«INFRASTRUCTURE PROJECT FINANCING IN ASIA LESSONS LEARNED Andrew D Cao, Ph.D,. Karim Solh Heidi Anderson May 1993 INTERNATIONAL PRIVATIZATION GROUP ...»
Project partnerslups should have exlt provisions for mcompabble or nonpaformmg partners and entry provisions for new parhcrpants.
PROJECTICOMMERCIAL RISKProject nsk involves construcbon, operatmg and complehon nsk. Which is the nsk taken that the project wdl be completed on hme and within budget. Tlus nsk is assumed by the development of a fixed pnce construcoon contract, and the pnce is increased by a nsk factor to compensate the contractor for talang this nsk
PohbcaUCountry nsk covers events whch are the result of pohfical instabhty should be the responsibihty of the host government Since these projects usually always involve an internahonal consorha of mvestors, the government, especially m developmg countrres must assume this nsk to attract mternabonal mvestors.
Talung into account the above-menhoned lessons and nsks involved in BOT-type projects, we
next examme four BOT/BOO type projects carned out in Asia:
THE HUB RIVER PRIVATE POWER PROJECT OF PAKISTAN
The Hub Rwer Power Project has been referred to by John Blackton, the Palastan director of USAID, as the "make or break" test for these types of projects m the developmg world The Hub Rwer scheme is the largest project of its land ever undertaken. Onginally scheduled to provide 500MW and cost roughly $900mllion, the Government of Palastan received two acceptable proposals and combmed them, so the project now stands at 1,200MWto be provided from an oil-fired stabon at Hub Chowlu, 50km west of Karach, costing roughly $1 88bdhon W e ongmally a BOT project, through the negottabons process, it 1s structured as a BOO scheme whch wdl sell its output to the state-owned Water and Power Development Authollty (WAPDA). The BOO decision was made when the consomum decided that a BOT project was deemed contrary to pnvamhon, a pnmary objectwe of the Pakistam government at h s juncture.
ARRANGEMENT OF THE CONSORTIUM E.
The part~cipants the Hub Rrver Power Project are m Saudi Arabia, Palastan, Japan, Europe m and the U.S. The principal sponsor of the project is Xenel Internabonal Energy of Saudi Arabia. Other owners include Mitsui & Co. of Japan and Hawker Siddeley Power, a Bnbsh fm. Pnce Waterhouse acted as the financial advisor to the Government of Palastan.
HUBCO, the project company, is responsible for providing 20% of the total cost as equity capital from both foreign and local shareholders. The remammg 80% wdl be borrowed from the PSAs. As of August 1992, the pnvate s t o r is involved in supplymg US$380 mdhon of equity for the scheme and $1.5 blllion of loans, includmg a substanbal quanhty of foreign borrowings.
PRlCE WATERHOUSE The debtlequity rabo is consbtuted as follows
The financmg structure is designed so that commercial lenders supply money aganst the revenue stream of the project rather than agmst the balance sheet of the Palastan Government.
As noted above, the ongmal project sue was slated to cost roughly $900m&on. However, the evaluab~lgcommttee received two good proposals and then decided to combme them to provide over double the origlnal wattage from 500MW to 1,200MW.
I In addihon, vanous contractual documents could have been prepared, although not m theu final form, pnor to project develupment, such as the Fuel Supply Agreement and the Power Purchase Agreement. Such documents should identify and establish the p o k y and operatmg issues necessary for a BOT-type project.
KEEP PROJECT SIZE MANAGEABLE 2.
Due to delays in the commencement of construcbon and fluctuations in exchange rates, the total cost of the project has now mcreased from the onglnal amount of $900million to the current cost of more than $1.8 billion. This is an extremely large figure for a first-bme project and therefore more difficult t arrange the various requlred financing schemes. In July 1991, a contmgency o provision of $200mn to cover cost overruns was added to the project cost, an obvious disadvantage of extendmg the project hfe
REDUCE NEGOTIATIONS STAGE 3.
