«INFRASTRUCTURE PROJECT FINANCING IN ASIA LESSONS LEARNED Andrew D Cao, Ph.D,. Karim Solh Heidi Anderson May 1993 INTERNATIONAL PRIVATIZATION GROUP ...»
PRICE WATERHOUSEUEM does not have a proven track record or strong financial standing UEM has no equity of its own, has an accumulated stock deficit of M$100million and has been suspended from the Kuda Lumpur Stock Exchange Furthermore, they had a difficult bme rasing pnvate financing, either local or foreign, for the construcbon of the remaming secbons of the Expressway Banks considered their financial nsk too high or insisted on guarantees the government is not willmg to provide In the end, the Malaysian government did provide an extensive secunty package, including traffic volume guarantees, and foreign exchange nsk and guarantees agmst vanous events of force majeure or government achon
As noted above, the Malaysian government inihally did not want to assume much nsk for the project and wanted a secunty package m which the concessionaue took on more responsibilrty, provide an extensive secunty package, including guarantees and covenng the government d ~ d much of the nsks for developmg country.
In addibon to providmg a generous secunty package to the project company, the government stdl found it difficult to raw the adequate financmg to complete the project, it was rejected fmancmg from the World Bank, and had to also provlde extensive guarantees to receive adequate financmg. Financing was difficult to mse because parts of the hghway can pay for themselves and other segments cannot, and the net effect is a margmal deal from an mvestor's point of view. The government agreed to provide subordinated project loans to the concessionaue and to provide backup funds m case traffic risks, exchange rate nsk or mterest rate nsk go beyond Certaln pomts.
Thls nsk addressed the reluctance that many semor lenders would have to take the nsk that the volume of toll paymg traffic wdl be too low to pay off the debt. It also covered the concerns of the equity mvestors who might also be reluctant to take sigruficant nsks m ttus regard unless they are given a chance to reap sigruficant rewards if traffic meets or exceeds projechons.
Also noted above, BOT-type projects are supported by the senior government members, evidenced by the security packages provided, detaded above, and thev provision of a substantnl support loan for ten years. UEM assumed v U y no nsk s u m the secunty package lncludes a pre-completiasr loan of M$4750 nullion to be drawn down dumg construchon and a postcomplebon loan of M$950&on to be drawn down dunng the operation phase of the project.
One note which could be also applied to the experience of the Eurotumel project, is that projects of this type succeed most readlly when financing for the arrangement is made more attiunable All of the income for this type of project will be in local currency, and wdl therefore magnify foreign exchange nsk. Pnvate concessionares will not accept that nsk meanmg the government or a multdateral lending agency must.
Malaysia has an excepbonal capital market by developing country standards, and the presence of a sophsbcated capital market is lnvanably one way to assure the presence of local fundmg.
If the funds are msed locally, the nsk of exchange rate fluctuabon whch comphcates financmg is ehmmated.
In addibon to its capital market, and unhke most developmg countries, Malaysia has a good credit rattng on sovereign nsks. However, although a UEM, pnvate concessionaxe, was selected to bulld and operate the North-South Expressway, the government was forced to take on all nsks associated with the venture and provide substantd guarantees.
For the North-South Expressway of Malaysia Project, its success is a result pnmanly because of Malaysia's pohcal stabhty, the sue and sophWxabon of its capital market, low interest rates on borrowed capital, and a strong need for econormc development of the Malaysian mfrastructure. That need was r e c o g d by Pnme b s t e r and other seruor pohbcal figures who were willing to put themselves on he h e personally to make the projects bankable deals.
THE SKYTRAIN OF THAILAND
Dunng the late 1970s, the Government of Thaland undertook large transport Investments and developed a compehtwe transport industry The expressed interest of the Government in such projects provides an advantageous foundahon for the success of a BOT-type project Throughout the 1980s, the government has developed numerous BOT-type projects in the transport sector, includmg the Skytran project, a $2.5 billion mass transit project. The government requested proposals to design, budd and operate the first 23-mde phase of the Skytmn, in two lines, to carry 40,000 passengers/hour/d~ect~on, an ophon to develop another 14.3 miles later with The Government of Thdand through the Expressway and Rapid Transit Authonty of Thaland (ETA), awarded the nght to build and operate the Skytmn to SNC-Lavalm, a Canadian engineemg firm. SNC-Lavah was contracted to finance, design, budd and operate the first 23-mle phase of the Skytram The ETA signed the provisional 30-year concession in February 1992 with the a m of largely completmg financing and other arrangements by year-end.
However, the ETA declared the master agreement void, (the government withdrew the project from ETA'S control), when they did not approve SNC-Lavah's selecbon of Bombardier, Inc The government subsequently launched two new agencies to rahonahe the highly fragmented insbtubonal arrangements b e h d Bangkok's ambihous transportahon plans. It created the Metropohtan Rapid Transit Authorrty to develop altemabves to Skytram. One alternatwe has been proposed, an elevated-cum-underground electnc tram system.
Whlle there have been rumors that the government is explomg alternatwes to fund the project itself, as there was a swong financial need on the part of the government to fund the project pnvately, there is speculahon that the financial condibon of the government is such that they can now pay for it with tax revenues.
ARRANGEMENT OF THE CONSORTXUM K.
