1995, comparable to international best practice. Spurred by increased domestic competition, Chile's tariffs are among the lowest in the world. * A private concessionaire became responsible for water and sewerage services in Buenos Aires in 1993. A 27 percent tariff reduction was implemented immediately. Within two years 400.000 water and 250,000 sewerage connections were made. * In 1991 six- to ten-hour daily blackouts in the Philippines were costing the economy an estimated US$1 billion in lost output annually. By 1995 they had disappeared. largely due to new privately financed power plants coming on stream. * Between 1990 and 1994, Hungary received US$671 of foreign direct investment per capita, compared to an average of US$45 for twenty-four other transition economies in the region. Much of this difference is explained by Hungary's vigorous infrastruc- ture privatization program. IFC has supported these policy initiatives through financing and advice, particularly by promoting pioneering projects in different developing countries and sectors. Recent financings include projects in. among other countries, Bangladesh, China, Cote d'Ivoire. the Dominican Republic, Honduras, Jordan, Latvia. Panama, Tanzania, Uruguay. and Vietnam. Current advisory assignments include the privatization of Gabon's water and electricity distribution company, telephone companies in Uganda and Ecuador, and electricity companies -. ~ in Venezuela and Pakistan. The Report's Purpose IFC published its first report on private infrastructure financing in September 1994.' Since then many projects in more countries have been financed. But progress has been uneven. A few high-profile projects have suffered setbacks. and that has sometimes held up progress on ; ~'~~-_e=-.-= ~. other projects. And even in countries where private participation and competition have been extensive, debates continue about the distribution of benefits arising from efficiency gains. Consequently, many policymakers, firms, and financiers are reviewing their approaches to - fra;structure Plivatization Efficient risk allocation Broadened0 Xpolitical Access to foreign 0 t0 f 0 Vsguppot ;S ;0:-00 0 0;\capital & expertise Stronger consumer Improved investor support perceptions Improved service quality, 0 .:\, :0......; 00 t 00 ;efft:0iciency & coptiveness .................: private infrastructure. Using the same conceptual tive infrastructure services are credible enough framework as the 1994 paper-the importance of to satisfy private financiers, usually in more managing political and project risks-this report aims than one sector. In several countries state- to contribute to the policy debate by updating IFC's owned utilities have also been privatized. experience over the last two years. Examples include Argentina, Chile, Hungary, Malaysia, Pakistan, and the Philippines. In This report documents construction and operational these countries, where constituencies exist for experience in IFC-financed projects (Chapter 3), issues further PPI, the key policy challenges are to delaying financial closure (Chapter 4), policy issues ensure that the benefits reach as many stake- for the government (Chapter 5), financing issues holders as possible and to stimulate more (Chapter 6), and risk management for lenders and competition in the operation of, and entry to, investors (Chapter 7), including environmental risks infrastructure markets. (Chapter 8). * The starters: Twenty to twenty-five countries where one or two PPI investments have Three Recurring Themes occurred, but further political commitment and regulatory changes are needed to sustain Uneven progress progress across infrastructure sectors. Most of these countries have announced programs to Managing private entry to infrastructure is complex encourage private participation, but few deals and politically charged. Few countries have so far have closed, for various legal, regulatory, made the demanding policy and regulatory adjust- bureaucratic, and creditworthiness reasons. ments needed to encourage the sustainable develop- Examples include many Latin American ment of private, competitive infrastructure services. countries, India, Indonesia, Turkey, and Latvia. IFC's experience suggests that three groups of coun- Here the challenge is to build on the early tries have emerged, each facing different challenges: successes-and leam from mistakes-to strengthen constituencies for further reform. * The leaders: Ten to fifteen developing coun- tries where the political commitment and * The latecomers: Here the primary challenge is institutional framework for private, competi- to muster the political commitment to start the 1 0 FINANCING PRIVATE INFRASTRUCTURE PPI process, and thus begin to reduce black- Backdrop to the PPI Revolution outs and waiting lists. In addition many of these countries face broader policy, regulatory, Several developments continue to define the back- and creditworthiness hurdles. ground to the PPI revolution: Substantial Special Risks * Technological change, new reguilatory practices, and uinbundling assets are all As regulators, buyers, or suppliers to PPr projects, enabling competition to be brought to more governments define the conditions for private entry to markets for infrastructure services. New infrastructure. The variety of approaches being used technologies are reducing barriers to entry in offers investors opportunities, but also poses risks- telecoms markets in particular. Other sectors particularly for foreign investors. Many problems have benefited from regulatory innovations reflect the inexperience of sponsors, lenders, or that separate ownership of an underlying governments. Governments may have unrealistic "network" (for example, electric or telecoms expectations, or mismanage the difficult process of cables, gas pipelines, rail tracks) from provid- awarding concessions. Delays in securing government ers of the services that flow along that commitments may prevent projects from achieving network-who can compete, after paying an financial closure. Or, following successful financing, access charge to the network owner. And political pressures may lead governments to revoke horizontal unbundling during privatization concessions, fail to adjust tariffs, or restrict access to (breaking up large state-owned companies into foreign exchange. several regional concessions) has allowed peer Risk management includes both technical and political competition to develop. dimensions: even well-structured PPI projects will fail Newfinancing sources. Insurance companies, if government is not committed to private participa- which offer the prospect of large volumes of tion. The importance of political commitment means long-term financing, are starting to finance that what is achievable varies enormously between PPf projects in developing countries. Local countries and over time. The art of designing success- pension funds have been notably important in ful PPI projects within political constraints involves, to Chile and Malaysia. International banks are borrow a phrase, "doing the do-able. 2 expanding their presence aggressively in the Successful Transactions Help Policies Evolve PPI market. And most official financing agencies are starting to support PPI projects, Political commitment differentiates the PPI leaders through direct financing or guarantees (see "olitcal ommimentdiffrentites he PI ledersTable 1.1I and Appendix Tables A7 and A8). from other countries. But policy changes need to be Several export credit agencies have set up translated into investments and improved services if specialist project financing units and are they are to garner broad support. IFC's experience financing some projects without government suggests that well-structured PPI projects undertaken transpar- ently create local constituencies for further policy liberalization: Table 1.1: Official Financing of PPI Projects, Excluding IFC consumers connected after years on waiting lists, firms using Total Ofrcial ponr waiting t blsts,ofims, u eing Number of project cost financing power without blackouts, foreign Date commitments (US$bn) (US$bn) and domestic strategic investors, institutional investors such as 1993 18 1.6 0.8 pension funds, employees with 1994 89 8.9 3.5 share options, retail investors 1995 82 11.8 7.0 with stock holdings, banks with new lending opportunities, Source: Annual reports and direct communication with multi/bilaterals and export credit agencies. Note: Includes guarantees and direct financing without a government counter-guaranltee. See also construction companies ... may Appendix Tables A7 and A8. all support more PPI. INTERNATIONAL FINANCE CORPORATION 1 counter-guarantees. Domestic banks are sions that are awarded but not yet financed. Neverthe- starting to finance private infrastructure in less, evidence from several sources (see Appendix some countries, while developing stock Tables A9, AIO, and Al l) suggests four conclusions. markets are improving access to equity. The globalization of capital markets is facilitating Growing Volume the mobilization of new financing sources. And infrastructure privatization itself is Total estimated PPIfinancing in developing countries stimulating local financial markets. dousbled between 1993 and 1995, from about US$17 billion to over US$35 billion. These figures are Ihiformation dissemination has accelerated and derived from international lending to PPI projects of experience has broadened. The number of PPI US$15 billion in 1995. Based on IFC's projects, conferences, round tables, and papers has intemational loans account for about 40 percent of exploded. Several leading PPI countries (for total financing.' This implies that private infrastruc- example, Chile and Argentina) are now ture projects in developing countries in 1995 involved advising other countries. And private infra- over US$35 billion of investment (see Figure 1.2).4 structure utilities from developing countries are starting to invest in other countries. More Privatization of Existing Assets Apart from the privatization of some airlines and What Is Happening? telecoms companies, most early PPI has involved the construction of new assets, such as power plants and H low much private infrastructure is being financed in cellular systems. However, there is increasing evi- developing countries? It is difficult to separate actual dence of "deeper" private entry, as more infrastructure financing from memoranda of agreement and conces- assets are privatized via divestiture or long-term operating concessions.: 40 -.0* w0- 0 La 35, 350 .0L S n c 200O 0 1990 1991 1992 1993 1994 1995 Estimated PPI financing from O Estimated PPI financing from international loans [1] all other sources Source: Capital DATA Loanware. Note: [11 Assumes international loans are 40% of total. 12 FINANCING PRIVATE INFRASTRUCTURE Table 1.2: Infrastructure Privatizations, the year to June 1996 governments commissioned IFC 1989-94 to advise on privatizing Manila's water supply and sanitation utility, electricity utilities in Venezuela and Volume No. of No. of Pakistan, and Gabon's water and electricity company. (US$bn) companies countries Some Broadening ... 1989 2.8 11 4 1990 6.0 32 10 Private infrastructure now exists in all regions, 199t 6.8 41 14 1992 9.8 63 22 although it remains limited in most countries and 1993 4.4 90 18 sectors. The World Bank's PPI database records 587 1994 10.1 75 30 projects in ninety-one developing countries, although cost details are only available for 361 projects (see Source: World Bank. Table 1.3 and Appendix Table A9). Table 1.3 estimates total PPI financing in developing countries during 1990-95 at US$150 billion. In contrast, Figure 1.2 suggests that the total is about US$90 billion. This is In 1994, seventy-five infrastructure firms in thirty because the US$150 billion includes many projects developing countries were privatized, raising over that have not yet reached financial closure, meaning US$10 billion for the divesting governments (see that the total financing actually mobilized is well under Table 1.2). More importantly, many of these firmns that level. Until recently, the volume of IFC's financ- immediately expanded their investment programs. ing has been relatively concentrated. Yet, through its Widely varying firm sizes means that the trend has developmental role, IFC has gained wide country been more haphazard than the sharp increase in experience (see Chapter 2). The broadening of IFC's international PPI loans. Although the 1992 total of advisory and financing experience in the last two years US$9.8 billion was nearly as high, it was concentrated suggests that the market is starting to widen. in fewer countries and companies. Furthermore. infrastructure privatization is extending into sectors ... but Much Remains Concentrated that raise complex political and regulatory issues, such as water and electricity distribution. For example, in Latin America and Asia continue to dominate PPI financing (see Figure 1.3), partly because the early "leader" countries in each region have continued to Table 1.3: PPI Projects in Developing liberalize their infrastructure sectors. Privatization has Countries, 1990-95 exceeded new construction in Latin America (all sectors) and Eastern Europe (mostly telecoms), Region/Sector No. US$ bn whereas greenfield projects dominate in East Asia. This reflects the fact that PPI is being promoted by Total 361 150.1 governments for different purposes. In East Asia building new capacity for the rapidly growing econo- by region mies is the main driving force. In Latin America and Afsrica 137 68.5 Eastern Europe, governments have privatized infra- CAMENA 13 11.4 structure to raise revenues, demonstrate commitment Europe 26 7.0 to economic reform, encourage investment. and Latin America 170 61.5 improve efficiency of existing assets. by sector Yet regional groupings are misleading. The pace of Gas 23 10.0 implementation is strong in relatively few countries. In Telecom 46 416.4 1993. just nine countries (Argentina, Colombia, Transport 114 32.0 Hungary, India, Malaysia, Mexico, Pakistan, Philip- Waste/water 18 10.2 pines, and Thailand) accounted for 99 percent of international private infrastructure loans. In 1995, the same nine countries, plus Indonesia and Turkey, Source: World Bank PPI database. accounted for 97 percent of the total. INTERNATIONAL FINANCE CORPORATION 13 0 - S . S - -~~~~~~ r- rqso e* =0 1 * *1.I * 60yY 50 1L C 40 B 30 D 20 - 10 U 0 Africa Eastern CAMENA South LAC East Europe I Asia Asia FSU El Privatization U New Investment Projects Source: World Bank PPI Database. *: - S : SEf : : SE I- - * * i arS * * 40 , 30 20 D 10~ ;0 - - - - - -i i Gas Water / Waste Telecoms Transportation Power O Privatization U New Investment Projects Source: World Bank PPI Database. Power and telecoms have dominated PPI financing to Where IFC Fits In date, although transport is catching up fast. Privatiza- tion and increased competition have occurred most IFC promotes PPI with the objective to yield sustain- rapidly in telecoms (see Figure 1.4), encouraged by able, beneficial outcomes, and thereby economic deregulation in industrial countries, technical change, development. More specifically, IFC's roles include: and investor interest. New construction dominates in transport and power. Supporting pioneer transactions, by structur- ing potential projects so that they are financeable. This process often yields benefits 14 FINANCING PRIVATE INFRASTRUCTURE Box 1.1: Privatization Advice: Peru Electricity In 1992 the Government of Peru introduced a regulatory framework for the electricity sector, to prepare the ground for the privatization of the power sector, The government asked IFC to advise on the privatization of Electrolima, which was responsible for generation, transmission, and distribution in Lima. Following a strategic review, the distri- bution component was split into two parts-North and South Lima-and the generation component left intact. Each of the three components were corporatized prior to sale. Shareholdings of 60 percent were sold in each of the distri- bution companies in August 1994 and the generation company in November 1995, raising a total of US$875 million. The buyers were intemational consortia, including leading U.S., Chilean, Canadian, and Spanish electricity utilities, and Peruvian groups. The government retained 40 percent of the shares for later sale to the public and employees. In the year since privatization, expanded investmnent programs have enabled 100,000 new customers to be connected, equivalent to a 10 percent increase. Line losses fell from about 20 percent to 17 percent and are expected to fall further. beyond the immediate project, by clarifying recently also to insurance companies). helping what governments can offer to close a infrastructure companies to tap international transaction. Issues such as security packages, equity markets, and investing in infrastructure termination arrangements, concession terms, funds. and dispute handling occur in every transac- tion. For example in 1992, in the face of high * Facilitating domestic financing, for example, country risk, the first private power project in through bringing a local bank into a project, or Guatemala succeeded, which subsequently advising on a privatization involving a local encouraged several other Central American flotation. Other work is more general. Advis- countries to introduce private power-and ing on stock market development, investing in local developers to sponsor projects. local mutual funds or private equity funds, promoting rating agencies, and financing Supporting politically challenging reforms. pension fund managers may all ultimately help such as utility privatization. For example, IFC PPI projects to be financed locally. has supported the investment plans of newly privatized telecoms companies in Chile, * Disseminating experience and promoting Hungary, and Latvia, and railroad and government-investor dialogue through formal electricity distribution companies in Argen- papers, speeches, seminars, and informal tina. IFC also helps governments to sell advice. IFC has also provided sectoral input to infrastructure companies, including structur- the World Bank and governments on what is ing, marketing, and coordinating bidding to needed to attract investors, including advising investors. Advisory assignments to privatize on agreements for interconnection and power power generators and distribution companies purchase. And IFC has joined with the World in Peru (see Box 1.1) and Trinidad and Tobago Bank in contributing to several infrastructure in 1994-95 have been followed by power round tables organized by the Foreign Invest- sector assignments in Venezuela, Pakistan. and ment Advisory Service (FIAS) to promote Gabon in the last year. dialogue between government and private investors (see Appendix Table A6). Regional Promoting competition by supporting new round tables have been held for south and east entrants (such as several cellular telecoms Asia (in 1993), central and eastern Europe, and projects and a terminal in a port with some southern and eastern Africa (in 1996). The private terminals). Asian roundtable was subsequently followed by similar country-focused events for China Mobilizing international financing via loan and Vietnam (see Chapter 5 for more details). syndications (mostly to commercial banks, but INTERNATIONAL FINANCE CORPORATION 15 Notes Financing Private Infrastructure Projects: Emerging Trends from IFC's Experience, IFC Discussion Paper No. 23 (1994). 2. Privatization: Principles and Practice, IFC Lessons of Experience Series No.1, (1995). 3. In IFC's projects, international loans accounted for 45- 50 percent of total financing. This sample is biased towards internationally financed projects, so the proportion for all private infrastructure projects is lower, but not much: few projects in developing countries are financed entirely locally. 4. The 1993 figure derived from the loans database is close to the estimate made by the 1994 World Develop- ment Report (WDR) on infrastructure. The WDR estimated PPI in 1993 at US$15 billion, equivalent to 7 percent of an estimated US$200 billion spent annually on infrastructure. 5. New construction and privatization of existing assets is often interlinked. Governments privatize infrastructure to facilitate new investment: a thirty-year concession to operate part of the Argentinian rail network was conditional upon the concessionaire's commitment to undertake a US$55 million rehabilitation plan. 16 FINANCING PRIVATE INFRASTRUCTURE 2 IFC's Evolving Experience What Is New? Mote countries and sectors. In the two years to June 1996 IFC's Board approved nearly US$1.5 billion of financing to sixty-four projects costing US$13.8 billion. These included several country and sector firsts. IFC financed PPI projects for the first time in Bangladesh, Brazil, China, Cbte d'lvoire, the Dominican Republic, Honduras, Indonesia, Jamaica, Jordan, Latvia, Panama, Tanzania, Thailand, Uruguay, and Vietnam. Sector firsts included an airport and a mass transit system. * Continuedfinancing in some str-onigly reforming countrties, notably Argentina with fifteen approvals in fiscal 1995 and 1996. In the same period IFC also financed five power projects in Pakistan, another in the Philippines, helped arrange a major syndicated loan for Hungary's telecoms company, and financed a Chilean railroad. * PPI projects are being financed in low-income countries with hiighier risk, providing they are well structured, with strong, committed sponsors and political commitment. IFC's role in advising, structuring, and mobilizing commercial financing for PPI projects is particularly strong in such countries. * A shlarp increase in priiatization advisory assignments-including several in coun- tries new to infrastructure privatization, such as telecoms companies in Uganda and Ecuador, a water/electricity company in Gabon, and a multi-sector assignment in Haiti. r ,.~4 Expanding Approvals Table 2.1: The Big Picture By June 1996, IFC's Board had Total project size (US$m) 28,648 approved US$3.1 billion to help Number of projects 148 finance 148 projects costing Countries 40 US$28.6 billion in forty develop- IFC approvals (US$m) 3,072 ing countries (see Table 2.1 and ofC aproai USc)3,7 Appendix Tables Al, A2, and A 3). FY67-90 437 Although IFC's first private FY91-96 2,634 infrastructure project was financed IFC debt 2,536 in 1966, over 80 percent have been IFC equity 536 approved during a period of Average debt approval (US$m) 2 1 dramatic growth in the 1990s (see Average equity approval (US$m) 7Table 2.2).' IFC's financing for its own account remained at the same Approved for IFC syndication (US$m) 3,857 level in fiscal t995 and 1996. although overall project size fell, Source: IFC. because no new "jumbo" projects over US$1 billion were financed in .0 - *.e I . . - M No. of Total project cost IFC net IFC syndications FY projects (US$m) (US$m) (US$m) 1967-87 7 517 78 4 1988 2 409 54 0 1989 6 704 109 40 1990 7 1,613 197 72 1991 6 876 102 60 1992 9 1,396 1t5 147 1993 17 3,737 372 309 1994 30 5,495 585 699 1995 32 8,190 734 1,001 1996 32 5,712 727 1,527 Total 148 28,648 3,072 3,857 Source: IFC. fiscal 96. Two such projects were approved during one of the first pooled investment vehicles to convert fiscal 95: a US$1.7 billion mass transit system for equity commitments from foreign institutional Bangkok and a US$1.4 billion Philippines power investors into long-term debt investments in infrastruc- plant. By comparison, barely US$1 billion was raised ture projects in developing countries. by all PPI projects in all developing countries by 1988. The average project size of US$194 million masks huge variations: five projects have exceeded Signed Commitments2 US$1 billion, while several have been under US$20 million, including some cellular projects, ports Actual disbursement occurs only after a project is and small power plants. approved, investment agreements are signed ("com- mitment"), and disbursement conditions are met. By Syndicated loans rose sharply, with over June 1996, IFC had committed US$2.1 billion to 101 US$2.5 billion approved in fiscal 1995 and 1996. Furtermoe, svera new nonradiiona paricipnts projects in thirty-five countries. The difference Furthermore, several new, nontraditional participants between approvals (US$3.1 billion) and commitments have entered the syndication program during the past is mostly explained by the large number of recently two years, including nonbank financial institutions approved projects where investment agreements had such as GE Capital, the first involvement of insurance not been signed by June 1996. In addition, about companies and commercial banks in other emerging US$150 million of financing has been dropped after markets, such as Korea and the Czech Republic (see approval, usually because the sponsors found altema- Chapter 6). tive financing. Several projects also have been dropped prior to Board approval because sponsors found In addition to financing PPI projects directly, IFC has altemative financing, although in two cases govern- helped sponsor four private equity funds targeted at ments decided to finance projects directly: Prague infrastructure, an agency line for telecoms projects, airport and a Turkish power plant. The fact that and most recently, a "mezzanine" debt fund that will sponsors go to the time and expense of securing invest mostly subordinated debt in Asian infrastruc- approval for IFC financing and then change their plans ture projects. Core investors in the Asian Mezzanine shows how rapidly the PPI market is evolving. Infrastructure Fund, which is cosponsored by Credit Lyonnais and Caisse des Depots et Consignations (a French development agency), are expected to include large insurance companies. The fund is expected to be 18 FINANCING PRIVATE INFRASTRUCTURE Increasing Breadth3 Table 2.3: Countries with Five or More IFC Approvals by June 1996 Although much of IFC's PPI financing is in Asia and Latin America (see Figure 2.1), the share of other Total IFC regions is increasing. During the past two years, two No. of project cost financing projects were approved in Africa (including the Country projects (US$m) (US$m) region's first private power plant in Cote d'Ivoire), Argentina 29 5,605 562 seven in Europe (including the privatization of Latvia's India 13 3,470 415 telecoms company), and seven in the Middle East and Philippines 11 3,715 279 Central Asia, including a nationwide cellular system in Chile I1 2,143 229 Jordan. Well over half of the number of IFC's PPI Pakistan 7 1769 214 approvals have been in Latin America, reflecting the Colombia 7 359 76 region's "deeper" infrastructure privatization. The Mexico 6 484 47 proportion of PPI approvals is smaller in volume, Hungary 5 1,667 however, because of the large number of smaller Subtotal 89 19,213 1,959 projects in Central America. % of total 60% 67% 64% Yet for encouraging PPI, country climates matter more Source: IFC. than regional characteristics because government Note: Some of these projects were repeat approvals to the same commitment largely determines the scope for private company. Some were subsequently droppd. entry. Eight countries account for two-thirds of IFC's infrastructure approvals (see Table 2.3). Until recently, however, IFC approved financing to three of India's in most countries these approvals have been concen- f tratd i onesecor, uchas tlecms i Hugaryandfirst independent power projects, although commit- trated in one sector, such as telecoms in Hungary and met a o ensge yJn 96bcueo power in the Philippines and Pakistan. Chile and ments had not been signed by June 1996 because of Argentina are exceipptiones,a w akisthanwi sleta seand long delays in negotiating power purchase agreements. Argentina are exceptions, with a wide sectoral spread of investments. India is a special case, as several IFC approals to eistin priate ower ompaies)The bulk of IFC's PPI approvals have been for power occurred in the late 1980s and early 1990s, before the generation and telecoms projects (see Table 2.4). These occuffed in that adal19sbfbroad classifications hide considerable diversity Indian government instituted PPI policies. In 1994. however. For example, the telecoms projects include cellular systems (for instance, Jordan, Tanzania), local networks (for example, Bangladesh, Hungary, Indone- Figure 2.1: Regional Distribution of sia) and mainline operators (such as, Latvia, Venezu- Approvals (total = US$3,072 million) ela). Similarly, the power generation plants include hydro plants, barge-mounted diesel generators, coal and gas-fired plants. and one fueled by bagasse. a Africa renewable waste product of sugar cane extraction. 2% - l ^ Asia Two of the projects in new sectors were also IFC's first LAC PPI project in that country: an airport in Uruguay (see 43% Box 2.1) and a mass transit project in Thailand (see Box 4.4 in Chapter 4). Another innovative project involves the expansion of a regional telephone network in northern Bangladesh from 7,000 lines to 123,000 lines by 1999. The project, a joint venture between a CAMENA local private telecoms company (which holds a 2Glbl [ Europe 8% franchise to build and operate fixed telecoms services 2% 11% in the region) and a foreign investor, will increase Source: IFC. telephone penetration in the region from 0.01 percent Note: [I] The Global Power Investment Fund. to about 0.2 percent INTERNATIONAL FINANCE CORPORATION 19 US$6 billion have been - 6 6 , - 6 financed in Cote d'lvoire, Total Tanzania, Uganda, Zaire, number of which in project cost IFC net Zimbabwe, Bangladesh, India, . 0 $f Sectort $ S projects FY95-96 (US$m) (US$m) Nepal, Pakistan, Sri Lanka, Vietnam, and Honduras. Power generation 44 21 9,317 1,085 Power trans/dist. 11 3 1,473 210 By June 1996, IFC had Telecoms 41 15 9,347 876 Ports 19 8 654 165 approved financing for Pipelines 8 2 1,238 162 projects in five of the twelve Water/waste 8 6 1071 129 poorest countries in the Railroads 4 1 175 47 world:5 Tanzania (cellular Roads 4 3 847 80 telecoms), Vietnam (port), Mass transit 2 2 1,668 70 0Q f MAirporamiits 10 0 2 2 1 ,6318 7°8 Uganda (cellular telecoms, and Mirscelaneous [11 6 2 2,828 242 advising on privatizing main telecom), Nepal (two power To 0 ;0lbtal 0 : 148 64 28,648 3,072 plants) and Bangladesh (regional telecoms network). If Source: IFC. per capita GDP figures were Note:. 11 Five infrastructure funds and one congtomerate. available for Zaire, the country would probably also fall into this group (another cellular telecoms project). PPI in Low-income Countries The first private port to be financed in Vietnam Well-structured PPI projects can be financed in low- illustrates characteristics that can help to mobilize income countries, particularly with strong sponsor financing in such environments: support and the presence of agencies such as IFC to add security. Nearly 60 percent of IFC's approvals * Effective demand: the US$10 million proposed have been in low-income or lower-middle income deep water port will relieve already severe countries, where country coverage has been broader congestion at Saigon port. Rapid economic (see Table 2.5). Moreover, Argentina and Chile growth has meant that container traffic grew account for two-thirds of the projects in the upper by 60 percent annually between 1989 and middle income group. Thirty-five projects costing 1994. The sponsors of the port have also been Few airports have been fully privatized to date, such that private parties are responsible for investmnent and opera- tions of both terminal and airside facilities.4 The reasons for the relatively slow development of PPI in airports include: governments' reluctance to release direct control over airports, opposition from state-owned airlines, and difficulties in forecasting traffic. CIn March 1995, IFC's Board approved financing for a US$31 million expansion of the Punta del Este airport in :Urtuguay. Following competitive bidding, a twenty-year concession was awarded to the project company to build a new terminal and runway, as well as upgrade other airside facilities by 1997. The concessionaire will be responsible for all airport operations except immigration, customs, police, and traffic control, and will collect all revenues. Why -is Punta del Este airport a PPI front-runner? It is a holiday destination airport, so strategic considerations are mini- ai, the nationlal airline has already been privatized and a growing market is projected to strengthen further. Passen- g departu rre tax and airline fees (the concessionaire's main sources of revenue) have been set in U.S. dollars and are indexed. 20 FINANCING PRIVATE INFRASTRUCTURE negotiating long-term contracts with large levels. Given the long-term vulnerability of infrastruc- importers of specific products. ture projects to major political and economic risks. investors base much of their risk assessment on a * Foreign e.-elcange revenues: most of the port's country's economic and political credibility. The revenues will be in U.S. dollars, in accordance Instituttional Investor index is a proxy indicator of with international shipping practices. transfer risk.' A score of under twenty-five (high risk) indicates little access to intemational financial markets. i Stivog sponsors: the foreign sponsors are whereas over forty equates to reasonably good access. major international dry goods suppliers and a Depending on country conditions and repayment shipping company. The local sponsor group records. Institutional Investor ranks some upper middle are importers and a bank. income countries as bearing more risk than low- income countries (for example, upper middle income * Multilateral ulin1brella: IFC has helped intro- Venezuela was rated 30.1, while India scored 45.8 in duce limited recourse project financing to the the March 1996 survey). country, as well as supporting the participation of foreign sponsors and lenders. NORAD also Over a quarter of IFC's projects have been approved in provided a US$2 million loan. countries with virtually no access to private interna- tional financing (see Table 2.5). Three of the countries Country income level appears to have little effect on bearing the highest risk were Zaire (I/stitutional project size: projects in low-income countries averaged Investor risk score of 9.5 at the time of investment). US$171 million, versus an overall average of Uganda (10. 1), and Tanzania (15.2). In these countries US$184 million. As might be expected. mobilization private investors focused on cellular networks, where rates were lower in low-income countries: 6.5 versus high demand and revenues during build-out mean that an overall average of 8.3. payback periods are relatively short. Other projects in countries with high risk include a port in Bolivia (risk score of 13.2). and power plants in C6te d lvoire Country Risk ( 17.0), Honduras (16.2-see Box 2.9). and Guatemala (18.8). Attracting private financing to infrastructure is detennined more by risk perceptions than by income Table 2.5: IFC Approvals by Country Income Level and Risk No. of No. of Project cost IFC rtnancing Avg. size countries projects (US$m) (US$m) (US$m) by country income level Low income 13 35 6,000 803 171 Lower middle income 18 47 7,986 845 170 Upper middle income 9 60 12,099 1,194 202 Subtotal [1 40 142 26,085 2,842 184 by Institutional Investor score Most risky (< 25) 18 36 3,529 546 98 Medium risk (25-40) 20 70 16,310 1,642 233 Lower risk (>40) 11 35 7,976 777 228 Subtotal [21 na 141 27,815 2,965 197 Source: IFC. Notes: [II Excludes regional projects. [21 The country total is not additive: some countries are counted twice because different projects were approved when the country fell into a different risk group. The total figures exclude regional projects and a few projects in countries without an Institutional Investor rating. INTERNATIONAL FINANCE CORPORATION 21 ing 0- prj. 60M,I$7 ilo fIn December1994 financing closed for the first independent power project in Honduras: the 60 MW, US$70 million Elcos p InDecember*1995 fin aning closedfora US$20millionexpansionofElcosato8OMW. Theproject represented one of the largest private investments in Honduran history and mobilized the first commercial lending for the coutry in twlve yeas. inancing was fied jst one year after the power purchase agreement was signed. The diesel-powered plant stoperat ininMay 1995. Honduras represents one of the highest risk country environments to see an IPP come to closure. Five factors enabled the project to achieve financial cloy: quickly: * MIGA extended expropriation, war, and civil disturbance cover to the main sponsor, who was then allowed to transfer the coverage to two new equity investors (which saved them spending time applying separately for such insurance). Separatly, MGA extended cover to two commercial banks that lent US$10 million each. * The government guaranteed that the power offtaker, the state-owned national electrical utility, would meet its contractual obligations. T* he governnent was motivated in part by severe energy shortages. 0 t* A Astrong foreig nso participatedWartsila company experienced in building and operating diesel en- gine-powered ants. * IFC's presence helpd brin the cercial bks, under a syndicated loan. Financing was also provided by FMO, theDutch agency for financing privatepoj:ects. * Debt financing fbr the expansion was provided IDB and DEG. Projects in countries with greater risk are under half Figure 2.2 suggests that the effects may be most the size of those in countries with better credit, as significant for countries with higher risks: PPI investors test the water. Similarly, mobilization rates financings may help put such countries "on the map" are lower in countries with greater risk (5.5 versus an for foreign investors. The figure shows the Institu- 8.3 average). Furthermore, much of the funding in PPI tional Investor rating for all projects in countries projects in countries with risk comes from other deemed to be a high risk (rated under twenty-five) at official financing agencies. This applies particularly to the time of the initial investment, and again at March debt: PPI projects in Sub-Saharan Africa have included 1996. Almost without exception the ratings had risen, very little purely private debt. implying a fall in perceived country risk. Does PPI Improve Credibility? Advisory Projects Infrastructure privatization may have helped some Advisory work is partly a leading indicator of future countries to improve their credibility on international investment trends. It is also important in itself: the financial markets. Table 2.6 shows the four-year complexity and political sensitivity of PPI projects change in the Institutional Investor index to March means that good quality advice can yield large payoffs 1996 for the countries where IFC has financed the in terms of projects that are financially well-structured most PPI projects. This is far from a scientific test. and which meet the needs of different stakeholders. Improving country credibility involves more than privatizing infrastructure. And some countries, such as During the past three years IFC has become increas- Malaysia, have been active in PPI, but IFC has not ingly active in undertaking PPI advisory assignments. participated. Nevertheless, there seems to be some There are two broad categories: correlation between PPI and improvements in risk ratings. 