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«INFRASTRUCTURE PROJECT FINANCING IN ASIA LESSONS LEARNED Andrew D Cao, Ph.D,. Karim Solh Heidi Anderson May 1993 INTERNATIONAL PRIVATIZATION GROUP ...»

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INFRASTRUCTURE PROJECT FINANCING IN ASIA

LESSONS LEARNED

Andrew D Cao, Ph.D,

.

Karim Solh

Heidi Anderson

May 1993

INTERNATIONAL PRIVATIZATION GROUP

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1801 K. St, N.W

Washington, D.C. 20006

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I. INTRODUCTION Public fiscal deficit has long plagued governments in developed as well as developing countnes Yet the demand for infrastructure has increased steadily and governments are having difficulties in rasing sufficiently and rapidly the required financing to meet such demand. In developing countries, the situauon is even more urgent because of nsing economic growth which is limited by infrastructure supply systems that histoncally have been insufficient in quanbty as well as in quality.

In an increasmg number of countnes around the world, the public and pnvate sectors are joining together to provide the badly needed infrastructure and overcome the funding contrants Although the balance of pubhc and pnvate responsibhhes vanes among projects, pubhc-pnvate partnershps have one central strength. they draw on the best of each sector to fulfill infrastructure needs which neither sector alone could provide. Smce no borrowing on the part of the government or government agency is ~nvolved, pnvate fmancmg of infrastructure projects shfts the debt burden from the government to the pnvate sector. The government, In this manner, conserves its hmted resources for other social mfrastructure needs such as health, educahon, flood control and drmage. In return, the pnvate sector earns a reasonnable rate of return for its role in the financmg, construchon and operahon of the project.

By attractmg domeshc and foreign pnvate entrepreneunal energy and capital (both debt and equity), the scheme contributes to the expansion and improvement of much needed mfrastructural fachhes whch otherwise would not have come onstream and whose absence would constram economic development of the country The pnvate sector is Uely to provide sound management, speedy implementahon and operational efficiency mcludmg the adopuon of mnovahve design featurks. In addihon, because the private sector is more focused on profitlloss than the public sector, it is by nature more efficient and cost-effectwe than public sector enhues With this focus on profitlloss, pnvate firms have as a key objectwe lowemg operatmg costs, increasmg capital mvestments and u t h e the most up-to-date and efficient technologies.

Given the wide range of infrastructure services that lend themselves to BOT schemes, it is necessary to have a thorough understanding of the issues lnvolved m g e m g a BOT-type project off the ground. The attracbveness of the use of BOTs m terms of finance and hmehness for mfrastructure projects must be balanced with an m-depth knowledge of the nsks mvolved, such as country, political, complaon, performance and operatmg, and cash nsks. This paper will analyze the most popular ~nfrastructurefinance methods and briefly descnbe the current trends and developments around the world. It wdl also highhght several relevant examples m Asia and summame the major lessons learned m project finance and the pitfalls to avoid

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TRENDS & DEVELOPMENTS:STATISTICS ON PRIVATIZATION & PRIVATE

1.

PROVISION OF PUBLIC SERVICES WORLDWIDE AND FOCUS ON ASIA.

"Pnvahzaaon" is a relahvely new term in the development lexlcon which can mean different things to different people. This wide scope of interpretahon is evidenced by the vmety of terms that have been adopted to explam the pnvahzahon process: "peophzaUon" m Sn-Lanka, "popular capitahsm" in Chrle and the all-encompassmg "pnvate sector development" m some countnes. In broad terms, pnvahzahon implies the transfer of ownership or management of state-owned enterpnses (SOEs) to the pnvate sector, or the dilution of,pubhc ownershp via mcreases in pnvate fmancrng of new projects W e the concept of pnvatuahon is relatwely new, its apphcatron is even more recent m economc development. In 1988, the total proceeds of pnvatmd SOEs worldwde were approximately $29.5 blllion accordmg to Pnvatlsanon Internutzonal. Th~s figure went to $24 7 bdhon m 1989 and to $25.3 bdhon m 1990. With the abolition of centrally-planned economc systems m Eastern Europe and the former Soviet Uruon, privatization has become an even more important development strategy m the overall economc restructuring and hberalizahon of world markets. As evidence, total privatuatron proceeds m 1991 reached $53.2 bfion, an increase of 110% over the previous year1. Sinular results were achieved m 1992, with worldwide pnvahzabon transachons exceedmg $53 bdhon m total value.

