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FINANCINGPRIVATEINFRASTRUCTURE

4L E S S O N S O F E X P E R I E N C E

T H E W O R L D B A N K , W A S H I N G T O N , D . C .

I N T E R N A T I O N A L F I N A N C E C O R P O R A T I O N

A M e m b e r o f t h e W o r l d B a n k G r o u p

Copyright © 1996The World Bank and International Finance Corporation1818 H Street, N.W.Washington, D.C. 20433, U.S.A.

All rights reservedManufactured in the United States of AmericaFirst printing September 1996

The International Finance Corporation (IFC), an affiliate of the World Bank, promotes the economic development of its membercountries through investment in the private sector. It is the world’s largest multilateral organization providing financial assistancedirectly in the form of loans and equity to private enterprises in developing countries.

The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors and should not be attributedin any manner to the IFC or the World Bank or to members of their Board of Executive Directors or the countries they represent.The World Bank does not guarantee the accuracy of the data included in this publication and accepts no responsibility whatsoeverfor any consequence of their use. Some sources cited in this paper may be informal documents that are not readily available.

The material in this publication is copyrighted. Requests for permission to reproduce portions of it should be sent to Director,Corporate Planning Department, IFC, at the address shown in the copyright notice above. The IFC encourages dissemination ofits work and will normally give permission promptly and, when the reproduction is for noncommercial purposes, without askinga fee. Permission to copy portions for classroom use is granted through the Copyright Clearance Center, Inc., Suite 910, 222Rosewood Drive, Danvers, Massachusetts 01923, U.S.A.

The complete backlist of publications from the World Bank, including those of the IFC, is shown in the annual Index of Publica-tions, which contains an alphabetical title list (with full ordering information) and indexes of subjects, authors, and countries andregions. The latest edition is available free of charge from the Distribution Unit, Office of the Publisher, The World Bank, 1818 HStreet, N.W., Washington, D.C. 20433, U.S.A., or from Publications, The World Bank, 66 Avenue d’Iena, 75116 Paris, France.

Laurence W. Carter and Gary Bond are senior policy analysts in the Corporate Planning Department of IFC.

This serial publication has been cataloged by the Library of Congress.

ISBN 0-8213-3822-6

Glossary

ADB Asian Development BankADR American Depositary ReceiptBNP Banque Nationale de ParisBOO build-own-operateBOT build-operate-transferCAMENA Central Asia, Middle East, and North AfricaCDC Commonwealth Development CorporationCESCE European Committee for Consultant ServicesCFA the African FrancCFD Caisse française de développementCGIC Comité général interprofessionnel chanvrierCOFIDES Compañia Española de Financiación del Desarrollo (Spain)CTC Compañia de Telecommunicaciones de ChileDEG Deutsche Entwicklungs GesellschaftDSCR debt service coverage ratioEBRD European Bank for Reconstruction and DevelopmentECA export credit agencyECGD Export Credit Guarantee Department (U.K.)EIB European Investment BankEID/MITI Export Insurance Division of the Ministry of International Trade

and Industry (Japan)FDI foreign direct investmentFIAS Foreign Investment Advisory ServiceFMO Netherlands Development Finance CompanyGDP gross domestic productGDR global depositary receiptHSBC Hongkong and Shanghai Banking Corporation LimitedIBRD International Bank for Reconstruction and DevelopmentICC International Chamber of CommerceIDB Inter-American Development BankIFC International Finance CorporationIFU Industrialization Fund for Developing CountriesIIC Inter-American Investment Corporation (affiliated with the IDB)IPP independent power projectIPR initial project reviewJEXIM Japan Export Import BankLAC Latin America and the CaribbeanMARAD United States Maritime AdministrationMIGA Multilateral Investment Guarantee AgencyNORAD Norwegian Agency for International DevelopmentOPIC Overseas Private Investment CorporationPE public enterprisePPA power purchase agreementPPI private participation in infrastructureUBS Union Bank of SwitzerlandUSEXIM United States Export Import Bank

Preface

Infrastructure is one of the fastest growing sectors in the world in terms of private participation and financing. Thegenerally poor performance of state-owned monopolies, combined with the rapid globalization of world economies,has brought into sharp focus the economic costs of inadequate infrastructure and prompted a growing number ofdeveloping countries to take active steps to promote competition, private entry, and foreign investment in the sector.

In recent years, IFC has become one of the major financiers of private infrastructure projects in the developingworld. It has been involved in the financing to date of more than 115 infrastructure projects, and has played an activerole in promoting the spread of private participation in the sector. In 1994, in an effort to disseminate some of thelessons of this experience, IFC released an initial paper on the financing of infrastructure projects based on itsproject data up to the end of June 1994. The paper provided insights into key issues of risk assessment, regulatorystructures, and debt and equity mobilization faced by IFC in its infrastructure investments.

