financing aspects of an ipp.pdf

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Strictly Private & Confidential

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

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