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MozambiqueFACILITATING PRIVATE SECTOR FINANCING
FOR INFRASTRUCTURE INVESTMENTS
THE WORLD BANK
Future Economic Policies and Non-Traditional Sources of Finance
Maputo, March 22-25, 2010
Regional and Sectoral Concentration of Private Flows in Infrastructure (1990-2008)
22Total: $1,640 bn (4,251 projects)Total: $1,640 bn (4,251 projects)
By regionBy region By sectorBy sector
Source: World Source: World BankBank
33
Factors that could affect Borrowings of Public Sector Entities
• State of Finance of the SOEState of Finance of the SOE
• Stage of development of the relevant sector Stage of development of the relevant sector
and the Regulatory environmentand the Regulatory environment
• Credit HistoryCredit History
• Credit RatingCredit Rating
• Source of revenues (generally local currency)Source of revenues (generally local currency)
• Limited to access to local marketsLimited to access to local markets
44
Factors that could affect State Entities Access to International Financing
• Limited financing capacity of local markets Limited financing capacity of local markets
• Recourse to international markets to fund Recourse to international markets to fund
infrastructure investments in foreign currencyinfrastructure investments in foreign currency
• Repayment obligations in foreign currency Repayment obligations in foreign currency
require access to foreign exchange which often require access to foreign exchange which often
necessitates Sovereign Guaranteesnecessitates Sovereign Guarantees
55
Sovereign Guarantees
• Guarantee provided by the Government to Guarantee provided by the Government to
backstop a public entity’s payment or backstop a public entity’s payment or
performance obligations in the context of public performance obligations in the context of public
sector borrowings or PPPssector borrowings or PPPs
Pros:Pros:
– Facilitates access to international debt and
capital markets
– Enables better terms of financing from
commercial markets
– Endorsement of Government of the
Financing/Project
66
Sovereign Guarantees
Cons:Cons:
– Creates contingent liability for the Government
which may require budgetary allocation
– Impacts on borrowing capacity of Government
and its debt profile
– Involves assumption of the underlying risk by
the Government
Contd.
77
Third Party Guarantees
• In addition to Sovereign Guarantees third party In addition to Sovereign Guarantees third party
Guarantees may be required in support of Guarantees may be required in support of
financings because of:financings because of:
• Perception of political risk resulting from Perception of political risk resulting from
– Possibility of Reversal in Government PolicyPossibility of Reversal in Government Policy
– Changes in Government that could lead to a Changes in Government that could lead to a
reneging of previous Government’s reneging of previous Government’s
contractual undertakingscontractual undertakings
88
Third Party Guarantees
– Private Insurance MarketPrivate Insurance Market
– Export Credit AgenciesExport Credit Agencies
– Bilateral Institutions Bilateral Institutions
– Multilateral InstitutionsMultilateral Institutions
99
The World Bank Guarantee Program
• Leveraging Bank resourcesLeveraging Bank resources
• Catalyzing private sector finance in support of Catalyzing private sector finance in support of
developmental objectivesdevelopmental objectives
• Facilitating member countries access to the Facilitating member countries access to the
international debt and capital marketsinternational debt and capital markets
1010
Partial Risk Guarantees
• Rationale: Promotes privatization by catalyzing Rationale: Promotes privatization by catalyzing
private sector interest through political risk private sector interest through political risk
mitigationmitigation
• Purpose: Supports debt financing in the form of Purpose: Supports debt financing in the form of
commercial debt or shareholder loans or provides commercial debt or shareholder loans or provides
cash flow supportcash flow support
• Guarantee coverage: Critical sovereign risks related Guarantee coverage: Critical sovereign risks related
to Government commitments under the relevant to Government commitments under the relevant
Contractual Agreements Contractual Agreements
• Modality: For Privatization, Concessions, or other Modality: For Privatization, Concessions, or other
PPP structures, or for Greenfield Projects PPP structures, or for Greenfield Projects
1111
Partial Credit Guarantees
• Partial Credit (PCG)Partial Credit (PCG)– Generally for public sector projects/entitiesGenerally for public sector projects/entities– Covers debt service default for specified paymentsCovers debt service default for specified payments– Alternative structures developed for different credits and Alternative structures developed for different credits and
market conditionsmarket conditions
• Policy Based Guarantees (PBG)Policy Based Guarantees (PBG)– For Sovereign or Sub Sovereign entitiesFor Sovereign or Sub Sovereign entities– With DPO IDA Credits or on a ‘stand alone’ basis under With DPO IDA Credits or on a ‘stand alone’ basis under
the DPO frameworkthe DPO framework– For fiscal supportFor fiscal support– To improve debt terms for government borrowingsTo improve debt terms for government borrowings
* Expected to be made available to IDA countries this year.* Expected to be made available to IDA countries this year.