This report, coming relatively quickly after the 1994 report, is a reflection of the rapid developments that have takenplace in the sector worldwide. Important among these is that the pace of progress has been somewhat uneven. Rapidchanges have taken place in some countries where there have been major policy breakthroughs, but changes havebeen much slower in those countries that have experienced political and other constraints. Private participation,which initially focused on the power and telecoms sub-sectors, has been successfully extended to other sub-sectorssuch as ports, water supply, and roads and railways, often with substantial benefits to consumers. However, inves-tors have found that project risk, particularly in difficult environments, has been more real than might have beenanticipated, with obvious implications on the speed of implementation. In addition to greenfield projects, govern-ments have also begun to focus on privatizing existing assets, generating demand for technical and advisory assis-tance in this area. IFC has continued to play an important role in supporting these various trends in its membercountries, on both transactional and advisory issues.

This report articulates the lessons of IFC’s experience in mobilizing financing for the sector. It discusses the issuesinvolved in arriving at workable project structures, the approaches available to countries wanting to pursue thisroute, and some of the pitfalls involved. The report also illustrates the Corporation’s development role through thepromotion of a more rapid and visible private sector investment response to policy and regulatory changes in itsdeveloping member countries.

The report was prepared in IFC’s Corporate Planning Department by Laurence Carter and Gary Bond, with researchsupport from Tracy Rahn, and under the overall direction of Dileep Wagle. Jennifer Wishart coordinated on behalfof IFC’s Infrastructure Department, which was closely involved with the work. It has benefited considerably frominput and comments by investment staff throughout the Corporation, as well as from staff in the World Bank. Anearlier version of the report was discussed by IFC’s Board of Directors in May 1996; data reflect IFC’s operationalposition up to the end of June 1996.

Jannik LindbaekSeptember 1996Executive Vice PresidentInternational Finance Corporation

1INTERNATIONAL FINANACE CORPORATION

ExecutiveSummary

Results on the Ground

Five examples illustrate the magnitude and breadth of the changes affecting infrastructureservices in many countries today:

• In 1996 a U.S.–based insurance company, Prudential Power, signed one of thefirst loans by an insurer to a private infrastructure project in a developing country.The sixteen-year, US$40 million loan was made under IFC’s syndicated loanumbrella to an unrated, greenfield project: the US$1.4 billion Sual power plant inthe Philippines.

• In August 1994 the government of Côte d’Ivoire signed a nineteen-year agree-ment to purchase power from the first private power project in Sub-SaharanAfrica. Financing closed five months later. The 100 MW plant was generatingpower by April 1995, achieving 83 percent availability in its first six monthsagainst an 80 percent target.

• In 1993, IFC helped finance a power plant innovatively structured to reducecountry risk: the generators in Guatemala’s first private power plant wereinstalled on a barge, which could be towed away in the event of nonpayment. Thedemonstration impact was rapid: by 1996 most other Central American countrieshad independent private power plants.

• In the 1993 privatization of a 30 percent stake in Hungary’s telecoms companythe government stipulated that the network be expanded by 15 percent perannum, to reach 35 lines per 100 population by 2002. The company is investingrapidly to meet this target: nearly US$1 billion in 1995–96 alone. In December1995 the government sold another 37 percent to the strategic investors forUS$852 million. Infrastructure privatization partly explains why Hungaryreceived over ten times the average foreign direct investment per capita forCentral and Eastern Europe in 1990–94.

• The 1993 concession to manage water and sewerage services for six millionpeople in Buenos Aires was awarded based on a 27 percent tariff reduction.Within two years 400,000 new water and 250,000 sewerage connections weremade (many in low-income areas), drinking water quality improved, averagerepair response times fell from 180 hours to 48 hours and Buenos Aires experi-enced its first summer without water shortages in fifteen years.

Ten years ago, none of these events might have been deemed remotely possible. Todaymore countries than ever are introducing competition and private participation in infra-structure (PPI). IFC has helped to finance many of these pioneering projects, approvingUS$3.1 billion of financing to 148 projects worth US$29 billion in forty countries byJune 1996. This report follows a paper published in September 19941 and draws someupdated lessons from IFC’s evolving financing and advisory experience with privateparticipation in infrastructure.

2 FINANCING PRIVATE INFRASTRUCTURE

The Upside

Three positive trends underlie recent experience with private infrastructure financing in developing countries:

• More volume, countries, and subsectors. Total estimated financing of new private infrastructure projects indeveloping countries doubled between 1993 and 1995, from about US$17 billion to over US$35 billion. Inthe two years to June 1996, IFC financed projects for the first time in, among other countries, Bangladesh,China, Côte d’Ivoire, the Dominican Republic, Honduras, Jordan, Latvia, Panama, Tanzania, Uruguay andVietnam. Sectoral firsts included an airport, a mass transit project and several toll roads.

• More privatization of existing assets. In 1994, the latest date for which figures are available, governmentssold US$10.1 billion worth of infrastructure assets in seventy-five companies in thirty countries.

• New financing sources. Insurance companies are starting to finance PPI projects in developing countries.And official financing agencies, including export credit agencies, have set up programs to provide financingor guarantees to private infrastructure projects. Commercial bank financing has expanded in the last two tothree years as more banks become familiar with PPI; IFC’s expanding syndicated loan program is oneindicator. Local financing is expanding in some countries, although slowly and from a low base. Somesizeable domestically owned infrastructure companies are beginning to emerge and invest substantial sums.