22 F NANCING PRIVATE INFRASTRUCTURE Table 2.6: Changes in Risk Ratings, side" assignments are undertaken in the 1992-96 context of a possible investment by IFC, should the project go ahead. IFC may also Country Mar 92 Mar 96 Change discuss with the government the regulatory or contractual framework for the project. In these Argentina 23.6 38.4 14.8 circumstances IFC represents the investors' Philippines 25.7 38.1 12.4 point of view, and it makes this expressly clear Chile 44.1 59.2 15.1 to government. Colombia 38.4 46.7 8.3 Pakistan 28.0 29.5 1.5 India 37.6 45.8 8.2 * Stand-alone advisory assignment. IFC also Hungary 41.7 43.6 1.9 provides "sell side" advice to governments on Mexico* 41.0 41.2 0.2 how to privatize existing infrastructure enterprises. This advice ranges from sector 135 countries 37.5 38.9 1.4 strategy and the appropriate regulatory framework, to the steps necessary to be taken Source: Institutional Investor. to restructure the enterprise for sale, through to Note: Mexico's 1995 peso crisis meant that its rating fell by 5.7 points in the yeartoSeptember 1995. actually advising on the sale process, including finding potential investors, tender, negotiation and sale closure. IFC offers this service when Project-related. Sponsors can retain IFC to it and the client government believe that IFC review a project's financial and economic has something to offer the process that other viability, to assess contractual arrangements, private advisers are not able to supply. Fees are and to help structure the project for financing. charged on a commercial basis, and care is For example, in early 1995 IFC was asked to taken to avoid real or perceived conflicts of undertake these tasks by the winners of a interest by not investing in the course of the concession to provide water and sewerage same transaction. services to a Brazilian city. Often such "buy Figure 2.2: Changes in Risk Ratings after PPI Investments Lower risk 30 - _ _ _ _ _ _ _ _ __ _ 00 0 c 35'vr . . 0 30 T- o - _ 0 ° )25 - - O LOO ' 20 * -~~~ 0 15 -_ g n 10 _ C~~ 5_ _ __ T_ 1 I0 ---------------_ _ _ _ _ _ _ _ to Higher risk Projects * Score at time of initial investment 0 Score as of March 1996 Source: Institutional Investor and IFC. INTERNATIONAL FINANCE CORPORATION 23 Between fiscal 1993 and 1995. IFC started nine PPI total capital costs in late 1992 to over US$11 billion in stand-alone advisory mandates. There has been a sharp May 1996 (see Figure 2.3). Among nearly forty acceleration in fiscal 96, with a further eight mandates potential projects in May 1996 were electricity signed (see Appendix Tables A5 and A6). The chang- generation projects in China, Indonesia, and Mexico, a ing pattern of demand for IFC's advice has matched renewable energy project. a water supply project, a the steady growth in the volume of infrastructure fund to invest in water projects and several telecoms privatization worldwide. It has also focused increas- projects. Several countries where IFC has not previ- ingly on the most politically sensitive transactions, ously financed any PPI projects are on the list (for where the highest value is attributed to IFC's neutrality example, Kazakhstan) as well as others where it has as part of the World Bank Group. Recently signed only financed one or two to date (such as Costa Rica, mandates have included sectors such as water, with Tanzania). Advisory work has also increased: in May projects in Manila, Gabon, and Cochin. India, and 1996. IFC was working on twenty-four PPI mandates electricity distribution in Peru and Pakistan. They have in countries such as Uganda, Peru, Kenya, China., also included countries where perceived risk is high Venezuela, and India, compared with seventeen a year and government unease with privatization the greatest: earlier. for example, Haiti, Kenya, Ecuador, and Uganda. Finally, the advisory mandates have involved an increased amount of upstream strategy work- recommending how monopolies should be broken up, Notes for example, before implementing a sale. 1. "Infrastructure" as used in this paper includes power, telecoms, ports, roads, railroads, mass transit, airports, IFC's PPI Pipeline and water and sewerage projects. Shipping and road transport are not included. Many of the PPI projects financed by IFC before 1990 were corporate credits: The "pipeline" of PPI investment projects which IFC since then the majority have been project financings. staff are assessing seriously for investment has risen over the past four years, from about US$3 billion of 2. All parties sign the commitment agreement and IFC funds its obligations at this point. 3. These figures refer to approvals. Geographical and sectoral splits for IFC's commitments to private infrastructure projects are shown in Appendix Table Al. 11:~1 - 4. Airport Infrastructure: The Emerging -: 12 Role of the Private Sector (Ellis Juan, June o: 1995) lists some UK airports as fully 10 privatized and Vienna and Copenhagen airports as partly privatized. 8 5. As defined by the World Bank in 0 Annex Table I in the 1995 llWorld Develop- -ient Report. ?isx 4- f- 0<0 ' VsY \<' 0:ij000:2V;;V0P i Q3Qi 00:.XX 6. Twice a year Inxtitutiotal Investor X0 $x0ft - '- h.stifi 0Q - -000: .00* 0020 -0ii Qpolls 75 to 100 international banks to grade 2 ~~~~~~~~~~~~~~~~~countries from 0 to 1 00, with I100 repre- X *;5R 0; X Qt;; .E s0 ;4ldShV 000000i0<0 d0<;;; senting the least chance of sovereign tll o < < Q < its_il= _ < default. The analysis gives more weight to 0if CoD0V -'r OT t ) 0,> a) responses from banks with greater 0- a C' O_ rb q) ca iQ: US$200m) 20 15 financing techniques, infrastructure regulation medium (US$75m-$200m) 13 12 and country risk. While government officials, small (< US$75m) 30 13 investors, and lenders may possess expertise in one or two of these areas, relatively few do in by sector all three. Delays can result from unrealistic telecoms 22 12 expectations or the need to adapt procedures ports 9 12 (see Box 4.3). Good advisors can help reduce power generation 26 13 such delays. Source: IFC. Government support arrangcments Where PPI ANote: Only includes projects which reached the commitment stage. projects t sup to t purchas from projects are selling to or purchasing from 38 ~~~~~~~~~~~~~~~~~~~~FINANCING PRIVATE INFRASTRUCTURE Table 4.2: Fast and Slow Closing Projects Year Closure period Project size Project Sector Country committed (months) [1] (US$m) over 20 months Pangue Power Chile 1994 43 465 Puerto Vallarta Water Mexico 1995 31 33 Karachi Port Pakistan 1995 26 88 Hidrozarcas Power Costa Rica 1994 23 17 Lanka Cell. Telecoms Sri Lanka 1994 21 14 N. Central Rail Argentina 1993 20 61 under 10 months Smith-Enron Power Dom. Rep 1995 4 204 P. Quetzal Power Guatemala 1993 5 92 Ciprel Power C6te d'lvoire 1995 6 70 Telemovil Telecoms El Salvador 1996 7 20 N. Mindanao Power Philippines 1993 8 103 AES Lal Pir Power Pakistan 1995 8 343 Baria Serece Port Vietnam 1995 8 10 Elcosa Power Honduras 1995 9 70 Source: IFC. Nore: III The months between preparation of an IFC Initial Project Review and signed commitment ol IFC funds to the project. Box 4.1: Rapid Closing in Cote d'lvoire Power Project In July 1994, IFC was formally approached by a French-led consortium to finance the first independent power project in Cote d'lvoire (and in Sub-Saharan Africa). Financing closed five months later and the 100 MW plant was operational by April 1995. Early results are good: in its first six months of operation the plant achieved 83 percent availability, compared to a contractual requirement of 80 percent. How was this possible in a country with limited access to international financial markets? * Strong political commitment. The government had signaled its interest in PPI in 1990, when it contracted man- agement of the electricity sector to a private company. Following the resumption of economic growth after the devaluation of the CFA Franc in 1994, and a drought that threatened hydro-based supply, new capacity was needed. The government negotiated a nineteen-year build-own-operate-transfer concession with the consortium managing the power company. * Strong sponsors. The project was sponsored by two major French groups (SAUR and EDF) with long experi- ence in constructing and managing power plants, as well as management experience in the Ivoirean power sector. * Multilateral financiers. The major lenders, two French official agencies (CFD and Proparco), were ready to proceed with IFC on board. * Structuring. Convertibility and transferability of funds was an issue. An offshore escrow account was estab- lished with a float adequate for six months of debt service. The foreign debt repayment component is paid directly to a foreign exchange account. INTERNATIONAL FINANCE CORPORATION .-- IFC has financed four power projects in the Philippines. Taking the first project (the US$41 million Navotas project) from initial review to loan commitment took twenty-one months between October 1988 and July 1990. Much of this time was spent by the sponsor, government officials, and lenders coming to terms with appropriate risk management arrangements under a previously untested implementation framnework. In contrast, appraisal and negotiation of the US$1.4 billion Sual project took just ten months between October 1994 and July 1995, notwithstanding its size and complexity. The faster closure on Sual reflected the experience gained by all participants (including their legal advisors) with previous transactions under the Philippine private power program. noncreditworthy state-owned companies, and * Asssing the market. This mainly affects government reforms will take time to improve transport projects (ports, railroads, roads, creditworthiness, financiers may request airports, and mass transit) and especially new government support, such as performance investments, where there is no track record of guarantees. While such guarantees can help to cash flows. Lenders in particular are con- start the PPI process, they may be politically cerned about whether debt service will be controversial. Delays in determining the covered in the event of lower-than-expected availability and kind of government support volumes and tariffs. They may require inde- have affected India's independent power pendent market assessments, use more program. conservative projections than those of the sponsors, and require some sponsor support to Intragovernment coordination. Several cover debt service in the event of inadequate projects have been beset by delays arising cash flow. from poor coordination between different parts of government, both at the central level and * Lender securitv. Establishing mortgage claims between local and central government. Delays over the physical assets of a project has been have tended to be longer when a regional difficult in some countries (Hungary, Poland) government entity was awarding a concession, due to outdated provisions of the legal but needed policy agreement or financial infrastructure (see Box 4.5). Weaknesses in support from central government to conclude laws relating to claims on intangible assets the transactions. (suchI as concession agreemenits and othier contractual arrangements) and the absence of SkLe. Large projects may take longer to close efficient registries have also created problems because of the need for extensive public for loan security. In a port in Vietnam, for consultation, the large number of financiers example. lenders were unable to take a required, and the complexity of coordinating mortgage over the assets, and instead secured numerous government agencies and technical partial sponsor guarantees. studies (see Box 4.4). Delays can occur when a financial institution is financing private infrastructure on a limited-recourse, nonguaranteed basis for the first time. Examples might include insurance companies, bilateral agencies, export credit agencies, and local financial institutions. Negotiations over risk allocation measures and security arrangements will usually take longer with new participants, and this can affect the time to reach agreement on closure. For example, when syndicat- ing a PPI loan to insurance companies for the first time, IFC and the insurance companies both had to adapt their procedures slightly. 40 FINANCING PRIVATE INFRASTRUCTURE Box 4.4: The Bangkok Mass Transit System At a cost of US$1.7 billion, the Bangkok Transit System is one of the largest infrastructure projects yet approved by IFC's Board. It has also been one of the longest to bring to financial closure, due mainly to the scale of activity involved and the need to achieve consensus among the different groups of financiers, IFC started appraisal in Sep- tember 1993, undertaking detailed assessments of traffic volumes, the concession agreement, legal and regulatory frameworks, and the social and environmental impacts. Public consultation procedures were initiated (lasting just over a year) to ensure that the environmental and social impacts of this high-profile project were properly handled. Commencing in August 1995. negotiations were conducted among three groups of financiers: KfW (leading a syndi- cate of German and Austrian banks), Siam Commercial Bank (leading a syndicate of Thai banks), and IFC. The term sheet was agreed in February 1996 and agreements were signed in August 1996. Sector specific issues. These include: and power is being purchased by another. Negotiations can drag on if key provisions in Interconnection righ7ts in telecoms. Some the fuel supply contract (such as tenor of the projects have been delayed (for instance, in contract, political force majeure provisions, Poland) because the state-owned operator took fuel price changes) are not aligned with those a long time to negotiate interconnection rights of the power purchase agreement. with private entrants. Land development r-ighits have been an issue The Broader Perspective on some toll roads. Another issue has been the need to secure complementary government It is likely that IFC's experience covers projects that investments to connect the road or bridge to are more likely to achieve financial closure than the the network. whole population of potential PPI investments. Many of the sponsors who approach IFC have international The reguliator' rIegime for tariff adjustments experience, some have already been awarded a has been a sticking point in several sectors, concession to develop and operate an infrastructure particularly in water projects, where tariffs service, and a few are operating in countries where tend to be below cost and adjustment has a gom ernments have developed expertise in handling high political profile. Similarly, negotiations private entry. Yet many developers, financiers, and on the level of road tolls has delayed closure governments are still at the initial stages of entering on some road projects. the market for private infrastructure. The next chapter discusses ways in which governments have managed Matschin1g fuel svupply anzd pov'er offtake the process of private entry. contracts can hold up closure on power generation projects. particularly where fuel is being supplied by one state-owned company Box 4.5: Legal Frameworks Inadequate legal infrastructure has contributed to delays in achieving financial closure in many projects. In Hungary a law that prohibits a change in a company's articles of association within the first year after establishment created problems for a cellular telephone company that wanted to increase its equity base to pursue market growth. With IFC's assistance, the equity increase was eventually achieved, but only after a complex five-step operation that involved shareholder loans, buyouts of the loans, equity transfers, and balance sheet reconfigurations. The process, which should have been straightforward, took six months and involved significant legal costs. INTERNATIONAL FINANCE CORPORATION 41 Notes I. The concept of closure applies more to projects financed on a limited-recourse basis (often greenfield projects). Existing firms with a track record may access financing on a corporate credit basis. 42 FINANCING PRIVATE INFRASTRUCTURE 5 Improving the Policy Framework In most developing countries the econiomiiic costs of not deregulating infrastructure services to allow private entry and encourage competition are very high. The challenges are greatest in those countries where infrastructure services are worst. Nevertheless, governments have several options for improving infrastrUcture services. Det'ininig the options and the scope l'or PPI will depend on political commitment, the strength of opposing groups. and investor inte- est. Establishing the right policy framework sets a basic toundaLtioni for PPI. Successful, sustain- able transactions require a policy frarmework that meets the interests of governments (acting on behalf of the public), sponsors. and len(lers. Such a framework provides a base for success- ftul transactionis, which in turn can create a positive dynamnic of more investor interest. conisumiler support. an(d furthel government liberalization. However, fully functioning regula- tory frameworks and internationail comilpetitive bidding are not always necessary or possible, particularly in the early stages of promioting PPI. Private entry is more likely to be successf'uil and sustainable if governments use experienlced and impartial advisers and if transactions are transparent. Moreover-, for concession agree- 3 menits to remrain viable over long periods. sponsors, governments, and Ienders need mecihai- nisms to deal with chan6ine circumstances, develop comilpetitive markets, and encourage the spread of'local ownership. Is PPI Worth the Trouble? Retonns to promote PPI are politically and sometimes socially painful. The uneven record of progress so far reflects the differing degrees to which governments have succeeded in overcoming these hurdles. Opposition may come from employees of state-owned enterprises woorried about jobs, consumers about to lose subsidized services, or existing infrastructure firims fearing, increased competition. There are often concerns about foreign companies buying "strategic" infrastructure assets. In additioni, transactions that fail or those that are perceived to reward investors too much carry political risks. So, while a successful PPI program can ultimilately yield political and economic benefits. in the short term political leaders run the risk of m;aking unpopulatr changes. Are existing iifrastructure services so poor that they warrant such attention'? Often, yes. In the early 199t)s, power blackouts of up to eight hours a day in the Philippines cost the country over USSI billion of lost output annually. Similar studies in India. Pakistan, and Colombia estimated the cost of power outages at 1-2 percenit ol GDP. In Cote d'lvoire it was estimated that a shipping monopoly addedL 4 2 perceint to the cost of transporting bananas, compared to . more competitive services. In a 1992 saniple ol ninety-t'ivc developing counitries, the waiting period for a new telephone coyitection averaged f ive years. Many f'irms internalize the costs of inadequate service: for example. Nigerian tfi-rs spenid US$90() million annually on backup electricity generators. But blackouts and long waiting lists do not automati- political leaders to emulate their neighbor's cally generate political commitment to policy reform. initiatives. Thus after Guatemala's success IFC's experience suggests that: with an independent power plant several other Central American countries encouraged Political commitment does not have to be all- independent power producers. encompassingffor PPI to start. Transactions can take place initially with enough commit- ment to simply give approval for the state- Starting Point Affects PPI owned power company to contract an indepen- Options dent power plant. Specific events may spur commitment. For Potential investor interest also affect the options for example, one president decided that the airline policymakers (see Table 5. I). Small, low-income should be privatized after an airplane was countries with high risk and poor legal frameworks. impounded for nonpayment of its debts. In and without exchange rate convertibility may face another country power sector reforms were limited investor interest and even less interest from spurred by a riot that occurred after a blackout foreign lenders. In such circumstances investors are during university student examinations, likely inilially to focus their interest on projects that: * Political changes may accelerate PPI. Some Are small enough not to need large numbers of incoming presidents have made PPI a part of linanciers. their mandate, such as Argentina's President Menem and President Ramos in the Philip- * Sell services where demand is growing rapidly pines. (for instance, cellular telecoms). * The demonstration effect of neighboring * Earn foreign exchange (such as ports). countries is important. Successful transactions in "comparator" countries can encourage Characteristic PPI is easier if ... Because ... Country Country risk Low More investor interest Country size Large More investor interest Foreign exchange Convertible More foreign investor interest Legal framework Laws and precedents exist More comfort for lenders and investors Project Project market "Wholesale" for example, to Lower political profile, fewer regulatory a power company rather than issues the public Cash flow stability Contractually set (take or pay) Comfort for lenders and investors New or existing? New construction, rather than Less politically contentious privatization of existing assets Project size Small enough to be simple Fewer parties involved-easier to finance Large enough to attract investors Serious investors-easier to finance State-owned buyers Creditworthy Reduces lender and investor risk and sellers Project revenue Foreign exchange, such as port, Removes forex risk for foreign lenders and airline, international telecoms investors FI4FNANCING PRIVATE INFRASTRUCTURE * Sell to creditworthy "wholesale" purchasers privatization is deepest.' More countries have so far (for example, independent power plants selling used private entry to build new assets rather than directly to large industrial firms). wholesale divestiture of existing assets (the first path in Figure 5. 1). But even limited entry can create * Have clear government support arrangements constituencies that press for further liberalization. (such as guarantees of the payment obligations After successful]y promoting new power generation of state-owned enterprises, permission for plants, the Philippines is preparing to privatize its offshore foreign exchange accounts). National Power Company and Manila's water system, and has already introduced competition to the domestic Most of the projects that IFC has financed in countries telecoms sector. with low income and high risk have shared several of these characteristics. Demonstrating strong political Figure 5.2 shows different ownership structures, commitment through privatization can partly override ranging from very limited private participation under a investors' risk perceptions, as illustrated by Argentina management contract through to devolving full (see Box 5.1-although Argentina was not a low- responsibility for long-term investment and operation income country and had good institutional capacity of existing assets ("divestiture" ).4 The difference when it began its infrastructure privatization program). between the "build-operate-transfer" and "build-own- operate" models is largely political. "Transfer" has been preferred where governments are concerned Transition Paths about the political implications of ceding control to private or foreign owners (for example, the Philip- Governments have various choices for divesting pines, C6te d'lvoire, and Oman). In practice, if private ownership and introducing competition for and w'ithin firms operate the assets efficiently, these concessions infrastructure markets. Consumer gains tend to be may be re-bid at expiry. largest where unbundling' promotes competition and Box 5.1: Financing Argentina's Infrastructure By June 1996, IFC's Board had approved US$562 million to finance twenty-nine projects costing US$5.6 billion in total in Argentina. These projects have covered power transmission and distribution, telecoms, railroads, gas distri- bution, ports, water, and a toll road. Four factors helped make this possible: Political commitment. In July 1989 the Menem Administration assumed office, after a decade of crisis that had culminated in hyperinflation. In 1989 expenditure and losses by public enterprises (PEs) were equivalent to 13 percent and 3.4 percent of GDP respectively. Starting with telecoms, the government used infrastructure priva- tization as a key part of its economic recovery program. * A willingness to accept foreign investment in politically sensitive infrastructure sectors. The government recog- nized that foreign capital and expertise were essential if large investments and efficiency improvements were to happen quickly. * Exchange rate convertibility and parity with the U.S. dollar reduced foreign lenders' concerns. a The institutional capacity to implement new regulatory regimes, use various mechanisms to promote PPI and competition (for example, concessions), and learn from experience. The political sustainability of Argentina's PPI program has been strengthened by benefits shared between consum- ers, government, and investors. By 1993, after privatizing many major infrastructure services, total PE expenditure had fallen to 4 percent of GDP, and the remaining PEs were making a small net surplus. Argentina's investment rate more than doubled from 8.1 percent of GDP in 1989 to 19.8 percent in 1994, with private investment accounting for all of the increase. INTERNATIONAL FINANCE CORPORATION -~~~~ Political costs of adjustment / Low regulatory effort High Low Unbundling & 4 No unbundling, I Unbundling & deregulation divestiture only privatization Economic _ efficiency of _ provision Divestiture of SOE 5 Unbundling/ + demonopolization y High Private investment - - tangeen Build Build aContracts Leasing Operate Own Divestiture Transfer Operate Low Extent of private participation High Note: Divestiture includes different ownership options. A government may sell all or part of its share in an infrastructure enterprise (and issue a license for the concessionaire to operate them). Or govemment may retain the ownership of the underlying assets but issue a long-tern licence to a private operator, including investment obligations. 46 FINANCING PRIVATE INFRASTRUCTURE Most of the projects financed by IFC so far have Table 5.2: Number of Projects Financed involved the construction of new, assets, structured as by IFC build-own-operate concessions (see Table 5.2). Experience with companies after privatization has New New been in telecoms (Hungary, Latvia, Chile), power build build Dives- distribution, water supply. railr-oads, and ports (all Sector BOT [11 BOO [11 titure [2] Ar-gentina). Power generation 8 21 0 Power distrib./trans. 0 6 3 Telecoms 0 16 4 Building Sustainability Water 1 0 2 Ports 0 6 1 Efficiency gains in PPI services may not necessarily Rail 0 0 3 ensure political or economic .sustainabilitv. There is a Roads 0 4 0 long (although mostly not recent) history of private Notes: Does not include repeat pr-ojects or those before fiscal 91. infrastructure being nationalized. Sustainability may [t1 BOT: build-operate-transfer; BOO: build-own-operate. depend on how the entry process is perceived, whether [2)IFCinvestmentswithcompanyafterprivatization.Severalofthe efficiency improvements continiue in the longer term projects retain some govemment ownership, but control for invest- ment and operations is vested with the private concessionaire for the and how benefits are shared. tenn of the concession. Advice The complex regulatory issues, the wide range of risks be made about trade-offs between attracting faced by investors, the relative newness of the task, investors and limiting competition through. for and the potential conflicts of interest facing- civil exalmple, temporary monopolies (this has been servants all mean that independent advice is important done in several telecomimlunicationis for governments preparing to liberalize infrastructure privvatizations, for cxample). services. What is desirable in an adviser? A reputation for professionalism, integrity, independence, and * Fee Xtl-lwre.s tor advisers. There is no pertect neutrality is central. Previous experience in the sector fee structure. Lump sum fees do not provide and region, and preferably Ihe country, are also the adviser the incentive to maximize sales prerequisites. Access to a networik of potential inves- revenue and investor interest. Fees expressed tors, strategic or portfolio, is important. Advisers need aS a percentage of sales value may not to know what matters to potential bidders, but also to encourage advisers to maximize competitionl recognize that the government may be looking for as a monopoly fetches a higher price than more than better infrastructure services from private several competing firms. Promoting capital entry. Other objectives might include some local market development, or a scheme for gettiig ownership or development of capital markets, for broad popular ownership takes time, and example. advisers' time is not free. Moreover, successful implementation depends as much on how the A growing and increasingly competitive industry of adviser manages the political side of the sale private sector advisers, investment banks, and consult- as on technical and financial competence (see ants has the experience to provide professional advice. Box 5.2). In addition, governments are becoming better at managing their advisers; separating advice on strategic * Mohiligini4 public opiniioni. High-profile sectoral structure, for example. from assistance to infrastructure privatization often requires a implement a sale. Nevertheless, difficult judgment major publicity effort among the general calls remain for goverinimlents: public and the employees ot atfected state- owned firms to create a constituency for * tInvestor intrestmlnarket trade-ovI. It is often change. Yet time may be short. This task needs impossible to decide strategic policy indepen- to be handledl transparently and caref'ully. dent of the transaction. Judgments may need to 47 INTERNATIONAL FINANCE CORPORATION .0 N * 0 - . I For the visitor to Manila in the early 1990s, its brownouts were an unmistakable manifestation of the power industry's problems. By 1995 the looming problems in the water and sanitation sectors were less apparent, but equally seri- ous-only two-thirds of the eleven million inhabitants of metropolitan Manila were connected to the water supply, and just 10 percent had sewerage connections. Water shortages were severe and growing. In response, in mid-1995, Congress passed the Water Crisis Act, granting the president emergency powers. IFC was appointed as the adviser in the privatization of Manila's water and sewerage services (MWSS) in November 1995. The challenge has been to persuade the unconvinced within the company, public, and Congress of the potential benefits of this extremely visible project. Three elements have proved key: * Leveraging limited past experience. The approach has drawn from the lessons of the pioneering Buenos Aires privatization. Visits to Argentina have been arranged for MWSS management, union officials, and Filipino members of congress to see firsthand how a successful water supply privatization can work. * Recognizing the importance of public relations. Unlike the power projects, MWSS interfaces directly with millions of current and potential consumers, who are concerned about the impact on tariffs and service quality. Communicating accurate and comprehensible information is important to help build a constituency for the sale. * Developing local capacity. The seven teams of consultants involved in the project include three local firms- accountants, lawyers, and public relations experts. The latter are gaining experience which may be relevant if the model is replicated in other cities throughout the country. A workshop approach to strategy formulation within the team, and between the team and clients and constituents, has also contributed to open debate and increased local ownership. Transparency Transparency dtoes not always equate to international competitive bidding. Under certain circumstances Transparency on the part of both governments and negotiated entry (where the government negotiates investors helps build sustainability. Transparency has directly with a particular sponsor) may be appropriate. several components. Although most of the concessions which IFC has financed have been subject to international competitive * Clar-ity. Governments can adopt clear proce- biddilg (see Table 5.3), a significant number have used dures for awarding and operating concessions other approaches, according to country and project so as to get a strong investor response (for circumstances:5 example, Pakistan's policy framework for power generation projects, see Box 5.3). * International competliive bidding is more suited to large, long-lead-time projects, where * Predictability. The government's role in governmcnt has the capacity to manage the implementing its commitments predictably is process and sponsors demonstrate widespread important. This might include, for example, interest. undertaking tariff adjustments, meeting fuel supply commitments, or purchasing land. * Competitive negotiation. Here the government selects several shortlisted bidders using * Competitiveness. Project fundamentals need to particulai criteria and then negotiates with be able to withstand public scrutiny. This each. In Plakistan, for example, the government applies in the longer term, not simply at the set a hurdle rate for power-based on a time of the transaction. Equally, however, maximum tariff that it would accept-and governments should be aware that sponsors of invited bids. early projects may demand a premium for the costs and risks of being first. * Negotiated entr y or direct negotiation refers, for example, to the first power projects in the 48 FINANCING PRIVATE INFRASTRUCTURE Box 5.3: Attracting Investors: Pakistan's Policy Framework for Power Generation Prior to 1994, the govemment of Pakistan's policy on private power was based on a rate of return approach which focused on capping the return on equity. This cumbersome approach did not attract investors, so the government decided to revise policy. It realized that it would need initially to rely heavily on foreign investors and lenders, and that private investors would look for some government support, given (a) relatively high country risk; (b) state- owned power purchasers and fuel suppliers without strong credit records; and, (c) government involvement in tariff setting. The key features of the revised policy framework introduced in March 1994 were: * Choice of site, fuel, and technology open to project proposers. * An average bulk power tariff of (a) an average of 6.5US¢ per kWh, over the first ten years and (b) a levelized tariff of 5.9USo per kWh over the life of a project. The tariff is payable in Pakistani rupees but pegged to the U.S. dollar. A bonus is available for projects commissioned before the end of 1997. The tariff is split into a capacity price and an energy price. Fuel price changes are a "pass-through" item. * Fiscal and related incentives. Private power companies are exempt from corporate income tax; import duties and sales taxes are not payable on power companies' imports or sales; repatriation of equity and dividends is allowed; there are no local ownership requirements; there is foreign exchange risk insurance available from the state bank. * Model agreements. Model Implementation Agreements (IA), Power Purchase Agreements (PPA) and Fuel Sup- ply Agreements (FSA) were prepared. * Government support arrangements. The government guarantees the payment obligations under the PPA of the state-owned electricity utility and under the FSA of state-owned fuel supplier. Government will also cover certain political and governmental force majeure risks, provide protection against changes in certain taxes/ duties, and ensure foreign exchange convertibility for the projects. One-window operation. A Private Power Board was set up to coordinate all interaction between government and investors. The response was dramatic. Over 7,000 MW of IPP proposals were received before the government ceased issuing letters of support later in the year. Since then agreement has been reached on 3,000 MW of new capacity through lPPs. IFC alone approved financing for five power projects between January 1995 and June 1996, and has started disbursement on three projects. Philippines, Costa Rica, Guatemala. Negoti- to learn what is required to obtain serious ated entry has been used where knowledge is private sector interest. It has sometimes been insufficient to specify terms for a competitive necessary at the start in sectors where expected tender. The negotiation process has been used private equity return is not obvious and the level of potential government support is unclear. Table 5.3: Entry Approaches There are other reasons why some governments have Bidding method No. of projects used negotiated entry in early projects (see Table 5.4). Bidding is relatively slow, expensive for companies International competitive bidding 34 (even for small projects), and uncertain, especially in Compebtitve negotiation 5 Diretiv negotiation 1 cotintries without track records. International competi- tive bidding may not be a realistic option (at least for the first project) for countries that are perceived as Note: Includes all projects where a concession was awarded. This risky by investors. where there is no track record. always occurred before IFCs financing was put in place, which are offering small projects for private financing, INTERNATIONAL FINANCE CORPORATION Advantages Disadvantages Intemational competitive bidding If well structured, should be most Slow, expensive for bidders, may transparent and lead to lowest cost, limit innovation, may still be vul- nerable to corruption or collusion. Competitive negotiation Some transparency. Can be struc- Some negotiation reduces transpar- tured to allow for direct competition. ency. Often requires advisers to help Allows some innovation. set benchmarks and evaluate alter- natives. Direct negotiation Fast, cheaper for bidders, innovative. Lack of transparency may reduce political viability, may be higher cost, risk of corruption. or where there is urgency. These conditions apply to conicessions (sec Box 5.4). They have also published many of the countries where IFC has financed projects. detailed iinplmeleiiting rules that let all parties know Negotiated bidding may result in higher returns lor the procedures to be followed. Countries without a winning investors, but that partly reflects the risks of concession frarmework have encountered difficulties in being first. Some countries (Philippines power) used project implementation, including bureaucratic direct negotiation for the first transactioni and then uncertaitnties ovei which agencies have responsibility competitive bidding for some subsequent awards. If a for approvals and the approval criteria to be applied. government decides to use direct negotiation, dealing with internationally recognized sponsors (who have Financino is casier to mobilize if thc legal framework their reputations on the line) reduces the risks of and conicession contracts mawke adeLluate provision for projects not being financed, or not performing ad- the security requiremiienits ot lenders. Lenders' loan equately. security packages olten includce a mortgage over a project's land or fixed assets, the assignimlenit of major Legal Framework agreements. such as the concessioni agreemenit, share pledges by the spolnsor. and share rctcntion agree- Several countries with successful PPI programs have a ments. clear legal framework for approval and award of Hungary, Chile, and the Philippines have enacted cross-sectoral concession laws and regulations to define entry conditions for private investors in infrastructure. The laws include: * Clear rules on the sectors open to private participation; * A definition of which government entity has authority to award concessions; * Rules on the requirements for open competitive bidding; and * Rules on the circumstances under which concessions may be modified or canceled. Such laws may require complementary sector-specific legislation and more detailed specification of sector-specific norms within concession contracts. But they enhance certainty for investors; reduce the scope for inconsistency, corruption and "capture" by interest groups; and signal government's commitment to PPI. 50 F NANCING PRIVATE INFRASTRUCTURE Foreign lenders often find it easier to finance conces- * Contriact ei/f ilemeflt a1/l disputs' ettlement. sions that include provision for arbitration under an Contractual undertakings form the basis of a internationally recognized set of rules and in a neutral project's