**
**
1212
IBRD Enclave Guarantees for IDA-only Countries
• IBRD Enclave Loans can support public and private IBRD Enclave Loans can support public and private
projectsprojects
• IBRD Enclave Partial Risk Guarantees (PRG) support IBRD Enclave Partial Risk Guarantees (PRG) support
private projectsprivate projects
• ‘‘Enclave Structure’ in support of foreign exchange Enclave Structure’ in support of foreign exchange
generating projects that rely primarily on acceptable generating projects that rely primarily on acceptable
credit enhancements to IBRD (e.g. through offshore credit enhancements to IBRD (e.g. through offshore
escrow accounts funded by foreign exchange (FX) escrow accounts funded by foreign exchange (FX)
revenues, strong third party guarantee) in addition revenues, strong third party guarantee) in addition
to host country government counter-guaranteeto host country government counter-guarantee
1313
IBRD Enclave Guarantees for IDA-only Countries
• Alternative ‘Enclave Structure’ in support of projects Alternative ‘Enclave Structure’ in support of projects
in relatively high-rated IDA countries (i) that have in relatively high-rated IDA countries (i) that have
clear economic benefits (e.g. import substitution) clear economic benefits (e.g. import substitution)
but do not themselves generate foreign exchange; but do not themselves generate foreign exchange;
and (ii) projects that have clear economic benefits and (ii) projects that have clear economic benefits
with strong financial flows in local currency through with strong financial flows in local currency through
an offtake to a stronger creditworthy partyan offtake to a stronger creditworthy party
• IBRD Enclave support would be additional to IDA’s IBRD Enclave support would be additional to IDA’s
Country EnvelopeCountry Envelope
Contd.
Guarantees help Extend Maturities ...
77 77
33
55 55
77
0011
55
11
55
1515 1515 1515
1010
1515
1010 1010
1212
1010
1414
1616
00
22
44
66
88
1010
1212
1414
1616
1818
China
China
Philip
pine
s
Philip
pine
s
Pakist
an
Pakist
an
Leban
on
Leban
on
Mor
occo
Mor
occo
Russia
/Ukr
aine
Russia
/Ukr
aine
Thaila
nd
Thaila
nd
Cote d
'Ivoi
re
Cote d
'Ivoi
re
Colom
bia
Colom
bia
Bangl
ades
h
Bangl
ades
h
Vietna
m
Vietna
m
Mat
uri
ty (
year
s)M
atu
rity
(ye
ars)
without Guaranteewithout Guarantee with Guaranteewith Guarantee
00
16.516.5
Laos
Laos
1616
Ugand
a
Ugand
a
22
1414
… at the same time Reduce Spreads
3.0%3.0%
4.5%4.5%
3.0%3.0%3.4%3.4%
8.5%8.5%
6.5%6.5%
3.0%3.0%
5.0%5.0%
0.6%0.6%
2.0%2.0%
2.8%2.8%
0.75%0.75%
3.0%3.0%
2.0%2.0% 2.0%2.0%
2.9%2.9%
2.0%2.0%2.5%2.5%
5.0%5.0%
0%0%
1%1%
2%2%
3%3%
4%4%
5%5%
6%6%
7%7%
8%8%
9%9%
China
China
Philipp
ines
Philipp
ines
Pakist
an
Pakist
anUga
nda
Ugand
a
Mor
occo
Mor
occo
Thailand
Thailand
Cote
d'Ivoire
Cote
d'Ivoire
Colom
bia
Colom
bia
Bangl
ades
h
Bangl
ades
h
Vietn
am
Vietn
am
Inte
rest
Sp
read
s o
ver
US
T/L
ibor
Inte
rest
Sp
read
s o
ver
US
T/L
ibor
without Guaranteewithout Guarantee with Guaranteewith Guarantee
2.25%2.25%
Laos
Laos
2.25%2.25%
1515
1616
Partial Risk Guarantee for PPPs Limited Recourse Structure
A Partial Risk Guarantee (PRG) can cover lenders in support ofA Partial Risk Guarantee (PRG) can cover lenders in support of
Public Sector contractual commitments Public Sector contractual commitments
Commercial Lenders
Project Company
Government
Guarantee
Indemnity Agreement
Contractual Government Undertakings
IAPPAGSA
Loans
World Bank
1717
Partial Risk Guarantee for Power Distribution Privatization
Letter of Credit Structure
Government
Service
Retail Tariff
Counter Guarantee
Consumers
PrivatizedDistribution
Company
Licensing Agreement
Regulator
BulkPower
Supplier
Tariff
Power Supply
Gov
ernm
ent
Sup
port
Agr
eem
ent
Letter of CreditCommercial
Bank
Rep
aym
ent o
f L
/ C
Covered by the Partial Risk Guarantee from the World Bank