Progress Is Uneven

Much of this activity remains concentrated in a few countries and in the power and telecoms sectors. For example, in1993 just nine countries (Argentina, Colombia, Hungary, India, Malaysia, Mexico, Pakistan, Philippines andThailand) accounted for 99 percent of international private infrastructure loans. In 1995 the same countries, plusIndonesia and Turkey, accounted for 97 percent of the total. Only ten to fifteen countries have so far made signifi-cant progress in privatizing and market restructuring. More have started to liberalize infrastructure services but havemade limited progress so far. And some countries are still just talking about PPI. Why? Managing private entry toinfrastructure is a complex, politically charged process. Furthermore, political costs may occur immediately, whilethe economic benefits of infrastructure liberalization emerge with a lag. The uneven record of progress reflects thediffering degrees to which governments have succeeded in overcoming these political hurdles.

Private infrastructure projects differ from many other private investments in that governments are intimatelyinvolved, as regulators, buyers, or suppliers. Governments thus need to help shape the conditions so that transactionscan close successfully. Many approaches to PPI are being used; these offer investors opportunities, but also poserisks. Some problems arise because all sides are relatively inexperienced. Governments may have unrealisticexpectations, or mismanage the difficult process of awarding concessions. Delays in securing government commit-ments may prevent projects from achieving financial closure. Or, following successful financing, political pressuresmay lead governments to revoke concessions, fail to adjust tariffs, or restrict access to foreign exchange. Accord-ingly, risk management of PPI projects has both technical and political dimensions: even well-structured PPIprojects may fail without government commitment. The importance of political commitment means that what isachievable varies enormously between countries and over time.

Successful transactions help policies to evolve

Political commitment differentiates the PPI leaders from other countries. But policy changes need to be translatedinto new investments and improved services if they are to garner broad support. IFC’s experience suggests that well-structured PPI projects undertaken transparently create local constituencies for further liberalization. Many countrieswhere early PPI projects were financed two to three years ago have since liberalized infrastructure services further.


IFC’s Recent Experience

In the two years to June 1996, IFC’s Board approved nearly US$1.5 billion of financing to sixty-four projectscosting US$13.8 billion. Fifteen projects were approved in Argentina alone, reflecting the breadth of the country’sinfrastructure liberalization and privatization efforts. Other highlights include five power projects approved inPakistan, reflecting a strong policy framework; a water and sewerage concession in Brazil; a Chilean railroad;regional basic telecoms networks in Bangladesh and Indonesia; cellular networks in Jordan and Bolivia; and ports inPanama, Vietnam, and China.

PPI advisory work to governments on divestiture has expanded sharply. Between fiscal 1993 and 1995, IFC startednine PPI stand-alone advisory mandates; in fiscal 96 a further eight mandates were signed. The work has focusedincreasingly on the most politically sensitive transactions, where the value attributed to IFC’s neutrality as part ofthe World Bank Group is highest. Recently signed mandates have included several in the water sector (Philippines,Gabon, and India), and countries where perceived risks are high (Haiti, Kenya, Ecuador, and Uganda). IFC has alsoprovided more general policy advice, often in conjunction with the World Bank or the Foreign Investment AdvisoryService (FIAS). FIAS has sponsored several round tables to facilitate dialogue between investors and policymakerson policy and regulatory obstacles to private infrastructure. In 1996 the round tables were held in central andeastern Europe and southern and eastern Africa.

Experience in Low-Income and Risky Environments

Low income

Over 60 percent of IFC’s PPI approvals have been in low or lower-middle income countries. Thirty-five projectscosting US$6 billion have been financed in Côte d’Ivoire, Tanzania, Uganda, Zaire, Zimbabwe, Bangladesh, China,India, Nepal, Pakistan, Sri Lanka, Vietnam, and Honduras.

IFC Approvals in Infrastructure, 1966–June 1996

No. of Total project cost IFC net IFC syndicationsFY projects (US$m) (US$m) (US$m)

1967-87 7 517 78 41988 2 409 54 01989 6 704 109 401990 7 1,613 197 721991 6 876 102 601992 9 1,396 115 1471993 17 3,737 372 3091994 30 5,495 585 6991995 32 8,190 734 1,0011996 32 5,712 727 1,527

Total 148 28,648 3,072 3,857

Source: IFC.


Country risk

Financing PPI projects is difficult—but nevertheless possible—in countries perceived by investors as risky. Over aquarter of IFC’s approvals have been in countries with little access to international private capital, including Hondu-ras, Latvia, Tanzania, Dominican Republic, Panama and Côte d’Ivoire. Investors have focused on projects offeringshort payback periods (cellular), projects which generate foreign exchange revenues (ports), or projects with strongsponsor and government support (for instance, some power plants).

Project Performance

By early 1996, forty-eight IFC-financed projects had completed construction and started operating. Although thissample is still small and new (especially in the context of the fifteen- to thirty-year agreements common in suchprojects), the evidence suggests that PPI projects yield operational efficiencies and good construction performance:

• Construction. On average the projects were 3 percent under budget and five months late (22 percent of theexpected period). Although they are not directly comparable, a much larger sample of publicly financedinfrastructure projects had cost overruns of 10-23 percent and time overruns of 54-68 percent.

• Good early operational performance. For example, several power projects have exceeded the performancetargets in their contracts.