ability to generate cash tlow and location. For example. in a sample of seven power service debt. It is important to investors and purchase agreements, all included provision for lcnders that contracts be enforceable under arbitration in countries sucih as Britain, Australia, law. France, and Singapore, under rules of internationally recognized bodies, such as the international Chamber * C/ liti o/txl countel/pa/ei s. Government of Commerce or the International Centre for the support such as guarantees of contractual Settlemenit of Investment Disputes. performance ot state-owned utilities have been used in over half of IFC's powet generation Attracting Foreign Investors and Lenders projects. Difficulties have arisen where there were no mechaniismiis tor national governmnent Initially, most counitries have relied heavily on foreign support to support n(oncre(litworthy municipal investors and lenders to f'inanice their PPI programs. authorities. Governments may need to address several issues to stimulate interest and competition among foreign Coordiation. Reforms may be needed in tinianciers: several areas ol governmielt simnultaneously: a single ministry working on its own cani only * F weigi ('xch(nige comoertibilitv. The mismatch make limited progress. Some governments between local revenues anld servicing foreign have set up high-level units to coordinate debts worries financiers. In the absence of policy relormr. general convertibility, some countries have agreed to set up offshore escrow accounts or to WhIat should he the priority areas for relorm11? The guaran tee foreign exchange convertibility for a/' ser depends o0n the urgency for improvcd service, particular projects. the credibility of the current econiomic environmeilet, andl the *deal-breaker' issues idenitified by investors Ow'nerx hip requiremcnts. Countries that aiid len(lers. In some cases investor surveys and mandate part local ownership in infrastructur-e roundtables to encourage government-investor enterprises may reduce the interest of foreign dialogu.e have helpe(i to identily the critical areas (see investors. Box .5.S). * Asset sccunitY. Lenders seek to protect their Specifying Government Requirements interests through taking collateral security over project assets, usually in the f orm of a mort- Governmiienats can help create popular support lor gage. In some counitries, procedures for pri vatc entry by specifyinig mlinlimum investment levels registering mortgages over landI and fixed in the concession agreciiemnts, backed up by bonuses. assets are not well established, penalties, and ultimnately loss of the con1cessioIn for failure to perform. Such arrangements may help build * Tarii .subsidies x(cd adju/stnt ni(nI nechanisms. political support lor private entry as the public sees a Subsidized taritfs are a major obstacle to concrete pIoIm1isC of shorter waiting lists and better foreigii investors. Competitive entry based on sCrVice quality (see Box 5.6). the cost of delivered service is much more difficult if prices are artificially low. Many investors may demand temporary market protection in investors prefer sectoral price reforms to start return-this has been common in telecoms projects, before entry. Even if current tariffs are for example. However there is some evidence that as adequate, they may be quickly eroded by governments become more experieniced, the level of inflation or devaluation. Automatic tariff market protection otfered is falling, as illustrated hy adjustmenits that pass through certain costs three cellular pro jects in Sub-Saharan Africa: either wholly (for instance, fuel) or partly (for example, exchanige rates) help to depoliticize this senisitive aret. INTERNATIONAL FINANCE CORPORATION i ~ ~~~~~- -g In Central and Eastem Europe, potential investors surveyed for the FIAS-sponsored round table in February 1996 identified five main concerns: * Discrepancies between official policies in favor of PPI and practical decisions taken during implementation. Many ministries were unwilling to concede majority foreign ownership. * The unreliability of legal systems. * Political instability, and its effects on tariff policies, currency stability, and convertibility. * The lack of transparency and slow speed of project bidding and award procedures. * Local funding constraints. In China and Vietnam, investors attending country-specific round tables in 1994 and 1995 emphasized lack of a clear approvals/negotiation framework, currency convertibility, and profitability limitations as their main concerns. In several countries action has been taken to address the issues identified in the round tables. In China, for example, the government announced in early 1995 that it intended to put a new regulatory framework in place to attract foreign investment into the power and transport sectors. The State Planning Commission asked FIAS to advise on a draft decree on concession projects involving foreign investors. By May 1996 regulations emanating from this work were under final review by the Legal Committee of the People's Congress. * A cellular concession awarded by the govern- suggested that foreign-financed PPI projects in ment of Zaire in 1989 included exclusivity for developing countries represent an "obsolescing a thirty-year period. bargain"." The argument is that most countries prefer local ownership, especially in highly visible sectors; D A fifteen-year concession awarded by the foreigners are only acceptable if the benefits over- government of Uganda in 1993 was not whelmingly outweigh economic and political costs. exclusive, but Uganda Posts and Telecommu- While PPI pro jects may deliver such benefits in the nications Corporation agreed not to conclude first few vears, it is not clear that the benefits will still another interconnection agreement for at least be perceived by the public or government in the long two years. term. For example, infrastr-ucture projects do not generally earn foreign exchange or keep on introduc- * In Tanzania, a fifteen-year concession awarded ing new technologies. Meanwhile, the "costs" of by the government in 1994 was not exclusive, foreign ownership remain visible, in the form of tariff and a competing license was issued the adjustments and dividend flows. This argument has following year. been put forward as an explanation for the widespread nationalization (and creeping expropriation) of Building Effective Regulation: Maintaining foreign-owned infrastructure in Latin Amcrica and Convergence of Interests Asia during 1950-1970. If the interests of the government (representing This view may be too pessimistic. at least as long as consumers), sponsors. and lenders converge, then PPI governments are competing vigorously for foreign projects will be financed. Indeed, in well-structured, capital. Nevertheless political risks remain high in competitive projects the interests of government and many markets. There are some approaches that foreign investors converge: projects that are built on time and investors an(d lenders can use to reduce noncommercial expand and improve service yield benefits to all risks (see Chapter 7). But goverm-aenlt policies can also parties. But what about the longer term' It has been help: 52 FINANCING PRIVATE INFRASTRUCTURE Box 5.6: Concession Requirements Stipulated by Governments In addition to providing the company with the legal right to operate, a concession agreement often stipulates perfor- mance requirements. The concession agreement for a cellular telephone project in Hungary obligated the company to provide nationwide coverage by 1996. Aguas Argentinas' concession stipulates the proportion of Buenos Aires' population to be supplied with potable water and sewerage services by certain dates. In Mexico, the wastewater treatment contract stipulates minimum effluent standards, with penalties to be imposed if these standards are not met. Power purchase agreements generally stipulate that capacity payments will not be made unless plants achieve certain levels of capacity and plant availability. Although such requirements may not always represent the most economically efficient option (for example, the costs of connecting a remote area may be more than those users would be prepared to pay), they are politically popular. Furthernore, the incentives for concessionaires to meet the stipulated requirements are strong. Financial penalties may be imposed for nonperformance, and ultirnately the govermment may revoke the concession. In addition many concessionaires have international reputations to uphold, and recognize the importance of building a long-term rela- tionship with the government. Writing detailed procedures Jor dealing with Notes disputes oW un f)reseen ('vents into concession agreements is useful. For example, the power I. These examples are taken fronm several Private Sector purchase agreement for a power plant in CC6te Aswessments carried out by the World Bank and IFC, d'lvoire includes several levels of procedure and the 1994 V''rldl DDevelopiment Report on infrastruc- for dealing with disputes, with specified ture. amounts of time to be spent at each level. This l. Unbundling by production, such as electricity genera- allows as much opportunity as possible for tion. transmission, and distribution; by market. for sorting out problems amicably. instance, cellular, data transmission, international, long distance and local telephone serviccs: and/or by region. aEg'fectiv e r-eg,^ilatiotn to encourlage the dev elopl- .ffective regulation to .ncourage 'he develop- 3. Privatization' oftexisting infrastructure assets can nient of conpetitive nmarkets for the operation occur in various ways: (a) full or partial sale of of infrastructure services (for example. power infrastructure assets with long-term operating rights to pools as in Argentina) helps maintain strong provide service; (b) government retaining ownership ot' incentives for efficiency gains, which in turn the underlying assets, but issuing long-term concessions may influence public perceptions. for private investors to operate and invest in the service. Depoliticizing infrastructure regulation 4. IFC does not finance management contracts or leases as through independent regulators and clear rules they do not inv ne priatemintment. z- ~~~~~~~~~~~~~~thev do not involve new private investiiient. can help. 5. There are more shades of grey than this list implies. Promnotintg the developnment of local capital The complexity of most infrastructure projects means markets can help to spread ownership to the that some degree of negotiation is used in all bidding public (directly through public flotations, or procedures. And several countries that have used indirectlythroughpe nfund holdings). competitive bidding changed the rules midway through indirectly through pension the process. thereby creating broad domestic constituencies for continued private ownership and respon- 6. Wells and Gleason, "Is Foreign Infrastructure sible regulation. Investment Still Riskyv?" [larcd Business Review. October 1995. INTERNATIONAL FINANCE CORPORATION Mobilizing Finance Three trends are emerging in PPI financing: * New sources. Insurance companies are starting to finance PPI projects in developing countries. And official financing agencies. including export credit agencies, have set up programs to finance or guarantee private infrastructure projects. * Comenrcial hank filnancinLg has risen in the last two to three years as more banks become familiar with PPI. One indicator is IFC's expanding syndicated loan program. * Localfinancintg is increasing in some countries, although slowly and from a low base. In particular some sizable domestically owned infrastructure companiies are begin- ning to emerge. Two financing structure parameters identified in the 1994 IFC Infrastructure Report remain broadly the same in this larger samrple: C* A average 58:.42 debt-cquiity rati(h indicates substantial equity commitments are being made to attract debt. Put another way, lenders are ensuring that PPI pro jects are not overleveraged. * Two-thirds of proji ect costs ae hbeinIgfu iiancedfriom fi-eitgn souieces. Despite increases in local financing in some countries, this ratio is not falling because IFC continues to finance PPI projects in new count-ies with higher risk, where access to domestic long-term finance is normally very limited and reliance is heavier on foreign financ- ing. During the past two years IFC has focused on mobilizing more sources of debt by syndicating to more banks and by bringing in nontraditional debt financiers. It has also work-ed with international and domestic cofinanciers new to PPI financing. to give them enough confidence to Table 6.1: Debt-Equity Ratios finance projects. No. of Debt Equity projects (%) (%) Debt-Equity Power generation 36 65 35 Structures Pipelines 8 65 35 Telecoms 34 St1 49 Transport 25 53 47 The unweighted average debt- equity ratio of 58:42 for IFC's PPI All projects 115 58 42 projects (see Table 6. I' ) conceals some variations. There is more Source: IFC. equity in sectors facing significanti Note: Unweighted averages. Sectors with fewer than eight proj'ects are not shown, but ace inciuded in the totai. miarket risk (fot- inistance, rail- 1-*61_fi q II vA _ 1 I I Internal cash generation can be a significant source of financing for: * Expansion projects undertaken by firms with existing cash flows. In a US$402 million investment plan by a privatized electricity distribution company in Argentina, just under a fifth was financed from intemal cash. * Sectors where revenues startflowing early, andfurther construction can befinancedpartlyfrom incremental revenue. Telecoms networks are the main example. The financing plan for a US$85 million cellular network expansion in Jordan includes a US$20 million contribution from internal sources. Internal sources have accounted for about a quarter of the US$14 billion of "expansion" infrastructure projects fi- nanced by IFC. As more state-owned utilities are privatized it is likely that internal cash generation will become an even more important financing source. roads, toll roads) or where internal cash generation Financing Sources: Overview possibilities exist (see Box 6. 1). or in both cases. Put another way: debt is easier to raise where lenders Debt perceive market risks as low. The "take or pay" power purchase agreements underpinning most independent The financing plans of 140 PPI projects3 costing power projects have enabled them to mobilize more US$26.6 billion for which IFC has approved financing debt. Financial structures are defined more by project show that foreign commercial banks have provided a fundamentals such as market risk than by country risk. third of the tJSS16.1 billion of debt (see Table 6.2). Debt-equity structures in countries with different risk Export credil agencies (ECA) and supplier credits profiles show no significant ditference. accounted for a further US$3.7 billion of debt. Several Foreign and Local Financing On average, 67 percent of the financing in IFC's PPI projects has come from foreign sources. Although this sample is biased towards projects with international financing, relatively few PPI projects in developing 100 countries have been financed entirely domestically. 2 X Few domestic financial markets yet match the cost or tenor of financing provided by international markets. a 60 40- PPI projects in countries with higher risk have more foreign financing (Figure 6. 1), probably because of 20 - underdeveloped financial markets. Countries are 0 perceived as risky by foreign investors because of Highest Medium Lowest macroeconomic instability (including debt arrears), or risk risk risk due to special factors such as war. Either way, domes- tic financial markets tend to be stunted.' Five PPI projects financed in Sub-Saharan Africa averaged a 89:11 foreign-local split, while thirty projects in Asia U % foreign O % local averaged 67 percent foreign and 33 percent local (Appendix Table A4 summarizes financing, structures). Note: Grouped by Institutional Investor scores. Under 25=highest risk (30 projects): 25-40=medium risk (52 projects); over 40=1ow- est risk (27 projects). 56 FINANCING PRIVATE INFRASTRUCTURE Table 6.2: Sources of Debt and Equity: IFC's Projects Total % of Total % of Debt (US$bn) total Equity (US$bn) total Foreign Foreign Foreign commercial banks [1] 5.6 21 Private foreign sponsors 2.6 10 Export credit agencies 2.0 7 IFC equity 0.8 3 Supplier credits 1.7 7 Other multi/bilateral 0.1 0 International bond [2] 0.5 2 IFC loans 2.2 8 Local Other multi/bilateral 1.3 5 Private local sponsors 2.8 10 Local publicly owned 0.0 0 Local Local commercial banks 2.7 10 Internal cash generation 4.2 16 Local publicly owned banks 0.1 0 Total debt 16.1 61 Total Equity 10.5 39 Source: IFC. Notes: [1]: Includes US$3.8 billion under IFC B-loans. 121 For the Bangkok mass transit project, but the issue had not been made by June 1996. ECAs have set up specialist project financing units Equity during the past two years, including the Japan and U.S. Eximbanks. Results have become evident quickly. For Foreign sponsors provided a third of total equity, local example, by March 1996, the U.S. Eximbank had sponsors a quarter. with the balance coming from approved US$2.7 billion of lending to twelve projects internal sources (see Table 6.2). Some local sponsors and had a further twenty transactions worth are investing large sums; in five IFC projects local US$4.7 billion in the pipeline. In 1995 export credit sponsors invested over US$100 million each. Their agencies from the UK. France, and the United States increasing importance reflects: lent about US$X0() million to the US$1.4 billion Sual power plant in the Philippines. Other official financiers * Local firms diversifying into infrastructure as have recently also become much more active in private opportunities expand. Examples include the infrastructure financing; Appendix Tables A7 and AX RPG group in India and Socma in Argentina list PPI projects financed by several multilateral and (see Box 6.2). bilateral official financing agencies during 1993-95. Privatization of utilities, which creates sizable A further US$2.7 billion of debt in IFC's sample came locally owned firms (or part local). from local commercial banks. Local mobilization depends both on domestic financial markets and the e The desire of foreign sponsors to include local borrower. Domestic banks often prefer to finance companies in their consortia. to reduce companies with existing cash flows, so utilities such as political risks. For example, the consortium the Hungarian telecoms company or private electricity that manages the water supply concession in distribution companies in India. have mobilized local Buenos Aires has both local ancl foreign financing. Sometimes local banks come into a project partners. after it starts operating. For example. a Hungarian cellular telecoms company refinanced its IFC loan after the network had been in place for four years. INTERNATIONAL FINANCE CORPORAT ON .;s . !; 0* - * 0_i-1* f Through three subholding companies, Argentina's Socma group invests in infrastructure, environmental services, telecommunications, and food. Following Argentina's infrastructure privatizations, the companies have embarked on investment programs totaling over US$700 million, including construction and operation of a toll road, gas distri- bution, and water supply. IFC invested US$15 million in one of Soema's companies and provided the group with a US$25 million loan. Construction of a major toll road that the group is managing has been completed. Following the onset of the regional Mercosur trade agreement in 1995, the group is also considering expanding its infrastructure operations to other markets. This type of investment-from firms in one developing country to an- other-is increasing. For example, the consortium that purchased a 51 percent stake in Edesur. an electricity distribu- tion company in Buenos Aires, included three Chilean energy companies. Commercial Debt: Why Is It equity investors typically expect (although Difficult to Mobilize? don't necessarily achieve) returns oftat least 15-2(0 percent when they invest in developing countries. So lenders seek to reduce a project's Mobilizing an adequate volume and maturity of risks by negotiating the coniditions under commercial debt is a key constraint in many PPI which thcy will participate. Many of the projects for several reasons: agreciiments associated with project hniantticings are risk (ontrol devices itnposed by lenders. Hi,nghi demand, cautious lendeis. For sponsors Lenders often have the strongest say' in how to realize adequate equity returns, thcy need to finanicing isi to be structured s hoW support mobilize significant volumes ofi debt- - ~~~~~~~~~~~agreemenlts 1irom sponsors, governmnent typically about two-thirds of the financing. Yet agencies. and other contracting parties are lenders have to be cautious. They' face many of the same risks as equitv investors, but without cverin aim on ssets arevseous covel-il18 claliils on assets are set out (see Box the upside potential. There are limits to how 63). far loan pricing can be pushed. In contrast, W.Wtv lorcigUn. so evra haird/cs. Because domiestic financial markets cannot mobilize _0 * large volumes of long-term debt, sponsors turn tio loremgeln lenders. But this requires mitigating exit-.t risks that the oovernmenet controls. such Lenders look first to the adequacy of a project's er cash flow to service the loan, including under ad- as the availabilily o fioreign exchange. verse scenarios. Loan security packages provide a second line of defence. Typical elements in- Pmn0'iio0ine ;-eaL requiemen;ts. Scarred by the clude: 1 980s debt crisis, commercial banks arc now require(l by regulations in miost OECD countri-es to make specific country provisionis * Pledge of shares by the sponsor for loans to certain developing countries * Share retention agreement A linmitcd pool. Fewer than fifty banks world- wide have a strong tr-adition ot' project financ- * Assignment of major agreements for con- ing, in dleveloping countries-although more cession and fuel supply have enter-ed the market recently. Each bank * Assignment of insurance proceeds has exposur-e limits to clients, sectors, and countrties. And organizing syndicaitionls of * Financial covenants lenders is timle consuning anid comnplex. 58 FINANCING PRIVATE INFRASTRUCTURE Tim1e protile of'deposito. Commercial banks But there is a silver lining. While lenders' require- cannot prudently lendL large volumes of long- ments add to the time and complexity of arranging term debt: the longest international coinmer- finance, the risk controls they impose often improve cial bank loans are typically seven to twelve the chances of project success. These benefits show up years. Yet many infrastrutcture projects require in plojects that are not overleveraged, in realistic long-tenr finzincinig if the tariffs to service the sponsor and government support agreements, in debt ar-e not to be prohibitive. Institutional mninimum cost overruns and in specified performance sources with long-term depositors, such as standards upon project comipletion. These outcomes pension funds anid life assurance companies, occur where investors have their own capital at risk. provide a better maturity-but are only now where returns are linked to performance. and where starting to lenid in developing countries. These contractual undler-takings providle incentives. IFC's institutions have become mra jor linanciers ol' experience indicates that a combinatiao of risk finance PPI projects in some OECD countrics. In the and performance-linked contracts providles the best United States, for example. m.tjor insurers chnce of achievinig success with PPI projects. developed their pro ject financing capability in the mar-ket folr indepellndelit powel- projects that emerged in the 1980(s. Debt Mobilization through IFC- R ,sticfi on potenltial Jiio,/i,,k locail Syndicated Loans lenders. Pension funds and insurance compa- nies exist in many developinig countries and IFC's syndicatedloan program (see Box 6.4) to PPI potentially represenit a largc source of PPI projects began to take ofT in fiscal 1992. Between financing. Yet this potentiall is not being met. f'iscal years 1992 andl 1995, US$963 millioni of loanis Many are publicly ownied monopolies and are were sigend for twenty-five projects. with a further poorly managed. Many countries also require LIS$691 millionl signed lor eleven projects in fiscal pension funds and insurers to invest mostly in 1 096 (see Tablc 6.3). Over 10() financial institutions governmienit securities. (nearly, but nol quite all. commercial banks) from twcnty-six countries have beeni involved to date. Append(ix Table A3 lists syndicated loains by the year in wihich they were signed. Box 6.4: IFC's Syndicated Loan Program Most commercial lenders look for some risk cover when taking new long-term exposure to developing countries. IFC's syndicated loans (the B-loan program) is one form of cover. Under a B-loan structure IFC becomes the sole lender of record to the project, acting on behalf of both itself and participating banks. IFC is responsible for process- ing disbursements by participants. and for subsequent collection and distribution of loan payments received from the borrower. This structure offers several advantages to participating banks: * Likelv access toforeign exchange: While there are no guarantees of access to foreign exchange for debt service, no IFC loan, including the portion funded by participants, has ever been included in the general rescheduling of a borrowing country's foreign debt. * A strong historicalperformance record: Despite investing in sometimes difficult country environments, IFC's projects have demonstrated a strong repayment record, with very few loan write-offs. * Regulatory benefits: Partly on the basis of this record, bank regulators in most OECD countries exempt B-loan participants from country-risk provisioning requirements. B-loan participation is not open to official lenders (including export financing agencies and official providers of political risk insurance) nor is it available to domestic lenders. Project loans from these sources are arranged on a cofinancing basis. INTERNATIONAL FINANCE CORPORATION _ _ _._ 1_ New Lenders: Insurance Companies 1992 1993 1994 1995 1996 Several nonhank t'inanicial institutions. No. of projects 4 4 8 9 11 Amount (US$m) 172 90 326 375 691 such as GE Capital and Transamerica Avg term (years) 7.0 7.5 7.2 7.4 8.6 Leasing, have recently participated t'or the I i-st time in IFC's PPI syndicated loans. Source: IFC. SinlCC JUl' 1995, howevcr. a nlew break- through has been achieved, with several synidications of PPI prOjCects to insurance . . . (~~~~~~~~~~~~ompanies. The large volumels of calpital The main participants have been from Europe (see nompanied. by in re thiS oa Table 6.4). Several tranisactions have been supported 1m tent tcen'. by global banks such as BNP. HSBC, L)BS. and ABN- important prcedent. AMRO. ING Bank of the Nethela-naids has been. Sua poIw cr7;1e, Phlilipp/incs. A l SS4()m loanl witlh particularly active, leniding US$ 185 Ilillioni to thirteen proJects. Some syndications have also been made to aI wals pros ided( by Prudenitiall Power to a banks based in developing countries. such as the ..ld pro ject (see Bo . Czech Republic. Jordan. Korea, and the Philippines. nnm-. greel * Ai'u Alrv 4c'n'1ti7a.$, oak')lb1 di.ltl'huu/o/, ./tl ,'en- Several syndications have served as path breakers (see tino. 1FC closed a loan with two insurers Box 6.5). Two syndications to Aguas Argentina (the takig LS$35m of exposure in twelve-yea oncessionaire providing water and sewerage services fixed-rate loans. in Buenos Aires) were the largest to a private borrower in the country in recent years: US$1 35m in November Tri ooo, 'WS distribution, Ar-tina. The 1994 and USS173m in March 1996. In addition, one - twelve-s ear. U S$2 15 million syn1dicationl of the syndications represented the f'irst tine that a sged ear JUly 216 t iluded fourteenLitS. , a , r .. .. ~~~~~~~~~sigicc( ll JulvI )t)(l iiclucled fUteu-cri LI.S. Japanese bank had lent to an Argentinian firml on a r s l long-ter-m basis since the I 980s debt crisis. And a date. thirty-two-bank, USS300m syndicationi under prepara- tion to an Indonesian telecoms pro ject is expected to be one of the largest to a private borrower in that country. Debt Cofinancing About half' o the debt in IFC's projects comes from cofinanciers: otficial lenders, such as export credit agencies, multilateral and bilateral developimient institutionis, domestic lenders, and foreigni commercial lenders who participate outside the B-loan prograim (Box 6.7 shows an example). Cofinanciers have played a larger role in IFC's Asian __ -projects (accounting for over three- quarters of all debt) than in Latin Country US$m Organization US$m America, wherc over half of the debt has comle froimn IFC's lenlding and syndica- France 312 ING Bank (Netherlands) 185 tions. on average. Netherlands 276 Societ6 Generale (France) 74 Germany 157 Swiss Bank (Switzerland) 73 Switzerland 118 Credit Lyonnais (France) 56 In several cases other officiallenders have United States 101 BNP (France) 55 indicated that they would not support a project without IFC participaltion. This Source: IFC. was the case with the participation of the 60 FINANCING PRIVATE INFRASTRUCTURE Box 6.5: A Record Syndication in Eastern Europe: Hungary Telecoms In September 1995 IFC, EBRD, and Deutsche Bank jointly arranged a US$300m syndicated corporate loan to the Hungarian Telecommunications Company (Matav). This will help finance Matav's US$900 million 1995-96 invest- ment program. The financing package includes: (a) ten-year US$50m loans from both IFC and EBRD; (b) eight-year loans totaling US$100m syndicated by IFC and EBRD; and (c) US$100nm of parallel five-year loans provided di- rectly by commercial banks to Matav. At the time the package represented the largest syndicated bank financing in Eastern Europe. A total of thirty-five commercial banks from ten countries took part in the syndication, including one from the Czech Republic. The facility was structured so as to enable Matav to continue to access the medium-term market without the umbrella of multilateral organizations, while encouraging commercial banks to extend the average maturity of their loans through participations in the EBRD and IFC B-loans. Japan Exim bank in one of Pakistan's first private counitr-ics, accouniting for just over- 2( percent of total power projects, AES Lal Pir. The pro ject reached project debt. Much of this has been concentrated in financial closure quickly (just seven months after the corpor-ate loans to local utilities, such as private main sponsor formally agreed to dcvelop the project), electricity companiies in India and the privatizedl with the Japan Exim banik providing an untied guar.tn- telecoms compatnies in Chile andi Hungary. There are tee for up to 95 percent of the commercial loans (the also examples of local banks providinig financinig to first untied guarantee ever to a BOO power project). new projects (see Box 6.8) In many cases the local banks were financing their first PPI project and so relied on IFC for much of the necessary diligence. In Domestic Debt the f'irst Costa Rica indlepenidenit power project, fior exatmiple, IFC helped bring in a local bank. Banex. And Local banks are providing some loans to PPI projects. IFC helpecd fouL local banks to lend US$15 million to Indeed, in IFC's PPI projects. local banks have the first independent power project in Om. contributed to fifty-five projects in twenty-one Box 6.6: U.S. Insurers Entering the International Market: Prudential When America's energy generation market was liberalized to allow entry to independent power producers in the early 1980s, major insurance companies started financing power projects. Now they are starting to extend their activities to developing countries. Regulatory changes have helped: U.S. insurance companies can now invest up to 20 percent of their assets in markets outside the United States and Canada, up from 6 percent a iew years ago. Prudential Insurance illustrates the trend. By 1995 it had lent US$4.5 billion to over 100 U.S.-based private power projects. Most of this was nonrecourse debt, provided both to greenfield projects and as take-out financing after construction. As growth in the U.S. market has slowed, Prudential has looked overseas. It expects to have 10-15 percent of its portfolio in non-U.S. markets within a few years, spread across several countries. Prudential looks for several aspects when considering a deal: * A cooperative alliance with a multilateral agency such as IFC, to reduce risks. * Strong track record of sponsors. * Good economics: the project must make sense for the country as well as investors. * A legal environment where contracts are enforceable. INTERNATIONAL FINANCE CORPORATION 61 At 34 kWh per year Nepal has one of the world's lowest per capita electricity consumption rates (India 300 kWh, China 580 kWh). Only 10 percent of the population has access to electricity. Nevertheless, rapid demand growth in recent years has led to load shedding. In 1992 the Nepalese Parliament enacted legislation that allowed private parties to build, own, and operate hydro power projects. In June 1994, IFC's Board approved financing for the first private project, a 60 MW run-of-the-river plant. Financing closed in February 1996, after detailed negotiations over tariff levels. The US$140 million cost is financed partly with US$99 million of debt. IFC is providing a US$28 million senior loan and a US$3 million subordinated loan. The Asian Development Bank is lending US$31 million of senior debt and US$3 million of subordinated debt. The Norwegian aid agency, NORAD, is making a US$5 million loan and guaranteeing most of a US$29 million loan from Norway's export credit bank. This project is the first time that NORAD has provided financing for a project without requesting a government counter-guarantee. The Nordic Development Fund is also investing in the project- US$3 million in an income participation note. This is the first time that it has invested in a private project. The successful negotiations on this project set a precedent: in June 1996, IFC's Board approved financing for a second hydro project. Much still needs to be done, however, to enable more Creating contractual savings vehicles- local debt to reach PPI projects. But the problems are penision Iftunids and insurance companies- not infrastructure-specific. Long-term debt does not helps to mobilize long-termn (omestic savinigs. exist in many countries because: macroeconomic instability dissuades savers from holding domestic Private infrastructure projects can serve as long-term financial assets; government ownership/ suitable assets for those contractual savings regulation of financial institutions distorts financial vehicles to hold. markets; fiscal deficits crowd out private investment; and inadequate legal frameworks make lending risky. In several countries IFC has helped to promote Countries such as Malaysia and Chile have showni domestic savings mobilization through setting up what policy reform can achieve: pension fund maniagemenlt companies and insurance companies (see Box 6.9). A stable macroeconomic framework, with low inflation and low fiscal deficits encourages private savings to be used for private invest- Bond Issues ment. A few of the private infrastructure companies that IFC has financed have tapped international bond markets, In December 1993 Panama's Legislative Assembly approved a twenty-year concession for the country's first private container port. IFC provided a US$25 million loan to the US$1 11 million project, and syndicated a further US$35 million, including over US$20 million to two nonbank financial institutions: GE Capital and Transamerica Leasing. IFC's presence also gave enough comfort for a syndicate of Panamanian banks to lend US$ 10 million to the project, a first in Panama. The terminal started operating in July 1994 with barge and roll-on/roll-off services. Container operations began shortly thereafter in November 1994. By early 1996 market response had proven so strong that the sponsors were proposing a further expansion of capacity, to be financed from internally generated cash. 62 FINANCING PRIVATE INFRASTRUCTURE Box 6.9: Pension Fund Managers in Peru and Argentina In December 1992 Peru approved a new private pension system modeled on that of Chile. It offered workers a voluntary option to opt out of the state-run pension system into a privately managed contribution-determined system. In September 1993, IFC invested US$0.7 million for a 7 percent share in one of the new pension management companies. Two years later this company, Horizonte, had over 250.000 contributors, nearly a quarter of the 1I.1 mil- lion subscribers to the new system. Horizonte had achieved a real annual return of 8.3 percent and had US$130 million under management. The overall system is well established, with over US$500 million under management and con- tinuing growth in the number of contributors. In July 1994 Argentina instituted an integrated pension system that combines state provision with a new private system. By late 1995 about four million people had subscribed to the new private system. Total funds under manage- ment had reached US$2.2 billion. After financing a feasibility study, IFC invested in one of the leading private pension managers, Maxima. By 2004 Maxima expects to be managing nearly US$5 billion in pension funds. although IFC has only been involved as an underwriter * Good ecoiionoics: in 1995 the plant was the in one deal (a US$207 million revenue bond in 1992 lowest cost indepenident power generator in the for a Mexican toll road that was already in operation). country, averaging 6.4 cents/kWh. Some companies have approached IFC for financing. but later decided to use the bond markets (for instance. Telecom Argentinia launched a US$500m seven year Private Equity Funds bond in 1993, and the MI/MIS toll road in Hungary was partly financed by a local bond issue underwritten Niost equity for PPI projects bas cone from primary by' EBRD). *sponsors, cosponsors (for instance, suppliers. finanicial distitutions). antd internal catsh generationi. Neverthe- Although a few greenfield projects in developing less, several private equity f'unds have beeii set up to countries have tapped international bond markets, invest specifically in ifrastructure projects. And bond financing has mostly been available only to large ieversl other fulls have been set up to ojcus On a projects with strong sponsor and government support 0ountry or region with an expectation of investing in arrangements (often past the construction stage) in fPI proeclts. Private e funs enable somiePIpojet.P-vte equity unseal countries with an adequate sovereign rating. An institutional investors, such as penision funds, to invest unusual' bond issue lor at 185 MW barge-mounted in PPI projects while retaiiiiiig the benefits of risk power plant in the Dominicaii Republic is an excep- diversilication andl proiessional fund iiianageiient. tion. In July 1994. IFC's Board approved IFC and syiidicated loans totaliiig US$82.5 imillion towards the The funds have raisedl large sums 'romi iiivestors: US$204 million project (the largest syndication for a approaching li 1.5 billion just for those in which IFC private project in the country). In February 1996 the has invested. The only perfornance indicator available project's sponsors. Smith-Enir-on, issued a ten-and-a- sn tar t'or the funds is their ,ute of i/11.vrnlcn11 which half-year, US$50 million bond guaranteed by the U.S. has varied considerably (it will be another two to live Maritiiiie Adminlistration (MARAD). This was the first vears before the perforiiianicc of returns is knowii). tinie that MARAD had financed a dleveloping counitry Sonic lunds have invested rapidly and have raised project. The features that enabled the bond financing to fiurther monies from investors. Other funds have close included: invested miore slowly than originally cnivisaged. Three lactors have aff'ected iiivestimienit rates: * Security on the barges. which could be towed away in the event of a default. * Thle / oI( of gan1'C)/1flIt JWi i_tiOtIO 011(1 ref wtn, which determines the size of the * Confidence arising from the presenice of potential iivcstment pipeline. official lenders (IFC. CDC. and DEG), strong sponsor support. and internationally renownedl equipnient suppliers. INTERNATIONAL FINANCE CORPORATION 63 .. . I - S In 1994, IFC invested US$50 million in the Asian Infrastructure Fund (AIF), one of the first funds established to target Asian infrastructure. IFC helped to structure AIF and define its investment policies and exposure guidelines. IFC's presence as an initial investor and its shareholding in the fund's manager increased AIF's marketability, help- ing it to mobilize US$500 million from major institutional investors at its first closing. By end-1995 eleven invest- ments totaling US$538 million had been approved in power, transportation, and telecommunications projects in China, the Philippines, Indonesia, and India. Investors were impressed: a further US$280 million was raised in early 1996. AIF's success in mobilizing capital and closing deals is attributable both to the contacts of its sponsor group and its managers' business strategy. Priority has been given to projects with quality sponsors, to building businesses rather than investing in discrete projects, to involving local partners, developing projects from the earliest stages, and using the political confidence conferred by the participation of IFC and ADB in the fund. Competition fiom otheIr fil(na iers. Sonie since the I 960s. And, the Indian power utility. Tata lenders demand equity as part of their price for Electric Companies, was the first private company in supplying long-term debt, thus squeezing out the Indian power sector to access international capital opportunities for private equity fundcs. Fundl markets throu-1h a lS$75 million GDR issue in managers have sometimes fotund themselves at February 1994. which IFC lead managed with a disadvantage where sponsors are seeking to Goldman Sachls. finance a project with as few financing sources as possible, to reduce complexity, timie, and However, the picture is broader. Access to portfolio costs. equity lor all issuers in developing countries has improved substantially as local stock markets have Fund manager experience and nin,cstor opcned up to international portfolio funds. IFC has connections. Fund managers who bring good invested in over thirty such funds between 1986 and industry contacts-to complement financial 1995 and hais played a major role in promoting themf. contacts-are important (see Box 6. 