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Finmedia Conference on Project Finance The Scope for Project Finance Denis Clarke Bucharest, Jan.24, 2005.

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Presentation on theme: "Finmedia Conference on Project Finance The Scope for Project Finance Denis Clarke Bucharest, Jan.24, 2005."— Presentation transcript:

1 Finmedia Conference on Project Finance The Scope for Project Finance Denis Clarke Bucharest, Jan.24, 2005

2 Outline  Why Project Finance  Why IFIs play a key role  What has been achieved  Lessons  Opportunities and new models

3 Why Project Finance  Large investments needn’t compromise credit rating –A-rated utility in EU could invest in risky country without downgrade –Less critical where host country is Investment Grade –But an EU utility downgraded as Balkans customers exceeded domestic  Project debt can be priced on its merits –Borrowing on sponsor balance sheet subsidizes partners  Finely sliced risk allows higher level of debt –May be only way to get adequate return for risk taken  Allows developers to conceive ambitious projects –Often local, no access to long term debt but key insights and access Most private infrastructure has been financed this way

4 Outline  Why Project Finance  Why IFIs play a key role  What has been achieved  Lessons  Opportunities and new models

5 Overview of Main Project Risks  Completion – typically borne largely by EPC contractor  Fuel / Key inputs: mitigated under supply agreements  Operation & Maintenance: Sponsor typically knows well –Project finance lenders don’t want technology risk – no “pilots”  Market risks: borne by the project co. so lenders share it  Country Risks – element differentiating emerging markets Foreign exchange rate; Convertibility and transfer;Riots and civil strife But country risk also includes –Change of law – including the regulatory & tariff frameworks Weak regulatory frameworks main problem in this region

6 Country Risk and Multilaterals  Countries own the multilaterals – they subscribe to attract investment  Information: investors see IFI has access to data & analysis –So analysis & shared due diligence confirms sponsor’s judgment  Trust: The IFI often cast in role of “honest broker” –IFI involvement with the investor comforts host country politicians –Multilateral’s access to ministers is a comfort for the investor  Mobilizing Finance: facilitated by key privileges – “Preferred debt” excluded from Paris & London club restructuring –Formal commitment to facilitate conversion & transfer –No withholding tax  Country risk reduced: financing terms will reflect this…but limits Country risk: key determinant of when an IFI is required

7 IFIs in Infrastructure, Mining etc.  Capital intensive, long term exposure in country  At interface of public & private: high profile politically  Usually earns local currency to repay hard currency debt  So IFI can make greatest contribution in these sectors  IFC’s portfolio supports this – e.g. excellent results in power –Returns on equity, NPLs, etc. all better than IFC average –Despite sponsors’ poor results in EMs -AES, Enron, El Paso, NRG,  But declined some opportunities where country risk too great Track record in many crises illustrates IFI risk mitigation

8 Outline  Why Project Finance  Why IFIs play a key role  What has been achieved  Lessons  Opportunities and new models

9 PPI:Total Investment By Sub-sector Total: $754 bn (2,493 projects)

10 PPI: Annual Flows by Region $ billion $128.4 $46.7 $75.6 $16.9 $41.3 $9.6 $90.3 $9.7 $5.4 $1.5 $23.2 $5.7

11 Outline  Why Project Finance  Why IFIs play a key role  What has been achieved  Lessons Learned  Opportunities and new models

12 Some Lessons from the Boom  Private participation brought improvement  Of 2500 private infrastructure schemes — Only 48 have reverted to the public sector  Privatising, competition is a means not an end –Not always necessary; not always sufficient  Transparent legal & regulatory regime is key  Competitive bidding improves contract design  Participation of local financial markets adds strength  Large markets are better: potential NPV not IRR  General economic growth reduces project risk Return to public sector not a credible alternative

13 Key Success Factors*  Political leadership –sector reforms  Political commitment to the project itself  Domestic capital role – debt / equity / cash generation  IFI support; (IFC’s power portfolio remained strong)  In Distribution/ network businesses – Prior tariff increases – Prior improved collections  Investors now seem to be interested in:  Large markets, strong growth prospects & transparent regulation *Based on sample of 20 successful projects in recent Deloitte study for WB

14 IFI ’ s initial screening questions  Sector fundamentals: tariff levels, pmt.discipline, etc.  Economically competitive: on a sustainable basis  Government committed to meet its obligations  Contractual framework: balanced, transparent –even if incomplete: IFI participation may help complete  Sponsor with adequate funds & expertise  Legal framework which is supportive – and enforceable

15 Outline  Why Project Finance  Why IFIs play a key role  What has been achieved  Lessons  Opportunities and new models

16 Current Context in SEE Investment needs too large for Governments Slow earnings growth in EU will draw investors out Big EU corporates will lead – will hit financial limits Region is building record of strong economic growth Missed the PF Boom: no legacy of large losses –Countries in this region are first place to look –Acquisition costs a fraction of what they paid elsewhere Big progress made on tariffs, regulation etc. Strong grounds for optimism: few projects…

17 Opportunities  Privatisations  EU & higher environmental standards  Water & treatement  Renewables & Co-Gen  Health and Gov. services  Major shifts in trading patterns Recent successes - but still far too few transactions

18 New Models Needed Where regulatory framework unproven: –World Bank’s Partial Risk Guarantee Where regulatory framework inadequate: –Concessions with regulation through the contract Where economic & commercial returns diverge: –PPPs: to reduce risk and/or raise returns to investor Longer term, incentivised Management Contracts Where uncertainty is so great required return too high Must change risk / reward balance in some sectors

19 PPPs Must offer a good economic return to the country Yet cannot generate commercial returns matching the risk May be impossible to raise tariffs quickly to level needed - Cost recovery in the water sector typically below 50% Experienced private investor with expertise & incentives Can bring benefits even if tariffs don’t provide a return Can receive subsidy - & still share the financial risk watewate Essential to launch projects in some sectors - water, heat ?

20 Structuring PPPs Using public funds – need political & public support Transparency & clear communication essential If ongoing subsidy, must be fiscally feasible for the future Should envision transition to full cost recovery Afffordability for all customer categories – “lifeline” Service delivery must visibly improve - quickly watewate Combining with public sector IFIs – World Bank, EIB etc.

21 Thank You Denis Clarke Chief Investment Officer


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