• Positive stakeholders. Successfully financed PPI projects have usually been followed by more infrastructurederegulation and privatization, suggesting that initial PPI projects are meeting consumer and governmentexpectations. These “demonstration effects” are working across countries as well as between sectors.

• Unexpected events have (mostly) not been serious enough to derail projects. Although unexpected eventshave affected several projects, a combination of good project structuring, adjustments by investors, andflexibility by lenders and governments means that nearly all projects have remained operational. Neverthe-less, concessions were disputed in two projects and the government is paying its utility’s obligations inanother project. The financial performance of IFC’s PPI portfolio has been satisfactory.

Achieving Financial Closure

Financial closure is important because it allows investment to proceed and encourages further policy changes. IFC’sexperience suggests:

• More projects are closing, but closure times show a mixed picture. Although average closure periods fellfrom seventeen months in fiscal 94 to eleven months in fiscal 96, this hides wide disparities at the projectlevel. Several high-profile projects have failed to close.

• Varying speeds. Closure has been faster for smaller projects, in countries with prior PPI experience or strongpolitical commitment, in projects with experienced sponsors providing strong support, and in projectsgenerating foreign exchange revenues.

• Delays have resulted from difficulties in resolving issues of risk allocation among project participants. Thishas taken longer where: investors, lenders, or government officials were inexperienced; political changesaffected government’s commitment; anti–PPI interests were stronger than anticipated; or noncreditworthybuyers or suppliers were involved.


Improving the Policy Framework

There is no single blueprint for improving infrastructure services. PPI options are defined by the extent of politicalcommitment, the strength of opposing groups, and investor interest. Successful early transactions can create apositive dynamic of more investor interest, consumer support, and further government liberalization. For sustainabletransactions to take place, the policy framework must meet the interests of governments (acting on behalf of thepublic), sponsors, and lenders.

IFC’s experience suggests that private entry is more likely to be successful and sustainable if governments useexperienced and impartial advisors, and if transactions are transparent. Transparency involves:

• Clarity. Governments that adopt clear procedures for awarding and operating concessions are likely to get astrong investor response. Pakistan’s policy framework for power generation projects is one example.

• Predictability. The government’s role in implementing its commitments predictably is important. This mightinclude, for example, undertaking tariff adjustments, meeting fuel supply commitments, or purchasing land.

• Competitiveness. Project fundamentals need to be able to withstand public scrutiny. This applies in thelonger term, not simply at the time of the transaction. Equally, however, governments need to recognize thatsponsors of early projects may demand a premium for the costs and risks of being first.

While fully functioning regulatory frameworks and international competitive bidding are desirable, they may notalways be possible, particularly in the early stages of promoting PPI. In certain circumstances—the first project in a

Transition Paths in Infrastructure Privatization

Political costs ofadjustment /

regulatory effort

Economicefficiency of

provision

Publicly owned regulated monopoly

Private entry allowed

Competitive / contestable private infrastructure provision

Divestiture

Unbundling & privatization

No unbundling, divestiture only

Unbundling / demonopolization

Unbundling & deregulation

Divestiture of SOE

HighLow

Low

High


country with higher risk, or a small project where there is urgency or limited knowledge of the market—directlynegotiated projects may be appropriate. IFC has financed several such projects.

Long-term agreements are bound to face unforeseen events and changing circumstances. Although it is too early todraw on experience yet, mechanisms such as dispute procedures in contracts or regulatory appeal procedures maybe important in helping sponsors, governments, and lenders to maintain viable contracts over long periods.

Financing Patterns

Two financing structure parameters identified in the 1994 IFC infrastructure report remain broadly the same in thisupdated sample:

• An average debt-equity ratio of 58:42 suggests that substantial equity commitments are being made toattract debt, or lenders are ensuring that projects are not overleveraged. Projects where market risk is not amajor issue, such as power generation projects backed by power purchase agreements, are generally morehighly leveraged.

• About two-thirds of project costs are financed from foreign sources. Why isn’t this ratio falling, givenincreased local financing in some countries? Simply, IFC continues to finance projects in risky countries,where access to domestic long-term finance is normally very limited and reliance is heavier on foreignfinancing.

Managing Project Risks

Efficient risk allocation and mitigation is central to bringing infrastructure projects to financial closure and toproviding appropriate incentives during construction and operation. Efficient risk allocation occurs where risks areassumed by the party best able to manage them. Projects may still be financeable if some risks are not allocatedaccording to this principle, but costs—and ultimately tariffs—will be higher. Sponsors and lenders expect higherrewards for assuming higher risks. Mobilizing debt is particularly sensitive to having adequate risk managementmechanisms in place. With at-risk debt supplying over half of project costs, achieving financial closure can bestalled if the risk mitigation requirements of lenders are not met.

Project financing has hitherto been a fairly specialized field. For PPI to continue spreading, more governmentofficials, investors, and lenders will need to become familiar with the risk mitigation and management techniquesused in successfully closed projects.

IFC’s approach to environmental risk management has evolved over the past two years to encompass greatertransparency and consultation in environmental assessment. IFC’s experience shows that many PPI sponsors—andtheir financiers—consider that sound environmental management makes good business sense.

Conclusions and the Future

Several conclusions have emerged from IFC’s experience to date:

• The uneven pace of private infrastructure growth in developing countries is due to varying degrees ofpolitical commitment to liberalization in the sector. Soundly structured investment opportunities haveattracted private financing.