10). The relatively large size and high profile ot inilastruc- Experienced managers have proven able to ture companies mealns that their shar-es are often adapt to external changes. For example, the relatively liquid and attractive to portfolio lundIC Central European Telecoms Fund was origi- managers. For example. the l'irst foreign portf olio fund nally expected to invest heavily in local targeted at African markets, the Africa Emerging telephone concessions in Hungary. The Markets Fund, had by endl-1995 invested in an concession winners demanded vcry high electricity distributioni company in Kenya, Air premiums for outside equity investors, Mauritius, and two companies with interests in however, so the fund focused on developing developing the port in Mauritius. local telecoms opportunities in PolaLn(d and the region. Mobilizing Local Portfolio Equity International Portfolio Equity The improvemncits in stock market size and liquidity that canl arise from i flotations of large infrastructure Because private investment banks have generally been companies are increasingly well recognized. Yet most willing to underwrite international equity issues by flotations in developing countries have so far been infrastructure companies, IFC has restricted its confined to upper middle income countries, or underwriting work in the sector to pathbreaking telecoms companies, or both. One recent exception is projects. An ADR issue in 1990 for CTC. the Chilean the sale in earlI 1996 of Kenya Airways. which telephone company, was the fi-st Latin American issue inclLided an ottering on the local market (see Box 6.1 1). 64 FINANCING PRIVATE INFRASTRUCTURE Box 6.11: Privatizing Kenya Airways In the early 1990s Kenya Airways was saddled with debt after years of losses. As the situation approached crisis point, the government decided to take drastic action and replaced the entire board, giving it a mandate to privatize the airline. Over the next three years the board restructured the airline's operations, management and labor force. It then approached IFC to cement these changes through privatization. The govemment wished to achieve a politically acceptable ownership pattern balancing the benefits of a foreign strategic partner against the desire to have local majority ownership. This was a business imperative as well: bilateral route rights depend on the airline being owned substantially by Kenyans. IFC identified a divestiture policy to meet these objectives. In January 1996 a 26 percent stake was sold to a strategic partner, the Royal Dutch Airline KLM. Kenya Airways' shares were then listed on the Nairobi stock exchanges, in an offering that was substantially over- subscribed. Kenyan institutions and individuals acquired 34 percent of the shares, international investors 14 percent (in addition to KLM's 26 percent), airline employees enrolled in a special program to purchase 3 percent and the government of Kenya retained 23 percent. The privatization involved the largest public offering on the Nairobi Stock Exchange and was the second largest privatization to date in Sub-Saharan Africa. Kenya Airways now has more shareholders than any other company in the country-the domestic offering was eventually taken up by 113,000 different shareholders, of whom 78,000 received the minimum shareholding of around US$200. Many Kenya Air- ways' employees also subscribed to the offering, independently of their special program. Very few greenfield PPI projects have includcd a ties are usually amilong the most liquid on the domestic public offering as part of their finanicinig plan. One market. Infrastructure privalization offers opportunities example among IFC's projects is an independent to the local population to participate in the dlomestic power project (IPP) in Oman-actually the first IPP in stockn market. Figure 6.2 shows that the increasing size the Arab Gulf region. The United Power Company was of stock markets in developing countries in recent established in 1994 to constIuct a 90 MW power plant ycairs has been paralleled with a quadrupling in the and 186 kilometers of transimission lines to nearby share of infrastrUcture stocks on those iyarkets, from towns. In late 1994 the comilpaniy ot'fered 40 percenit of' under 5 percent in 1989 to jtLst under 210 percent by its capital on the Omani SecuLities Marlket in a 1 05. Iiil'n-astructure privattizattioni has clearly played an US$30 million issue. The issuc W.as oversubscribed by important role in the expansion ol' these markets. about 10 percent and the allocation was made such that small shareholders received their tull bids. Other local The large size ol' PPI projects and their high political financiers also contribtIted to the US$222 million profile means that they can serve as "ccredibility l'inanicing package: local sponsor-s contributed markcrs" for foreiLn investors. For example. Hungary US$ 16 million of equity and( local banks lent has receivedl hy f.ar the highest loreign (lirect invest- US$15 million, meait per capita in Central and Eastern Europe partly because of its broadly-based program of' infrastructure pri\ ati/ationi' (sec Table 6.5). PPI-relate(d projects Accessing International Capital a.ccount fOr a hi-h share of the largest l'oreign invest- and Domestic Market ments in the counitry to dlate. Furthermore the figures in Tablc 6.5 exclude privatizations ol' electricity and Development gas companiies made in 1995, as well as a further sell- dow n ot' the government's share of the telecommunica- Private financinig of infrastructure, access to interna- tions company. tional capital markets. and the developimenit of domes- tic financial markets ofteni occur in parallel. InfrastrLic- Appendix Table A 12 shows some indicators relating to ttire companies are often among the largest firms in a access to international capital and stock market country. Their high profile and relatively stable catsh dexclopinent for ten developing countries that have flows make them attractive to local and foreign lenders promoted PPI in recent years. Despite considerable and investors. If they are publicly tradedl their securi- dil'lerences between coLuntries and changes fronm year INTERNATIONAL FINANCE CORPORATION 65 ~~___ --.--- 25 -s 2Nj o 1,000 / o t2 U)~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~U 1, 500] _ 5 o~~~~~~~~~~~~~~~~~~~~~~~~~oI 0. 0 C 1989 1990 1991 1992 1993 1994 1995 *Total capitalization (US$bn) r 00w % infrastructure stocks Sour (e. Emrerging Markets Database. IFC. k ~~~~~~~~Notes __ u 1. Th~~~~~~~~~Flc \wcigltced aver;age was shimilar- (61:39'. 'Fil inujiiber CFumulative FDI oi pro ject, t'or which dicht-cqluity ratil)s were calceulated 1990-94 is slkigiitl, lhelow IFC's totall. hec;ause transacetionis sucli (US$ per capita) as rig11lts N>sues wei-c excltidcd(. Hungary 671 1'. File ;lssocuatioll betwcein low i/l('otnc couliitries z;uld Estonia 295 lowei shatics ot'loe.tl f'inancini is weaiker than (fie hiiigh Czech Republic 289 (couwrly-ri,;k-- low local-financllim, orekirc tion. This, Slovenia 178 SLJLt ests th.tt lovw-incom c ouiilries m;inintainimig Latvia 92 inacroteconiornici stahility ale- likcly lo have be(ttc- Slovak Republic 84 developedl i'ilanulial sector-s and( to he able to raiiwsoie SIl Lithuania 46 loc;ll 'linal.icing fl-o private hni'-asnutrUCtU FlroiCCIS. Poland 40 Croatia 38 3, Exctiude.s inl'ra.trutuewre funds. aprepovalls lot righlts Albania 38 iSSLWS, andt otlier nonproJect arppiovalls. Romania 26 Bulgaria 22 4. Because M1ARA D is a t l.S. gokverninlenlt agenlcy, the pro~jcct (litl niot access pi ivate calpitawl marikets. Never- thleiccs, it *vais the i'iilSt tiiiie th;at MARAD had( t'itiaiicedi Sourcze: IFC. a dC\ ClnirinL cottLny p-O jeet 5. SCC ''h1VC1t1nl1elt Fuliids in Enmergi.,im Markets," IFC's l.cssons (A' Expericnecc Series, No. 2 (Septembler It)96). . . . , , , ( .~~~~~~~~~~6 HILIngary FDI per Ceapit;t t'iguires ale- high l'or- othcr to year, it is apparent that counitries enioy Incesn .... resn.-1 sispi.t7tto tacy helioue access to internctional finiancial m-arkets and a develop- . .. on the salc ol'snrategic siakes to investors. Othier ing local stock nmarket. PPI is not solely r-esponsible l'or c... ounitrice that have dlonc ilhis. suchi ;is Esioni;a. also hatvc these changes, but it is clearly coilti-ibutiiig. .... igii Fl)l per cap)it;. Buit PPI dlIOVC HuIgL111,' s FDI figL'UrS Lul) SignMif'ie;0Vtiltly ulC-t 66 ~~~~~~~~~~~~~~~~~~~~FINANCING PRIVATE INFRASTRUCTURE 7 Managing Project Risks Etficient risk allocation and mitigation are cenltral to bringing infrtstructure projects to financial closure and to providing appropi;tte incentives during construction nid operation. Efficient risk allocation occurs where risks are assunedc by the paity best able to manage them. Projects may still be financeable if sotme risks are not allocated according to this principle, hut costs-and ultimately tariffs -will be higher. Sponisors and lenders expect higher rewards for assuming highe- risks. Mobilizing debt is particularly sensitive to having adequattc risk management mechanisms in place. With at-risk debt supplying over halft of project costs. achievinig financial closure can be stalled if the risk management need,s of linc(lers are not met. Critical arcas for lenders include market risk, noncommercial risks, insurance arrangeiemits, lorce miajeurc provisions, and sponsor anid government support arranmgcents. Project financing has hitlherto been a fairly specialized field. For PPI to continue spreadiiig 3rapidly, morc government officials, investors, and lender-s will need to become faLmiliar with the risk mitigation and managemenit techiniques used by project financiers. Although mlore PPI projects are being financed (even in (lifficult country enviroiinmenits). there are still many project propos,als and awarded conceCsions that have not heen tinaniced. While soIm1e projects may not be viable, others are experiencing delays because the relevant players are inexperi- enced in structur-ing risks to cieate fiiianceahle projects. This chapteri reviews proJect r isk ;lmanaigemiient techniques usecd in PPI projects finanIcedL by' IFC. Giveni the importance of debt mobilization. the discussion focuises on risk manazgemelnt fromii a Icnch`l.s perspective. Lenders Face Three Risk Phases F endcrs judge the need for risk mamagement in line with their level of exposure to a project Three separate phases of risk are usuall identified (see Figure 7.1 ) * Construction. The project company draws dowIn the major-ity of' the loan to t'iianlce constructioni activity, equipmiienit purchase. and other preoperatiug costs. This phase can last several years. depending on the size of the project. * P-oject stirl-up. During this phase equipment is teste(l. raw material inpLits aire ordered, project stal'fing is cotimpleted, atn(d marketing starts. Loan exposur-e may rise slightly during this phase (lue to kk or'king capital requirements and fifinal payments to contractors and eqCUipmnent suppliers. Initial sales fromii project stairt-tip enable loan payolf to commence. This phalCse usuLally lasts aroun1d six months. :* Opration. Risk exposuLe dcclCiles as the loa.n is i'epaid. The length of this phase ain(d the rate at which exposure declines depenids on the repayment termns of'the loan agreement. The averag,e teci'm of IFC' loans to inltrastructulre projects has heen just under eleven years, made up ol' an average grace perio(d of three yealrs and a repayy- nment ter-m of eight years. a) Engaineer ng & c ~ Enierig&Start-up Opierations co construction phase phase Time The level of exposure faced by lenders does not developing countr-ies, and foreign exchlitige issues crop necessarily correspond directly to the risks involved. Up in many projects. The tesponse of lendre-s in turn Specific strategies are adopted at each stage of the depends on their appetite lor- r isk, appraisal capacity, project's life either to reduce the likelihood of adverse experience, and existing exposure profiles. events or to lay risks off to parties best positioned to manage them. Iiitiltftiooa(il lnve.stors have a lowcr appetite lor risk thian commercial banks. They preter Lenders view each risk in consideration of threats to lPI pro jects with existing cash flows andl either the project's cash flow or its security arrange- strong spoInsoIs in countries with conivertible ments. The principles ol project risk management are currencies. They may rely partly on rating the same for infrastructure as for other projects. agencies for appraisal aLid may prefel partici- although infrastructure presenits some additional pation from official financing agenIcies such as difficulties. Box 7.1 lists some pro ject risks anid risk IFC to help mitigate political risks. management arrangements. Although the list looks formidable, lenders focus on two key issues: * (Co n ial hanks have more appetite for risk, but miay \aly widlely in their appraisal and * Predictability of cashfliows. Projects tacing lenidingv c: pacities. severe market, nonpayment, or regulatory risks need careful structuring * Off/h ial /iliancing agencies may have more Iclcding caipacity and appetite for risk (reflect- * Track record. How credible and experienced ing their- mniildaites), but appraisal capaicities are the main players: the project's sponsors and risk-pricing strategies are evolving. and suppliers. the purchasers of the project's services, and the government regulating the environment in which the project is operating? Construction and Completion Several of the risks described in Box 7.1 may be Risk judged as severe for many PPI projects. Noncreditworthy state-owned suppliers or off-takers v l are common, the regulatory environmient is weak or or completioni risk. Instead they look to strong, evolving in most infrastructure sectors m most experienced sponsors for SLpport arrangements and 68 FINANCING PRIVATE INFRASTRUCTURE Box 7.1: Risk Management in Project Finance Risk to lender Risk mitigation arrangements Project Performance Prefer strong, experienced sponsors with significant equity stake. * High cost of service Competitive entry. Concession agreement stipulating costs and service quality stan- dards, backed up with penalties. Comparison with other similar projects. * Sponsors sell out Share Retention Agreement to tie original sponsors to the project. Project Completion Seek sponsor support until physical and financial completion certified. * Delays Construction/equipment supply contracts. Specify performance obligations with pen- alty clauses. Trade-offs between international and local contractors. * Cost overruns Project Funds Agreement with main sponsors. Include contingency and escalation amounts in original cost estimates. * Site availability Land Use Agreement Technology Prefer tried and tested technologies. * Nonperformance Performance bond/guarantee from equipment suppliers on quantity and quality. Op- eration agreement linking operating performance to compensation Fuel/other inputs * Fuel Supply contracts specifying quantity. quality, and pricing. Match term of supply con- tract to term of off-take commitment. "Pass through" fuel price changes. Consider alternative supply arrangements and on-site storage. * Skilled labor Training provided by equipment suppliers and technical advisers Market risk Undertake independent market assessment. Off-take contract specifying minimum quantities and prices (take or pay arrangements). Conservative financing structure. Payment risk Sell output where possible to creditworthy buyers. If buyer not creditworthy, consider credit enhancements such as (a) government guarantees of contractual performnance (if buyer is state-owned): (b) direct assignment of part of the buyer's revenue stream; (c) escrow account covering several months debt service. Financial * Debt service coverage Financial Support Agreement until D-E ratio reduced to safe level. Use 'worst case' to set up-front D-E ratio. Escrow accounts with debt service reserve. * Security Mortgages and negative pledges on project assets. Assignment of concession agree- ment and other relevant agreements. Share pledges. * On-going compliance Staged disbursements. Disbursement conditions and loan covenants. Accident/Loss Insurance policies and force majeure provisions Country Environment Risks lower where governments have adopted a clear policy framework for private entry, and where broader sectoral reforms have started. * Expropriation IFC accepts this risk (otherwise political risk insurance) * Regulatory interference Contractual arrangements-but some risk will remain. * Concession revoked Transparent initial award process. Some local ownership. Buyout clause. * Legal framework Change in law risk assumed by government. Contract arbitration in neutral location under rules of international body (for instance, ICC) * Environmental approval Independent assessment. Agree on guidelines, monitoring, and reporting; include in loan covenants. * Foreign exchange Agreement with central bank for forex availability. Offshore escrow account. Tariff adjustment mechanisms to maintain foreign exchange equivalent value of tariff. In- crease share of local financing. INTERNATIONAL FINANCE CORPORATION 69 contractors to whom the risks can be laid off. For Operational Risk example, in the Jamaica Old Harbour Diesel power project a turnkey construction contract between the The miain operational risk is that the asset does not project cormpaniy and Wartsila Diesel includes a fixed- operate etticiently. Concession agreements often liik price, date-certain contract with guaranteed output, payments to required perormance levels such as and fuel and lube oil consumption. Wartsila Diesel minhmum pou er plant availabilily, new telcphone or will be liable for liquidated damages should the water connections, toll road/bridge capacity or fault project fail to meet the coinpletion schedule or repail times. hor example, the powcr purchase guaranteed performance. In addition, the project agreemenlt for a power plant in Oman stipulates that company is providing completion support. project will have to pay penalties if the plant does not meet a 95 percent availability level during peak seaison Sponsors deal with completion risk by: and 90 percent annually. Lenders generally require project companies to cover operational risk through * Using fixed-price, date-certainl turnkey agreements with equipmenit and input suppliers. constructioni contracts contaiiio provisions maintenance ;tgreemn for liquidated damages if the cotactor fails insuratance toreentsu ad business interruptioi to ' prom(and bouss,o better (su nurich aSLiiis foir fuel supply agreements to L to peitorm pr onuses tmr tha power generator). Where the technical skills needed to expected performanice). ensure eflicieilt operation reside with the lead sponsor. lenders may require a miniilum ownership agreement. * Taking out business start up and other com- Goverinimients have the same interest. For example, the mercial insurances. terms of the Buenos Aires water concession require the designated techinical operator to maintain at least a 25 Building a contingency amount into the percent share in the consortiumi. In additionl the financing plan. consortiumn was required to post a US$15(0 million perforinmice bohnd as a guarantee ot its operational * Building in excess capacity to create head- ohlkitations room to meet contracted output levels in the event of- technical difficulties. Operational risk may arise through delays or failure c acscd hy other parties. Where the party responsible * Naintainlin. standby credit facilities, for the connection is a governmenlt agency. the oblications of that agency and remedial actions in the If a member of the sponsor group is also a supplier to event ot failure to perform. may be set out in the the project there may be a potentiall contlict of interest. *concessionl aereernent. For examilple in the Philippines This will be reduced if the project's regulatory Pagbilao po>cr project startup was delayed by six tramework definies tariffs directly. rather than in months due to the iability of the state utility to matke relation to ar rat oeturn on investment (in which n trirl coninections oin time. The issue was resolved in a case there might be an incentive to increase invcst- negotiated settlemcnt between the project sponsor and ment costs). Lenders can also mitigate the risk by: the utilit_ * Undertakin(g independent rcviews of contracts Because some operational risk is unavoidable lenders between the project companiy and( the supplier seek to protect their position through loan covenants to ensure that they are "arms-length" and designed to cisuie that the borrower manages the broadly competitive, project in a financially responsible manner (sec Box 7.2). * Requiring the project company to sign l'ixed- price, date-certaini construction contralcts, with penalties for nonperl'ormance. Market Risk * Requiring spolso5-s to retain their ownership of the project comilpanyv through the operal- Pro'jects opeating in unregulated comilpetitive markets tionlal stage. (tor instaince, soImle cellular operators) faceC malket size 70 FINANCING PRIVATE INFRASTRUCTURE risk, price risk, and payment Box 7.2: Loan Covenants risk (see Table 7.1). At the other extreme, power plants with take-or-pay contracts IFC requires borrowers to sign agreements that govern the use of project funds from a single buyer f:ace and the assumption of new liabilities during the loan's term. Loan covenants payment risk. Market risk is help protect the ability of the project to service its debt out of cash flow. They affected by market structure include: and buyer creditworthiniess. Minimum debt service coverage ratio (DSCR) Lenders use several strategies No cash dividends if current ratio falls below a certain amount to reduce their exposure to * Capital expenditure not to exceed a given amount per year market risk: * No additional long-tern debt if long-term debt-to-equity ratio exceeds a certain amount Inidependent p1p;ri.V;h. * Short-term debt not to exceed a fixed percentage of receivables and in- When assessing cellulaLr ventories projects. for example. * No guarantees in excess of a certain amount projects, for exatmple. IFC examines how, DSCRs measure a project's debt service obligations relative to its cash flow, cellular markets have and indicate whether it can service its debt. Projected DSCRs at IFC loan evolved in other similar- approval have been: counitr-ies, and uses conservative assu* ptions Projected Projected Projected f'or ovcrall miiar-ket Size avg. DSCR avg. DSCR lowest and miiar-ket share of the in year I in year 2 DSCR project companiy. Also. Power generation 2.2 1.8 1.4 market assessments may Telecoms 2.9 2.8 1.5 need to be cxtended to infrastructur-e that links to Overall average 2.6 2.3 1.5 the project. In a rail In all sectors, debt service coverage falls after the initial years as principal projectt foir example. IFC repayments commence after grace periods end. did not foresee that difficulties in turnaround times in a port at the cnd of the railroad might affect the traffic on the comilpetition f'rom roadl haulers, lull sponsor line. A port expert might have suggested a guarantees halve ensured continued debt complementary investment in warehousing service. facilities, to expandl the railroad's market share. * Jrst ow a(ccomals. These enable debt servicing to continue in the face of a temporary ftall in Limiting dlebt eXpo.sure. Debt-equity ratios are m-eveniues. A six-month (lebt reserve account lower for transport projects (averaging 53:47 was established lor a wastewater treatment in twenty-five projects) than for many plant in Mexico; this provedt usel'ul alter the indepen(lent power projects (averaging 65:35 peso devaluation rcducCd the foreign exchange for thirty-six pro jects) because they face equivalent ol' thc plant's revetiues. A dlebt greater market risk. reserve accounlt for a power plant in Comte d'lvoire goes further: it is otTshore and SPonsorg m,uarantces. Lenders may request denominated in foreign exchange. partial sponsor support to service the debt until the project is ccrtified as physically and Standl* .5 ' Sftt CV xtiredit. Issued by the financially complete (limited recourse purchaser- in favor of' the project, these servc financing) or full sponsor guarantees (corpo- the same purpose as a debt reserve account. In rate finanicinig). In an Argentine railroad where a Honduran power plant the power purchaser revenues fell below expectationis due to stiff issucd a US$4 millionl standby lettcr- of crcdit to the project. INTERNATIONAL FINANCE CORPORATION 71 IV - Market Structure Risk type Infrastructure examples Single buyer, take-or-pay agreement Payment risk Power generation, gas pipeline Single buyer, no take-or-pay agreement Demand risk Power generation in open competition Payment risk Power transmission Many buyers, no competitors Demand risk Water, power distribution Payment risk Monopoly telecoms, port. bridge Many buyers. and competitors Demand risk Competitive power, telecoms, port, road Payment risk * Goxw terroont ,i2zo ex *1 rot' rtc toul thc Ezeiza-Canuclas Highway; anld (c) their pertosrnince. Where payment risk is due to a ope-attiotn. Combining a greenlield and existing noncreditworthy state-owned entity, sponsors toll road allows the company to collect and lenders may request governmiienet guaran- revcnues durinig constructio-thus giVinlg tees of the entity's paymenit obligations under lenles mor-c comiortOl abLout debt servicc. The contracts signed with the project (see Box 7.3). existiti roadl has enjoyed high levels of untolled traffic in the past thus providing some * Go\vrllments somIetitmlefs butille n exjisting,' contidciice in trallic projections. asset into a c( onession to give lenider:s more cont dece. For example, in 1995, IFC's Board approved financinig for a toll road in Argentina Noncommercial Risks comprising: (a) the improvement of the existing 16 km Ricchieri Highway which Most PPI pro jects are heavily exposed to noncomnmler- connects Buenos Aires to the interna.ztionial cial and politicail risks, at both thc couintry and project airport; (b) construction of a new 3 i km roald, level. Noncommelncrcial risks arise where investors and All but two of the independent power projects financed by IFC to July 1996 have been underpinned by long-term power purchase agreements (the exceptions being a plant in Chile and another in the Czech Republic). In over 80 percent of these projects the power off-taker is a state-owned utility. Government performance guarantees of the state-owned utility's contractual payment obligations have been provided in the majority of these projects. Investors and lenders have sought the guarantees under two interlinked circumstances: * Where the state-owned utility was perceived not to be sufficiently creditworthy. * Where the tariffs charged by the state-owned utility are set by government agencies, rather than by independent regulatory bodies. The payment obligations of a state-owned utility purchaser typically include: (a) capacity and energy payments; (b) buyout in the event of termination due to a political force majeure event of a payment default by the state-owned utility; and, (c) damages, under certain circumstances. No government performance guarantees have been issued where the buyer is a private utility. And power purchase agreements with private utilities do not generally have buyout clauses. Government performance guarantees are a transitional device. They enable new investments to proceed while buy- ing the government time to implement the measures that will obviate their need: tariff reform, utility privatization, and independent regulation. 72 FINANCING PRIVATE INFRASTRUCTURE lenders have concerns about the stability and cotisis- loreigni exchange tcrmis) may help to tency of the government's economic and political depoliticize tarift' adjustmients. For cxample. policies that could affect the prospective investment. Hlungary uses a pricc cap tariff adjustment While some risks, such as expropriation or convertibil- regimie for regulatinrg telecoms tariffs. Sub'ject ity risk. apply to many projects financed by foreign to governmeint approval, tarilfs can be in- investors others, such as payment risk or regulatory creased twice a year by the change in the risk, are more infrastructure-specific (see Box 7.4). IProduccr Price Index, with a six-month lag. In arddition, taifIfs can be increased if the Forint Project sponsors or lenders caninlot remove these risks IS devalued faster than the change in the PPI. entirely. But several mechLianisins have been used to with the following lorimiula: il' the differenice is mitigate them: under 5 percent then no adjustment is allowed: il' over 5 percenit then tariff's may be increased CoFUrcM(al p1oYViNi0ons. Specifying 'auto- hv two-thirds of the diffcreincc. While this may matic" formulas in contracts or regulatory provide considlerable assurance, it is no regimnes for- adjusting tariffs in the face of panacea: governments may still deci(de to inflation or devaluation (or defining tariifs in ignore contractual agreemnents. Specifying Box 7.4: Noncommercial Risks Risks applying to most projects sponsored by foreign investors * Convertihiftt./tran.sfer. The risk that earnings generated in local currency can not be converted into foreign exchange in a timely manner and transferred abroad to meet debt service obligations and pay dividends. * Legalftamework. The risk that contracts and other undertakings may not be enforceable, that legal provisions for loan security may not be in place, and that effective dispute settlement procedures may not be adhered to or exist. l War and civil disatrbancce. The risk that the project will be aftected by politically motivated acts of war or civil disturbance. * Expropr-iation. The risk that government may expropriate the assets of the company without due compensation. "Creeping" expropriation-a series of acts over time which have an expropriatory effect-is a variation. Risks faced by PPI projects due to the close involvement of government agencies * Payment risk. The risk that a government-owned utility may not pay for project outputs. * Pefornmance risk. For example, the risk that a government agency fails to deliver fuel to a power project or fails to acquire land as per a concession agreement. Negotiating inter-connection agreements with state-owned op- erators is a major issue in telecoms projects. * Tariij'lisk. The risk that tariffs will not be adjusted in accordance with a pre-agreed formula in a contract, or by regulators. * Sutbsidized competition r isk. The risk that private infrastructure operators will not be allowed to compete on equal terms with government-owned utilities. * Permit r isk. The risk that, for example, environmental or safety permits will be withheld. * Change of concession risk. The risk that government breaks a concession arrangement and insists on renegotia- tion of terms. INTERNATIONAL FINANCE CORPORATION 73 buvout clauses, including damages if the political risk insurance for financiers. The government defaults, partly addresses this World Ba3nk's guarantee scheme, which concern. involves, a counter-guarantee from the host government, provides assurance to lencders on * Ffocusing o)17 /low(r-rIsk pro/ecrvt.s. Projects that specific risks such as the contractual per1'or- generate foreign exchange revenues (for mance of state-owned enterprises. In mid- instance, ports, airports, international tele- 1996, IFC's Board approved the first pro ject to coms) mitigate convertibility risk. Projects that blend a World Bank guarantee and IFC supply services for which there is demon- financing-the Uch power pro ject in Pakistan strable excess demand (for example, power (sec Box 9.2 in Chapter 9). plants where there are blackouts, early cellular projects) are likely to be lower risk. Most of * Carefil ideniti/catioii ofn fore mu/cur events the projects that IFC has finianiced in risky (and pro( dures to he tollowued in their event) countries have fallen into these categories. anid ( comprehensive insurance arrangements. Projects that sell their services into "whole- sale" markets (for example, power plants sell to distributors, ports to shippers) are less likely Force Majeure to be subject to political inter-ference than those which supply retail customers. Force tmajeure provisions define the events that are Ipbevond the ( ontrol of either party, and their occurrence * innloated soitr uc ti ag t Several power projects gives either party the right to suspend obligations are located on barges that can be towed away under the contract. Force majeure events usually fall if necessalry. under two groups: * Par-tine'iilg with local ilivestors (or tie * DoIestic political cvens.ts such as war, riot, government). Developing a pro ject in partner- sabotace, radioactive contamination, general ship with a local investor may reduce political strikes, lapses of consent, and changes in laws risks for a foreign investor. Sonic project that affsct the pronject. sponsors have taken this further, and deliber- ately sought to spread local ownership more * Nonpolitical events or "acts of God." such as widely through partial public offerings (for natuiral dlisasters, fire, epidemics, or strikes. example, in Oman and Pakistan). Some institutional investors follow a similar strat- Sometimiles a third category of political events occur- egy: for example, the managers of the Asia ring outside the country is also considered (for Infr-astructure Funid target inivestmienits where rn usd h onr sas osdrd(o Iau r u target investillelits whereinstance, strikes in a supplier country preventing foreign investors are aligning themselves with delivery of cquipment on time). local firms. Lenders aim to ensure that all risks have been identi- * Inv o/lving offic ial financ1( ing ins5tituStionI.s. fied. analyzed, and allocated. This is not an exact Different types of oftficial financing institu- sciene, and eovernments. lenders, and project tions offer various types of security to project sponsors often negotiate extensively over fore sponsors. as well as some costs, such as majeure provisions, even 'i it means amending a bureaicratic processing procedures. Some signed power purchase or luel supply agreement. In istitutions (including IFC) otffer assudrance by some cases a lender may determine that the project their presence as investors and lenders, their spoInsoI's risk exposure might best be handled through track record of good project performance, and improved insurance. Such caution may be appropriate not having been included by host governments where the riiht to suspension under force majeure in debt reschedulings. Agencies such as the Occurs only if the atffected party couldl not reasonably Overseas Private Investment Corporation have forescen the adverse events when the agreement (OPIC) or the Multilateral Investment Guaran- was si-ned or could not reasonably have avoided the tee Agency (MIGA) (see Box 7.5) provide FINANCING PRIVATE INFRASTRUCTURE Box 7.5: Insuring Political Risks with MIGA MIGA's political risk guarantees (insurance) to private infrastructure companies have expanded sharply in recent years. As well as offering lenders and investors coverage against four specific political risks (currency transfer, expropriation, war/civil disturbance, and breach of contract), MIGA's multilateral status means that its participation in a project enhances confidence that the investor's rights will be respected. By June 1996, MIGA-insured private infrastructure projects had facilitated over US$3 billion in foreign investments inArgentina, Chile, China, the Czech Republic, Honduras, Indonesia, Jamaica, Pakistan, the Philippines, and Uganda. Most of this activity has occurred in the last two years. In 1995 and 1996, for example, MIGA issued guarantees for several equity and debt participants in the first and second privately financed power plants in Jamaica. The second project, a 74 MW barge-mounted diesel plant at Old Harbour, was also financed by IFC. Construction was completed in nine months and the plant is producing power. MIGA's private infrastructure insurance seems likely to expand further: in March 1996 the agency had 300 applica- tions for guarantees in over sixty developing countries, equivalent to about 30 percent of its total applications. events. Provisions such as this make a thorough Changes in the insurance markel. International insurance review an integral part of force majeure underwriters have either withdrawn or are negotiation. reducing cover in several areals. For example, take-or-pay obligations are not being insured, and insurers have argued that principal Insurance Arrangements repayments should be excluded froim debt service cover because they can be rescheduled. Lenders have a well-defined set of requirements for * Tecihnology' riisks. Where underwriters conisider insurance arrangements (see Appendix Box AI). In technology to be untested, no insurance is IFC's experience, projects have been able to incorpo- provided dur-ing the cruciail testing perio(l. The rate most of the "desirable" features required by solution is tor the manufacturer to be conltrac- lenders. But some difficulties have arisen (see also tually bound to covcr what would otherwise be Box 7.6): uninsurabIc. Contractor-controlled insurances. In two cases / Local legal requirements. Although most where the contractor arranged the construction countries expressly prohibit the placing of insurances, ensuring that lenders' requirements insurances directly outside the country, were met involved lengthy negotiations with arrangemenits whereby local insurers effec- contractors whose primary concern was tively "'front" internationally reinsured additional costs. Eventually, the insurance programs are usually permitted. with the local arrangements were amended, but at the insurer retaining a small percentage. Difficul- expense of considerable time and effort. In ties sometimes arise when local insurers seek addition, Delay in Start Up insurances cost to retain more than the level with which more than they would have had the owner lenders are comfortable. made the arrangements. Costs. Weighing lenders' requirements against * Mark-et capacity constraints. For some risks sponsors' desire to contain costs is an ongoing the cost of available capacity is escalating as issue. Delay in start-up insurances in particular the size of projects increases. Insurance attract high premiums, and sponsors try to capacity for risks such as earthquake. volcanic contain costs by keepinig indlemnity periods eruption, and typhoon depend on project low and deductibles high. location, its existing risk profile, and under- writers' exposure in the country or region. 