One key lesson drawn from this project is that the negobatrons phase should be reduced to the
PRICE WATERHOUSEmaxlmum extent possible. Given the numerous p m e s involved from start to finish m the BOTtype project, negobabons will, by nature, be a trying process Negohahons for the Hub Rwer Project were lengthy and difficult, due pnmmly to the fact that the Palastan government had not appointed a smgle individual to represent the Government. In addibon, on both the public and pnvate sector sides, those mvolved in the negobabons did not have carte blanche responsibility to commit their p m e s to all agreements. One key way to avoid these difficulhes is to appoint one central negobator who holds the power to commt the resources of the respectwe company/government This is a fundamental step to be taken to reduce the negobabon stage In addibon, the vanous government agencies and other vested interests should be Informed of the projects purpose, gods and objecuves which mght impact upon theu actlvlbes up front However, at the negobabon stage, these agencies and interest groups must speak with one voice on behalf of the government.
Smce BOT-type projects in general, and project fmanclng specifically, are complex, both the pubhc and pnvate sector m e s mvolved must be aware at the proposal development stage of the financial and legal elements of such a project. Also, it should be ensured that the government in partxular understands the vmous legal and financial convenbons of the pnvate sector, summanzed m the introducbon.
Addibonal ways to reduce the bme spent in negobabons is to have idenbfied andlor estabhshed pohcies regarding relevant legislabon, foreign mvestment issues, and legal issues before the project incepbon.
The Mushm Court recently passed the Shana Law of Palustan whrch may hectly affect tlus project, m that it prohbits interest. There have been delays m sigmg contracts due largely to western bankers' concerns over the potenha1 threat to returns from tlzls law. Obviously, relabons with the Government of Palustan (GOP) must be strong so as to ensure that the project may be constructed and operated under the terms of the contracts signed. In order to cover the problems that wdl arise as a result of th~s u h g, the GOP and the World Bank have switched r the goverrung law to Enghsh.
Evidence of the strong relabonshrp which Hubco has wth the government, and the importance of that rela~onship, demonstrated through the numerous nsks whch the GOP was wilhg to is assume to make this project succeed. The GOP has accepted responsibWy for the performance of the utility to whom HUBCO will sell its power generated, the Water and Power Development Authority (WAPDA).
Addibonal guarantees and comnutments were requlred by the GOP and other state enbbes, due to thew weak credit-worthmess. The resultant secunty package, govermng law, evolved Into
four sets of documents for HUBCO. They are:
PRICE WATERHOUSEGovernment of Palastan' Implementatton Agreement Power Purchase Agreement Fuel Supply Agreement
Challenges to fmancmg private power projects m developing countries wdl be to mmnuze pohbcal nsk allowmg banks to concentrate on the commercial nsk of the project itself. The major nsks under thls project were seen to be polihcal, rather than technological or market related, and therefore thg involvement of development agencies was essenhal to help spread this developmg country nsk.
In order to attract addihonal financmg, the World Bank developed the Expanded Cofmancmg Operahon (ECO). ECO was developed to get the project off the ground by attractmg pnvate fmancmg through its mvolvement m committmg equity and substanha1 guarantees to other mvestors and lenders.
An altematwe method u W by the GOP to attract foreign mvestment was its offer to foreign lends for exchange nsk msurance at an extremely compebtive rate (3% per year) for the hfe of the loans. In addition, the GOP has agreed to guarantee the performance of the Water and Power Development Authority (WAPDA), the State 011 Company, and the State Bank of Palastan Extraordinary wmmtments that were reqwed m order to attract the necessary financmg for the project.
THE NORTH-SOUTH EXPRESSWAY OF MALAYSIA
The onginabon of the North-South Expressway project goes back as far as 1978, when, due to heavy traffic growth dunng the 1970s, the Malaysian Government decided that an interstate expressway should be b'uilt along the west coast of the Peninsula where most of the country's populabon and high traffic densibes occurred The Malaysian Ministry of Public Works was assigned the task of designing and budding the new expressway, was planned to be built over a five year penod.
