Permissible/Admissible country analysis (for portfolio investors)

Political risk This segment analyzes the risk to foreign investors resulting from political changes in a country that can negatively impact market openness, liquidity, or performance. Markets with stable, democratic political system and those committed to supporting foreign investment are ranked high while markets with unstable political system are ranked lower. Aside from the type of government, each country’s sovereign credit rating was also analyzed. The sovereign credit rating reflects a country’s stability, its willingness and ability to repay its debt. Countries were assigned either a score of 1 (low) to 3 (stable government, strong credit rating).” --- Wilshire Associate, 1999.

Project Finance: An Introduction

Project finance “…the raising of funds to finance an economically separable capital investment project in which the providers of the funds look primarily to the cash flow from the project as the source of funds to service their loans and provide the return of and a return on their equity invested in the project.” -- Finnerty (1996, p.2) involves the use of limited- or fully non-recourse debt by a corporate parent (the sponsor or sponsors) to finance investment in and ownership of a legally independent, single purpose industrial asset.

History of project finance Devon silver mines. –In 1299, the English Crown enlisted a Florentine merchant bank to aid in the mines development. The bank received a one-year lease for the total output of the mines in exchange for paying all operating costs without recourse to the Crown if the value or the amount of the extracted ore was less than expected. (This type of loan is known today as a production payment loan.) Trading expeditions in the 17 th and 18 th centuries. –Investors provided funds to the Dutch East India Company and the British East India Company for voyages to Asia after which they were paid according to their share of the liquidated cargoes. In the 1930s, “wildcat” explorers in Texas and Oklahoma used production payment loans to finance oilfield exploration. Modern project finance developed in the 1970s partly in response to several large natural resource discoveries and partly in response to soaring energy prices and the resulting demand for alternative energy sources. –BP raised $945 million on a project basis in the early 1970s to develop the “Forties Field” in the North Sea. –Power finance in the U.S. from the late 1970s to the early 1990s. The Public Utility Regulatory Policy Act of 1978 required local utilities to purchase all of the output from qualified power producers under long-term contracts. Public sector’s use of tax-exempt municipal bonds to finance roads, water treatment plants, and other infrastructure projects.

Volume of project finance deals signed from 1994 to 1999

Volume of project finance deals signed in 1999 by sector

Volume of project finance deals signed in 1999 by region

The Chad-Cameroon Pipeline

What happened 10/18/00. Esso Chad begins construction (break ground) 2/22/01. World Bank appoints Int’l Advisory Group –Will monitor oil cash flow for 10 years 5/27/01. Deby wins 2 nd Presidential election –Six opposition candidates briefly jailed. 6/20/01. Close on $600m of financings (18 banks) –$100m IFC A Loan –$100m IFC B Loan –$200m ECA (US Exim) –$200m ECA (Coface) –Deal is over-subscribed by 50% –Cancel the bond offering –D/V for the project = 16% (low for PF) –Chad’s first syndicated credit 6/28/01. External Compliance Monitoring Group –2 nd report finds no critical non-compliance issues First oil expected (full production by 2005)

What happened--Comments “This is a proud day for Chad and Cameroon. It is also a proud day for the World Bank…As an Africa, too, I am heartened by the sheer size of this private investment at the heart of our continent—which needs to attract much more international capital if we are to realize our development dreams…The world is watching this experiment closely and we should take advantage of that attention. In fact, I would like to see us transform what was a controversy into a model of intelligent and open project implementation.” Mr. Calliso Madavo, VP African Region, the World Bank, 10/18/00, Groundbreaking Ceremony. “We agreed to the strictest conditions to receive international funding (for the pipeline) of any nation ever, as far as I know.” Moustapha Ali Alife, Chad Communications and Human Rights Counselor, The Washington Times, 7/22/01.