• Private entry and competition in infrastructure are yielding significant gains in construction and operationalefficiency.

• There is no single PPI method, although economic benefits generally increase with the volume of assetsunder private control and the extent of competition. The options depend on a country’s creditworthiness, theextent of political commitment, and investor interest. Nevertheless transactions are more likely to achievefinancial closure and be sustainable if they are transparent in the broadest sense: clear, predictable, andcompetitive.

• Well-structured PPI projects can be financed in countries with low income or high risk, or both. Someprojects are easier to finance in such circumstances: smaller projects, those not facing severe market risk,those with strong sponsor and government support arrangements, and those earning foreign exchange.

• There is often a link between financed transactions and further policy changes. These demonstration effectsapply within and among countries.

• Although it is early to conclude, most operational projects have not been jeopardized by serious noncom-mercial risks.

• There is some evidence of increased local financing, yet IFC’s sample suggests that foreign financingcontinues to account for over half of project costs in developing countries.

Several fundamental changes appear likely in infrastructure services, particularly in the countries that have liberal-ized and privatized the furthest. Many of the projects being financed today reflect the transitional state of partlyreformed infrastructure sectors. They are likely to be quite different from the types of investments that will beoccurring when reforms are complete. Three trends seem likely:

• Stronger competition within infrastructure markets. This has happened already in telecoms and transporta-tion services and is quickly spreading to other sectors such as power. Competitive infrastructure marketshave many forms, but there are probably some common features that they will share. First, there will be aclear separation of the roles of regulator and operator. Second, project sponsors will increasingly be thosewilling to take both implementation and market risk. Third, governments who expose investors to marketrisks will come under pressure to reform markets that supply such projects, such as state-owned fuel supplymonopolies. And fourth, local investors are likely to play a larger role in investments than at present.

• More projects will be at the subnational level. If the privatization of transport, water, and waste sectors is toaccelerate, the creditworthiness of municipal and provincial governments will need to be assured. Ulti-mately this requires the reform of local finances. In the meantime, there may be some scope to design creditenhancement and risk-sharing packages in the more attractive projects and regions.

• Domestic savings are likely to play a bigger role in financing private infrastructure projects. Developingdomestic capabilities to manage, participate in, and finance private infrastructure projects is important tobroaden the constituency of PPI, enlarge the pool of funding, and mitigate foreign exchange risk. Inindustrialized countries, and increasingly in the more mature reformed developing countries, one of thelargest sources of financing for investment is the utility’s own cash flow. But additional funding will have tocome from the domestic capital markets. This will require a strong macroeconomic framework and a solidfinancial infrastructure, as well as attractive investment opportunities.

1. Financing Private Infrastructure Projects: Emerging Trends from IFC’s Experience, IFC Discussion Paper No. 23 (1994).

Notes


Introduction

The Context

During the past five years many developing countries have started to liberalize markets forinfrastructure services. Countries such as Chile, Argentina, Malaysia, Hungary, and thePhilippines have promoted competition and private participation in infrastructure (PPI), asector hitherto dominated by state-owned monopolies. Results have been dramatic in somecountries, with development of a virtuous circle of policy changes, successful transactions,satisfied consumers, and further policy liberalization (see Figure 1.1):

• Since Chile’s main local telecoms operator was privatized in 1988, the number oflines has trebled. The number of employees per 1,000 lines fell from 13.7 in 1989 to4.3 in 1995, comparable to international best practice. Spurred by increased domesticcompetition, Chile’s tariffs are among the lowest in the world.

• A private concessionaire became responsible for water and sewerage services inBuenos Aires in 1993. A 27 percent tariff reduction was implemented immediately.Within two years 400,000 water and 250,000 sewerage connections were made.

• In 1991 six- to ten-hour daily blackouts in the Philippines were costing the economyan estimated US$1 billion in lost output annually. By 1995 they had disappeared,largely due to new privately financed power plants coming on stream.

• Between 1990 and 1994, Hungary received US$671 of foreign direct investment percapita, compared to an average of US$45 for twenty-four other transition economiesin the region. Much of this difference is explained by Hungary’s vigorous infrastruc-ture privatization program.

IFC has supported these policy initiatives through financing and advice, particularly bypromoting pioneering projects in different developing countries and sectors. Recentfinancings include projects in, among other countries, Bangladesh, China, Côte d’Ivoire, theDominican Republic, Honduras, Jordan, Latvia, Panama, Tanzania, Uruguay, and Vietnam.Current advisory assignments include the privatization of Gabon’s water and electricitydistribution company, telephone companies in Uganda and Ecuador, and electricity companiesin Venezuela and Pakistan.

The Report’s Purpose

IFC published its first report on private infrastructure financing in September 1994.1 Sincethen many projects in more countries have been financed. But progress has been uneven. Afew high-profile projects have suffered setbacks, and that has sometimes held up progress onother projects. And even in countries where private participation and competition have beenextensive, debates continue about the distribution of benefits arising from efficiency gains.Consequently, many policymakers, firms, and financiers are reviewing their approaches to

1


private infrastructure. Using the same conceptual framework as the 1994 paper—the importance of managingpolitical and project risks—this report aims to contribute to the policy debate by updating IFC’s experience over thelast two years.