The project was spht into a dozen packages and design contracts were awarded to consultants It became clear early on that the project hmetable of 5 years was shppmg and m order to speed up the process, the government created the Malaysian fighway Authority (LLM) in 1980 and gave it the mandate to fmsh the project without too much considerahon to cost. The authonty was hastdy set up with staff seconded from the Mimstry of Pubhc Works, laclang in capitahzabon, smce it was not onginally planned that LLM would be responsible for financmg the project When the government decided to go to external borrowmg for the project, it mandated LLM to get commercial funds wth the federal treasury providmg guarantees.
Dumg the Expressway construcbon, the LLM became more and more financially stramed as it was appomted to finance addibonal projects, whch essenbally made the LLM bankrupt. The LLM sought addibonal financmg from the World Bank, and fded, at whrch bme, the Government decided to pnvatue the project m order to complete it, whch is the ongmabon of the current BOT stage of the project.
ARRANGEMENT OF TBE CONSORTIUM H.
To mihate the pnvatmhon of the North-South Expressway, the government awarded to Umted Engmeers Malaysia (UEM) a contract for M$3.5bdlion to manage the complebon of unfmshed segments or upgrade exlstmg secbons of the major road over a seven-year schedule. UEM has, as major shareholders, the Prime Mmster and the Mmster of Public Works, the latter also bemg the executmg agency. UEM is overseemg the construcbon by several contractors. As part of the contract, UEM was given the entire system, rncludmg that whch was already constructed, to operate and collect tolls dumg a 30 year penod, but the government contmued to assume the debt for the r o d already constructed.
I. PROJECT FINANCING
The project cost is esbmated to be up to M$5.2 blllion and is funded through a rmx of government and pnvate funds. It rncludes $2.5 bdhon m commercial loans made by local lenders on fixed and floatmg rates for 15-years. The government provided $1 7 bllhon in suborbated loans. In addibon, the Government wdl transfer some exlstmg mfrastructure, PRlCE WATERHOUSE already built stretches of the road wdl be tolled and the revenues attributable to these stretches wlll be made avdable to help finance the construction of the new stretches Tolls from these stretches will provide approximately $1 billion About $800 million m equity was also rased The LLM sought financing from the World Bank in excess of M$600million, who dropped its financing of the project because the design standards and tolhng were unacceptable
A cnbcal step taken which made this project possible was that the Government of Malaysia, in the 1980s felt pressure to establish an investment climate more conducive to attractmg pnvate mvestment, and therefore BOT-type projects, and estabhshed the Malaysian Industrial Development Authority (MIDA) In addibon to thls step, the government effecbvely addressed numerous issues which would duectly affect a prospectwe mvestors mterest in financmg projects m Malaysia. Some of the issues dealt with included the passing of laws and admrustratwe rules relatmg to pubhc procurement; land laws, tax regulabons, stock exchange rules and other hurdles were negobated Furthermore, the speed with whlch the government estabhshed the LLM and gave it the mandate to finance and complete the project is ewdence of the government's active mterest m seemg that the mfrastructure needs of the country are met regardless of how. In addition, the project had the benefit of the feehg among top pohbcal operabves that pnvate concessionaxes could manage and operate projects of h s nature.
2. ESTABLISH STRICT SELECTION PROCEDURES
The selecbon of the concesslonaxes for t h s project was conducted by the government after the LLM faded, and constructron was at a standst~ll. The government played a substanbal role in defitllng and regulatmg the busmess terms m an effort to lncrease compebbon m the selecbon process. However, those cornpama who offered proposals often didn't have the experhse, credit and credibility to implement the concessions. hbally, the government was reluctant to prowde a reasonable secunty package and thereby deterred truly private sponsors from blddmg on the project. The selected concessionaire, as noted above UEM has, as major shareholders, the Pnme Mmster and the Minrster of Pubhc Works, agencies mvolved m the project. Thls can lead one to the obvious conclusion of the presence of a confhct of interest, however, it 1s thought that the government was unable to attract a project campany willing to assume the risks the government wanted.