Pnvahzahon implementation vanes among different regions and countnes. Memco and Chde m Lam A m e m have proven to be the most aggressive and successful m reahzmg positwe results from the= pnvatuahon programs, s e m g as a stimulus for other countnes m the region such as Argentma and Brazil. In Memco, around 200 public sales have msed about $17 bilhon or 6.6% of the country's gross domeshc product (GDP)after three years. Hundreds of losmg state-owned enterpnses (SOB) have been closed through the privatnation program, allowmg the government t turn around the 8% deficit m 1981 to a surplus and bmg mflabon below o 20 %*. Simrlat results have been aclueved in Chde.





Despite such proven benefits, the development of pnvatmhon mQatwes has been rather slow in other countries o w g to a lack of fanulianty with the concept or the fear of labor redundancy displacement and its pohtical consequences For these reasons, many countnes have started pnvatmhon under the form of pnvate financmg of mhtructure projects rather than outnght sales of emstmg SOEs. This method 07 pnvatizahon via diluQon of the pubhc sector mvolvement m r m z e s the nsk of labor displacement whde mcreasmg the supply of much needed rnfrastructure services such as water, electricity, road, ports, telecommu~cahons sohd or waste removal at a faster speed and improved quality. The latest aggregate data avdable for

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major privately financed infrastructure projects indicates that $22 7 blllion in financing have been signed to such projects and $36 6 billion are planned for 1993.

Pnvate financing of infrastructure projects encompass a wide spectrum of pubhc-pnvate relabonships with varying degrees of public and pnvate repsonsibility Important factors include nature of the developer's organizabon, source of inihabve, who operates the facility, ownership (includmg durabon), financing sources, and type of revenues. The most popular methods of infrastructure project financing are bnefly described in the next secbon.

A. Build-Own-Operate (BOO)

The BOO method is used when the mfrastructure fachty is brand new rather than exlstmg, requmg financing for construclhon ("build") such as the Bangkok Hopewell Rad, the Meman toll road or the French MUSE tunnel. The sponsonng consomum whch finances the project takes care of the construclhon and operattons of the fachties as owners without worrymg about transferring back the fachbes to the host country government. One major reason why the transfer is not considered by the government as necessary is because it is not under pohlhcal pressure to own the fachlhes. In general, countnes whch are truly commtted to pnvate sector development and hberalmlhon tend to use this method as one pnvatmbon strategy

B. Build-Operate-Transfer (BOT)

The BOT method (more accurately referred to as "Bulld-Own-*rate-Transfer" or BOOT) is used for new projects f.equhg construclhon such as the Phdippmes power plant and port terminal, the Palustan Hab Rwer power plant or the Malaysia Saba water supply. The sponsonng consorlmm financmg the project takes care of the construclhon and operabons and is expected to transfer the ownershp of the project to the host government at some future date, normally at no cost. Dependmg on the ttme of transfer, the performance of the sponsor and the remasnrng economc lrfe of the project, the host government may opt to extend the sponsor's operabon of the project to some future penod m bme.

One major reason for the transfer feature has been the concern many governments have concernmg privPte o w n e ~ and control of sensitwe or strategc economc actwibes such as p t e l e c o m m ~ s transportabon and mfrastructure, resulting m a hesitancy to allow total, pnvamtzon. Addigonally, as the concepts of BOO and BOT are std new to many countnes, many decision-makers are still trying to understand how they can best apply these techniques to then parhcular situattons. As evldence of the lack of a clear understandmg of the BOT and BOO financmg methods, we find that manrpeople talk about the two concepts as though they are mterchangeable and synonymous. To the contrary, specific components of each method sigmficantly distmgulsh them from each other. For example, applicatton of the BOT method often requues some financmg parhcipabon on the part of the host government, and the tanff

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structure is genemy regulated to avoid monopohtlc pnclng pracbces C. Build-Transfer-Operate (BTO)

–  –  –

D. Buy-Build-Operate (BBO), and Derivative Methods In projects lnvolvmg existmg fachhes, the sponsoring consorhum can purchase the assets from the government, expand capacity and then operate. This method, referred to as Buy-BulldOperate (BBO), is used for by governments that are comrmtted to pnvatmhon and wish to expand the capacity of exlstmg operabons. Examples Include the Phhppmes light rad system, the Palustan telephone operabons and the Dubh, Ireland beltway.