This report documents construction and operational experience in IFC-financed projects (Chapter 3), issues delayingfinancial closure (Chapter 4), policy issues for the government (Chapter 5), financing issues (Chapter 6), and riskmanagement for lenders and investors (Chapter 7), including environmental risks (Chapter 8).

Three Recurring Themes

Uneven progress

Managing private entry to infrastructure is complex and politically charged. Few countries have so far made thedemanding policy and regulatory adjustments needed to encourage the sustainable development of private, competi-tive infrastructure services. IFC’s experience suggests that three groups of countries have emerged, each facingdifferent challenges:

• The leaders: Ten to fifteen developing countries where the political commitment and institutional frameworkfor private, competitive infrastructure services are credible enough to satisfy private financiers, usually inmore than one sector. In several countries state-owned utilities have also been privatized. Examples includeArgentina, Chile, Hungary, Malaysia, Pakistan, and the Philippines. In these countries, where constituenciesexist for further PPI, the key policy challenges are to ensure that the benefits reach as many stakeholders aspossible and to stimulate more competition in the operation of, and entry to, infrastructure markets.

• The starters: Twenty to twenty-five countries where one or two PPI investments have occurred, but furtherpolitical commitment and regulatory changes are needed to sustain progress across infrastructure sectors.Most of these countries have announced programs to encourage private participation, but few deals haveclosed, for various legal, regulatory, bureaucratic, and creditworthiness reasons. Examples include many

Figure 1.1: Benefits from Privatization and Competition

Infrastructure Privatization

Efficient risk allocation

Access to foreigncapital & expertise

Improved investorperceptions

Improved service quality,efficiency & competitiveness

Stronger consumersupport

Broadened politicalsupport

Deeper domesticcapital markets


Latin American countries, India, Indonesia, Turkey, and Latvia. Here the challenge is to build on the earlysuccesses—and learn from mistakes—to strengthen constituencies for further reform.

• The latecomers: Here the primary challenge is to muster the political commitment to start the PPI process,and thus begin to reduce blackouts and waiting lists. In addition many of these countries face broader policy,regulatory, and creditworthiness hurdles.

Substantial Special Risks

As regulators, buyers, or suppliers to PPI projects, governments define the conditions for private entry to infrastruc-ture. The variety of approaches being used offers investors opportunities, but also poses risks—particularly forforeign investors. Many problems reflect the inexperience of sponsors, lenders, or governments. Governments mayhave unrealistic expectations, or mismanage the difficult process of awarding concessions. Delays in securinggovernment commitments may prevent projects from achieving financial closure. Or, following successful financ-ing, political pressures may lead governments to revoke concessions, fail to adjust tariffs, or restrict access to foreignexchange.

Risk management includes both technical and political dimensions: even well-structured PPI projects will fail ifgovernment is not committed to private participation. The importance of political commitment means that what isachievable varies enormously between countries and over time. The art of designing successful PPI projects withinpolitical constraints involves, to borrow a phrase, “doing the do-able.”2

Successful Transactions Help Policies Evolve

Political commitment differentiates the PPI leaders from other countries. But policy changes need to be translatedinto investments and improved services if they are to garner broad support. IFC’s experience suggests that well-structured PPI projects undertaken transparently create local constituencies for further policy liberalization: consum-ers connected after years on waiting lists, firms using power without blackouts, foreign and domestic strategicinvestors, institutional investors such as pension funds, employees with share options, retail investors with stockholdings, banks with new lending opportunities, construction companies . . . may all support more PPI.

Backdrop to the PPI Revolution

Several developments continue to define the background to the PPI revolution:

• Technological change, new regulatory practices, and unbundling assets are all enabling competition to bebrought to more markets for infrastructure services. New technologies are reducing barriers to entry intelecoms markets in particular. Other sectors have benefited from regulatory innovations that separateownership of an underlying “network” (for example, electric or telecoms cables, gas pipelines, rail tracks)from providers of the services that flow along that network—who can compete, after paying an accesscharge to the network owner. And horizontal unbundling during privatization (breaking up large state-ownedcompanies into several regional concessions) has allowed peer competition to develop.

• New financing sources. Insurance companies, which offer the prospect of large volumes of long-termfinancing, are starting to finance PPI projects in developing countries. Local pension funds have beennotably important in Chile and Malaysia. International banks are expanding their presence aggressively inthe PPI market. And most official financing agencies are starting to support PPI projects, through directfinancing or guarantees (see Table 1.1 and Appendix Tables A7 and A8). Several export credit agencies haveset up specialist project financing units and are financing some projects without government counter-guarantees. Domestic banks are starting to finance private infrastructure in some countries, while developingstock markets are improving access to equity. The globalization of capital markets is facilitating the mobili-


zation of new financingsources. And infrastructureprivatization itself isstimulating local financialmarkets.

• Information dissemina-tion has accelerated andexperience has broadened.The number of PPI confer-ences, round tables, andpapers has exploded. Severalleading PPI countries (forexample, Chile and Argen-tina) are now advising other

countries. And private infrastructure utilities from developing countries are starting to invest in othercountries.

What Is Happening?