75 INTERNATIONAL FINANCE CORPORATION Damage to equipment or machinery during transit to a project site does occur, and in most istances insurance claims are settled with little undue impact on project implementation. In the case of the Hopewell Navotas power project in the Philippines, however, the insurance claim for typhoon damage to turbines during shipping resulted in a dispute that was resolved only after a period of two years. The dispute could have led to a serious delay in project commis- sioning had the sponsors not covered the losses out of their own pocket. While IFC requires sponsors to take adequate insurance coverage, there is no additional requirement to provide bridging funds in the event of a drawn-out insurance dispute. Where an insurance payout delay does occur, a sponsor who is committed to the project will be more likely to take necessary steps to ensure project implementation. This is one reason IFC places considerable reliance on its assessment of the sponsor. Experience has shown that if insurance issues are discussed early with sponsors, coverage is usually more comprehensive. Sponsors are encouraged to retain the services of professional brokers or consult- ants. and lenders usually require certification of the adequacy of insurance arrangements by an indepen- dent insurance adviser. In some countries insurance markets have looked to IFC and other lenders to increase the awareness of, and need for, the more sophisticated insurance products. which insurance buyers would not otherwise use. 76 FINANCING PRIVATE INFRASTRUCTURE 8 Environmental Management Today there is greater awareness by governments, multilateral agencies, nongovernmental organizations (NGOs), and the general public that economic development and environmental sustainability are inseparable. In turn, private firms in both industrial and developing countries increasingly view environment as a business concern affecting products, markets, technologies and long-term sustainability. The long-term viability of private infrastructure projects is closely linked to environmental quality. The issue for project sponsors is not simply to comply with environmental standards, but rather to develop a deliberate strateg) linking long-term profitability to sound environ- mental management. Lenders such as IFC encourage sponsors to deal with environmental issues in PPI projects in the same way as other factors affecting business viability: as opportunities for adding value to the investments. Projects in which IFC invests must meet high environmental standards. From a business perspective, this provides: * Lener and .sponsor con?,l,rt: PPI sponsors that abide by environmental guidelines and demonstrate how to manage environmental risks are more attractive to investors and lenders. * Demonstration e(ffcts: Companies competing for PPI projects are likely to emulate successful projects where good environ mental management resulted in improved efficiency, lower risks, increased access to and lower cost of funds, and greater profitability. IFC's broad approach to environmental management encompasses eco-efficiency, waste minimization, social issues, avoidance of contamination, health and safety measures, and maintenance of good relations with local communities. IFC also assists private investors in providing solutions to local environmiental challenges-clean water supplies, wastewater treatment, and waste management. IFC also plays a proactive role in catalyzing private investments in renewable energy projects and alternative energy technologies that are environmentally more benign. For this, IFC uses its own resources and funds from the Global Environment Facility administered by the World Bank. Disclosure and Consultation IFC has carefully established procedures to guide its operations and address environmental 'matters. In 1994, after consulting statf', shareholders, clients. and NGOs. IFC implemented a revised environmental review procedure that clearly defines the roles and responsibilities of staff and project sponsors, and strengthens requirements for public disclosure of environ- mental information about propose(d pro jects (see Box S. I) Sponsors of category A projects must consult with local groups and interested parties during the preparation of the environmental assessment, which is subsequently released to the :.: Environmental disclosure requirements were incorporated into a general disclosure policy adopted by IFC in 1994. The policy aims to balance the private sector's need for confidentiality with the public's right to know about issues affecting it and involving the use of public funds. Under the policy a "Summary of Project Information" (SPI) document is prepared for all IFC projects. The summary includes the environmental category of the proposed invest- ment, an overview of environmental issues, and possible mitigation measures. These summaries are issued through the World Bank's Public Information Center at least thirty days prior to project consideration by the IFC Board. Projects are classified according to their potential environmental impacts: Category A. Projects with potentially diverse and significant impacts due to causes such as emissions, hazards, ecological disturbances, significant land use or habitat modifications, or relocation of people. In fiscal 1995, six of IFC's infrastructure approvals fell into this category: four power projects, a toll road, and a mass transit system. These projects require a detailed environmental assessment with significant public consultation carried out by the project sponsor. IFC's environmental staff visit all category A sites and review the assessment prior to its release to the World Bank's Public Information Center. The Environmental Assessment is issued at least sixty days before Board consideration. * Category B. Projects that have a limited number of environmental impacts for which there are performance standards, guidelines, or design criteria to mitigate impacts. An Environmental Review Summary focuses on key issues identified by IFC, sponsors, or local authorities, and the measures to address them. In fiscal 1995, sixteen of IFC's infrastructure approvals were category B, including power, port, airport, water supply, and telecommunications projects. The Environmental Review Summary is issued at least thirty days prior to Board consideration. * Category C. Projects that nornally do not result in an environmental impact and thus do not require an environ- mental review. An example is B-loan increases to previously approved PPI projects (three in fiscal 1995). public. Local laws and customs affect the forum used facilitate relocation of families, and to act as an for the consultation process as well as the method used intermediary hetween affected families and local and of notifying local groups of the availability of environ- national autlhorities. mental information. These methods have included newspaper announcements, public hearings, and direct Project sponsors often recognize that extensive contact. Consultation techniques include official consultation can help build support among local review committees established by local regulatory residenits and employees. The winner of a concession requirements, social acceptance surveys, and meetings to provide water and sewagc services to the city of with village elders. Meetings with elders are common Limeria in Brazil has to date conducted eleven public in areas where local communities are primarily meetings with residents to solicit feedback. At the illiterate. same time the company has built a classroom to train its workers in personal health and safety and to enable In the Philippines, for example, social acceptance them to install and maintain safety equipment. As part surveys in the affected community are mandatory of their public consultation process, the sponsors of a during preparation of the environmental impact small run-of-the-river 36 MW hydro project in Nepal statement, and formed the basis for public hearings on conducted a detailed household survey of every the Sual Thermal power plant. In another case, during dwelling in the project area. This was followed with planning for construction of a toll highway in Argen- two public meetings to ensur-e that local people were tina, meetings were held with local officials and fully involvcd. The population in the project area is NGOs, and a sample survey of the famiiilies to be low, and few families will nec(i to be relocated (with relocated was conducted to determine the social impact compensation in cash or land, as preferred). Mitigation of the resettlement. At IFC's suggestion, an NGO was measur-es identified havc been incorporated into the created in cooperation with the municipality to constructioni contract. 78 FINANCING PRIVATE INFRASTRUCTURE World Bank and Host Country issues and opportunities is occurring gradually among local business groups, difficulties still arise when local sponsors fail to assess the importance of addressing environmental issues early during the project develop- IFC adheres to the World Bank's policies and guide- ment stage in order to maximize eco-efficiency and lines regarding environmental, health. and safety minimize costs. matters. The Bank's Environmental and Occupational Health and Safety guidelines address specific matters, Adtherence to environmental standards is not without such as liquid effluents, air emissions, and worker cost, even though the initial eff'ort and expenditure safety concerns. Operations and facilities in which IFC involved niay be small compared with the benefits invests must also comply with national and local oxer the project's life span. An important issue for environmental and health safety laws and regulations. sponsors is to find cost efficient ways of meeting environmental requirements, not only in the selection World Bank guidelines apply to IFC's investments in of technology but also in dealing with social issues all countries. In countries where local laws and (see Box 82). regulations (and their eniorcemienlt) are not yet well developed, the use of World Bank standards can provide countries with guidance in their efforts to Box 8.2: Addressing Social Issues improve environmental laws. This in turn helps to establish more consistent standards to be met by project developers. In some countries where IFC Many project sponsors exercise corporate respon- invests, local laws and regulations are well developed. sibility in developing programs that will benefit After conducting an environimilental, health, and safety communities. The Khimti Khola project is a 60 audit of [S West's joint venture cellular telecoi,s MW run-of-the-river (no reservoir) hydropower operauditon in Hungary. sonsulnture celluaro theU ased project in central Nepal. The project will bring operation in Hungary. consultants from the U.S.-based electricity to a large number of people in the re- parent company rated the company's standards very gion, provide a community-based utility with long- highly, using international comparators. term use of a 500-kilowatt minihydro plant de- signed to provide power during construction, and Sometimes a lack of understanding by project spon- make initial funds available for rural electrifica- sors will contribute to procedural delays. Most IFC tion. The project sponsors have also been involved in a community program that should help to raise sponsors are aware of environmental management ting standrdsrof thea populatoion issues, often through business experience in the industrialized countries. However, IFC has rejected a Sponsors consulted with local communities and number of project proposals in which sponsors from established an environmental program to provide industrialized countries have sought financing for them with the skills to gain sustainable benefits projects with lower environmental standards than from the project.Anonformal education program, would be required of them at home. This does not consisting of a series of fourteen-month courses. alwould brequirednot these i nts frome* oing ahea. nhas been scheduled over a five- to six-year pe- always prevent these investments from going ahead nriod. The first seven-month course focuses on lit- but growing awareness among commercial lenders of eracy and numeracy and the follow-up course is potential legal hazards makes it more difficult to designed to develop practical skills. As of 1996, finance environmentally unsound projects. over 200 people had completed the fourteen- month program. Adjusting to environimental requirements may also be The project established women's community- difficult for some businesses based in developing based cooperatives to help develop small enter- countries who seek to move into private infrastructure prises. Eight community forest user groups and for the first time. Few businesses in developing two nurseries have also been created, where countries have direct experience with the often 27,000 seedlings have been developed, more than demanding environmental requirements of infrastruc- 20,000 of which have been planted in the com- ture projects, and additional time is sometimes needed munity forest. The community school has been to work towards cost efficient environmental solu- relocated, improved, and expanded, and another has been built for power plant workers' and some tions. While improved understanding of environmental local children. INTERNATIONAL FINANCE CORPORATION Some aspects of environmental management are building reser-voirs and treatment plants; reducing becoming relatively straightforward. In many projects unaccounted tor water from 36-25 percent and (particularly under IFC's category B). the preparation upgrading water quality to Brazilian and World Bank of an environmental analysis can be undertaken in standards. The concession specifies in detail the around three months. Preparation of environmental penalties that will be imposed on the concessionaire if assessments for category A projects may require more these targets are not achieved. time due to the need for baseline (lata collection, the number of potential impacts to be assessed, and the IFC has developed a strategy to improve the supervi- need to define a project specific environmental sion of projects under implementation. Measures management plan. include more site visits to ensure compliance with the World Bank's environmental guidelines and policies; The time taken for regulatory assessments, including assessments ot the value and quality of advice given to public hearings to review environmental (including sponsors on environmental issues during project social) concerns, varies depending on the circum- development and appraisal: advice to project sponsors stances of the project. Major power stations that on measures to improve performnance in these areas involve installation of primary fuel loading facilities, during implementation; and identification of the need transmission line construction, emission discharge, for any additional assistance from the Corporation. and displacement of indigenous people will-in virtually all cases-require lengthy regulatory proceedings and public hearings. Similarly, road or Transferring Good rail projects located in densely populated urban areas Environmental Practice will also require extensive proceedings simply because of the number of people directly and indirectly affected. In the past. many private firms tended to perceive environmental requirements as costs that reduce profitability. D)uring the 1990s, this perception has Legal Documentation and gradually shil'ted towards viewing environmental management its an efficiency measure. IFC has had a Supervision positive exper-ience with many project sponsors who understanid that soutnd environmental management IFC builds legal covenants on environmental perfor- makes good business sense. This link is strongest mance into loan agreements signed with the project where the sponsor has a clear long term commitment sponsor. Concession agreements signed between the to the project and envisages doing more than one project company and the government may also contain project in the country. explicit environmental requirements. In the Philip- pines, where IFC has approved four power projects, In one Pakistani project undertaken by AES at Lal Pir, energy conversion agreements signed between private the sponsors took the initiative to introduce a carbon power developers and the National Power Corporation offset program in which a given area of trees will be incorporate (a) a schedule detailing the information to planted tor every ton of carbon dioxide produced by be included in the environmental assessment: (b) the power plant. In Sual, Philippines, the project warranties that bind the developer to construct, operate sponlsor proposed an alternative project site to one and maintain the facility "in accordance with interna- chosen by the national utility because there were (a) tionally accepted environmental standards adopted in fewer people requiring resettlement; (b) less impact on the Philippines;" and, (c) general conditions that refer the view from nearby communities; and, (c) access to explicitly to an "Environmental Compliance Certifi- deeper water, requiring no dredging. cate for the Power Station." Some compatnies also recognize that the additional The terms of the thirty-year concession to supply costs of environmental controls need not necessarily be water and sewerage services to a city in Brazil include a burden. Where there is an opportunity to build more detailed specifications to improve service coverage than one power plant at a given site, for instance, and quality, including targets for expanding water companies may find that environmental control saves distribution and sewage collection by specific dates; money. For ex.tmple, the unit cost of air emission 80 FINANCING PRIVATE INFRASTRUCTURE Box 8.3: A Positive Business Approach In Pakistan, approximately 49 percent of electric power is generated by coal, oil, or gas-powered thermal power plants. Scrubbers and other air pollution control devices have not been standard equipment. Pak Gen, a 337 MW oil- fired power plant, developed by the AES Corporation of the United States, will be the first oil-fired plant to be equipped with scrubbers, which significantly reduce sulfur dioxide emissions. Pak Gen will be located next to the existing Lal Pir plant, also owned by AES, in central Pakistan. Lal Pir complies with World Bank environmental, health, and safety guidelines, as well as those of Pakistan. Although the emission levels of Pak Gen and Lal Pir would each individually comply with World Bank emission guidelines, one of the major envirownental concerns in the development of Pak Gen was the cumulative effect of the two plants on air quality. Under certain conditions, emissions from the two plants could potentially have exceeded the World Bank's allowable emissions for SO2. To ensure that this situation will not occur, AES Pak Gen will be equipped with a scrubber. controls can be reduced by locating several power IFC policies require that sponsors make adequate plants at the one site. The reduction in emissions from provision for resettlement costs as part of project each plant creates air-quality headroom for additional development. The aim is to ensure that adequate plants, with substantial cost savings compared with compensation is paid to inhabitants of the project site installing plants at separate locations (see Box 8.3). and that they are no worse off as a result of resettle- ment. One difficulty for some project sponsors is in distinguishing between indigenous inhabitants of the Infrastructure's Link to Social project site and people who move in on the expectation and Public Policy Issues of a compensation payment. In some projects the Issues number of "inhabitants" in the project area has increased more than tenfold since IFC interest became Through more transparent disclosure and consultation public. In one project proposal, trucks began unloading policies and better understanding of environmental bricks and timber for construction of dwellings within guidelines, IFC, project sponsors. local communities, days of an inspection visit by IFC. Project sponsors and governments are better able to anticipate social may also have difficulty assessing whose concerns to and environmental issues surrounding infrastructure respond to in cases of resettlement and local distur- projects. Not only are participants better able to mitigate the negative effects of projects but, in several cases, they directly or indirectly improve local social, Box 8.4: Utility Privatization Leads environmental, and economic situations. to Demand-Side Efficiency One example of improved social conditions can be found in Aguas Argentinas' management and opera- In 1994, IFC approved an investment in Edenor, tion of greater Buenos Aires' water and sewage system the newly privatized power distribution company where benefits did not stop at improved water quality serving the northern half of Buenos Aires. One important issue addressed in the project's envi- and better service. Connections were made to poorer ronmental review was the increased efficiency of neighborhoods for the first time which, in turn, helped consumption through proper pricing of electric- spur social services in these areas such as schools and ity. Because of clandestine connections, faulty health clinics. Similar improvements in service are meters, and subsidies on electricity, many Bue- occurring in electricity distribution in the city, where nos Aires residents paid for none or only part of the introduction of proper pricing and billing of power the energy consumed. It is estimated that when the full cost of electricity is billed to them, their has enabled the number of connections to be expanded consumption will decline by 40 percent. As of May (see Box 8.4). 1995, Edenor was progressing according to plan, with 73,000 clandestine connections legally con- nected in 1994. INTERNATIONAL FINANCE CORPORATION 81 bance. There have been situations where traditional projects and a biomass project (see Box 8.5), and is inhabitants have presented one view, new arrivals currently considering several wind energy, small another view, government officials a differing view, hydro. biomass cogeneration, and geothermal plants in and NGOs something different again. Reconciling different regions. these different claims presents sponsors with a significant challenge, and one where a dialogue among IFC is also evaluating creation of a Renewable Energy all groups is essential to reach an acceptable solution. and Energy Efficiency Fund. The fund would be designed to invest in smaller grid-connected renewable energy projects (less than 50 MW) as well as off-grid Future Directions o0- mini-grid projects in rem(ote or rural areas. A feasibility study for the fund, with support from The infrastructure sector presents significant environ- several of IFC's principal shareholders, indicates that mental challenges and opportunities for private firms favorable market conditions appear to exist for this as demand increases throughout the developing world. type of initiative. IFC is also exploring with organiza- Environmental issues are, potentially, among the most tions such as the World Business Council for Sustain- controversial and sensitive issues conisi(dered in able Development and private investors the scope for investment decisions, and particularly so in infrastruc- investments in carbon otfset pilot projects that mitigate ture projects. The increasing transparency of the greenhouse gas emissions. project review process has heightened awareness of the issues involved. IFC is committed to situating itself at the leading edge in resolving these issues by creating and implementing innovative solutions for the private sector. IFC will continue to emphasize to sponsors the value of considering environmental issues and opportunities very early in project design. And IFC will increase its emphasis on addressing the social dimenisionls of projects. One focus of IFC's future work will be to identify more commercially viable renewable energy projects. IFC has already financed several hydro In January 1996 IFC's Board approved financing for a 70MW expansion of two bagasse-based cogeneration plants in Guatemala. The plants are owned by sugar processors, but they sell part of their capacity to a power distribution utility. IFC helped the gestation of the project by: * Financing a feasibility study covering both technical and financial issues. * Suggesting changes to the power purchase agreement to make it more financeable. * Helping the companies to design an environmental upgrade program to control particulate emissions during the part of the year when bagasse is used as a fuel, and SO2 emissions during the remaining part of the year. A 24 MW geothermal power plant in Guatemala is currently under consideration for IFC financing. The US$66 million project is being developed with an Israeli geothermal equipment manufacturer. The electricity generated by the project will be sold to the national electricity utility under a twenty-five-year power supply agreement. It will be Guatemala's first geothermal power plant, opening the way for further development of the country's substantial geothermal resources. It will also be IFC's first investment in geothermal power. 82 FINANCING PRIVATE INFRASTRUCTURE Conclusions and Future Directions Recent Lessons Private participation in infrastructure is here to stay. As more developing countries have started to open up their infrastructure sectors to private financiers, the policy debate has evolved from "whether to" to "how to." However implementation has not been easy or uniformly successful. The uneven pace and geographical distribution of private entry to infrastructure reflects different levels of political commitment and investor perceptions of country risk. IFC has advised governments on divesting infrastructure assets, worked with investors to structure successful projects, and helped mobilize commercial finance in environments perceived to be risky. The Corporation's intrastructure project approvals have encompassed a widening range of countries and subsectors. IFC's experience suggests that private participa- tion brings with it efficiencies in construction and operation. The majority of projects in its portfolio have been completed at or under budget, with minimal time overruns. They have also begun to demonstrate operating efficiencies in terms of improved delivery and cost of services. And, although it is early yet, financial performance has been satisfactory. Two key lessons arise from IFC's experience: Successfil transactions he/p policies t(o evolve. By giving policymakers, investors, and financiers experience, and through building domestic constituencies for further change, successful transactions encourage further sectoral liberalization. These demonstration effects are being strengthiened as time reveals the efficiencies in conistruction and operation yielded by private investors and increased competition. In many countries there has been both a "widening" of private participation. with pioneering private projects being followed by further projects in the same countries, and a "deepening" of privatization of existing assets. * With political commitmtient, private infrastructure projects can hefinanced even in relative1v difficult environments, on uihen per capita incomes alre low, provided that they ar e proper-v structured to mat(ch rewards to r-isks. The special "comfort" role played by multilateral agencies such as IFC is largest in such environments; by sharing some of the political risks, they can help lower financing costs. These positive results need to be viewed in context. Although the infrastructure projects financed by IFC have generally performed well to date, most are still in early stages of operation. Furthermore, in some countries negotiations on potential projects have dragged on for years without financial closure. A key issue in the progress of many projects has been the allocation and management of risks between governments and private investors. Experience has proven that a transparent policy framework is important in achieving financial closure. And, as experience has increased, the tine taken to bring projects to financial closure has generally fallen. Individual projects have faced since 1992, both in terms of financing volume and significant delays, however, particularly in countries numbers of participant financial institutions. Partici- relatively new to private participation, pant lenders have taken comfort both from IFC's presence to help mitigate noncommercial risk and its The unavailability of debt remains a significant ability to ensure sound project structures incorporating constraint in many private infrastructure projects. appropriate r isk-management strategies. A key element Given the size of financing needs for these projects, of this is to cinsure an allocation of commercial and particularly in relation to the size and maturity of noncommercial risks between the contractual parties financial sectors in emerging economies. foreign that is consi(dere(d reasonable by all. lenders play a critical role. Commercial lenders are concerned particularly by the noncommercial risks Environmental requirements are not an insurmountable that feature prominently in many private infrastructure hurdle to private investment. Companies have learned projects. Thus achieving financial closure depends to manage environmental risks in the same way as significantly on the ability of governments to intro- other business risks. Additionally, recent experience duce stable regulatory regimes and contractual has prompte(d a shift in perception to viewing environ- arrangements that mitigate these risks enough to make mental mana-ement as a sound efficiency measure. them fair to all parties. The process of private entry into infrastructure can The Future most usefully be viewed as a transition path. Although wide-ranging policy reforms are often necessary to Several trends identified here seem likely to continue provide for sustainable private entry, political con- for several years: private infrastructure financing in straints can prevent these from being implemented more countries and sectors, more privatization of quickly. At the same time, developing countries facing existing assets, and more sources of financing becom- severe power shortages or port congestion cannot ing available. But more fundamental changes are afford the costs of delay. How can governments make likely, particulalrly in the countries that have liberalized progress'? IFC's experience suggests that an important and privatized the furthest. Many of the projects priority should be to close one or two initial transac- financed today retlect the transitional state ot' partly tions successfully. This builds experience among all reformed infrastructure sectors. When reforms are parties and starts the dynamic of developing constitu- complete, it is likelv that l'uture investments will be encies for more t'ar-reaching refonm. Achieving quite dil'ferent from those of today. Three main trends financial closure requires a focus on measures to seem likely to develop further: mitigate and share noncommercial risks through the use of appropriate contractual arrangements. Initial Stioig1er (com/petitiofn within inftastructure markets. options in the framing of concession arrangements and This has happened already in markets for telecoms and entry conditions (for example, competitive bidding transportation services, and is quickly spreading to versus negotiated entry) may be limited but are likely other sectors, suchi as power. Privatization and unbun- to widen once the first few projects have been imple- dling of national power utilities mean that the days of mented. Once the process gathers momentum, and the single power purchaser or the single power price policy reforms take root, governments can focus on are numbered. In some countries regulators are increasing the competitive structure of the sector, so as fostering competition by loosening restrictions on the to put private participation on a more sustainable right to buy and sell power. For example, in Argentina basis. at privatization, customers using over 5 MW were free to choose suppliers; now the limit is only 10() kW. IFC has helped projects achieve financial closure by Competition is being spurred partly by technological mobilizing commercial debt, by syndicating to banks changes. but more importantlytby bynew approaches to through its B-loan program. and by bringing in ces,lhtiiln o nontraditional debt financiers. In addition, IFC has regulation. supported several private equity funds set up to invest What will competition mean'? Although there is no in infrastructure projects. Its syndicated loans to single model tbor how a competitive market for infrastructure projects have increased significantly nrsucrewlwoktheaepoblyom infrastructure will work, there are probably some 84 FINANCING PRIVATE INFRASTRUCTURE Box 9.1: Taking Market Risk: A Czech Power Plant When investors have enough confidence in a country and the policy framework they will bear significant amounts of risk, including foreign exchange risk and market risk, in a power generation project. In July 1996 IFC's Board approved financing for what is expected to be the first majority private power plant in Eastem Europe. The Energy Center Kladno Generating project involves the environmental upgrading and expansion of a 28MW district heating plant into a 332MW cogeneration plant that will sell electricity to a local steel mill and the local grid, and hot water to the city of Kladno. The plant will sell electricity and steam first to a steel mill at the prevailing national industrial tariff. There is no power purchase agreement (PPA) for this output, making this partly a "merchant" plant. In effect the sponsors are taking the risk that the (only partly privatized) national electricity utility, CEZ, will maintain industrial tariffs at unsubsidized levels. This risk is mitigated by several years of consistent tariff increases by CEZ; and a large environ- mental upgrading program that will require CEZ to borrow extensively from private financiers, thus pressuring it to maintain what is the best nonsovereign credit rating in Eastern Europe. Capacity not likely to be required by the steel company will be committed annually to the local distribution grid under a twenty-year power purchase agreement at a price slightly below what the distributor pays CEZ for power. Tariffs are in Czech crowns and are not indexed to the foreign currency portion of the loans. Apart from demonstrating that efficient cogeneration can supply electricity at very competitive rates, the project will demonstrate a readily replicable environmental solution to reducing the emissions of the country's district heating and power plants. It will also support the development of domestic financial markets-local banks are contributing over half of the senior debt for a longer term than has hitherto been available. This will also mitigate the project's foreign exchange risk. common features that these markets will share (see sha^ring packages in the more attractive Box 9.1). First, there will be a clear separation of the projects an(d regions. roles of regulator and operator. Second, project sponsors will increasingly be those willing to take * DJomestic savinags ale likehv to lplav a higger both implementation and market risk, rather than those role iln tnialc in 1 private in/faistructiore who merely manage implementation risk. Third, projects. The developm-ent of domestic governments that expose investors to market risks will capabilities to manage. participate in. and come under pressure to reform markets that supply Ina;lnce private infrastructure projects is such projects, such as state-owned fuel supply imiportanit to broa(len the constituency ot PPI, monopolies, for example. And fourth, local investors enlarge the pool of funding. and mitigate are likely to play a larger role in investments than at foreign exchange risk. In industrialized present. After all, they are in the best position to know counitries, and increasingly in the more mature what is needed in their countries to do business over reformed developing countries, one of the the long term. largest sources of financing for investment is the utility's own cash f'low. But additional Mor-e projeets will he at thie suhnational level funding will have to come from the domestic where local or proYvinlcial agencies ar e the capital markets. This will r equire a strong proposed contracting parties. This presents macroeconomic framework, and a solid some important challenges. If the privatization financial infrastructuLre, as well as attractive of transport. water, and waste sectors is to investment opportunities. accelerate, it will depend on the creditworthi- ness of municipal and provincial governments. Many of these changes will occur only slowly, Ultimately this requires the reform of local especially in counitr-ies that have only just started to finances. In the meantime, there may be some liberalize and privatize. IFC's role, in conjunction with scope to design credit enhancement and risk other parts of the World Bank Group. will be to use its advisory, structuring, and mobilizationi capacities to: INTERNATIONAL FINANCE CORPORATION 85 * Broaden the reform process, through support- In appropriate cases, projects can be financed by ing demonstrator projects; blending IFC's financing instruments with others from the World Bank Group. IFC's financing has been * Complement the markets in more mature combined with MIGA guarantees (for example, a countries; and power project in Honduras) and the World Bank's new guarantee instrument (Pakistan power project-see * Build domestic financing capabilities. Box 9.2). What does this mean in practice? Some recent work IFC's financial mobilization activities are likely to provides possible pointers. Where countries are at an extend further towards nontraditional financing early stage of preparing to liberalize infrastructure sources such as insurance companies, as well as services IFC can help to inform the policy debate by mobilizing "mezzanine" financing. One of the most providing advice about what has worked in other important roles for IFC's private infrastructure countries, often through round tables and seminars promotion efforts will be to continue helping countries undertaken in conjunction with FIAS or the World develop the capacity of domestic financial markets Bank. Where decisions to privatize have been made in through promoting private pension funds, insurance principle, IFC can help structure transactions. Helping companies, domestic mutual funds, local bond demonstrator projects to achieve financial closure will markets, and rating agencies. remain a core part of the Corporation's work; it is expected that government reforms will gradually enable more projects to be financed in Sub-Saharan Africa, North Africa, the Middle East, and the former Soviet Union. Further liberalization in some larger countries, such as China and Brazil, may also expand opportunities for private financing significantly. Demonstration effects also arise from financing projects in infrastructure sectors where private financiers have not yet penetrated deeply, such as local telecoms providers, power and water distribution companies, and transport facilities (for example, airports and roads). - * A - k11*n* _ M21TTiq * KBe1&1T7.rLT_if In May 1996, the $630 million Uch power project in Pakistan reached financial closure with assistance from IFC and a partial risk guarantee provided by the World Bank. This was the first time that a World Bank guarantee of this type had been provided, and the first guarantee operation to be undertaken in collaboration with IFC. The US$75 million partial risk guarantee provides support for a debt service default resulting from the nonperformance of specific contractual obligations entered into by government agencies-in this project the power purchase agreement and the fuel supply agreement. The project set several financing precedents. IFC mobilized its largest syndicated loan to Pakistan at US$75 million. And the partial risk guarantee helped mobilize a syndicated US$75 million commercial bank loan with a fifteen-year term-the longest maturity to date for a commercial financing package in Pakistan. The 586 MW Uch project is the fifth private power project financed by IFC in Pakistan since the launching of the private power program in March 1994. The project consists of a gas-fired, combined cycle plant using natural gas from a nearby field. 