Letter of Credit
Power Purchase Agreement
1818
Guarantee Coverage
• Breach of Contract (e.g.):Breach of Contract (e.g.):– Power Purchase AgreementsPower Purchase Agreements– Supply of gas or water Supply of gas or water
• Licensing Arrangements Licensing Arrangements • Regulatory RiskRegulatory Risk• Foreign exchange availability & convertibility Foreign exchange availability & convertibility • Changes in law Changes in law • Political force majeure Political force majeure • Natural force majeure events limited to government Natural force majeure events limited to government
obligationsobligations• Frustration of ArbitrationFrustration of Arbitration• Environmental liabilitiesEnvironmental liabilities• Government/Public Sector payment obligations Government/Public Sector payment obligations
1919
Partial Credit Guarantees can help in the following situations
• Government or State Owned Enterprise Government or State Owned Enterprise (SOEs) access to capital or the bank (SOEs) access to capital or the bank markets markets
• Bond issues or commercial loans by public Bond issues or commercial loans by public intermediaries, or public entitiesintermediaries, or public entities
• Pre-Privatization support for public entities Pre-Privatization support for public entities through convertible Bondsthrough convertible Bonds
2020
Partial Credit Guarantees can help financeLong Term Public Investments
00 1010 1515
$100 m$100 m
WB Support WB Support for Principal for Principal Bullet Bullet RepaymentRepayment
Pricing (250 bp* ) (250 bp* )Pricing (250 bp* ) (250 bp* )
* Above US Treasuries * Above US Treasuries
Philippines: Leyte-Luzon Power ProjectPhilippines: Leyte-Luzon Power Project
Bond StructureBond Structure
Longest Term Available to the Philippines Longest Term Available to the Philippines without WB Supportwithout WB Support
Additional termAdditional term provided by WBprovided by WB SupportSupport
2121
Partial Credit Guarantees can help access the loan market
00 1515 2020
• World Bank World Bank exposure under the exposure under the PCG is $120m PCG is $120m (present value of the (present value of the PCG)PCG)
• Only $30m (25% of Only $30m (25% of $120m) to be $120m) to be charged to country charged to country exposure limit exposure limit
Botswana Power Corporation (guaranteed by the government) Morupule B Power Generation Project (2009)
World Bank PCG World Bank PCG helped mobilize helped mobilize $825 million $825 million commercial loan commercial loan with 20-year with 20-year maturitymaturity
World Bank World Bank GuaranteesGuarantees$243 m (29% of $243 m (29% of $825m)$825m)principal payments principal payments (plus one accrued (plus one accrued interest payment )interest payment )callable on and after callable on and after year 15+ 1 dayyear 15+ 1 day
Risk assumed by commercial lenders World Bank Risk assumed by commercial lenders World Bank guaranteedguaranteed
IBRD “Enclave” Support for Projects in IDA Countries
2222
Limited GovernmentLimited GovernmentObligations:Obligations:
• Permits/consentsPermits/consents• Change in lawChange in law• Political eventsPolitical events• ExpropriationExpropriation
““Off Off Shore”Shore”
LendersLendersGuaranteeGuarantee
CounterCounterGuaranteeGuarantee
LoanLoanAgreementAgreement
CreditworthyCreditworthyPurchaserPurchaserEnclave ProjectEnclave Project
PPAPPAExportExport
Guarantee Guarantee FeeFee
ConcessionConcessionContractContract
FXFX
GovernmenGovernmentt
Reserve Reserve AccountAccount
2323
Application of Guarantees
• Greenfield Projects/Privatizations/PPP StructuresGreenfield Projects/Privatizations/PPP Structures– TelecomTelecom– Power sector Power sector