How much private infrastructure is being financed in developing countries? It is difficult to separate actual financingfrom memoranda of agreement and concessions that are awarded but not yet financed. Nevertheless, evidence fromseveral sources (see Appendix Tables A9, A10, and A11) suggests four conclusions.

Growing Volume

Total estimated PPI financing in developing countries doubled between 1993 and 1995, from about US$17 billion toover US$35 billion. These figures are derived from international lending to PPI projects of US$15 billion in 1995.Based on IFC’s projects, international loans account for about 40 percent of total financing.3 This implies thatprivate infrastructure projects in developing countries in 1995 involved over US$35 billion of investment (seeFigure 1.2).4

More Privatization of Existing Assets

Apart from the privatization of some airlines and telecoms companies, most early PPI has involved the constructionof new assets, such as power plants and cellular systems. However, there is increasing evidence of “deeper” privateentry, as more infrastructure assets are privatized via divestiture or long-term operating concessions.5

In 1994, seventy-five infrastructure firms in thirty developing countries were privatized, raising over US$10 billionfor the divesting governments (see Table 1.2). More importantly, many of these firms immediately expanded theirinvestment programs. Widely varying firm sizes means that the trend has been more haphazard than the sharpincrease in international PPI loans. Although the 1992 total of US$9.8 billion was nearly as high, it was concentratedin fewer countries and companies. Furthermore, infrastructure privatization is extending into sectors that raisecomplex political and regulatory issues, such as water and electricity distribution. For example, in the year to June1996 governments commissioned IFC to advise on privatizing Manila’s water supply and sanitation utility, electric-ity utilities in Venezuela and Pakistan, and Gabon’s water and electricity company.

Some Broadening . . .

Private infrastructure now exists in all regions, although it remains limited in most countries and sectors. The WorldBank’s PPI database records 587 projects in ninety-one developing countries, although cost details are only available

Table 1.1: Official Financing of PPI Projects, Excluding IFC

Total OfficialNumber of project cost financing

Date commitments (US$bn) (US$bn)

1993 18 1.6 0.81994 89 8.9 3.51995 82 11.8 7.0

Source: Annual reports and direct communication with multi/bilaterals and export credit agencies.Note: Includes guarantees and direct financing without a government counter-guarantee. See alsoAppendix Tables A7 and A8.


for 361 projects (see Table 1.3 and Appendix Table A9).Table 1.3 estimates total PPI financing in developingcountries during 1990–95 at US$150 billion. In contrast,Figure 1.2 suggests that the total is about US$90 billion.This is because the US$150 billion includes manyprojects that have not yet reached financial closure,meaning that the total financing actually mobilized iswell under that level. Until recently, the volume of IFC’s

Table 1.2: Infrastructure Privatizations,1989-94

Volume No. of No. of(US$bn) companies countries

1989 2.8 11 41990 6.0 32 101991 6.8 41 141992 9.8 63 221993 4.4 90 181994 10.1 75 30

Source: World Bank.

Table 1.3: PPI Projects in DevelopingCountries, 1990–95

Region/Sector No. US$ bn

Total 361 150.1

by regionAfrica 15 1.7Asia 137 68.5CAMENA 13 11.4Europe 26 7.0Latin America 170 61.5

by sectorGas 23 10.0Power 160 56.4Telecom 46 41.4Transport 114 32.0Waste/water 18 10.2

Source: World Bank PPI database.

Figure 1.2: The Rapid Rise of Private Infrastructure Financing, 1990–95

1990 1991 1992 1993 1994 19950.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

US

$ bi

llion

s

Estimated PPI financing frominternational loans [1]

Estimated PPI financing fromall other sources

2.7 4.5 6

17.220.7

37.5

Total

Source: Capital DATA Loanware.Note: [1] Assumes international loans are 40% of total.


East Asia building new capacity for the rapidly growing economies is the main driving force. In Latin America andEastern Europe, governments have privatized infrastructure to raise revenues, demonstrate commitment to economicreform, encourage investment, and improve efficiency of existing assets.

Yet regional groupings are misleading. The pace of implementation is strong in relatively few countries. In 1993,just nine countries (Argentina, Colombia, Hungary, India, Malaysia, Mexico, Pakistan, Philippines, and Thailand)accounted for 99 percent of international private infrastructure loans. In 1995, the same nine countries, plus Indone-sia and Turkey, accounted for 97 percent of the total.

Figure 1.3: Privatization and New Investment in Developing Countries by Region, 1990–95

Africa EasternEurope /

FSU

CAMENA SouthAsia

LAC EastAsia

0

10

20

30

40

50

60

US

$ bi

llion

s

Privatization New Investment Projects

Source: World Bank PPI Database.

Figure 1.4: Privatization and New Investment in Developing Countries by Sector, 1990–95

Gas Water / Waste Telecoms Transportation Power0

10

20

30

40

US

$ bi

llion

s

Privatization New Investment Projects

Source: World Bank PPI Database.

financing has been relatively concentrated. Yet, through its developmental role, IFC has gained wide countryexperience (see Chapter 2). The broadening of IFC’s advisory and financing experience in the last two yearssuggests that the market is starting to widen.