86 FINANCING PRIVATE INFRASTRUCTURE Appendix r V~~~~~~~~ables Table Al: IFC Infrastructure Projects, 1966-June 1996 88 Table A2: IFC Approval and Commitment Summaries 91 Table A3: Syndicated Loans to Private Infrastructure Projects 92 Table A4: Financial Structures of PPI Projects 93 Table A5: IFC's Advisory Work to Governments in Private Infrastructure, FY89-96 95 Table A6: FIAS-Sponsored Private Infrastructure Round Tables, 1993-96 98 Table A7: Multilateral and Bilateral Financing of Private Infrastructure Projects in 99 Developing Countries, 1993-95 Table A8: Summary of Multilateral and Bilateral Financing of Private Infrastructure 103 Projects in Developing Countries, 1993-95 Table A9: Private Infrastructure Projects in Developing Countries 104 Table AIO: Proportion of Foreign Finance in Infrastructure Privatizations, 1988-94 106 Table AI 1: Loans to Private Infrastructure Projects, 1990-95 107 Table A 12: PPI and Capital Markets Country Indicators, 1990-95 115 Box Al: Insurance Arrangements for Infrastructure Projects 108 Box A2: Subjects Covered In IFC's Project Appraisal 110 Box A3: Toll Road Concession Agreements 112 Box A4: A Guide to Power Purchase Agreements 118 :< -.s 4' Commnit- Project IFC IFC IFC Approval ment size loan equity total FY Country Company Sector date date (tlJS$m) ([;S$ml (US$m) (US$m) 1967 Philippines Meralco lUl power distribution 9/15/66 9/15/66 94 8 4 12 1970 Philippinies I'LDT I" telecoms 9/15/69 9/15/69 18(I 5 5 1977 Colombia Promigas IV pipeline: gas 11/15/76 12/15/76 55 13 2 15 1981 Korea lihanl Bulk' port 9/2/8() 12/3/8X) 28 4 3 6 1981 Peru Conenhua* power transmission 5/15/81 11/15/81 18 5 5 1986 Philippines PLDT 11- telecoms 6/12/86 11/14/86 12( 30 30 1987 Argentina Terminal 6:1* port 1/15/X7 5/27/87 22 6 6 1988 Plhilippines PLDT III* telecoms 12/17/87 2/11/88 96 24 24 1988 Philippincs Meralco 11* power distribution (i/15/88 9/15/88 313 30 3(0 1989 India Ahmedabad Electric* power generation 4/1 1/i9 5/3(1/89 83 211 20 1989 Philippines PLDT IV tclecoms 5/31/89 11/6/89 455 31J 30) 1989 Argentina Terminal 6: II* port 6/1/89 9/1/89 11 3 3 1989 India Tata Electric I* power transmission )/1 5/89 7/201/89 81) 35 35 1989 Ptilippinles Navotas* power generation 01/22/89 7/11/9(1 41 1) I 11 1989 Colombia Promigas I11 pipeline: gas 0/22/89 6/28/89 35 1() 10 1990 Chile CTC IU telecomlis h,/14/9(0 12/15/9(0 22 199(1 Chile CTC H telecoms 0/14/91( 12/3/91) 1104 8(1 80 1990 India Tatla Electric I' power generation n/26/9() 1(0/2/9() 274 6(1 60 199() Turkey Kepez Elektrik, power generation o/28/'() 10/18/9(0 68 25 25 1990 India Calcutta Electric l* power trinsmission n,/2X/9(0 2/1/91 92 2() 20 199(0 Chile Puerto Co,olnel port t,/2o/')( 4(0 5 3 8 1990 Argentinia Terminal 6: III* port (/28/91) 1()/11/9() 13 4 4 1991 Chile Aconciagnal I" power generation 12/27/9(0 8/26/91 82 14 6 20 1991 Bolivia Centril Aguirre" port 112X8/90( 7/2/91 5 2 () 3 1991 Mexico Cedetel* telecoims: cellular (/1 1/91 1(0/22/91 70) 13 1 14 1991 India Bombay Suburban* power generation t-/13/91 6/28/91 653 5(1 5() 1991 Zaire Telecel* telecoms: cellular 6I/17//91 9/24/91 19 6 6 1991 Chile Puerto Ventantas port (-/28/91 46 5 5 10 1992 Zimbalbwe Petrozim' pipeline: oil 7/25/91 9/19/91 67 17 17 1992 Chile C'('C 1II telecoins I1 14/91 11/19/')1 258 0 1992 Colombia Prmligas 111 pipelitie: gas 2'25/92 7/2/92 51 15 IS 1992 Hungary Westel* telecoms: cellular 3'31,/92 6/8/92 82 15 IS 1992 Costa Rica Milliconm telecoms: cellular 4/9/92 7/16/92 1() 3 i 4 1992 Argentina FEPSA I* rail 1/9/92 2/24/93 55 11 2 13 1992 Mexico 'Illuca Toll Road5 toll roa(l 5 14/92 6/22/92 314 1() iI) 1992 Jamaica Teleconis of Jamaica telecoms: swap 1/5/92 12 12 12 1992 India Caclutta Electric l* power geinerationi 6 23/92 6/17/93 548 3(0 30 1993 Chile Aconcagtia I1 power gen: rights issue '/1/92 9/1/92 14 2 2 1993 Argentina Nuevo Central' iail I 1/5/92 6/2/93 61 10 3 13 1993 Chile Pangue power generation 12,17/92 1(1/22/93 465 7(0 5 75 1993 Sri Lanka Lanka Cellular' telecoms: cellular 12,22/92 1/28/94 14 1 i 1993 Nlexico Telecoim Gollo telecoms: cellular 12'I 2/92 45 9 9 1993 Argentina Impsat-Arg telecoms: data/sat 12/22/92 52 6 2 8 1993 Chile CrC telecoms: hedge 12/24/92 7/15/93 14 14 14 1993 Mexico GOTM* port 12/1()/92 9/2/93 21 5 2 7 1993 Belize Belize Electric CoW power generation 12/ (0/92 6/28/93 59 15 IS 1993 Philippines Pagbilao* power generation 1/7/93 4/22/93 888 6(0 1( 7() 1993 Philippines Northern NMindanao* power generatioli 1/15/93 4/16/93 1(03 15 5 2(0 1993 Argentinia FEPSA 11 rail 214/93 11 1993 Guatemala Puerto Quetzal* power generation 3/23/93 3/31/93 92 20 20 1993 Argentina Yacylec* power transmission 61/93 1(0/15/93 135 2(0 2(0 1993 Latin America Scudder Fund fund 613/93 6/3/93 2(0)( 25 25 1993 Argentinaa Teleflonica telecomns 6/22/93 1,475 6(0 60 1993 Pakistan Karachi Cont. Tern,. port 6/(0/9(3 1/25/95 88 12 2 14 88 FINANCING PRIVATE INFRASTRUCTURE Table Al: IFC Infrastructure Projects, 1966-June 1996 (cont.) Commit- Project IFC 1 VC 1FC Approval miien size loan equity total FY Country Company Sector date date (1IS$ml (US$m) US$mnl lUS$m) 1994 El Salvador Telemovil* teleco ms: cellular 7/6/93 4/1 /94 7 2 II 2 1994 Venezuela Terquirmca polrt 7/7/93 14 3 1 4 1994 Argentina Tucunian power feasihility 7/7/93 2 tI II 1994 Argentina Transconor/Gasinvest pipeline: gis 7/20/93 530 25 2(1 45 1994 Argentina Edenor* power distribution 8/5/93 5/3/94 402 45 45 1994 Colombia Promigas IV* pipeline: gas )/3t1/93 6/17/94 41 5 5 1994 Hungary Hungary Telecom5 telecoms 11/2/93 11/18/93 470 30 3(1 1994 Hungary Papatel' telecotios 1I/22/93 12/14/93 14 3 1 4 1994 Colombia El Bosque Port port 12/23/93 21( 6 6 1994 Mexico Biwater/CTAPV* wvastcwater 1 2/30/93 1()/26/94 33 7 7 1994 Costa Rica Hidrozarcas$- power generation 1/6/94 5/27/94 17 4 4 1994 SriLanka Lanka Cellular* telecoms: rights issue l/27/94 1/28/94 17 2 2 1994 India Tata Elec IV* pow-er gen: underwriting 2/7/94 3/1/94 75 1994 Asia Asia Inlra. Fund fund ./24/94 11/2/94 753 5() 50 1994 Chile Pangue ll power gen: B loan increase 3/29/94 5(0 1994 Argentina Agua.s I water/sewerage 4/6t/94 11/10(/94 329 38 7 45 1994 World GPfC fund 4/14/94 12/9/)4 101)1 5 1 51 1994 Argentina Edenor 11 power dist: B loan increase 4/14/94 8 1994 E.Europe CETAL telecoms 4/27/94 4/30/94 1()() 20 2() 1994 Guatemala Fabrigas* power generation 5/18/94 8/5/94 17 7 7 1994 India GVK Power power generation 5131/94 9/l/95 291 4(1 8 48 1994 Philippines Northern Mindanao power gen: swap 6/8/94 23 () () 1994 Oman Manah Power power generation 6/110/94 1/25/95 236 15 4 19 1994 Uganda Clovergemil telecoms: cellular 6/21/94 11/1/94 l6 5 1 6 1994 Poland Sprint Polska telecoms 628/94 11/1/94 165 25 8 33 1994 Nepal Khimti Khola power generation 628/94 1/31/ 96 126 28 3 31 1994 India ILFS Ltd. ilnr leasing 6,28/94 8/22/94 8(1 25 1 26 1994 India Neyveli Power power generation 6,28/94 451) 3(0 18 48 1994 Hungary Westel 9(10 telecoms: cellular 6,28/94 3/21/95 16(0 35 4 39 1994 Russia Russian Teleconi telecoms 6O 311/94 12/12i,J4 41) 8 8 1995 Honduras Elcosa* power generation 75/94 1(1/24/94 7() 14 2 16 1995 India lb Valley power generation 7, 19/94 721 5( 2(0 70 1995 Argentina Nahuelsat> telecoms: satellite 7/2l/94 5/31/95 24( 310 5 35 1995 Latvia Lattelekom telecoms 92(1/94 3/7/95 237 16 16 1995 Tanzania MIC Tanzania Ltd. telecoms: cellilar 9/23/94 7/14/95 4 1 0 1 1995 Argentina Aguas water/sewage: increase 9/28/94 52 0 1995 Dominican Rep. Smith Enron * power generation 1H/22/94 11/1/94 2(04 32 32 1995 Panama Manzanillo Terminal* port 11/1/94 12/21/94 1(03 25 25 1995 Cote dIlvoire Ciprel Power* power generation I U3/94 11/17/94 69 17 1 1X 1995 Mexico GOTM II/Mex. Puertos port 12/201/94 1/27/95 1 1 1 1995 Argentina Socmna conglomerate 12/22/94 3/2/95 385 25 15 40 1995 Brazil Globocabo telecoms: cable-tv I /95 3/30/95 290 35 10 45 1995 Pakistan Karachi Cont. Term. 11 port I '6/(95 22 0 1995 Pakistan Kohinoor power generation 1!19/95 1/24/95 139 25 6 31 1995 E.Europe CETAL teleconis: agency line 2/21/95 1(( 33 33 1995 Pakistan AES Lal Pir power generation 3/-21/95 4/7/95 344 4(0 i1) 511 1995 Philippines Sual Thermal power generation 3/23/95 7/12/95 1,40(2 3(0 18 48 1995 ULrguay Consor Aeropuert airport 3/28/95 7/19/95 31 8 8 1995 Argentina R-E-C Toll Highway toll road 3/301/95 161 2(0 20 1995 Honduras Elcosa* power gen: rights issue 4/11/95 4/27/95 1 1 1 1995 Jamaica Old Harbor Diesel power generation 6/i/95 99 22 2 24 1995 Argentina Edenor power gen: swap 6/9/95 9/22/95 4 4 4 1995 Vietnam Baria Serece Port port 6/1 1/95 6/22/95 1() 3 3 1995 Argentina Termtnales Portuarias port 6/1o/95 11/1/95 50 It) 2 12 INTERNATIONAL FINANCE CORPORATION 89 - - - S~~~~~~~~~F - 1 O * M: a . Commit- Project IFC IFC IFC Approval ment size loan equity total FY Country Company Sector date date (US$m) (US$m) (US$m) (US$m) 1995 India RPG Communications telecoms 6/21/95 87 8 8 1995 Thailand BTSC mass transit 6/22/95 1.648 50 5( 1995 Hungary Hun Telecom If telecoms 6/22/95 9/4/95 940 50 5( 1995 Jordan Jordan Telephone telecoms: cellular 6/28/95 10/29/95 85 15 3 18 1995 Turkey Arcelik - KOC power gen/waste 6/30/95 10/12/95 16 8 8 1995 Turkey ENTEK - KOC power generation 6/30)/95 130 25 25 1995 Turkey TDD - KOC powergeneration 6/30/95 10/12/95 7 2 2 1995 Argentina Aguas If water/sewerage 6/30/95 3/22/96 54(0 4(0 40 1996 Argentina Edesur power distribution 7/6/95 328 40 4(0 1996 Pakistan Gul Ahmed Energy power generation 7/10/95 7/24/95 138 30 4 34 1996 Guatemala Puerto Quetzal power gen: swap 8/9/95 9/15/95 1 1 1 1996 Dominican Rep. Smith Eron power gen: swap 8/31/95 9/15/95 2 2 2 1996 Argentina Aguas water: swap 9/14/95 10/1/95 4 4 4 1996 Poland Gaspol port for LPG (gas) 10)/19/95 10/20/95 6(0 2(0 5 25 1996 Argentina Terminal 6 S.A.: IV port 11/29/95 4/16/96 2(0 11 II 1996 Pakistan AES Pak Gen power generation 12/11/95 12/20/95 349 21) 10 3() 1996 Argentina Aguas water: B loan increase 12/14/95 39 1996 Guatemala Concepcion Pantaleon power generation 2/8/96 83 25 25 1996 El Salvador Telemovil II telecoms: cell 2/22/96 3/7/96 20) 8 8 1996 Argentina Edesur 11 power trans: B loan increase 3/14/96 () 1996 India Calcutta Electric II power dist: B loan increase 3/22/96 37 1996 Indonesia Praimindo telecoms 3/28/96 624 50 8 58 1996 Venezuela CANTV telecoms: tel & cell 4/9/96 6/7/96 872 75 75 1996 Pakistan UCH Power Ltd power generation 5/14/96 691 56 56 1996 Bangladesh ITC Ltd telecoms 5/22/96 1((7 15 0 15 1996 Thailand BTSC 11 mass transit - equity 5/24/96 2(0 20 20) 1996 China Fairyoung Ports port 6/14/96 82 14 5 19 1996 Brazil Lightel telecoms 6/14/96 299 25 1() 35 1996 Colombia Buga-Tulua-La Paila toll highway 6/19/96 10() 10 5 15 1996 Brazil Aguas de Limeira S.A. water/sewage 6/19/96 71 17 1 18 1996 Brazil Globocabo telecoms: B loan inc./rights 6/19/96 360) 8 8 1996 Sri Lanka Asia Power (Priv.) Ltd. power generation 6/24/96 62 13 3 15 1996 Nepal Up. Bhote Koshi Hlydro power generation 6/24/96 98 21 3 24 1996 Chile FEPASA rail 6/25/96 48 21 21 1996 Colombia Promigas V pipeline: gas 6/26/96 58 1() 1( 1996 Argentina Aguas IlI water/sewage 6/26/96 3 15 15 1996 Argentina Western Access Toll toll road 6/26/96 272 35 35 1996 Bolivia Telecel teLecoms: cell 6/27/96 65 15 15 1996 Asia Asian Mezz. lnfr. Fund fund 6/28/96 400 50 50 1996 Argentina Transconor 11 pipeline: gas 6/28/96 402 45 45 Total (148 projects) 28,648 2,536 536 3,072 Note: * denotes projects reaching physical completion or already completed by Jun. 1996 90 FINANCING PRIVATE INFRASTRUCTURE Table A2: IFC Approval and Commitment Summaries, 1966-Present* Approvals Commitments IFC IFC IFC IFC IFC IFC Number of Project loan equity total Number of Project loan equity total projects size (US$m) (US$m) (US$m) projects size (US$m) (US$m) (US$m) by region Africa 5 175 46 2 47 5 175 47 2 48 Asia 38 11,173 849 190 1039 25 6.815 572 101 673 CAMENA 9 2,090 213 38 251 7 1.377 154 38 192 Europe 15 2.588 241 92 333 13 2,359 185 75 260 LAC 80 11,612 1.187 164 1.351 50 6,869 748 90 838 World I 1,010 0 51 51 1 1.010 0 51 51 Total 148 28,648 2,536 536 3,072 101 18,604 1,706 357 2,062 by sector Power Generation 44 9,317 945 139 1,1185 32 6,872 709 92 8(1 PowerTransmission 11 1,473 206 4 21( 8 1.138 169 4 172 Pipelines 8 1,238 140 22 162 5 249 53 2 55 Air 1 31 8 0 8 1 31 8 0 8 Mass Transit 2 1,668 50 20 70 Port 19 654 136 29 165 13 431 103 14 117 Rail 4 175 42 5 47 2 116 23 3 26 Road 4 847 75 5 80 1 314 14 0 14 Telecoms 41 9,347 714 162 876 30 6,121 493 93 586 Water/Waste 8 1.071 121 8 129 4 906 85 7 92 Miscellaneous 6 2,828 100 142 242 5 2.428 50 141 191 Total 148 28,648 2,536 536 3,072 101 18,604 1,706 357 2,062 by fiscal year 1967-87 7 517 69 9 78 7 517 59 8 68 1988 2 409 54 0 54 1 96 24 0 24 1989 6 704 108 1 109 3 431 56 0 56 1990 7 1,613 194 3 197 3 545 77 0 77 1991 6 876 90 12 102 8 2.267 262 1 263 1992 9 1,396 112 3 115 8 897 83 7 90 1993 17 3,737 302 70 372 11 2,081 178 46 224 1994 30 5.495 348 237 585 14 1.792 150 68 218 1995 32 8,190 614 120 734 25 5,019 422 194 616 1996 32 5,712 645 82 727 21 4,960 396 32 427 Total 148 28,648 2,536 536 3,072 101 18,604 t,706 357 2,062 Note: *to June 1996 tor approvals. May 1996 for commitments INTERNATIONAL FINANCE CORPORATION 91 *il "j - _iS *.: ' 0>r*{ X1.g Syndicated No. of FY signed Country Borrower Sector (US$m) participants 1992 Chile Aconcagua power: generation 6 1 Chile CTC telecoms 113 4 Mexico Cedetel telecoms: cellular 37 4 Zimbabwe Petrozim pipeline:oil 16 14 Subtotal 172 1993 Argentina FEPSA rail 20 3 Colombia Promigas pipeline: gas 15 1 Costa Rica Millicom telecoms: cellular 4 5 Guatemala Puerto Queztal power: generation 51 1 Subtotal 90 1994 Argentina Edenor power: generation 128 15 Argentina Yacylec power: transmission 45 11 Chile Pangue power: B loan increase 100 20 Columbia Promigas pipeline: gas 25 4 Costa Rica Hidrozarcas power: generation 6 1 El Salvador Telemovil telecoms: cellular 2 1 Philippines Hopewell Power power: generation 11 I Philippines N. Mindanao power: generation 9 I Subtotal 326 1995 Argentina Aguas Argentinas water/waste 135 15 Dom. Republic Smith-Enron power: generation 50 2 Honduras Elcosa power: generation 36 5 Mexico GOTM port 3 I Oman Manah Power power: generation 57 12 Panama Manzanillo port 35 3 Philippines N. Mindanao power: hedge 13 2 Poland Polska Telecoms telecoms 45 7 Vietnam Baria Serece port 2 1 Subtotal 375 1996 Argentina Aguas water/sewagc 173 21 Argentina Nuevo Central rail 15 2 Argentina Terminal 6 S.A. port 7 1 El Salvador Telemovil telecoms: cellular 12 1 Hungary Hungary Telecoms telecoms 50 35 India CESC Limited power: generation 67 7 Pakistan AES Pak Gen (Private) power: generation 50 4 Pakistan Kohinoor power: generation 37 6 Pakistan Uch Power power: generation 75 3 Philippines Sual Thermal power: generation 196 32 Uruguay Consorcio Aeropuertos airport 10 3 Subtotal 691 Total FY92-96 1,654 92 FINANCING PRIVATE INFRASTRUCTURE Table A4: Financial Structures of PPI Projects These tables summarize the financial structure of the private infrastructure projects that IFC has helped to finance, using three measures: * debt versus equity * local versus foreign financing * financing source: from IFC itself, syndicated by IFC. other private financiers, and official financiers The tables group these structurcs by region, sector, year of approval. countr) risk level, country income level and whether the project was an expansion or greenfield. The total number of observations varies slightly for each group of categories, as some projects do inot fall within the categories (for example, funds, r ights issues) or indicators are not available (for example. not all countries have a risk rating). No. of % % % % % % % IFC %IFC projects debt equity local foreign private official own syndicated by region Africa 5 65 35 11 X9 44 22 30 5 Asia 30 65 35 33 67 57 IX 16 8 CAMENA 8 62 38 18 82 55 14 15 16 Europe 12 49 51 39 61 61 7 24 8 LAC 60 55 45 36 64 54 4 21 21 Total 115 58 42 33 67 55 9 20 15 by sector PowerGeneration 35 65 35 28 72 46 I8 21 15 Power Transmission 8 64 36 40 60 62 8 19 11 Pipelines 8 65 35 42 58 52 3 20 25 Air 1 45 55 42 58 42 0 26 32 Mass Transit 1 70 30 50 50 97 0 3 0 Port 17 52 48 37 63 55 3 30 13 Rail 3 55 45 37 63 44 0 29 26 Road 3 55 45 37 63 65 2 it 22 Telecoms 34 51 49 33 67 62 8 17 13 Water/Waste 4 59 41 27 73 56 8 17 19 Miscellaneous 1 70 30 37 63 78 3 11 8 Total 115 58 42 33 67 55 9 20 15 by fiscal year 1967 1 63 37 33 67 87 0 13 0 1970 1 70 30 48 52 98 0 3 0 1977 1 73 27 73 27 73 ( 27 0 1981 2 67 33 52 48 61 9 23 6 1986 1 86 14 14 86 14 61 25 0 1987 1 60 40 75 25 75 0 25 0 1988 2 49 51 58 42 58 25 17 0 1989 6 68 32 57 43 65 8 26 1 1990) 6 53 47 52 48 66 11 23 1 1991 6 60 40 38 62 56 6 26 12 1992 7 57 43 38 62 59 4 18 19 1993 13 50 50 31 69 55 10 17 18 1994 19 59 41 37 63 56 8 20 16 1995 26 61 39 25 75 51 14 19 16 1996 23 54 46 22 78 50 6 21 23 Total 115 58 42 33 67 55 9 20 15 INTERNATIONAL FINANCE CORPORATION No. of % % % % % % % IFC %IFC projects debt equity local foreign private official own syndicated by Institutional Investor score 0-25 30 60 40 28 72 47 14 25 14 25-40 52 57 43 31 69 55 7 18 20 40+ 37 56 44 44 56 62 8 20 10 Subtotal 109 58 42 33 67 55 10 20 16 by income level Low income 29 65 35 25 75 54 15 20 1i Lower middle 40 60 40 36 64 Sl 10 23 15 Upper middle 45 51 49 38 62 60 5 18 17 Subtotal 114 58 42 34 66 56 9 20 15 by project status Expansion 55 56 44 41 59 60 6 19 15 Greenfield 58 59 41 27 73 51 13 21 15 Subtotal 113 58 42 34 66 55 9 20 15 Note: Due to rounding, somiie percentages inay not total 100s% lnstititinorieIl Investor country rating (( = worst, I(X) = best) FINANCING PRIVATE INFRASTRUCTURE Table A5: IFC's Advisory Work to Governments in Private Infrastructure, FY89-96 Country Project Year Description and IFC Task Argentina Aerolineas 1989 IFC advised the government of Argentina on valuation in the partial Argentinas privatization of Aerolineas Argentinas. Belize Belize City Port 1993 IFC received a mandate from the government of Belize to provide ad- vice on the privatization of the Belize City Port. Phase II started but IFC involvement terminated before sale. Colombia Central 1994 IFC advised the government on the formulationl of privatization Hidroelectrica strategy of a hydroelectric generating plant located south of Bogota de Betania. Ecuador Emetel 1996 Mandate signed to assist the Telecommunications Modernization Com- mission of Ermetel. Gabon SEEG (Water /Power) 1996 The govermnent of Gabon has appointed IFC as lead adviser for the preparation and implementation of the privatization of the provision of water and electricity services for the country. Societe d 'Energie et d 'Eau du Gabon (SEEG) is the public utility that presently has the exclusive concession for production, transportation, and distribution of water and electricity in Gabon. IFC's role includes designing a privatization strat- egy, preparing sales documentation. marketing to potential investors. and negotiating with selected investors. Haiti Democratization 1995 IFC is continuing work with the government of Haiti on the democra- Program (9 cos) tization of nine state owned enterprises that represent key economic sectors encompassing power, telecom, transport, finance, construction, and agribusiness. Under a contract funded mainly by USAID, the de- mocratization process is expected to increase public access to basic infrastructure services and reduce dependence on government finances by the state-owned enterprises. IFC will also assist the government to develop mechanisms to ensure that the benefits of enterprise privatiza- tion flow to the most disadvantaged segments of the population. India CWIS (Water) 1996 IFC is advising the government of Kerala in the establishment of a BOT/BOC)T water supply project that would provide water services to major industrial consumers in the Greater Cochin Industrial Area. This project is the first of its kind in India and is expected to serve as a model for replication. The project also represents an important step in the attraction of increased private sector participation in the modern- ization of India's infrastructure. Kenya Kenya Airways 1994-1995 IFC helped the government of Kenya in the privatization of Kenya Airways. Twenty-six percent of Kenya airways was sold to a major international airline, with further shares sold to international financial investors and the Kenyan public. This landmark transaction was the first privatization of an African airline and represented the largest-ever public offering on the Nairobi Stock Exchange. Pakistan FAEB (Power) 1996 The goveniment of Pakistan has appointed IFC as lead adviser in the planned privatization of Faisalabad Area Electricity Board (FAEB). The proposed privatization is a first for an electricity distribution network in Pakistan and is part of a wider government initiative to restructure and privatize the power sector. This privatization of one of the eight area electricity boards would be a critical step toward the complete INTERNATIONAL FINANCE CORPORATION L'.1MA 1191n4 * -- . ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 0 Country Project Year Description and IFC Task restructuring of the seclor. The government wishes to introduce a pri- vate sector operator/investor to FAEB in order to provide the necessary capital expenditures, improve operationaL,l efficiency and reliability, and serve as a mo(lel for other area boardls. Peru Electrolima 1993-1995 IFC advised the government in the structurinig and implementation of the privatization of this electricity generation and distribution company serving metropolitan Limna. Sixty percent of the distribution company was sold in August 1994 to two international consortia and 60 percent of the generation compaly was sold to an international consortium in November 1995. Peru Edelnor 1995 IFC provided the government a fairness opinion on the purchase price of the 60 percent of the Northern Lima electricity distribution company privatized in 1994. in thc content of offerings to employees and Peru- vian population. Peru Chancay and Canete 1996 The government ol' Peru appointed IFC as financial adviser in the pri- (Power) vatization of two small power companies: Chancay (north of Lima) and Cafnete (south of Linma). One of the companies, Chancay, was suc- cessfully privatized in January 1996. No bids were received for Canete. This company is likely to be merged with other regional distribution companies when they arc privatized. Philippines Philippines 1989-1990 After conducting a comprehensive review of PAL, IFC designed a de- Airlines (PAL) tailed debt-reduction and privatization program to enable PAL to achieve financial viability with a new ownership structure. PAL subsequently implemented the program, although IFC was not involved in the priva- tization transaction. Philippines MWSS (Water) 1996 The government of the P'hilippines, as part of a broader government initiative to improve the water services in the Philippines, has appointed IFC as lead adviser on the planned privatization of Metropolitan Water- works and Sewerage System (MWSS). In that function, IFC coordi- nates, supervises, and integrates the input of specialist consultants. MWSS provides water and sewerage services to the Metropolitan Ma- nila area. comprising eleven million potential customers. Of the total population, 67 percent have coniected water service while only 10 per- cent have sewerage connections. The latter poses significant environ- mental and public health hazards. MWSS produces close to 2.5 million cubic meters of water daily. but supply is intermittent and nonrevenue water loss is almost 55 percent. Sri Lanka Air Lanka 1992 IFC assessed Air Lanka's f'inancial capacity, reviewed options on refleeting, and planned to assist Air Lanka in the privatization transac- tion itself. Government chose not to implement privatization. Trinidad Trinidad & Tobago 1994 IFC advised the government on the sale ol' the generating assets of the & Tobago Electricity Commision commission. Two compainies. Southern Electric and Amoco Trinidad Power Resources Corporation. won through an international bidding process. Uganda UTL 1995 IFC is providing assistance to the goverinent of Uganda on the priva- tization of Uganda Telecom Limited (UTL) and the preparation for the sale of a license to a second network operator. IFC is coordinating with 96 FINANCING PRIVATE INFRASTRUCTURE Table A5: IFC's Advisory Work to Governments in Private Infrastructure, FY89-96 (cont.) Country Project Year Description and IFC Task IBRD on the preparatory phase of developing the necessary legal and regulatory framework. IFC will define the divestiture strategy, market, negotiate, and close both transactions with foreign strategic investor(s). Venezuela Gen. Advisory (Power) 1996 In its effort to privatize the electrical sector in Venezuela. the Venezu- elan (iovernment has appointed IFC to act as general adviser on the privatization of Venezuela's state-owned electricity sector. The work entails sequencing the sale for the various electricity companies, coor- dinating the work of investment banks in the selling strategies, and imple- menting the transactions for these companies. Venezuela Isla Margarita (Power) 1996 IFC is assisting with the privatization of an electric utility-Isla Margarita. 'he aim is for the privatization to serve as a model for future transactions in the sector. Zimbabwe Affretair 1993-1994 IFC helped the government to evaluate the viability of this national cargo airline. and to restructure it. INTERNATIONAL FINANCE CORPORATION Date Location Region Issues Participation December Bangkok, South and Review the region's private sector 29 officials from 12 countries; 19 12-13, 1993 Thailand East Asia infrastructure experience; examine the host private sector executives; 10 country policy environment to regulate and representatives from multilateral promote private infrastructure investments. organizations Discuss possible future trends and policy implications. November Beijing, China Review China's experience in attracting 38 government officials: 13 7-8, 1994 China FDI into infrastructure; examine the private sector executives; 8 experience in other countries and evaluate representatives from multilateral the particular obstacles encountered in organizations China. Develop policy options to overconme critical constraints. September Hanoi, Vietnam Review Vietnam's experience in attracting 25 government officials; 17 14-15, 1995 Vietnam FDI into infrastructure; examine the private sector executives; 5 experience in other countries an(d evaluate representatives from multilateral the particular obstacles encountered in organizations Vietnam. Develop policy options to overcome critical constraints February Vienna, Central and Discuss the impediments to a stronger 25 officials from I I countries; 17 8-9, 1996 Austria Eastern Europe involvement by foreign investors in the private sector executives; 22 region's infrastructure; examine the representatives from multilateral elements of an attractive enabling environ- and bilateral organizations ment; consider the necessary policy framework and institutional capacity. March Entebbe, Southern and Examine the role of FDI in Africa's 33 officials from 16 countries; 21 28-29,1996 Uganda Eastern Africa infrastructure; review the experience in private sector executives; 16 different regions; review the obstacles to representatives from multilateral promoting and implementing private organizations. infrastructure in the region. Develop policy options to overcome these constraints. 98 FINANCING PRIVATE INFRASTRUCTURE Table A7: Multilateral and Bilateral Financing of Private Infrastructure Projects in Developing Countries, 1993-1995 - Project finance App. 5 Agency date Project name Region Country Sector Description s' a- . ADB 1993 ILFS Ltd.* Asia India Misc. Leasing company na 15 15 ADB 1993 Fauji Oil Terminal CAMENA Pakistan Port Marine oil terminal/port oasim 82 19 19 ADB 1993 Batangas Power Corporation Asia Philippines Posser 123 27 27 ADB 1993 Pagbilao* Asia Philippines Po" er 700 MW coal-fired BOT X88 40 40 CDC 1993 Almacandorade Exportacion LAC Nicaragua Port Warehousing 3 1 0 1 CDC 1993 Fauji Oil Terminal CAMENA Pakistan Port Marine oil terminal/port oasim 82 18 1 19 CDC 1993 Grenada Electricity Services LAC Grenada Power Power generation 27 9 6 15 CDC 1993 Huh Power Co. Ltd. CAMENA Pakistan Power 4X323 MW oil-fired (BOO) 1.829 19 19 EBRD 1993 MI-M15 Toll Highway Europe Hungary Road Toll highway 428 137 7 144 EID/MITI 1993 Hub Power Co. Ltd. CAMENA Pakistan Posser 4X323 MW oil-fired (BOO) 1,829 96 96 EID/MITI 1993 Pagbilao* Asia Philippines Posser 700 MW coal-fired BOT 888 150 15t) IFU 1993 PECORSA LAC Argentina Posi er Electricity from wind power I () 0 U IFU 1993 DRTG Europe Russia Telecoms 12 3 3 IFU 1993 Moravska-Spolenost Europe Czech Republic Water/Waste Waste treatment () 0 0 IFU 1993 SSHL Europe Czech Republic Water/Waste Waste treatmcnt I 0 0 IIC 1993 Hydroelectrica Platanar LAC Costa Rica Power 15 MW hydroelectric 20 6 6 JEXIM 1993 Pagbilao* Asia Philippines Power 7(J0 MW coal-fired BOT 888 22(1 220 MIGA 1993 Cointel LAC Argcntina elelecoms Inv. in priv. of national telecoms 15 15 CDC 1994 John Fernandez Ltd. LAC Guyana Port Redevelop wharf space/port 4 2 2 CDC 1994 Hydroelectrica Platanar LAC Costa Rica Povs r 15 MW hydroelectric 21) 4 2 6 CDC 1994 Jamaican Private PowerCompany LAC Jamaica Power Power generation fossil fuel 14 II) 1 HI CDC 1994 Jamaican Private Power Company LAC Jamaica Pow.r Power generation fossil fuel 130 10 7 18 CDC 1994 Zanzibar Telecoms Ltd. Africa Tanzania Telecoms 26 8 3 1(1 CDC 1994 Clovergem* Africa Uganda Telecoms Cellular 16 4 1 6 CESCE 1994 Yacylec* LAC Argentina Power Power transmission 135 13 40 53 CFD 1994 Ciprel* Africa C6te d'lvoire Power 0(0) MW station 69 14 14 CFD 1994 Hidroelectrica de Cahora-Bassa Africa Mozambique Power Power transmission 149 17 17 DEC 1994 EXOLGAN LAC Argentina Port Container temiinal 11 DEG 1994 Rio Lajas LAC Costa Rica Pow.r 12 MW station 4 DEG 1994 Smith Enron Cogeneration* LAC Dominican Rep. PIow.r 185 MW power fossil fuel 2(04 1() DEG 1994 DECASA LAC Guatemala Pow.r 20 MW station 6 DEG 1994 Elcosa* LAC Honduras Power 80 MW diesel power plant 70 7 DEG 1994 Ferrosur LAC Argentina Rail Railways 40 10( DEG 1994 CTC* LAC Chile TeleLoms Telephone company 10 DEG 1994 PLD'I'* Asia Philippines Telecoms Telephone company 455 1(1 DEG 1994 lskratel Europe Slovenia Telecoms Teleconiunications systems 13 DEG 1994 Camtainer S.A. Africa Cameroon Transport Container/Transport I EBRD 1994 Eurotel Praeue Europe Czech Republic 'rele(oms Expansion w/e-mail 4 4 EBRD 1994 Kabel Net Europe Czech Republic Telecoms Install. des. & oper. cable service 39 11 EBRD 1994 CETAL* Europe Europe Region Telecoms Agency line for telecom priv. 128 65 EBRD 1994 Mobil Telesystems/GSM/900 Europe Russian Federation Telecoms GSM 900 Network 421 42 EIB 1994 Gas Natural Ban S.A. LAC Argentina Power Modemization of dist. network 196 59 59 EIB 1994 CTC LAC Chile Telecoms Network mod. and ext. 937 96 96 FMO 1994 Edenor* LAC Argentina Power Power distribution 400 1() 11) FMO 1994 Aguas LAC Costa Rica Power Power generation 17 2 2 FMO 1994 Puerto Quetzal* LAC Guatemala Power 110MW diesel 92 13 13 FMO 1994 Elcosa* LAC Honduras Power 80 MW diesel power plant 70 11 11 IFU 1994 Fibcom Ltd. Asia India Power Power transmission systems 8 1 1 IFU 1994 Inreco Poland Europe Poland Road Road maintenance 0 0 0 IFU 1994 Kelet-Nograd-Com Europe Hungary Telecoms Telecommunications 69 4 1 5 IFU 1994 Pannon GSM Europe Hungary [elecoms Cellular 215 4 4 INTERNATIONAL FINANCE CORPORATION App. . 5 Agency date Project name Region Country Sector Description a IZ ; C IFU 1994 Raba-com Europe Hungary Telecoms 29 2 i 3 IFU 1994 Arcodan Asia India Telecontm. Cable-TV systems 2 () 0 IFU 1994 Segetrans S.A. LAC Chile Transport I I IFU 1994 DanBalt Trans UAB Europe Lithuania Transport Spedition & transport 0 ( 0 (' IFU 1994 Ailinco LAC Argentina Water/Waste Treatment of hazardous waste 16 1 I IFU 1994 EKO-Chlebicov Europe Czech Republic Water/Waste Waste management 3 1 I IFU 1994 Regios Europe Czech Republic WMtter/Waste Waste management 4 1 1 IIC 1994 San Lorenzo/Conelectricas LAC Costa Rica Power 15MW hydroelectric 23 3 3 tIC 1994 Fondelec-Energy & Elec. Fund LAC Regional Power Inv. fund for private power 30 5 5 IIC 1994 Impsat LAC Colombia Teleconm Private satellite network 48 3 1 4 JEXIM 1994 Hub Power Co. Ltd. CAMENA Pakistan Power 4X323 MW oil-fired (BOO) 1.829 135 135 JEXIM 1994 Leyte Geothermal Asia Philippines Power 440 MW geothermal power 1,334 185 185 JEXIM 1994 Metrovias Subway LAC Argentina Rail Purchase passenger cars 9 9 JEXIM J994 PLDT* Asia Philippines Teleconts Outside plant network 320 55 55 MIGA 1994 Transener SA. LAC Argentina Power Priv. of Transener S.A. 15 15 MIGA 1994 PMCL CAMENA Pakistan Telecotns Cellular 7 7 MIGA 1994 PMCL CAMENA Pakistan Telecottts 17 17 OPIC 1994 Bechtel Group. Inc. CAMENA Algeria Pipeliie Natural gas pipeline 55 55 OPIC 1994 Enron Corp. LAC Colombia Pipeline Natural gas pipeline 10() 1(00 OPIC 1994 CMS Generation Co. LAC Argentina Power Ellectric power generation 30 3(0 OPIC 1994 WRB Enterprises, Inc. LAC Grenada Power Power generation 8 8 OPIC 1994 Dabhol Power Company Asia India Power Power generation 1(0 1(0 OPIC 1994 Dabhol Power Company Asia India Power Power getteration 10( 10( OPIC 1994 lb Valley* Asia India Power Power generation 72(0 150 150 OPIC 1994 lb Valley* Asia India Power Power generation 720 75 75 OPIC 1994 Mission Energy Company Asia Indonesia Power Power generation 2(0) 20(0 OPIC 1994 Califomia Energy Company Asia Philippines Power Power generation 7(0 70 OPIC 1994 CE Luzon Geothermal Power Co. Asia Philippines Power Power generation 40 40 OPIC 1994 CE Luzon Geothermal Power Co. Asia Philippines l'ower Power generation 1()0 1()0 OPIC 1994 Citibank/Enron/l st Nat. of Boston Asia Philippines Power Power generation 69 69 OPIC 1994 Visayas Geothermal Power Co. Asia Philippines lPowel Power generation 75 75 OPIC 1994 Trakya Elektrik Uretim ve Ticaret Europe Turkey Power Electric power getteration 85 85 OPIC 1994 LG&E Energy Systems. Inc. LAC Venezuela lPowel Power generation 65 65 OPIC 1994 CTI Comp. de Tele. del Interior LAC Argentina Telecoms Cellular 2(0) 2()0 OPIC 1994 United Intemational Holdings LAC Brazil lelecomrs Cable television 20 20 OPIC 1994 Monor Telefon Tarasag RT Europe Hungary relecoms 3(0 3(0 OPIC 1994 Westel 900* Europe Hungary Telecorms Cellular 45 45 OPIC 1994 Telecel Madagascar, S.A. Africa Madagascar Telecoms Telephone system 9 9 OPIC 1994 Andrew Corporation Europe Russia Telecomss 8 8 OPIC 1994 Andrew Corporation Europe Russia Telecoms 5 5 OPIC 1994 Intemational Business Comm. Europe Russia Telecoms Satellite telecommunications 25 25 OPIC 1994 Mid-Com Communications. Inc. Europe Russia Telecoms 38 38 OPIC 1994 RTDC Europe Russia Telecoms 125 125 OPIC 1994 SFMT, Inc. Europe Russia Telecoms 6(0 6(1 OPIC 1994 Adelphia Communications nt. LAC Venezuela Telecoms Cable television 8 8 OPIC 1994 Radio Movil Digital Venezuela LAC Venezuela Telecoms Mobile radio communications 8 8 OPIC 1994 Citibank Colombia-Nassau LAC Colombia Tran port Transportation equipment 9 9 OPIC 1994 Citibank, N.A. LAC Jamaica Transport Air terminal construction 9(1 9() Proparco 1994 Ciprel* Africa Cbte dIvoire Power 1(0 MW station 69 12 12 Proparco 1994 A Company CAMENA Tunisia Road Installation of toll gates 6 6 Sinvest 1994 Autopistas del Sol LAC Argentina Roa(d Toll highways 325 2 2 100 FINANCING PRIVATE INFRASTRUCTURE Table A7: Multilateral and Bilateral Financing of Private Infrastructure Projects in Developing Countries, 1993-1995 (cont.) Project finance 5, - - 7._ _ App. G V Agency date Project name Region Country Sector D)escription z Li Sinvest 1994 Pianimpianti Maroc CAMENA Morocco Watl/rWastc (I 1) () Swedfund 1994 Pannon GSM Telecoms. Europe Hungary Telesoms Cellular 215 5 5 Swedfund 1994 Comvik International Vietnam Asia Vietniam Telceoms 9(t 4 4 USEXIM 1994 Mahanagdong Asia Philippines Pow,vr Power teneration 320 200 8() 28(0 USEXIM 1994 Upper Mahiao Asia Philippines PowCr Power generationi 229 (O8 57 225 CDC 1995 Kingston Wharres Ltd. LAC Jamaica Port Transport port/tcmtinatls (t ( CDC 1995 Oasion Intl. Container Term. CAMENA Pakistan l'ort Transport port/terminals II II 11 CDC 1995 Comp. de Electric. de Puerto Plata LAC Dominican Rep. Polscr Power genieraition fossil Iuel 74 13 13 CDC 1995 Smith Enron Cogeneration* LAC Dominicani Rep. Powcr 185 MW power fossil Iucl 2(04 9' 19 CDC 1995 Sual Thermal* Asia Philippines Poner Power aeneration tossil tuel 1.4012 34 34 CGIC 1995 Aounda Power Station Africa Congo Power Power uen. andl tri.s 51) 15 15 5() COFIDES 1995 Autopistas del Sol LAC Argentinalt Road Toll highways 325 2 2 DEG 1995 Terminales Portuarias* LAC Argentina l'ort Contalirlt terminal 5() 2 EBRD 1995 M5 Motorway Europe Hungary Road Priviate toll road 468 154 EBRD 1995 Deltav Rt Europe Hungary Tclecolms Capital eXpelditdure program 21(0 38 EBRD 1995 EMITEL Rt Europe Hungary lelecoms Exp. anid (CV. (oflocal reteworks 85 15 EBRD 1995 Matav - Investel synd. loan facility Europe Hungary Telecnims Expansion & mod,. ofi network 994 68 EBRD 1995 United Teleconmmunications Inv. Europe Hungary Telcconrs Exp. an( dev. olflocil network 3(0(1 59 EBRD 1995 Slovakia Telecom Europe Slovenia Telecotns Information program 3(16 46 46 EBRD 1995 Muncipal Services Multi-project Europe Regional Water'Waste Gas/Saiitar)/Water supply 3(0(0 9() ECGD 1995 Manah Power CAMENA Oman P'owel Power cen ail(f trans. 