(Generation/Distribution/Environmental Retrofit) (Generation/Distribution/Environmental Retrofit) – Waste Water and Municipal servicesWaste Water and Municipal services– Oil, Gas PipelinesOil, Gas Pipelines– Transport (Railways/Ports/Airports)Transport (Railways/Ports/Airports)
2424
Mozambique’s Infrastructure Investment Requirement
• Investments in the Energy Sector (Power Investments in the Energy Sector (Power Generation/Transmission)Generation/Transmission)
• Investments in pipelines Investments in pipelines • Investments in Water, Urban and Irrigation Investments in Water, Urban and Irrigation
ProjectsProjects• Investments in the Transport Sector (Roads, Investments in the Transport Sector (Roads,
Bridges, Ports, Air Ports and Railways)Bridges, Ports, Air Ports and Railways)
2525
Pre-Conditions for Use of Guarantees
• Subject to Bank appraisalSubject to Bank appraisal
• Counter-Guarantee from the Counter-Guarantee from the Government Government
IDA IBRD Enclave
Fee Type PRGs PCGs PRGsUpfront Charges Front End Fee N/A N/A 0.25%
Initiation Fee 0.15% on the guaranteed amount or
USD 100,000
(whichever is higher)
N/A 0.15% on the guaranteed amount
or USD 100,000
(whichever is higher)
Processing Fee Up to 0.50% (for reimbursable expenses)
N/A Up to 0.50% (for reimbursable expenses)
Recurring charges
Guarantee Fee 0.75% per annum on guaranteed amount
0.50% per annum on guaranteed amount (in NPV terms)
200% per annum on guaranteed amount
Standby Fee Currently 0% N/A N/A
Payment of Fees (by the Private Sector) (by the Gov./ Public Entity)
(by the Private Sector)
Pricing for IDA and IBRD Enclave Guarantees
* Expected to be extended to IDA countries from this year. Is determined by the IDA Board annually.
2626
*
2727
Preferred Guarantee Modality
• Early involvement of the Bank may help to Early involvement of the Bank may help to
enhance investor interest enhance investor interest
• Guarantee structure to be incorporated in the Guarantee structure to be incorporated in the
Bid Documents as an optionBid Documents as an option
• Bids should demonstrate value added of the Bids should demonstrate value added of the
GuaranteeGuarantee
• Value added of the Guarantee to be a part of Value added of the Guarantee to be a part of
the Bid Evaluationthe Bid Evaluation
2828
Benefits of the Guarantee to the Government
• Catalyzes financing through market access, Catalyzes financing through market access,
longer tenors and lower financings costslonger tenors and lower financings costs• Facilitates privatization & PPPs by enhancing Facilitates privatization & PPPs by enhancing
investor interest investor interest • Accelerates the pace of new investment for Accelerates the pace of new investment for
expansion of relevant servicesexpansion of relevant services• Sustains relatively more attractive retail tariff Sustains relatively more attractive retail tariff
regimes by significantly improving the debt regimes by significantly improving the debt profile of financings profile of financings
• Enhances the potential “sale” value of existing Enhances the potential “sale” value of existing assets or of the franchise for the Government assets or of the franchise for the Government
2929
Benefits of the Guarantee to the Government
• No additional contingent liabilityNo additional contingent liability• Is additional to the country lending programIs additional to the country lending program• Creates market confidence through Bank Creates market confidence through Bank
leverage and track recordleverage and track record• Provides for risk sharing with the private sectorProvides for risk sharing with the private sector• No associated costs (guarantee fee would be No associated costs (guarantee fee would be
payable by the investor as part of project costs)payable by the investor as part of project costs)• Transitional - can be structured to fall awayTransitional - can be structured to fall away
contd.