A denvatwe of BBO is the Lease-Develop-Operate (LDO) method. m s method is simdar to BBO except that fl pnvatzabon is avoided through the government's retenbon of ownership ul rights. Under h s arrangement the government receives cash flows as specified by the lease agreement and exlstmg facrlibes are financed by the lessee. The Toronto auport terrmnal, the Atlantic City InternaQonalauport and the Kuala Lumpur/Kauntan road are examples of LDOs.

Another denvabve methbd allows the government to retam ownershp of exlstmg fachhes whde the pnvate sector financed expansion 1s owned by the sponsor. This method is called Add-OwnOperate (AOO). Examples of AOO mclude an addibon of a fuel fachty on an auport site whlch belongs to the government. Thn method is also used if the government's objectwe is, for example, to mamtam the existmg labor force wlule increasing the service supply and creatmg compebbon (thereby mcreasmg efficiency) withm the state-owned fachty. A thud denvatwe is called Contract-Add-Operate (CAO) and is used m those cases where ownershp is not allowed even for the pnvate sector financed expansion These methods are popular in waste processing plant expansion projects.

GENERAL ISSUES TO BE CONSIDERED IN BOT-TYPE PROJECTS

N.

Dumg the preparabon and evaluabon stages of a BOT-type project, it is essential to research the various aspects mvolved in each stage ~f the arrangement, from the mitial plammg and evaluabon stage to the negot~abon/promot.~on/development to the implementatron stage.

stage The BOT-type programs conceived of to date have been difficult, to say the least, and numerous lessons have been learned dunng all stages of this type of project.

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BOT projects are increasing in dollar size, as well as the number of pmcipants, reflectmg monumental infrastructure and energy undertalungs Banks worldwide are reducing the~rlendmg m general, and this has a negatwe effect on the avadability of funds for higher-nsk project financings The shnnlung market has resulted in new pressures on project development and financiers Less than ten years ago, a single lender would be willing to underwrite power projects with about $100 M i o n, now those same projects often need $300 milhon to $500 million, and no smgle lender is willing to sponsor al of the debt, so sponsors must put together unwieldy groups l of banks and other lenders. The marketplace has responded m ways that permit deals to get done, but it requues much more work and costs project sponsors more Sponsonng consoma have become large not only because of the size of the project, but also because they are shying away from the nsks. The nsks have increased because of the size of the project, therefore you have to have more partxipants to allocate costs equitably.

–  –  –

A common lesson learned through the execuhon of numerous BOT-typeproject is the necessity for trust and cornmumcabon between the -project part~cipants. The untrustmg relahonshp between the plnvate and pubhc sector partners leads to msunderstandings and doubts about mohves and intensifies where a shanng of nsks must be negotiated. The pubhc and pnvate sector negobators must trust each party and collaborate as a team rather than work as

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adversaries m s mstrust slows the process of early negohations, and leads to the costly involvement of addihonal low-value-added consultants, lawyers and arbitrators

–  –  –

One of the mam reasons for projects falmg is due to the relabve shortage of "packaging slulls" based on sound pmciples and prachces Without the basic components of the project acceptable to all pmes, no BOT-type project wdl be able to run smoothly Issues which must be dealt

with under packaging are:

–  –  –

The project should be structured compebbvely to secure the required fundmg. Profit has to be easily ~denbfiableto the project pmcipants

–  –  –

Project creditors waver in intensity of interest m the project throughout the project's development and implementation stages, creatmg ordeals whde the project company struggles to develop the financial structure of the project. Tlus is a result of the long hfe of a BOT-type project and can therefore be mitigated through proper structuring before the negobabons stage.

–  –  –



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