2(05 27 27 ECGD 1995 Sual Thermal, Asia Philippines l'owet 2X60(0 MW coal-fired power 14012 445 445 EIB 1995 Aguas Argenginas LAC Argentina Water,Waste Rehaband expansioni ofsystem 253 911 9(t EID/MITI 1995 Paiton Power Asia Indonesia Pover 2X6l5 MW coal-fired 2.500(1 36(0 360) EID/MITI 1995 AES Lal Pir* CAMENA Pakistan Power 362 MW oil-fired (BOO) 343 73 73 EID/MITI 1995 Geothermal Plant Asia Philippines Power Power generation 65 8 8 EID/MITI 1995 Flag LAC Bermuda lelecools 561 4t)5 4()5 FMO 1995 Terminales Rio de la Plata LAC Argentina P'ort Port 8() 8 4 12 FMO 1995 Societe National d'Electricite Africa Congo Power Power distribution 9 2 2 FMO 1995 Smith Enron Cogeneration* LAC Dom. Repulh. Po\wer 185 MW power fossil ftiel 2()4 15 15 FMO 1995 Ferrosur LAC Argetitina Rail Railways 4( 1() 1() IDB 1995 Terminales Portuarias* LAC Argentina Plort Container terminal 5() 1) (1( IDB 1995 LITSA LAC Argentina Power l'ower trans. (Yacyreta) 177 43 43 IDB 1995 Tilaran LAC Costa Rica Power 2(0 MW wind turhine 30( 7 7 IDB 1995 Elcosa* LAC Honduras Power 8(1 MW diesel power plant 7( 11 i IDB 1995 Samalayuca LAC Mexico Power 69(1 MW power generation 643 75 75 IFU 1995 Ghana emulsion Africa Ghana Road 5 1 1 IFU 1995 Male Water & Sewage Co. Ltd. Asia Maldises Water/Waste Water & sewage systems 23 5 5 JEXIM 1995 Paiton Energy Asia Indonesia Powel 2X615 MW coal-fired 2.5()0 54(0 54(0 JEXIM 1995 AES Lal Pir* CAMENA Pakistan Powel 362 MW oil-fired (BOO) 343 23 1 231 JEXIM 1995 Pak Gen Power* CAMENA Pakistan Power 337 MW oil-Fired (BOO) 349 01(8 I()X JEXIM 1995 Tel Networks Ex. LAC Argentina Teleconis Network cxtension 7001 8(1 8() KfW 1995 Asia China Power Power generation 181( KtW 1(995 Asia Philippines Teleconis 181 MIGA 1995 Elcosa* I-AC Honduras Po elr 8() MW diesel power plant 71) 2 2 MIGA 1995 Elcosa* LAC Honduras Po\Ner 81) MW diesel power plant 71) 4 4 MIGA 1995 Elcosa* LAC Honduras Pokser 81) MW diesel power platlt 7(0 6 6 MIGA 1995 Elcosa* LAC Honduras Power 8() MW diesel power plant 71) ) 9 MIGA 1995 Elcosa* LAC Honduras Power 81) MW diesel power plant 7) 9' 9 MIGA 1995 Jamaican Private Power Company LAC Jamaica Power 61) MW diesel power platit 26 26 MIGA 1995 Jamaican Private Power Company LAC Jamaica Poewer 611 MW diesel power plant 3 3 INTERNATIONAL FINANCE CORPORATION 101 App. - -. Agency date Project name Region Country Sector Description & MIGA 1995 Jamaican Private Power Company LAC Jamaica Power 60 MW diesel power plant I I MIGA 1995 Jamaican Private Power Company LAC Jamaica Power 60 MW diesel power plant 12 12 MIGA 1995 Jamaican Private Power Company LAC Jamaica Power 60 MW diesel power plant 8 8 MIGA 1995 Tintaya Asia Philippines Power 231 MW geothermal plant 30 30 MIGA 1995 Autopistas del Sol LAC Argentina Road Toll highways 325 5 5 OPIC 1995 Termobarranquilla LAC Colombia Power 750 MW combined cycle power 738 150 150 OPIC 1995 TECO Power Services Corp. LAC Guatemala Power Oil-fired power generation 154 154 OPIC 1995 Paiton Power Asia Indonesia Power 1230 MW coal-fired power 2,500 200 200 OPIC 1995 Caterpillar Financial Services Corp. LAC Jamaica Power Oil-fired power generation 3 3 OPIC 1995 Old Harbour Diesel* LAC Jamaica Power Oil-fired power generation 50 50 OPIC 1995 Magma/Visayas Power Asia Philippines Power Geothermal power generation 200 200 OPIC 1995 Ogden/International Generating Asia Philippines Power Coal-fired power generation 100 100 OPIC 1995 Enron Corp. Europe Turkey Power Gas-fired power generation 200 200 OPIC 1995 Mission Energy Company Europe Turkey Power Gas-fired power generation 80 80 OPIC 1995 GTE LAC Argentina Telecoms Cellular 175 175 OPIC 1995 Citibank, N.A. LAC Brazil Telecoms Cable television 13 13 OPIC 1995 Motorola, Inc. LAC Brazil 'Telecoms Telephone trunking system I I OPIC 1995 Andrew Corporation Europe Hungary 'Telecoms Telephone system upgrade 60 60 OPIC 1995 International Telcell, Inc. Europe Hungary Telecoms Cellular 9 9 OPIC 1995 Westel 900* Europe Hungary Telecoms Cellular 25 25 OPIC 1995 TK Tel, Ltd. CAMENA Kyrgyzstan Telecoms Cellular 25 25 OPIC 1995 Intemational Telcell SPS Europe Latvia Telecoms Cable television network 4 4 OPIC 1995 Intemational Telcell SPS Europe New Ind. St./E. Eur. Telecoms Cable television network 26 26 OPIC 1995 Andrew Corporation Europe Russia Telecoms Voice/data communications 3 3 OPIC 1995 Andrew Corporation Europe Russia Telecoms Fiber-optic telecommunications 7 7 OPIC 1995 Andrew Corporation Europe Russia Telecoms Fiber-optic telecommunications 10 10 OPIC 1995 Andrew Corporation Europe Russia Telecoms Telephone services 8 8 OPIC 1995 RTDC* Europe Russia Telecoms 75 75 OPIC 1995 ICF Kaiser Intemational Holdings Asia Philippines Transport Light rail transport system 150 150 Sinvest 1995 ENECOR LAC Argentina Power 28 0 0 Swedfund 1995 Mobile Telecommunications Ltd Africa Namibia Telecoms Celular: Phase 1 18 2 2 4 USEXIM 1995 Termobarranquilia LAC Colombia Power 750 MW combined cycle power 738 162 162 USEXIM 1995 Paiton Power Asia Indonesia Power 1230 MW coal-fired power 2,500 540 540 USEXIM 1995 Samalayuca LAC Mexico Power 690 MW power generation 643 477 477 USEXIM 1995 Sual Thermal* Asia Philippines Power 2X600 MW coal-fired power 1402 182 182 USEXIM 1995 Marmara Europe Turkey Powser 500 MW gas-fired plant 544 241 241 Notes: *Denotes projects financed by IFC as well. These figures have been collected from annual reports of official financing agencies and, in some cases, direct correspondence. Coverage is not complete in termts of organizations, financing details obtained or time periods (parnicularly 1995). However, the list does provide an indicative measure of the increased participation of official financing in PPI financinig. Where the sanme project was financed by several agencies, a common project size was used. 102 FINANCING PRIVATE INFRASTRUCTURE Table A8: Summmary of Multilateral and Bilateral Financing of Private Infrastructure Projects in Developing Countries, 1993-95 Total Official Total Official Number of project cost financing Number of project cost financing projects (US$m) (US$m) projects (US$m) (US$m) by year by sector 1993 18 1,585 789 Miscellaneous 1 0 15 1994 89 8,917 3,521 Pipeline 2 0 155 1995 82 11,761 6,965 Port 10 230 86 Total 189 22,264 11,275 Power 92 13,988 7,932 Rail 3 40 28 by agency Road 8 1.226 314 ADB 4 101 Telecoms 58 6,179 2,305 CDC 15 184 Transport 6 1 251 CESCE 1 53 Water/Waste 9 599 188 CFD 2 31 Total 189 22,264 11,275 CGIC 1 50 COFIDES 1 2 by region DEG 11 83 Africa I1 340 125 EBRD 12 736 Aski 38 8,478 5,347 ECGD 2 472 Bermuda 1 561 405 EIB 3 245 CAMENA 16 2,818 847 EID/MITI 6 1,092 Europe 46 4,560 1,939 FMO 8 74 LAC 77 5,506 2,611 IDB 5 146 Total 189 22,264 11,275 IFU 17 27 IIC 4 18 JEXIM 9 1,563 KfW 2 361 MIGA 16 169 OPIC 55 3,727 Proparco 2 18 Swedfund 3 13 USEXIM 7 2,107 Sinvest 3 3 Total 189 11,275 INTERNATIONAL FINANCE CORPORATION 103 .6 -- Of which Of which l'otal cost Cost Total cost Cost Country projects known (US$m) Country projects known (US$m) by region Venezuela 5 3 2,0(X) Asia Subtotal (20 countries) 235 170 61,453 Bamgladesh I Cambodia I I 1( Africa China 48 33 15,828 Benin 3 1 15 fndia 18 If 4,248 Botswana I Indonesia 11 7 5,226 Burkina Faso I 1 4 Laos I Burundi I Malaysia 31 23 17,360 Cameroon 3 1 300 Maldives I Cent. Alrican Rep. 2 Myanmar I Chad I Philippines 51 49 11,223 C6te (I'lvoire 5 4 280 Solomon Islands I Djibouti I South Korea 6 3 4,437 Equatorial Guinca I Sri Lanka 4 Ethiopia I Thailand 12 8 9,419 Gabon 4 Vanuatu I Gambia I Vietnam 2 2 715 Ghana 3 1 185 Subtotal (16 countries) 190 137 68,465 Guinea 7 1 1 G(uinca-Bissau I CAMENA Madagascar 3 Algeria 3 1 2,800 Mali Bahrain I Mauritania I Egypt I 1 1,500 Mauritius Kazakhstan 2 1 17 Mozambiclue 5 1 5 Morocco 5 4 2,967 Namibia I 1 32 Pakistan 6 4 3.90)8 Niger I Tunisia I 1 97 Nigeria 2 1 900 Turkmenistan I I 8( Sao Tome & Principe I United Arab Emirates I Seychelles I Yemeni 2 Sierri Leone 3 Subtotal (10 countries) 23 13 11,369 South Africa 12 Sudan I LAC Tanzania 2 2 8 Argentina 70 61 26,845 Togo Belize 2 l 32 Ugancla 2 1 16 Bolivia 7 4 1,103 Zaire 2 Brazil 4 2 509 Subtotal (33 countries) 79 15 1,747 Chile 22 1 1 1,960 Colombia 1l 6 591 Europe Costa Rica 2 l 20 Belarus 5 3 20 Dominiican Republic 4 3 265 Bulgaria 2 1 42 El Salvador 3 1 74 Czech Republic 7 1 1,450 Guatemala 3 2 107 Estonia 6 3 3 Guyana I Hungary 7 6 2,452 Honduras 4 2 104 Latvia 2 1 160 Jamaica 3 3 369 Lithuania 2 Mexico 80 63 24,438 Poland 6 2 380 Nicaragua 2 l 0 Russia 15 3 200 Panama 2 1 8 Slovak Republic I Peru 4 4 2,915 Turkey 5 5 1,828 Trinidad & Tobago 3 1 112 Ukraine 2 1 500 UJruguay 3 Subtotal (12 countries) 60 26 7,035 104 FINANCING PRIVATE INFRASTRUCTURE Table A9: Private Infrastructure Projects in Developing Countries, 1990-December 1995 Of which Total cost Cost Country projects known (US$m) by region (summary) Asia 19( 137 68,465 CAMENA 23 13 11,369 LAC 235 170 61,453 Africa 79 15 1,747 Europe 60 26 7,035 Total 587 361 150,068 by sector Gas 32 23 9,989 Power 196 156 50,593 Telecom 133 46 41,428 Transport 180 114 32,035 Waste 20 13 8,774 Water 15 5 1,444 Other 11 4 5,804 Total 587 361 150,068 Source: World Bank PPI Database. Note: This database is maintained by the Private Participation in Infrastructure GrouIp in the World Bank (contacl Ben Shin. 20)2-473-2057). The inforination is drawn from published sources such as major newspapers and industry nevws- letters. While giving the best overall picture (particularly about pending projects), there are two limitations with the data: Coverage is limited b) whatever biases the published sources might have. such as towards larger projects or particular regions or sectors. * Financing figures are incomplete. Costs and finanicing sources are not known on some projects, and in some other cases it is not known whether projects have achieved financial closure. INTERNATIONAL FINANCE CORPORATION 105 *Tilzr . 0= * * r M. * RM7- - ,W f .5ss - .S 1988 1989 1990 1991 Of which Of which Of which Of which Total foreign Total foreign Total foreign Total foreign Infrastructure sector (US$m) (lS$m) (US$m) (US$m) (US$m) (US$m) (US$m) (US$m) Telecom 325 150 212 46 3,690 1,203 5,80() 1,532 Power 106 45 2,108 441 59 4 364 76 Gas distribution 0 0 0 0 0 0 0 0 Railroads 0 0 0 () 0 0 159 49 Road infrastructure 0 0 0 0 300 0 0 ( Ports 0 0 0 0 0 0 0 0 Water 0 0 0 0 2 0 0 0 Subtotal 431 195 2,320 487 4,051 1,207 6,323 1,657 closely related privatizations Airlines 367 367 473 351 1,926 1,094 269 191 Road Transport 0 0 0 0 13 1 ( 40 2 Shipping 0 ( 0 0 10 1 ( 181 150 All Infrastructure 798 562 2,793 838 6,000 2,321 6,812 2,001 Foreign share 70% 3003 39% 29% 1992 1993 1994 Of which Of which Of which Total foreign Total foreign Total foreign Infrastructure sector (US$m) (US$m) (US$m) (US$m) (UJS$m) (US$m) Telecom 3.007 485 1,269 340 6,725 1,864 Power 2.996 1,138 1,767 946 1,645 630 Gas Distribution 1.905 1,400 105 68 651 143 Railroads 217 153 0 0 0 0 Road Infrastructure 0 0 0 () 0 0 Ports 13 9 274 116 4 2 Water 175 0 50 0 0 0 Subtotal 8,313 3,186 3,466 1,470 9,026 2,639 closely related privatizations Airlines 1.472 430 820 183 763 264 Road Transport 19 11 54 47 90 61 Shipping 14 12 45 42 247 133 All Infrastructure 9,818 3,639 4,385 1,742 10,126 3,097 Foreign share 37% 40% 31% Source: World Bank. Note: A database on all privatizations is maintained by the Intemnational Economics Depanment in the World Bank (contact Andrea Anayiotos 202473-3920). The latest two years on the database are published anniually as anl annex in the World Debt Tables. The figures on privatization of infrastructure enterprises have beenl drawn from this database. 106 FINANCING PRIVATE INFRASTRUCTURE Table All: Loans to Private Infrastructure Projects, 1990-95 1990 1991 1992 1993 No. of No. of No. of No. of US$m Co's US$m Co's lIJS$m Co's US$m Co's by sector Airline 80 4 687 7 406 12 425 3 Communications 446 4 998 11 643 11 3,179 9 Electrical Utility 117 2 75 2 1.241 5 2,126 25 Motorway Operator 464 3 1,040 6 Shipping 419 5 835 7 171 5 1,389 15 Transportation 9 2 36 2 54 3 Water & Sewerage 106 2 124 2 Subtotal Infrastructure 1,535 20 2,595 27 2,603 37 8,338 63 Oil & Gas 2,072 10 2522 15 1.557 24 3,015 30 Other 8,222 182 8,896 3(15 12,82 317 14,842 383 Subtotal 11,829 212 14,014 347 17,042 378 26,196 476 by region Africa 0 0 428 1 13 1 142 2 Asia 1.062 12 1.105 12 1,89() 23 6.409 34 Camena 6 1 0 () 92 1 15 1 Europe 0 0 0 0 118 2 324 7 LAC 467 7 1,061 14 490 1 0 1,448 19 Subtotal Infrastructure 1,535 20 2,595 27 2,603 37 8,338 63 1994 1995 No. of No. of US$m Co's US$m Co's by sector Airline 1.027 4 383 5 Communications 2.034 26 3,250 36 Electrical Utility 4.785 36 8,950 6(0 Motorway Operator 98 2 1.177 12 Shipping 1,234 31 2,715 66 Transportation 166 2 158 4 Water & Sewerage 180 5 1,094 1(U Subtotal Infrastructure 9,523 106 17,726 193 Oil & Gas 2.555 18 3,160 35 Other 20,606 485 28,400 53s5 Subtotal 32,683 609 49,286 763 by region Africa 172 3 41 3 Asia 5,825 53 10,280 1()5 Camena 854 7 859 22 Europe 280 9 2,925 26 LAC 2,391 34 3,622 37 Subtotal Infrastructure 9,523 106 17,726 193 Sour, e: Capital DATA Loanware. Note: This database provides information on international loans, including those to infrastructure projects. It con1- tains detailed information on horrowers and financing characteristics and is updated v ceklv INTERNATIONAL FINANCE CORPORATION 107 -S . - . s Insurance is an integral part of the security package for project finance and particularly so for infrastructure, where the size and complexity of projects necessitates a careful and thorough analysis of risks, exposures, and correspond- ing insurance requirements. The obligations arising from project-related documents and contracts (such as implementation agreements, power purchase agreements, fuel supply agreements, EPC contracts, concession agreements, and O&M agreements) and their implications, are all taken into account in the formulation of minimum insurance requirements. Scope of Insurance Coverage The following basic policies (in addition to all statutorily required insurances) are typical of the requirements for projects: Construction Phase * Construction All Risks, based on full contract value and covering the risks of physical loss or damage to the contract works until project completion. * Marine All Risks, covering the transit of plant and equipment from suppliers' premises to the project site. * Delay in Start-Up, which covers continuing fixed expenses (including debt service) and loss of anticipated net profit in the event of delay in project completion, as a result of insured loss or damage during the marine transit or construction. Operational Phase * All Risks of physical loss or damage to assets, based on replacement value. * Machinery Breakdown (defined as "sudden and unforeseen mechanical and electrical breakdown). * Business Interruption following physical loss or damage to contract works or to equipment in transit. * Third-Party Liability Lenders' Insurance Requirements Although there is no blueprint of standard requirements for infrastructure projects, as programs should ideally be tailor-made to suit the requirements of each case, the following is a list of desirable features from a lender's perspec- tive: * "Owner or Principal Controled" insurance program. It is very important that the sponsor, and not the contractor, arrange and control the insurance program. The owner needs to ensure that the program meets the requirements of the financing agreement, to which the contractor is not usually a direct party. An owner should have control over the choice of insurer and nature and extent of cover. Owner-controled programs are usually more cost effective and allow ease of administration and control. And the involvement of a sole lead insurer eliminates potential conflicts that would arise if more than one insurer is involved in the construction insurances. If the contractor arranges the construction physical damage insurances, an owner may find it difficult, if not impossible, to arrange the Delay in Start-Up insurances separately. Even for a turnkey contract an owner can arrange the insurances. Some contractors may add insurances in the overall turnkey contract price, without specifying the actual cost. 108 FINANCING PRIVATE INFRASTRUCTURE Box Al: Insurance Arrangements for Infrastructure Projects (cont.) Broad Form insurance program. Policies should be based on international- as opposed to local-wordings. And manuscript policies are preferable to "off-the-shelf' versions. In many developing countries, insurance markets are still evolving and the breadth and sophistication of covers required by lenders is not yet available in most local markets. Reinsurance of the program into the intemational market, with a small retention by local insurers is recom- mended. Participation by domestic insurers is desirable. Selection of the insurer should be based on size and capacity. The identity and retention levels of reinsurers require monitoring. X For projects faced with high exposure to natural hazards, for example, earthquake, volcanic eruption, and the like, full value insurance as opposed to loss limits should be arranged, to the extent that such cover is available. * Inclusion of the full range of "Bankers Clause," such as inclusion of lenders as insured parties, waiver of subrogation, nonvitiation, assignment. loss payee provisions, and noncancellation. The intent of a nonvitiation clause is to ensure that the interests, rights, and benefits of lenders are not prejudiced in the event that the sponsor or any one of the other insured parties breaches a policy warranty, condition, or terms, or fails to do something that is required of them. In addition to being named as "Sole Loss Payees," lenders require assign- ment of all insurance policies. This strengthens the lenders' position by giving them preferential creditor status in the event of insolvency of the insured. INTERNATIONAL FINANACE CORPORATION 109 ~~~~~~~~~~ -. Project Description . Production process (a) Plant layout and production flow diagram * Proposed ownership structure and sponsors' in- (b) Critical operations/bottlenecks formation (c) Options for future expansion or modification * Legal status of project and status of governmnent Production requirements and costs (per unit) approvals (a) Raw materials-sources, quality, local versus domestic * Project's comparative advantages (b) Consumables (c) Utilities-sources, reliability (d) Labor Capital Investment (e) Maintenance (f) Fees and royalties * Project site (g) Expected changes in operating efficiency (a) Size and location of project site (land) (b) Infrastructure requirements * Annual capital investment (c) Legal agreements for land use rights * Quality control * Civil works and buildings * Environmental impact * Major and auxiliaiy equipment (a) Description of environmental impact (a) Estimatedrequirementsandcosts-imported (b) Plans for treatment of emissions and disposal versus local and duties of effluents (b) Potential suppliers/contractors (c) Occupational health and safety issues (d) Local regulations-plans for compliance * Project management-plant construction and su- pervision services * Technical assistance agreements(s) (a) Status of negotiations-proposed terms Pre-operating requirements and costs (b) Patents and proprietary technology (c) Training and support for plant staff * Contingencies (physical) and escalations (finan- cial) Marketing and Sales * Initial working capital requirements * Product definition Project Schedules . Competitive position of product/company (a) Product advantages versus competition (current * Construction, start-up, operations and future) (b) Project's target market(s) * Expenditures * Market structure * Funding (a) Demand-domestic versus foreign, current ver- sus future Production Process (b) Supply-domestic versus foreign, current ver- sus future-capacity, cost position, strategy * Production technology versus state of the art (c) Marketing and sales practices (d) Market trends in future-new products, etc. * Scale and scope of production (e) Projected market share by segment (a) Rated capacity and comparison with optimal sizes * Marketing/sales arrangements and fees (b) Expected operating efficiency (c) Frequency of shut-downs, changeovers Management and Personnel (d) Previous experience with technology * Organization chart and manpower requirements 11 0 FINANCNG PRIVATE INFRASTRUCTURE Box A2: Subjects Covered in IFC's Project Appraisal (cont.) * Personnel practices * Management targets and incentives * Management agreement Financing * Capital structure (a) Proposed debt/equity structure (b) Equity (1) Shareholder structure (2) Long-term plans-stay private/go public (3) Quasi-equity-subordinated debt, and so forth (c) Debt (1) Long-term debt/working capital (2) Domestic/foreign (3) Desired terms and conditions (4) Funding sources already identified * Margin and breakeven analysis (a) Unit cost structure as percentage of unit sales price (b) Cash and full-cost bases (c) Fixed and variable costs * Financial projections (a) Projected financial statements-income state- ments, cash flows, balance sheets (b) Clear statement of all assumptions (c) Sensitivity analyses under different scenarios Copies of Legal Documents * Joint venture agreements * Articles of association * Government approval documents/business license * Land certificate/red line map * Mortgages, if any * Loan agreements * Major contracts including (a) Off-take arrangements to the sponsors, if any (b) Technical assistance agreements INTERNAjIONAL FINANACE CORPORATION _ : 1 .~~ ...1 . S] * *: * The following is a summary of key points contained in toll road concession agreements signed between private project developers and government agencies. It is drawn from several concession agreements that IFC has reviewed in the course of appraisal. It is meant to be illustrative, rather than exhaustive. Each concession agreement will vary according to the particular circumstances of the road to be constructed, rehabilitated, or maintained, and how respon- sibilities are allocated between government and the concessionaire-narnely, which party is responsible for final design and which for connecting roads. Particular care is needed in drafting sections that might serve as bidding criteria, for instance "lowest average toll rate," and "minimum government contribution." Clause 1. Definitions and Interpretation. A list of the definitions of terms appearing within the Concession Con- tract. Clause 2. Concession Rights and Obligations. A summary of the general rights and obligations awarded to the Concessionaire by the relevant Ministry in accordance with the relevant Act. Included in this Clause may be refer- ence to the Concessionaire's responsibility for undertaking work at their own cost and risk, and without recourse to Government credits or loan guarantees. Where the Concession Contract places financial burdens on the Ministry, this Clause may include a statement that such financial obligations shall be backed by the full faith and credit of the State. The clause may also specify annual Concession Fees, land ownership/title arrangements, and arrangements regard- ing construction of competing roadways or bridges in the vicinity of the works. Clause 3. Concession Company. This outlines requirements for the establishment of the Concession Company, its registration as a legal entity, and the Company's minimum registered capital. Clause 4. Pre-Concession Period and Effectiveness. The Pre-Concession period commences on the date of the Concession Contract and lasts until the Effective Date. This clause specifies the obligations of the Concession Com- pany during the Pre-Concession period in terms of company registration, preparation, and submission of design for approval, entry into the Construction Contract, entry into the Shareholders Agreement for subscribing the initial registered capital of the Concession Company, and preparation of the manual for construction works. The Conces- sion Company will also during this period use all endeavors to raise funding for the project to achieve Financial Closing. This clause also outlines the Ministry's obligations during the Pre-Concession period. The Ministry shall provide all reasonable assistance to the Concessionaire in its applications for the Specified Consents and perform other actions required by the Concession Agreement such as allocation of land and Right of Way. The Effective Date may be defined in several ways, including: achievement of Financial Closing; or delivery of the site by the Ministry with Vacant Enjoyment together with the necessary rights of way. If the Effective Date is not reached within a fixed period (usually twelve to fourteen months) of the date of the Concession Contract, the validity of the Concession Contract shall cease in its entirety, unless provision is made for the parties to agree to an extension. The Ministry may reimburse the Concession Company its direct costs incurred during the Pre-Concession period should the Ministry fail to complete the acquisition of land or should any Relevant Authority refuse to grant any of the Specified Consents. After the Effective Date, the clause specifies the time period over which the registered capital of the Concession Company should reach certain minimum values. During the Pre-Concession period, an Environmental Impact Study (EIS) will be undertaken, to be carried out either by the Concession Company or the Ministry. The EIS will be in accordance with relevant laws or decrees. Clause S. Independent Engineer. This provides for the appointment of an independent engineer for the period of the construction works. The independent engineer will report directly to the Ministry, the Concession Company and to the Lenders or the Lenders' Representatives. The costs of the independent engineer may be borne entirely by the Concession Company. Clause 6. Acquisition of Site. This provides for site acquisition, vacant enjoyment, roadworks, and public utilities. The Ministry may at its own cost acquire the land and deliver vacant enjoyment of the land, being in ownership of the state, together with the necessary rights of way to the Concession Company. The Ministry absorbs site acquisition risk. 112 FINANCING PRIVATE INFRASTRUCTURE Box A3: Toll Road Concession Agreements (cont.) Clause 7. Financial Statements and Reporting. This provides for appointment of auditors by the Concession Company, the right of the Ministry to inspect works, provision by the Concession Company of periodic reports, and provision of information regarding lenders and creditors to the project. Clause 8. Construction Works. This clause may specify the last date of commencement of construction works (usually not more than thirty days from the Effective Date) and the period for completion of works. Construction will be in accordance with the Approved Design and subject to inspection by the independent engineer. Clause 9. Inspection and Commissioning. The independent engineer will inspect the works at the completion of construction and will issue a completion certificate subject to satisfactory inspection. Clause 10. Tolls. The initial tolls will be specified in the Annex. Revisions to tolls will be made in accordance with a formula set out in a separate Annex. This clause will set out the procedures to be followed by the Concession Company in applying to the Ministry for a toll revision, and any exemptions to toll collections (such as ambulances, police vehicles, army vehicles, and so forth). Clause 11. Operation and Maintenance. This clause specifies the obligations of the Concession Company in rela- tion to operation and maintenance of the road or toll bridge. The clause may require the Concession Company to deliver to the Ministry a Maintenance Bond. The clause may outline the rights of the Concession Company to under- take secondary developments within the site. Clause 12. Profit Sharing. This clause may provide for a profit sharing arrangement between the Concession Com- pany and the Ministry, usually after the Company shareholders have received a specified minimum return on equity. The Ministry's earnings from profit sharing may or may not be earmarked for specific development expenditures. Clause 13. Liability, Insurance, and Force Majeure. The Concession Contract will contain one or several clauses outlining liability with respect to users and third parties, insurance coverage, and provisions for force majeure, hardship and material adverse governmental action. Provision for an arbitral tribunal in the event of a dispute be- tween the Concession Company and the ministry may be made. Clause 14. Termination. This clause provides for the rights of either party to serve notice of termination of the Concession Contract on the other party and to receive compensation under specified circumstances, Clause 15. Extension. This clause will specify the term of the Concession Contract (usually twenty-five to thirty- five years from the Effective Date) and will provide for arrangements whereby an extension of the Contract may be effected. Clause 16. Assignment and Substituted Equity. This clause prohibits either party from assigning its rights or obligations without the prior written consent of the other party, with the exception that the Concession Company may do so for the purpose of creating a security interest in its assets in order to finance the project. The clause must provide that the holder of any security so created shall not be prevented or impeded by the Ministry or Government from enforcing such security in accordance with its terms. The clause may also provide for the right of the Ministry to continue the Concession Contract with a Substituted Entity and for the right of the lenders to nominate a Substi- tuted Entity in the event of loan default. Clause 17. Governing Law. The rights and obligations of the parties under or pursuant to the Concession Contract shall be governed by and construed in accordance with the laws of the country. This clause will also refer to dispute settlement and arbitration procedures. Clause 18. Language. This clause will nominate the language(s) of the Concession Contract, and, in the event of there being more than one language, which language version shall prevail when there are differences. Clause 19. Miscellaneous. Other provisions not covered above. INTERNAIIONAL FINANACE CORPORATION 11 3 Annexes in addition to the main body of the Concession Contract there will usually be Annexes detailing provisions of the Contract. An illustrative list is as follows: : : I. Agements: 2. Design Procedures 3. Form of Comnencement Certificate 4. Form of Completion Certificate 5. Main Terms of Construction Contract 6. Forms 'of Material and Workmanship Warranty 7. Guarantee Bonds 8. Site Description 9. Specified Consents 10. Subscription of Minimum Registered Capital 11. Duties of ithe Independent Engineer 12. Scope of Work 13. Environmental Pennits and Approvals 14. Initial Toll Rates 15. Totl Increase Formula 16. Formn of Maintenance Bonds 17. Insurance During Construction 18. Insurance During Operation 114 FINANCING PR VATE INF RASTRUCTURE Table A12: PPI and Capital Markets Country Indicators, 1990-95 Country / Measure 1990 1991 1992 1993 1994 1995 Argentina Access to International Capital: Institutionial litvest9 country rating 18.3 20.2 26.2 32.6 37.3 38.8 Net foreign direct investment Sm 1.836 2.439 4,179 6,305 1,2() 3.90(0 Bonds/loans raised on int'l. capital markets Sm na 725 1,529 6,473 5,716 3,947 Domestic Capital Market Indicators: Stock market capitalization SmIl 3,268 18.509 18,633 43,967 36,864 37,783 Liquidity: turnover as %,of capitalization 26.1' P 6.1'c( 84.16/. 23.5'S, 3(1.X% 12.2%/c Private Infrastructure Indicators: Intrastructure stocks as 'S., of total capitalization na 24'S. 49%/, 47'i'. 23'S, 25%k Foreign loans to private infrastructure companies $m - - 64 660 844 1,395 Chile Access to International Capital: In.stitntional Im-estor country rating 37.8 41.1 45.9 51.5 54.9 57.4 Net foreign direct investment $n-m 59(0 523 699 841 1.795 2.300 Bonds/loans raised on int'l. capital markets $m 285 na 35(1 775 8(1 903 Domestic Capital Market Indicators: Stock market capitalization $m 13,545 '7.984 29,644 44,622 68.195 72.928 Liquidity: turnover as % of capitalization 9'1 6%i, 7'k 7'k 7.7'k 15.2°k, Private Infrastructure Indicators: Infrastructure stocks as % of total capitalization 35', 499/! 51% 59'1', 50()'J 499k Foreign loans to private infrastructure companies Sm - 25 - - - 375 Colombia Access to International Capital: Institutional Investor country rating 33.7 36.6 37.2 4(0.4 44.4 46.5 Net foreign direct investment Sm 500 457 79(1 85(1 95(0 na Bonds/loans raised on int'l. capital markets $m na 20(( na 621 1172 553 Domestic Capital Market Indicators: Stock market capitalization $m 1416 4036 5681 9237 14(028 (7893 Liquidity: turnover as 9! ofcapitalization 5.(1' 5.0()% 9.8%' 7.9%k, 15.6'S, 8.5%S, Private Infrastructure Indicators: Infrastructure stocks as 'k of total capitalization 0)' I'k I1% (0%/ ()'k (0% Foreign loans to private intrastructure companies $m - - - 15() 763 1,113 Hungary Access to International Capital: ln.stituitioinal Investor country rating 43.6 40.9 42.3 44.8 46.2 45.(0 Net foreign direct investment $m ( 1.462 1.479 2.349 1,100 4.200 Bonds/loans raised on int'l. capital niarkets $m 987 1.378 1,446 5.071 2.541 3.(076 Domestic Capital Market Indicators: Stock market capitalizationi Sm ia 5()5 562 812 1,6(04 2,399 Liquidity: turnover as 9'( of capitalization iia 23.2% 6.8f/ 12.2% 16.9% 14.7% Private Infrastructure Indicators: Infrastructure stocks as 'k of total capitalization na na na na na 12% Foreign loans to private infrastructure companies $m - - 244 1 () 512 INTERNATIONAL FINANCE CORPORATION - * .6 - LW S . * **I Country / Measure 1990 1991 1992 1993 1994 1995 Indonesia Access to International Capital: Institational Investor country rating 48.0 50.4 50.5 51.5 51.5 52.4 Net foreign direct investment $m 1,093 1.482 1.777 2,004 2,100 4,500 Bondsloans raised on int'l. capital markets $m 5,462 5,639 2.641 3,726 6,199 5,463 Domestic Capital Market Indicators: Stock market capitalization $m 8,081 6,823 12.038 32,953 47,241 66,585 Liquidity: turnover as % of capitalization 49.4% 42.8% 32.4% 27.8% 25.0% 21.6% Private Infrastructure Indicators: Infrastructure stocks as % of total capitalization 0% 0% 0% na 5% 10% Foreign loans to private infrastructure companies $m - - 524 - 299 2,510 Malaysia Access to International Capital: Institntional Investor country rating 60.5 62.0 62.9 64.8 67.6 69.1 Net foreign direct investment $m 2,333 3,999 4,469 5,00() 4,300 5,800 Bonds/loans raised on int'l. capital markets $m 730 512 1,271 1,612 3526 2,397 Domestic Capital Market Indicators: Stock market capitalization $m 48,611 58,627 94,004 220,328 199,276 222,729 Liquidity: turnover as % of capitalization 22% 18% 23% 94% 63% 35% Private Infrastructure Indicators: Infrastructure stocks as % of total capitalization 12% 26% 30% 31% 26% 25% Foreign loans to private infrastructure companies $m 261 - 246 1,135 3,224 1,609 Pakistan Access to International Capital: Institutional Investor country rating 30.0 27.0 27.7 27.7 29.7 30.7 Net foreign direct investment $m na Bonds/loans raised on int'l. capital markets $m na Domestic Capital Market Indicators: Stock market capitalization $m 2,850 7,326 8,028 11,602 12,263 9,286 Liquidity: turnover as % of capitalization 8% 8% 12% 16% 26% 35% Private Infrastructure Indicators: Infrastructure stocks as % of total capitalization 18g 25% 19% 14% 13% 29% Foreign loans to private infrastructure companies $m - - 92 15 836 530 Philippines Access to International Capital: Institutional Investor country rating 25.9 24.5 25.2 28.0 32.9 36.8 Net foreign direct investment $m 530 544 228 763 1,000 na Bonds/loans raised on int'l. capital markets $m 715 na na 1,250 1,164 673 Domestic Capital Market Indicators: Stock market capitalization $m 5,927 10,197 13,794 40,327 55,519 58,859 Liquidity: turnover as % of capitalization 21% 15% 23% 25% 25% 25% Private Infrastructure Indicators: Infrastructure stocks as % of total capitalization 11% 21% 22% 38% 26% 22% Foreign loans to private infrastructure companies $m - - - 706 626 1,512 116 FINANCING PRIVATE INFRASTRUCTURE Table A12: PPI and Capital Markets Country Indicators, 1990-95 (cont.) Country / Measure 1990 1991 1992 1993 1994 1995 Thailand Access to International Capital: Institutional Investofr country rating 62.3 62.5 61.3 60.8 62.2 63.8 Net foreign direct investment $m 2.444 2,014 2.116 2.400 2,100 na Bonds/loans raised on int'l. capital markets $m 1.465 1.907 2,718 5,550 7.910 5,171 Domestic Capital Market Indicators: Stock market capitalization $m 23.896 35.815 58.259 130,510 131,479 141,507 Liquidity: turnover as % of capitalization 96% 84% 124% 67% 61% 4(0% Private Infrastructure Indicators: Infrastructure stocks as % of total capitalization 2%7 3% 3% 16% 20% 18% Foreign loans to private infrastructure companies $m 293 - 20 2,900 256 811 Turkey Access to International Capital: Institutionial Investor country rating 41.4 42.7 43.9 45.1 41.9 40.9 Net foreign direct investment $m 684 810 844 636 850 na Bonds/loans raised on int'l. capital markets $m 2,498 2,280 4,580 5,763 851 2.428 Domestic Capital Market Indicators: Stock market capitalization $m 19,065 15.703 9,931 37,496 21,605 20.772 Liquidity: turnover as % of capitalization 31% 55% 82%k 62% 100% 248% Private Infrastructure Indicators: Infrastructure stocks as % of total capitalization 4%k 4% 7% 3% 8 % 12% Foreign loans to private infrastructure companies $m - - - - - 2,326 SouJIrc es: In,stiurionaollttnestor magazine. Twice a year IfosttutionatotInvest,r polls 75-l1)0 intemational banks to grade countries on a a scale ofO to t1(10, with I(1() representing the least chance of default. The responses are weighed to give more importance to responses from banks with greater worldwide cxposure and inore sophisticated country analysis systems. FiIan( cial Fhloss undl The Deselecpimg Countrries. World Bank. FDI figures arc preel binary fot 1994 and estimated for 1995. Emerging Market Database, IFC. Capital DATA Loanware. INTERNATIONAL FINANCE CORPORATION 117 . S . - S -- This annex provides an overview of issues that should be addressed in a Power Purchase Agreement (PPA) between a Purchaset (often a state-owned electricity utility) and a privately owned power supplier (the "Company") con- structing a power plant. It emphasizes issues tiset might be of concern to leaders. The paper does not address all issues that might arise in negotiating a PPA, but provides examples of ways in which they were addressed in existing power projects. In this exatnple, the project is assumed tobe a base load thermal plant financed partly with foreign loans and equity (it could be modified to accommodate nti&range or peaking thermal or hyrlro plants). This example does not cover creditenhancements that might be required if the power purchaser is not creditworthy. The discussion is organized by the section headings that might be found in a typical PPA. Much of the detail of a PPA is often contained in annexes; a list of those commonly found is also provided. ARTICLE I - DEFINITIONS Defines all the capitalized terms used in the PPA and annexes, or cross-references to the section in the PPA where the term is defined. Often complex terms (e.g., Force Majeure, Monthly Tariff) are defined in the text of the PPA. ARTICLE II- SALE OF CAPACITY AND ENERGY 2.1 Obligations to Provide Contract Capacity and Electrical Outnut Specifies that the Company must make avail- able to the Purchaser not later than the specified commercial operation date (COD)2 the contracted capacity of each unit and deliver energy to the Purdiaser in accordance with the PPA. The Company will commit to make each unit available by the COD, to ensure that each unit meets specified operating characteristics, to operate and maintain the plant over the term of the PPA and to comply with the Purchaser's despatch instructions (see Section 8.2). 2.2 Obligation to Pay for Available Capacity and Electrical Output The Purchaser will be required to pay a monthly tariff for the available capacity and the electrical output generated by the plant. Themost common approach is a rwo-parf' tariff, separated into capacity and energy components. The capacity charge is designed to recover the plant's fixed costs3 and the energy charge covers fuel costs.3 Energy costs are usually incurred only if the plant is despatched by the Purchaser, whereas fixed charges are payable if the capacity is available hut not despatched and, under specified force majeure events, even where capacity is not available. The detailed tariff provisions are often contained in an annex. The tariff methodology should satisfy several objectives if the PPA is to be bankable: (1) he sufficiently clear to allow potential investors to calculate theproject's likely cash flows; (2) generate sufficient revenues to cover the fixed and variable costs of the project, including debt service; and (3) generate sufficient revenue to yield a minimum ratio of earnings to payments of principal and interest to satisfy lenders' criteria. The tariff method- ology should also meet the country's regulatory requirements and result in an economically satisfactory and politically acceptable price of electricity 2.3 Third Party Sales Generally, the ability to make third party sales, particularly where the Purchaser creditworthi- ness is questionable, enhances the financeabiliry of a projecL4 It may benefit both the Purchaser and the Com- pany if the Company were permitted (hut not obligated) to sell excess capacity and energy not despatched by the Purchaser. Because the PPA generally constitutes a take-or-pay obligation of the Purchaser, the proceeds of third party sales can reduce the Purchaser's monthly tariff payments. Alternatively, the Company, as agent for the Purchaser might sell available capacity and energy to a third party in return for a negotiated agency fee from the Purchaser. Another approach would be to allow the Company, after it has delivered a notice of termination to the Purchaser based on failure of the Purchaser to comply with payment or other obligations under the PPA, to sell part of the plant's contracted capacity and energy to any third party. The revenue would be set off against amounts due to the Company from the Purchaser under the PPA, 2.4 Deemed Commissioning Deemed Generation Developers and lenders expect a mechanism in a PPA which enables a deemed commissioning to occur where a unit is ready but cannot be conunissioned because of speci- fied events. These events are typically breaches by the Purchaser of its obligations (e.g., failure to complete interconnection or transmission facilities or to provide energy for commissioning) and certain force majeure 118 FINANCING PRIVATE INFRASTRUCTURE Box A4: A Guide to Power Purchase Agreements (cont.) events. The capacity payments are generally determined on the basis of a specified deemed availability. The PPA should set out the point at which deemed commissioning occurs and when it ceases. These provisions often require an independent engineer' to certify when a unit would have passed the relevant test but for the occur- rence of specified events. In addition, PPAs often include a "deemed generation" provision whereby the Pur- chaser makes capacity payments to the Company for capacity which would have been available but for speci- fied force majeure events, generally political events. 