3030
Benefits of the Guarantee to the Private Sector
• Would help to mitigate critical perceived political risksWould help to mitigate critical perceived political risks• Would help to make privatizations financeable Would help to make privatizations financeable
through facilitating direct access to financial marketsthrough facilitating direct access to financial markets• Would help to catalyze long term “non recourse” debt Would help to catalyze long term “non recourse” debt
financing thereby reducing the risk profile of the financing thereby reducing the risk profile of the investment and overall capital costsinvestment and overall capital costs
• Associates the Bank with the project providing Associates the Bank with the project providing comfort on Government governance issuescomfort on Government governance issues
Country Project Project Cost
(Million)
PRG Amount (Million)
Date
Morocco Jorf Lasfar Power $1,400 $180 1997
Cote d’Ivoire Azito Power Project $223 $30 1998
Uganda Distribution Concession $65 $5.5 2005
Mozambique/South
Africa
The Sothern African
Regional Gas Project
R 3.692 R 140m
R 70m
2005
Ghana West African Gas Pipeline $590 $50m 2005
Uganda Bujagali Hydropower
Project
$799 $115 2007
Kenya Railway Concession $120 $40m 2007
Uganda Railway Concession $120 $10m 2007
Nigeria Energy & Gas Improvement
Project
$4,000 $400m 2009
Botswana Morupule B Power Project $825 $243m 2009
Completed PRG Operations in Africa
3131
3232
Case Study
Nigeria Energy and Gas Nigeria Energy and Gas Improvement Project Improvement Project
(NEGIP) - 2009(NEGIP) - 2009
3333
Nigeria Energy and Gas Improvement Project
• Sector Issues:Sector Issues:– Abundant gas resources yet shortage of gas Abundant gas resources yet shortage of gas
for powerfor power– Pricing structure for gasPricing structure for gas– Contractual arrangementsContractual arrangements– Creditworthiness of the Power UtilityCreditworthiness of the Power Utility
3434
Nigeria Energy and Gas Improvement Project
Solutions:Solutions:• Sector ReformSector Reform
– Pricing restructuringPricing restructuring– Imposition of domestic gas obligations on International Imposition of domestic gas obligations on International
Oil Companies (IOC)Oil Companies (IOC)– Change in existing contractual arrangementsChange in existing contractual arrangements– Appointment of a Gas RegulatorAppointment of a Gas Regulator
• Risk MitigationRisk Mitigation– PRG to backstop the Power Utility‘s payment PRG to backstop the Power Utility‘s payment
obligations under the Gas Supply and Aggregator obligations under the Gas Supply and Aggregator Agreements with IOCsAgreements with IOCs
PRG Contractual Structure in Support of Gas Supply and Aggregation Agreements
IDAFGN
L/C Bank
PHCN
Indemnity AgreementGuarantee
Agreement
PRG
L/C Reimbursement & Credit Agreement
JV Operator
Stand
by L
/C
Proj
ect A
gree
men
t
Contractual Agreements with no regular Payment flows
Payment flows in the event of a Breach of the Gas Supply Agreement
JV Agreement
NNPC 60%
IOC 40%
Contractual Agreements & regular Project Payment flows
PRG Support Agreement
Gas Supply Agreement
EscrowAccount
AggregatorAggregator
3535
3636
Benefits of the PRG
• Underpinned market development for domestic Underpinned market development for domestic gasgas
• Helped to create an enabling environment for Helped to create an enabling environment for sector reformsector reform
• Minimal risk mitigation of US$400m will help to Minimal risk mitigation of US$400m will help to catalyze around US$4 bn of gas flows for the catalyze around US$4 bn of gas flows for the priority power sectorpriority power sector
• Will help to mobilize substantial investments in Will help to mobilize substantial investments in the sector from the private sectorthe sector from the private sector
3737
Case Study
Southern African Regional Gas Southern African Regional Gas ProjectProject
Mozambique – South AfricaMozambique – South Africa
IBRD Enclave Partial Risk Guarantee forSouthern Africa Regional Gas Project
• Key AgreementsKey Agreements– Petroleum Production Agreement: Govt of Mozambique granted exclusive Petroleum Production Agreement: Govt of Mozambique granted exclusive
rights for development of Pande and Temane gas fields to UJV comprising rights for development of Pande and Temane gas fields to UJV comprising Sasol subsidiary SPT and CMH a subsidiary of the Mozambican oil co.Sasol subsidiary SPT and CMH a subsidiary of the Mozambican oil co.
