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FINANCING ASPECTS OF AN IPP
Crosby Asset Management (Pakistan) Ltd.Dubai
February 20, 2005
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Presentation Outline
1. An Enabling Environment2. What has changed since 1994?
3. The Power Purchaser4. Financing Requirements5. Financing the Transaction6. Security Package7. Conclusion
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An Enabling Environment
ETA/Al-Ghurair Group have recently concludedtariff negotiations with WAPDA.
Like any other developer/financier what attractedthe Group to invest was: Clear policy framework
Political commitment to the process
Need for new power Power purchaser capable of paying for purchases
Presence of other successful IPPs
Besides power, the Group is actively pursuingopportunities in the oil & gas, fertilizer and the
housing sector in Pakistan.
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What has changed since 1994?
Risk Perception for Pakistan in general and IPPs inparticular has changed.
Pakistan is characterized by a robust economy and acontinuously improving credit standing.
11 years of IPP experience and the current shortfallin power has made people realize the importance ofIPPs.
Competitive Bidding is bound to ensuretransparency and efficiency in the whole process.
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The Power Purchaser
Restructuring of WAPDA has led to a greatimprovement in its capacity to pay.
In certain instances, WAPDA has made payments toIPPs even prior to the payment due date.
Over the last 10 years, WAPDA has become moreeducated and developed a better understanding onissues related to IPPs.
During our recent tariff negotiations, we haveexperienced remarkable understanding by WAPDA
on a number of issues and their resolution.
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Financing Requirements IPPs under the previous round were characterized by
and criticized for their high project costs, which were
primarily on account of:
Bulk Power Tariff
High equipment prices due to a supply constraint
High Project Development Costs especially thoserelated to legal & financing fees.
Risk Premium associated with Pakistan
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Financing Requirements
Project costs and consequently tariffs are expected tobe lower on account of the following:
Size of the project ensuring economies of scale
Lower prices of equipment
Improved risk profile of Pakistan
Lower project development costs due to theavailability of local technical, legal & financialexpertise and advice.
Lower project costs are expected to reduce the riskassociated with financing the projects and there
should be sufficient availability of capital.
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Financing the Transaction-Equity Profile of sponsors under the previous policy varied
based on the project size.
Participation of local sponsors was primarily in
smaller projects up to 150 MW. Foreign participation was seen in larger projects
such as Rousch, Uch, Liberty, Lalpir, Pakgen etc.
A booming stock market will provide the sponsorsopportunities of
Private placement to local & international mutualfunds/investment banks
Partial exit from the project at attractive earningmultiples.
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Financing the Transaction The previous round of IPP financing was primarily
through
Multilateral agencies
Export Credit Agencies International Trading Houses
Vendors
International Commercial Banks
Main reasons were
Low foreign exchange reserves
Constant devaluation of local currency
High interest rates in the domestic economy
Liquidity constraints
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Financing the Transaction Local financial institutions are expected to play a
major role in the current round of IPP financing:
Foreign exchange reserves are available to meetpayment requirements
Interest rates are significantly lower havingrecently touched all time lows
Local banks are more educated as to IPPs andassociated risks
No liquidity constraints
Greater appetite for large deals with longertenors
Local funding is also expected to ensure the politicalsustainability of the project.
S i l P i C fid i l
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Financing the Transaction
Alternative financing structures to plain vanillasyndicate loans are now available in the form of:
Listed Term Finance Certificates Special Purpose Vehicles (SPVs)
Infrastructure Bonds
Credit rating agencies have been operational in thecountry to provide an independent assessment of risk
associated with the projects.
S i l P i & C fid i l
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The Security Package
Developers/financiers require that risks related to theproject be properly managed and allocated.
Means to mitigate risks are provided through astandard security package, which consists of Implementation Agreement with GoP
Power Purchase Agreement
Fuel/Gas Supply Agreement Turnkey EPC Contract
O&M Contract
Project Insurances
St i tl P i t & C fid ti l
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Conclusion ETA/Al Ghurair Group feel that the Government,
the Power Purchaser and most importantly the publicitself acknowledge the role of the private sector inpower generation.
With an economy growing at a rate of 7% per annumthe supply of power is and will remain constrained.
The Government has the political commitment andhas developed clear policy guidelines to attractinvestment in this sector.
The credit standing of both the country and thepower purchaser have improved.
A booming stock market, a liquid banking sector andavailability of a standard security package will
facilitate the financing of such projects.
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Thank You