2.5 Liquidated Damages 2.5.1 Damagesfor Delays If a unit fails to pass its performance tests by the commercial operation date, the Com- pany may be required to pay the Purchaser liquidated damages of an agreed amount per day up to a cap.' Sometimes the damages increase after a specified number of days of delay. Lenders will examine the impact of liquidated damages on debt coverage ratios. The Company should not be required to pay damages if the delay results from events beyond the control of the Company, such as certain force majeure events or failure by the Purchaser to comply with specified obligations. Another approach is to provide that inordinate delay by the Company that is not excused should allow the Purchaser to terminate the PPA. From the independent power developer's point of view, however, the power seller should receive and be required to apply liquidated damages from the contractor to either complete the units or to redeem project debt in order to adjust fixed charges payable thereafter under the PPA. 2.5.2 Damagesfor Underperformance Liquidated damages are often payable when a plant fails to meet specifica- tions, particularly contracted capacity tests. The relationship between liquidated damages and provisions al- lowing the Purchaser to terminate the agreement for failure to meet such tests needs to be carefully considered. The parties may wish to consider, for example, whether the Company's failure to meet a contracted capacity test could lead the Company to terminate the tests and pay liquidated damages to the Purchaser. The liquidated damages could be measured by the difference between contracted capacity and the actual percentage of con- tracted capacity demonstrated in testing. The Purchaser might prefer an underperforming unit to a termination right which would require the Purchaser to buy out the project (see Section 5.3). 2.6 Testing Performance testing should be objective and designed to confirm levels of contracted capacity, reliabil- ity and fuel efficiency or heat rate. Testing should be certified by an independent engineer. Receipt of the engineer's certificate should become the trigger for the commencement of capacity payments unless an earlier "deemed" commissioning has occurred (see Section 2.4). The PPA should specify the consequences of any inability to complete testing due to unavailability of testing power or transmission facilities. 2.7 Company's Purchase of Power: Pre-commissioning Power These provisions oblige the Purchaser to provide to the Company energy required for construction, commissioning, maintenance and start-up. Often the tariff for electricity supplied to generating companies for such purposes is the applicable tariff for industrial companies. In addition, the Company would look to the Purchaser to purchase "pre-commissioning power" - power gen- erated by a unit during testing after its synchronization - generally at a price which would cover the Company's fuel cost associated with producing such pre-commissioning power. ARTICLE III - CONDITIONS PRECEDENT PPAs often set out conditions precedent to the effectiveness of each party's obligations under the PPA (and certain other obligations may not be conditional'). Conditions to the Company's obligations under the PPA may include (I) receipt of good, enforceable leasehold interest to the site; (2) receipt of certain governmental authorizations and clearances; (3) obtaining comfort regarding receipt of approvals not received as of the date of execution of the PPA; (4) if applicable, government assurances relating to currency convertibility, availability of fuel etc; (5) if applicable, receipt of government guarantee of the payment performance of the Purchaser; and (6) execution of the construction contract and certain other project agreements. Conditions precedent to the Purchaser's obligations may include receipt by the Purchaser of (I) corporate documents (e.g., articles of association and board resolutions) and (2) evi- dence of the Company's receipt of necessary governmental approvals. INTERNATIONAL FINANACE CORPORATION The Company will usually wish to make financial closing a condition precedent to its obligations, whereas the Purchaser will expect that any conditions precedent to the Company's obligations be satisfied within a certain period or the Purchaser shall have the ability to terminate the PPA without liability. Lenders will require that the PPA specify when the obligations of the parties commence. There should be no amnbiguity as to whether any provision in the PPA is effective and enforceable. Accordingly, lenders will prefer to make all obligations effective as of the date of execution of the PPA. Open-ended commitments for either party can be avoided by including provisions allowing termination if, after specified dates, certain key events have not occurred (such as financial closing). ARTICLE IV - PRE-OPERATION PERIOD Pre-operation obligations frequently include a "reasonable efforts" obligation by the Company to obtain necessary consents and approvals, and by the Purchaser to provide reasonable assistance to the Company in obtaining the consents and approvals. The Company's other pre-operation obligations may include (1) appointing the construction contractor and an operator; and (2) providing copies of the construction and O&M contracts to the Purchaser. The Purchaser may be required to provide the Company with title to the site and construction water, power and other services. Some advisors have recommended that a Purchaser should have the right under a PPA to approve project contracts. Developers and lenders will prefer to avoid this, as the Purchaser may not have sufficient resources to review these agreements in detail. The Purchaser is perhaps better served by clear construction and operational performance criteria in the PPA for the Company to adhere to; the PPA could also include appropriate incentives. It will be the obligation of the Company to contract with construction contractors and operators to see that these criteria are met. The Purchaser's concerns about the enforceability of the Company's obligations can also be addressed through requirements for perfornance bonds under the PPA in favor of the Purchaser. The pre-operations provisions gener- ally also provide the Purchaser with the right to observe construction progress of the project. A PPA will often provide, as part of the pre-operating obligations, for the Purchaser and the Company to agree on operating procedures. These include methods of day-to-day communication, key personnel lists, clearances and switching practices, outage scheduling, capacity energy reporting, etc. If the parties are able to agree on such oper- ating procedures before the execution of the PPA, they could be included in a schedule to the PPA. ARTICLE V - TERM AND TERMINATION 5.1 Term Defines the date on which the agreement becomes effective and the period after which it will terminate. The provision will also provide extensions for specified force majeure events and may also include procedures fora request by eitherparty for an extension (in which case tariff calculations should be defined for the extended term). Lenders will insist that the PPA's term be a few years beyond the period, permitting the Company to generate sufficient cash flow to retire the project's debt. 5.2 TerminatiQn In the event of default, the nondefaulting party will have the right, subject to certain cure rights for the defaulting party and lenders and other limitations.' to terminate the agreement and exercise certain other rights. In addition, continuation of force majeure events beyond a specified period (see Article XI) could also trigger a right of either the Company or the Purchaser to terminate the PPA. Lenders will generally prefer to limit the number of the termination events. Events giving rise to a termination and/or buy-out right for the Company typically include (I) dissolution of the Purchaser; (2) failures by the Purchaser to observe payment obligations and maintain letters of credit or other security; (3) breaches of other obligations by the Purchaser under the PPA; (4) government guarantees (if any) or irnplementation agreements ceasing to remain in force; and (5) repudiation by the Purchaser of the PPA. The Purchaser typically has the right to terminate the PPA and/or exercise its buy-out rights if: (1) the Company fails to achieve financial closing by a specified date: (2) the Company fails to achieve commercial operations of the units by specified deadlines (generally subject to extensions for certain events); (3) the Company abandons the project; (4) the Company breaches its obligations under the PPA; and (5) the Company is dissolved. Termination provisions generally include requirements for notice by the party wishing to invoke termination and/or buy-out, followed by a consultation period between the parties and a period during which the defaulting 120 FINANCING PRIVATE INFRASTRUCTURE Box A4: A Guide to Power Purchase Agreements (cont.) party may attempt to cure the default. Such cure right is usually accompanied by a cure period (in addition to the cure period provided to the nondefaulting party) in favor of the lenders if the Company defaults. 5.3 Buy-out Price Generally, the termination provisions lead to a buy-out by the Purchaser which can be triggered by either party depending on the termination event. Lenders will wish to ascertain that all outstanding debt be included in the buy-out price. However, where the Purchaser's credit is in question, buy-out will be considered of limited value by developers and lenders, unless supported by government guarantees. The PPA should provide a methodology for calculating the buy-out price. In some PPAs this is specified as a combination of: (I) a discounted cash flow valuation based on the estimated net present value of the Company' expected cash flows over the remainder of the PPA plus a specified residual value of the plant; (2) a construction period evaluation consisting of a specified percentage of equity subscriptions paid into the Company plus an allowed return on the equity at a specified rate; (3) a terminal evaluation set at a specified percentage of the plant's depreciated replacement cost; (4) the Company's outstanding long and short-term loans and any accrued interest and financing fees; and (5) transfer costs. Each component is scaled according to the reason for termi- nation, with the highest buy-out price following a Purchaser default and generally none in the event of expiry of the PPA. Intermediate buy-out prices can be negotiated for terminations caused by different force majeure events. An appraiser may be appointed by the parties to calculate the buy-out price. ARTICLE VI - REPRESENTATIONS AND WARRANTIES The representations and warranties in a PPA typically include the organization and valid existence of the Purchaser and the Company, the legal and binding nature of the obligations constituted by the PPA, the absence of certain legal proceedings that might adversely affect the ability of the parties to meet their obligations, and the due authorization of the PPA by the parties. Sometimes, a project might require additional representations and warranties, frequently covering environmental issues, or on land owned by the Purchaser, for example. ARTICLE VIl - UNDERTAKINGS A PPA generally contains additional undertakings/covenants from each party. The Company's undertakings might include obligations to: (1) use reasonable efforts to obtain financing for the project; (2) use reasonable efforts to negotiate fuel supply agreements,9 a construction contract and financing documents; (3) use reasonable efforts to obtain government authorizations; and (4) operate the plant in accordance with the Purchaser's despatch instructions and prudent utility practices. Typical covenants of the Purchaser include (I) to provide, by or before a specified commercial operation date, interconnection and transmission facilities; (2) to assist in identifying and preparing applications for government authorizations; (3) to assist the Company in negotiating and executing the financing documents; and (4) to cooperate with the Company with respect to the Company's obligations and rights under the PPA. The PPA should set forth the consequences of a failure to comply with any such obligations. ARTICLE Vil - PROJECT OPERATION Issues typically include scheduled outages and maintenance outages. operations and maintenance, emergencies and record keeping. 8.1 Scheduled Outages and Maintenance Outages Prior to the commercial operation date (COD), the Company will be required to submit its desired schedule of scheduled outage periods for the first full maintenance year after commissioning. The PPA should also provide for a date by which the Company must submit its desired sched- ule of outage periods for each subsequent year. Generally, longer notice is required for years subsequent to the COD. The PPA may also set paramneters on when the scheduled outage periods should occur. The PPA will generally provide for a period during which the Purchaser may object in writing to a requested schedule and propose an alternative schedule. The Company will often insist that scheduled outages should occur only at times determined in accordance with this procedure and that the Purchaser should not require the Company to schedule outages in a manner or time outside the technical limits of the plant, or inconsistent with prudent utility practices or manufacturer's recommendations, or which would pose risk of damage to the plant. INTERNATIONAL FINANACE CORPORATION 121 -; ;&X -L s jS SS Sf - .z wS a The Purchaser's maintenance program for interconnection facilities and transmnission facilities should also be coordinated with the approved scheduled outages for the plant. Frequently, the Purchaser will also be prohib- ited from discriminating against the Companyin favor of other plants when the Purchaser schedules and re- schedules outages. The PPA will also address "maintenance outages", defined as an interruption or reduction of generating capabil- ity (excluding scheduled outages) that cannot be postponed until the next scheduled outage. An abbreviated set of procedures requiring oral notice within 24 hours (or a similar period) to the Purchaser usually is provided for maintenance outages. 8.2 Operation; Despatch This sets out procedures for issuance by the Purchaser of despatch instructions to the Company and for the degree of despatchability allowed to the Purchaser, if any. These provisions usually provide that the plant's despatch procedures shall be in accordance with despatch procedures for similar plants on the Purchaser system. Iypically the despatch instructions should take into account the characteristics of the plant, the overall system condition and requirements, and the conditions and characteristics of other power sources available to the purchaser, in setting out appropriate and equitable despatch instructions. The PPA can also provide the Purchaser with the right to request that the plant be shut down. In tum, the Company will expect limitations on this right as well as inrdmnifcation for costs incurred in shutting down and restarting the plant and any increased costs incurred in connection with the shut down. The Company will also reasonably ask for a lead time in which to restart the plant, in accordance with the relevant unit specifications. These provisions may also provide that the Company shall not be required to operate the plant other than in accordance with prudent utility practices and scifie technical limits. The Company may also be asked to use best efforts to employ qualified personnel from the country and to institute training programs for such person- nel. 8.3 Emergencv Plans: Supply of Power and i*rqeqgv The PPA will generally call for each party to establish plans for an emergency, such as local or widespread electric blackout and voltage reduction to effect load curtailment. During an emergency, the Company may be required as soon as possible after a request from the Purchaser to supply such power as the plant is able to generate, consistent with prudent utility practices and specified techni- cal limits of the plant, and, at the Purchaser's expense, make reasonable efforts to reschedule any outages or to complete work during the outage to restore power as soon as possible. Other limitations and parameters on the ability of the Purchaser to direct the Company to perform emergency related operations (such as cold starts, emergency maximum loading or deloading) may be imcluded. 8.4 Record Mainenance Each party will be required to keep the records necessary to administer the PPA, including an accurate and up-to-date operation log at the plant. T'he provisions will generally require maintenance of such records for an agreed period after their creation. 8.5 Interconnection. Metering Standards and Teg The PPA should contain provisions providing for exchanges of information concerning the plant's design, the interconnection and transmission facilities, the allocation of responsibility for construction, and interonnection, easements and rights-of-way, protective devices and the testing of interconnection and transmission facilities. Specifications for the meters to be used for the project should be set forth, as well as responsibility for maintaining the meters, providing regular metering results, checking meter accuracy, etc. ARTICLE IX - PAYMENT This specifies procedures for invoicing, the method and amount of payment, resolving disputes relating to invoices, security for payment, and rights to set off. 9.1 Invoicing This section should establish a payment date by which the Purchaser must pay the Company the monthly tariff payment for a given month. It should also specify the manner in which invoices are to be provided by the Company. Generally, commencing with a month following the date on which synchronization for the first unit occurs, the Company will be required to submit to the Purchaser by a specified date an invoice 122 FINANCING PRIVATE INFRASTRUCFURE Box A4: A Guide to Power Purchase Agreements (cont.) stating the available capacity, the energy delivered to the Purchaser, the aggregate variable charges and the total monthly tariff payment. The invoice should include reasonably detailed calculations in accordance with the PPA; an example of a tariff calculation in a schedule to the PPA is often helpful. Other charges, fees and reimbursements payable by the Purchaser to the Company are generally billed separately. If the tariff calcula- tion procedures call for an annual adjustment, such as for fluctuations in foreign exchange rates, the provisions will generally provide for invoicing at a specified time(s) each year for such amounts. The agreement will provide for the form of payment, such as direct payment or wire transfer to an account designated by the Company"' to the Purchaser. Any delayed payment charges should also be specified. Notice of disputes relating to an invoice should be given promptly. Lenders often expect the agreement to provide that the Purchaser pay the invoice when due, though it may be entitled to a repayment after any invoice dispute is resolved. The waiver of set off rights may also be included. 9.2 Security for Payment The PPA may require the Purchaser to cause a bank acceptable to the Company to issue to the Company one or more irrevocable, unconditional standby letters of credit to ensure short termn liquidity. The PPA will generally provide that the letter of credit shall at all times be in a specified amount, usually tied to projected tariff payments for a specified period, using certain assumptions regarding load factors and other elements of the tariff calculation to calculate the amount. Typically. the Company may draw upon such letter of credit if the due date for an invoice has passed without payment or if a replacement letter of credit has not been delivered to replace an expiring or partially drawn letter of credit." Failure to replace a letter of credit fully could result in addition of interest to the invoice until such time the letter of credit is fully restored. ARTICLE X - LIABILITY AND INDEMNIFICATION These provisions state that neither party shall be liable to the other for damages except as specified. The Article also requires for each party to indemnify the other for losses resulting from negligent acts of the indemnifying party, except to the extent (I) such losses are caused by any act of the indemnified party and (2) the indemnified parties are compensated by insurance or specified agreement. The parties may also agree not to assert claims for indemnifica- tion until the aggregate amount of all claims exceed a minimum amount. The indemnity provisions will generally provide the indemnifying party with the option to assume and control the defense of claims for which the indemnify- ing party acknowledges its obligation to provide indemnification. ARTICLE Xi - FORCE MAJEURE Treatment of force majeure in PPAs is highly contentious and many approaches have been used. A PPA should clearly classify force majeure events, specifying the impact of each event on the obligations of the parties, in particu- lar on the payment obligations of the Purchaser and the construction, completion and operational obligations of the Company. The parties might consider the following approach: 11.1 Categories An event of force majeure is any event that prevents any party in the performance of its obligations under the PPA, but only to the extent that the events are not within the reasonable control of the affected party and could not have been avoided with reasonable care. A non-exhaustive list includes: (1) Speified non-poitical events:1 such as natural disasters, labor difficulties and contractor failure; (2) Domestic po-itical events including war, revolution, terrorismn, political sabotage, changes in law affecting the project, expropriation, unjustified denials of govemmental authorization and certain interruptions in fuel supply (if fuel risk is borne by the utility); 13 (3) Foreign Political Events including generally the same events in category (2) but occurring outside the country concerned. Generally the following conditions shall not constitute an event of force majeure unless the existence of such condition is the result of an event of force majeure: a. late delivery of plant, machinery, equipment, materials, spare parts or consumables for the project, or b. a delay in the performance of any contractor. INTERNATIONAL FINANACE CORPORATION 123 -n. WM * Ive*r. S S" - 11.2 Notices/Duty to Mitigate This provides procedures for notification by the party claiming force majeure to the other party and imposes a duty on the party affected by the force majeure to use reasonable efforts to mitigate the effects of the force majeure. 1 1.3 Effect on Obligations The Article provides that neither party shall be liable for any failures in complying with its obligations under the PPA (though the obligation to make payments which are payable"4 should be excluded) if the failure was caused by force majeure events. The period allowed for performance by the affected party of its obligations under the PPA is extended day-for-day (plus additional periods to compensate for demobilization and remobilization). 11.4 Buy-out Consequences of Force Maieure Even If the construction or the operation of the plant is adversely affected for a certain continuous period due to the occurrence of a domestic political event, either party can deliver a notice to the other party and, subject to dispute resolution procedures and time limits, terminate the PPA. Upon termination, the Purchaser will be obligated to buy out the project (see Article V). ARTICLE XIl - TAXES Taxes are generally passed through to the Purchaser under the tariff. In addition, there should be provisions address- ing administrative matters relating to taxes, including requirements for the Purchaser to support all applications by the Company for exemptions from domestic taxes and an obligation on the part of the Company to take reasonable steps to ensure that its liability on taxes is minimized,"' and procedures for resolving any dispute of claims by the Company for a payment in respect of taxes under the tariff provisions. ARTICLE XIll - CHANGE IN LAW The PPA should address the impact on the tariff in the event of a change in applicable law or its interpretation which affects the Company. "Applicable law" is frequently defined to include any act, decree, regulation, notification, or order having the force of law. "Change in law" is defined to include any new enactment, amendment, modification or repeal of any applicable law as well as any change in the interpretation of the applicable law (either through decisions by courts or by governmnent). Some PPAs in such circumstances have required an automatic adjustment of the tariff, subject to the approval of the regulatory agencies; other PPAs may require that the parties meet to attempt to amend the PPA to pass on the impact in the tariff payment. In the absence of agreement, the dispute resolution procedures in the PPA would apply. While various approaches to the allocation of risk of change in law are taken in PPAs, lenders will require that the cash flows of a project required for debt service be protected against such changes through tariff modifications. ARTICLE XIV - DISPUTE RESOLUTION Dispute resolution provisions should generally provide for good faith negotiations followed by arbitration under intemationally accepted rules"6 in a third country. The provision should specify the applicable rules, the number of arbitrators, the place of arbitration, the language of the arbitration proceedings, the nature and enforceability of the award, and the appointing and administrating authority. In addition to arbitration, the PPA may also allow referral of technical matters to an expert for quicker resolution. ARTICLE XV - NOTICES This Article sets forth the details for providing notices under the PPA, as well as provisions for changing notice addresses for the parties. ARTICLE XVI - MISCELLANEOUS These may include an assignment provision restricting assignment by either party to the PPA. Lenders will generally require that the Company assign its rights under the PPA to lenders and that the Purchaser enter into a direct agree- ment with the lenders relating to such assignment and certain other issues. The Purchaser or the regulatory agencies may wish to provide for an assignment of the PPA to an entity which results from future privatization of the Pur- 124 FINANCING PRIVATE INFRASTRUCTURE Box A4: A Guide to Power Purchase Agreements (cont.) chaser. Because of concerns for the privatized entity's operational criteria and creditworthiness, lenders often at- tempt to spell out the operational and financial parameters of the privatized entity in hopes of ensuring that the Purchaser's payment obligations under the PPA will be properly assumed and performed. The miscellaneous provi- sions should also address the governing law of the agreement, severability clause, a waiver of immunity by the Purchaser, and confidentiality provisions. SAMPLE ANNEXES/SCHEDULES * Permits and authorizations * Technical limits and parameters * Interconnection * Conimissioning and testing specifications * Metering standards and testing * Buy-out price * Insurance * Determination of availability * Outages and emergencies * Tariff calculations Notes 1. The commercial operation date is often based on the financial closing date and should be extended by delays caused by the Purchaser's breach of obligations and certain force majeure events. 2. Fixed charges in a two-part tariff usually include all fixed costs associated with the project, including fixed O&M costs, insurance costs, administrative costs, financial costs, taxes, and return on equity. (The fixed component of fuel transport charges may also be included.) It could be expressed in local currency and/or foreign currency. 3. The energy charge is also known as the "variable charge" and may include variable operating and mainte- nance costs. 4. Third party sales also promote the interchange of power, the expansion of transmission systems and improve overall system efficiency. All such direct sales could be interruptable by the Purchaser, unless the Purchaser notifies the Company of a reduction in the Purchaser's system demand for an extended duration. In such case, the Company could contract to make its excess capacity available for the corresponding duration. 5. Lenders often require the Company to engage an independent engineer to report on construction progress and to provide certification on construction, testing (usually a condition of loan disbursement) and operations. Sometimes the independent engineer also mediates technical disputes between the parties. 6. If liquidated damages are imposed, they should reflect the actual damages expected to be suffered by the Purchaser (e.g., in respect of its outlay on the interconnection and transmission facilities). 7. Such obligations include, for the Company, using its best efforts to achieve financial closing, to obtain consents and approvals, to conduct preliminary studies etc., and, for the Purchaser, the transfer of title to the site, obtaining consents and approvals and assisting the Company in doing the same. 8. The lenders will expect to enter into a direct contractual relationship with the Purchaser, whereby the Purchaser agrees (i) to make payments to the Company directly into an account designated by the lenders without right of credit or right of set-off; (ii) to provide to the lenders reasonable notice and cure rights; (iii) to accept in the event of a default, as a substitute for the Company under the PPA, any reasonable agent for INTERNATIONAL FINANACE CORPORAJION the lenders or any reasonable purchaser of the Company upon a foreclosure sale, provided that such person shall assume all of the Company's obligations under the PPA; and (iv) to afford the lenders an opportunity to remedy the event giving rise to a termination notice prior to termination of the PPA. Also, it may be necessary to negotiate with the Purchaser further provisions to address issues of concem to the lenders arising after the PPA is signed. 9. Lenders will focus on fuel supply risks and how such risks should be managed and mitigated. They will consider the reliability and credit of the fuel supplier, the adequacy of the fuel source, the existence of an alternative fuel supplier, the consequences of non-supply (for example, whether this should be a force majeure event under the PPA), and also transportation, storage and disposal risks. The liquidated damages payable under the fuel supply agreement will also be relevant. Finally, lenders may investigate whether fuel or alternate fuel could be imported into the country. 10. Lenders will generally require that payments of invoices be made directly to an account controlled by a trustee or security agent or over which the lenders hold some form of security. 11. Some PPAs look to the establishment of escrow accounts funded by the Purchaser's receivables (or liens over such receivables) from specified customers for additional liquidity security. 12. To the extent insurance is available at a reasonable cost to cover the occurrence of any of the natural events, the Company will be asked to undertake to insure such risks. 13. Lenders will also examine whether the force majeure arrangement under the fuel supply agreement is properly reflected in the force majeure section of the PPA, in order to leave no gap in the allocation of fuel risks. If, for example, the fuel supplier will be excused from its obligation to supply fuel under the fuel supply agreement due to government actions, the lenders are likely to require that the unavailability of fuel be a political force majeure event for the Company in the PPA. 14. Although the occurrence of a force majeure event may prevent a payment obligation from arising, once a sum does become payable, the payment obligation will not be excused by force majeure. 15. The developers will also be considering the tax implications under their home tax regime. 16. The most often used arbitration rules are those of the International Chamber of Commerce (ICC) and the United Nations Commission on International Trade Law (UNCITRAL). Depending on the parties involved in a dispute, the arbitration rules under the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (through the Intemational Centre for Settlement of Investment Disputes - ICSID) may also be suitable. 126 FINANCING PRIVATE INFRASTRUCTURE Bibliography Bacon, Robert. (May 1995), "Competitive Contracting for Privately Generated Power: What to Do in the Absence of Competition in the Market." World Bank Financial Sector Development Departnietit Note No. 47. Bacon, Robert. (October 1995), "Lessons 1rom Power Sector Reform in England and Wales." World Bank Financial Sector Development Department Note No. 61. Capital DATA Loanware. An electronic database providing information on international loans, including those to infrastructure projects. It contains detailed information on borrowers and financing characteristics and is updatedl weekly. Carter, L., Barger, T. and Kuczynski, I. (September1996). "Investment Funds in Emerging Markets." IFC Lessons of Experience Series, Number 2. Dnes, Antony. (October 1995), "Post-Privatiz.ation Performance-Regulating Telecommuni- cations in the U.K.: Testing Our Regulatory Capture." World Bank Financial Sector Development Departmenit Note No. 60. Donaldson, David, and Wagle. Dileep M. (Septemberl995), "Privatization: Principles and Practice." IFC Lessons of Experience Series, Number 1. Guislain, Pierre and Kerf. Michel. (October 1995), "Concessions-The Way to Privatize Infrastructure Sector Monopolies." World Bank Financial Sector Development Department Note No. 59. IFC (1995). 'Emerging Stock Market, Factbook." Jechoutek. Karl G. and Lamech, Ranjit. (October 1995), "Private Power Financing-From Project Finance to Corporate Finance." World Bank Financial Sector Develop- ment Department Note No. 56. Juan, Ellis J. ( 1995), "Airport InfrastrUcture: The Emerging Role of the Private Sector: Recent Experiences Based oo 1O Case Studies," CFS Discussion Paper Series, Number 115. IFC. Karasapan, Omer. (October 1995), "The World Bank Contribution to Private Participation in Infrastructure." World Bank Finiancial Sector Development Department Note No. 55. Kessides, loannis N. and Willig, Robert D. (October 1995). "Restructuring Regulation of the Railroad Industry." World Bank Financial Sector Development Department Note No. 58. Klein, Michael and Roger, Neil. (November 1994), "Back to the Future: The Potential in Infrastructure Privatization." World Bank Financial Sector Development Department Note No. 30. MIGA (1995). Annual Report. Newbery, David M. (September 1995), "A Template for Power Reform." World Bank Financial Sector Development Department Note No. 54. Rohlfs, Jeffrey H. (January 1996), "Regulating Telecommunications: Lessons from the U.S. Price Cap Experience." World Bank Financial Sector Development Department Note No. 65. Smith, Peter. (December 1995), "End of the Line for the Local Loop Monopoly?" World Bank Financial Sector Development Department Note No. 63. So, Jae and Shin, Ben. (October 1995). "The Private Infrastructure Industy--A Global Market of US$60 Billion a Year." World Bank Financial Sector Development Department Note No. 45. Tenenbaum, Bernard. (June 1995), "The Real World of Power Sector Regulation." World Bank Financial Sector Development Department Note No. 50. Wel]s, Louis T. and Gleason, Eric S. (September-October 1995), "Is Foreigi Infrastructure Investment Still Risky?" Harvard Business Review. 44. World Bank (1994), "Annual Review of Evaluation Results 1994." World Bank (December 1994), "Republic of C6te d'lvoire Private Sector Assessment." World Bank (1994), "World Development Report." World Bank (1995), "World Development Report." Note: Copies of the World Bank Financial Sector Development Department Notes cani be obtained from Suzanne Smith, Editor, Room G-8105, The World Bank, 1818 H Street. N.W., Washington, D.C. 20433. 128 FINANCING PRIVATE INFRASTRUCTURE I I : F N u f 00 -INFRASTRUCTURE - ae investment in the basic infrastructure of developing countries has < cveleratedover the past three years. Despite many obstacles, billions of lirs worth of investments are now taking place on a privately Ainded basis in pow e ttelec ommunications, ports. roads, bridges, water sutply and other t critical to the livinig standards of the world's pooret peoples. The Internationa Finance Corporation (IFC) has been closely involved with the growth instructure in the developing world through the provision of financia services. Since financing its first private infrastructure trans- actionn1 Cs Bo has approved $3.1 billion to help finance 148 projects costing $ 0 developing countries. Much of this activity has occurred ; in reenyears, however, with almost half of IFC's financing commitments being approv4> in :he two yearrsto June 1996. IFC has also been active in providing advi- sory assistancetogovemrnments on areas ranging from privatization of stite-owned ,, utilitietorem of the policy and regulatory framework for investment. . An important conlusion to emerge from this review of IFC operatioalLexpert- ence is ency of private infrastructure provision depends very much on the cj environments that are created by governments. At each stage of:prect' likfcycle (which will usually include bidding, negotiation, A financial clsure, construction and operation), government agencies playva funda- - mentalfrolethatcan mean the difference between success and failure. The quality of the enablingenvironment, perhaps more so than country risk or income levels, wi i u the pace at which private infrastructure is implernnted in the coigeas Fia gltn tructure is one of a set of publications on private see- A tor dee e aIis releasing in its Lessons of Experience serie, Other TA: - X publi li es include reviews of IFC's experience with priva0zation, - investmentfundsand leasing companies in emerging markets. ince its formationlin 1956, [FC has been providing loan and equity finance to povatesecto investments in developing countries, sharing full commerciol risks witho se tgovernment guarantees for loan repayments. Strong growth in the I99s ed IFC to play a leading role in areas that are newly Opening to die privt secor ISBN 13-382- 13 822 FID 080 Cover : len n Pierce/The Magazine Group Il\l\rlE l 400000022284 $14:95