W e the ETA awarded the contract for the project to SNC-Lavah of Canada, in addihon to the problems menboned above, the project was provisionally p e n to the second choice dumg the biddmg stage, the Asia-Euro Consortium, after ETA and SNC-Lavah were unable to conclude a contract. However, SNC-Lavah came up with necessary financing guarantees, and was re-awarded the contract.
Currently there is no formally estabhshed project company and the financing plan is as well undetemed. However, further negohabons between the Government of T h h d and the onginal concessionaxe are bemg conducPRKE WATERHOUSE
L. PROJECT FINANCINGCurrently the award of the project is being renegobated between SNC-Lavalin and the Government of Thdand, the ETA has been removed from the project The onginal project financing arrangements were structured with about 60% msed as mxed credits, soft loans mamly from Canada, with a smaller credit from Japan, and the government will provide 25% equity As of earlier last year, the project financing was to be arranged by Morgan Grenfell and the Tha Farmers Bank. The esbmated project cost was US$1 6bdlion.
The Canadian Government has agreed to provide stronger financing support While onginally the Canadian government proposed to provide soft loans, the government of Thdand stated that there would be no government guarantees, and the soft loans could be made only agamst the guarantee of the government or a pretmer internabonal bank.
Whlle the demls of the financing arrangements for the project are stdl undecided, as is the fate of the project in general, both should be defined after the conclusion of the on-going negobabons
The bidding procedure was urnbated by the Thiu Government m 1988. The bidding The
decision-malang and procurement process was disorgaruzed, as evidenced by:
In addibon to the poor procurement procedure, the contract to desrgn and complete the Skytrain project went to Lavalin, who, after bemg awarded the contract, went bankrupt and was rescued by SNC.
Since BOT-type projects are essenbally businesses, a sponsor who fads to approach them as such may nsk fadure This appears to be a major lesson to be drawn from the breakdown of negobabons between SNC-Lavahn and the Government in June. They seemed to perceive the project as just a large construchon job. This percephon is evidenced by the fact that they rased project financing through the Canadian Government, who provided soft loans that could be made only aganst the guarantee of the Tha government or a first-class mternabonal bank, and disregarded the Tha Government's consistently stated condibon that there would be no government guarantees.
As discussed m the above three projects, the government must support wholeheartedly BOT-type projects for them to succeed. T ~ support can come through legislahon as well as therr acme H involvement in f o s t e ~ g pnvate sector pmcipahon in the provision of pubhc rnfrastructure services. The Skytram project is no different.
Throughout the biddmg hfe of th~sproject, the Government's mterest m the pnvate sector involvement has shfted. At the bme the project was bid, the Government had the financial need for the project, and currently there is a percepbon that the government feels that they can make the necessary mvestments m infrastructure without the mvolvement of the pnvate sector. Tlus
is evidenced by:
Outside of the problems wth the contractor, external financmg for the project became difficult as a result of the nots m May 1992 The percepbon of pohbcal nsk was evident to any mvestor, and they had to be strongly reassured by the mtenm government. We have as yet to see what, if any, poslhve effect they had on persuading the prospectwe rnvestors to take on the proJect.
In addibon to these country-wde events, the Wmted States Agency for Intemabonal Development
PRICE WATERHOUSEpublished a report which demls the government's "unwillingness to openly support programs which expand pnvate sector involvement in the provision of mfrastructure services" Key issues cited for their lack of support mclude.
In addbon to the support of the project's host country government, the government of the concessionaue, m thls mstance, the Canadian Government was mvolved m the project The Canadian Government hdd provided soft loan support for the ongmal project, and has guaranteed addihonal loans for SNC-Lavalm to persuade the Thsu Government d m g thls round of negohabons In addhon, when the ETA provisionally awarded the contract to Asia-Euro Consorhum because SNC-Lavalm was unable to obtain the necessary financmg m 1991, SNC-Lavah was able to come up with the requved "guarantee" from Japanese banks. It appears from the text of the "guarantee" that Canada must have apphed strong diplomabc pressure on the Japanese banks.
PHILIPPINES' ASSISTANCE PROGRAM SUPPORT PROJECT PAPS)
Pnce Waterhouse was engaged by US Agency for Internabonal Development and the Government of the Philippines in July 1992 to provide technical assistance to the Coordinatmg Council of the Philippines Assistance Project (CCPAP), in conductmg PAPS' Operatioris Support Component.
The objectives of the techmcal assistance are to.
Promote infrastructure projects through the partxipabon of the pnvate sector;
Increase the number of projects implemented by the pnvate sector, Expedite the implementahon of projects through pnvate sector participahon, and, Ensure that the government's infrastructure pnvatmhon program is selfsustammg so that it can manage the basic day-to-day operabons of the project.
The techcal requxements of the project include:
Promotmg and marketmg pnvatmhon of pubhc sector infrastructure projects;
Developmg the techcal slulls of local officials to develop bulld-operate-transfer (BOT) infrastructure projects as well as pnvatmbon projects, and;
This assistance program is still m its mit~al phase and no major project has been funded yet However, it is expected that, under the leadership of President Ramos and hls new admstrahon, PAPS wdl be a strong catalyst m the development of pubhc-pnvate partnerships m the Pluhppmes. A l signs lndicate that the-current Government is strongly commtted to BOTl type projects as evidenced by its strong support for the Hopewell BOT Power Project and PAPS.
Given the country's tremendous infrastructure needs and fiscal constmnts, BOT-type project wdl