– Pipeline Agreement: GoM authorized ROMPCO and other Sasol subsidiary to Pipeline Agreement: GoM authorized ROMPCO and other Sasol subsidiary to construct, own and operate the gas pipeline to transport gas to South Africa construct, own and operate the gas pipeline to transport gas to South Africa
• SponsorsSponsors– Gas fields: SPT (70%); CMH (25%); IFC (5%)Gas fields: SPT (70%); CMH (25%); IFC (5%)– Pipeline: ROMPCO (100%)Pipeline: ROMPCO (100%)
• Financing Financing – ZAR3.7 bn ( US$490m) debt – full recourse with Sasol assuming all project ZAR3.7 bn ( US$490m) debt – full recourse with Sasol assuming all project
risks under debt support agreement , except for Mozambican political riskrisks under debt support agreement , except for Mozambican political risk
• IBRD Enclave PRGIBRD Enclave PRG– ZAR 140m for upstream; ZAR70m for downstream covering Mozambican ZAR 140m for upstream; ZAR70m for downstream covering Mozambican
political riskspolitical risks
• MIGA PRIMIGA PRI– ZAR820m including ZAR310m reinsured with SACE and EFIC under the PPA ZAR820m including ZAR310m reinsured with SACE and EFIC under the PPA
and PAand PA3838
Enclave Guarantee Structure
GOMGOMSPT SPT
(Sasol owned, (Sasol owned, Moz Moz
company)company)
ROMPCOROMPCO
(Sasol owned, (Sasol owned, RSA company)RSA company)
Commercial LendersCommercial Lenders
Petroleum Petroleum Production Production AgreementAgreement
Pipeline Pipeline AgreementAgreement
Project Project AgreementAgreement
Project Project AgreementAgreement
IndemnitIndemnity y
AgreemeAgreementnt
Loan Loan AgreementAgreement
Loan Loan AgreementAgreement
Guarantee Guarantee Agreement SPTAgreement SPT
Guarantee Guarantee Agreement Agreement ROMPCOROMPCO
3939
Example of Joint WBG SupportSouthern Africa Regional Gas Project
• IBRD Enclave PRGIBRD Enclave PRG
Political Risk Cover for debt to SPT & Rompco including:
• Sovereign obligations (including protection against changes in laws; non-provision of permits/ approvals, etc.)
• expropriation• Currency transferability as to funds located in Mozambique
MIGAMIGA
Political Risk Cover for equity and debt to SPT & Rompco including:•Breach of contract •Currency transferability •Expropriation •War & Civil Disturbance
IFC
IFC Investment and Advisory Role:• Equity investment in Upstream • Advisory assistance to CMH in mobilizing financing for the Upstream• Facilitating local participation
IBRD Enclave PRG was provided for local currency (ZAR) debt
4040
For Further Information Contact:
Farida MazharFarida MazharLead Financial Officer Lead Financial Officer
Finance & Guarantees GroupFinance & Guarantees GroupFinance, Economics & Urban DepartmentFinance, Economics & Urban Department
The World BankThe World Bank1818 H Street, NW1818 H Street, NW
Washington, DC 20433 (USA)Washington, DC 20433 (USA)Ph: +1 (202) 473-1235Ph: +1 (202) 473-1235Fax: +1 (202) 522-0761Fax: +1 (202) 522-0761
Email: Email: [email protected]@worldbank.org
or visit our web site: or visit our web site: www.worldbank.org/guaranteeswww.worldbank.org/guarantees