. . . but Much Remains Concentrated

Latin America and Asia continue to dominate PPI financing (see Figure 1.3), partly because the early “leader”countries in each region have continued to liberalize their infrastructure sectors. Privatization has exceeded newconstruction in Latin America (all sectors) and Eastern Europe (mostly telecoms), whereas greenfield projectsdominate in East Asia. This reflects the fact that PPI is being promoted by governments for different purposes. In


Power and telecoms have dominated PPI financing to date, although transport is catching up fast. Privatization andincreased competition have occurred most rapidly in telecoms (see Figure 1.4), encouraged by deregulation inindustrial countries, technical change, and investor interest. New construction dominates in transport and power.

Where IFC Fits In

IFC promotes PPI with the objective to yield sustainable, beneficial outcomes, and thereby economic development.More specifically, IFC’s roles include:

• Supporting pioneer transactions, by structuring potential projects so that they are financeable. This processoften yields benefits beyond the immediate project, by clarifying what governments can offer to close atransaction. Issues such as security packages, termination arrangements, concession terms, and disputehandling occur in every transaction. For example in 1992, in the face of high country risk, the first privatepower project in Guatemala succeeded, which subsequently encouraged several other Central Americancountries to introduce private power—and local developers to sponsor projects.

• Supporting politically challenging reforms, such as utility privatization. For example, IFC has supported theinvestment plans of newly privatized telecoms companies in Chile, Hungary, and Latvia, and railroad andelectricity distribution companies in Argentina. IFC also helps governments to sell infrastructure companies,including structuring, marketing, and coordinating bidding to investors. Advisory assignments to privatizepower generators and distribution companies in Peru (see Box 1.1) and Trinidad and Tobago in 1994–95have been followed by power sector assignments in Venezuela, Pakistan, and Gabon in the last year.

• Promoting competition by supporting new entrants (such as several cellular telecoms projects and a terminalin a port with some private terminals).

• Mobilizing international financing via loan syndications (mostly to commercial banks, but recently also toinsurance companies), helping infrastructure companies to tap international equity markets, and investing ininfrastructure funds.

• Facilitating domestic financing, for example, through bringing a local bank into a project, or advising on aprivatization involving a local flotation. Other work is more general. Advising on stock market development,investing in local mutual funds or private equity funds, promoting rating agencies, and financing pensionfund managers may all ultimately help PPI projects to be financed locally.

Box 1.1: Privatization Advice: Peru Electricity

In 1992 the Government of Peru introduced a regulatory framework for the electricity sector, to prepare the groundfor the privatization of the power sector. The government asked IFC to advise on the privatization of Electrolima,which was responsible for generation, transmission, and distribution in Lima.. Following a strategic review, thedistribution component was split into two parts—North and South Lima—and the generation component left intact.Each of the three components were corporatized prior to sale. Shareholdings of 60 percent were sold in each of thedistribution companies in August 1994 and the generation company in November 1995, raising a total ofUS$875 million. The buyers were international consortia, including leading U.S., Chilean, Canadian, and Spanishelectricity utilities, and Peruvian groups. The government retained 40 percent of the shares for later sale to the publicand employees.

In the year since privatization, expanded investment programs have enabled 100,000 new customers to be connected,equivalent to a 10 percent increase. Line losses fell from about 20 percent to 17 percent and are expected to fallfurther.


• Disseminating experience and promoting government-investor dialogue through formal papers, speeches,seminars, and informal advice. IFC has also provided sectoral input to the World Bank and governments onwhat is needed to attract investors, including advising on agreements for interconnection and power pur-chase. And IFC has joined with the World Bank in contributing to several infrastructure round tablesorganized by the Foreign Investment Advisory Service (FIAS) to promote dialogue between government andprivate investors (see Appendix Table A6). Regional round tables have been held for south and east Asia (in1993), central and eastern Europe, and southern and eastern Africa (in 1996). The Asian roundtable wassubsequently followed by similar country-focused events for China and Vietnam (see Chapter 5 for moredetails).

1. Financing Private Infrastructure Projects: Emerging Trends from IFC’s Experience, IFC Discussion Paper No. 23 (1994).

2. Privatization: Principles and Practice, IFC Lessons of Experience Series No.1, (1995).

3. In IFC’s projects, international loans accounted for 45-50 percent of total financing. This sample is biased towardsinternationally financed projects, so the proportion for all private infrastructure projects is lower, but not much: few projectsin developing countries are financed entirely locally.

4. The 1993 figure derived from the loans database is close to the estimate made by the 1994 World Development Report(WDR) on infrastructure. The WDR estimated PPI in 1993 at US$15 billion, equivalent to 7 percent of an estimatedUS$200 billion spent annually on infrastructure.

5. New construction and privatization of existing assets is often interlinked. Governments privatize infrastructure to facilitatenew investment: a thirty-year concession to operate part of the Argentinian rail network was conditional upon theconcessionaire’s commitment to undertake a US$55 million rehabilitation plan.

Notes


IFC’s Evolving Experience

What Is New?

• More countries and sectors. In the two years to June 1996 IFC’s Board approvednearly US$1.5 billion of financing to sixty-four projects costing US$13.8 billion.These included several country and sector firsts. IFC financed PPI projects for thefirst time in Bangladesh, Brazil, China, Côte d’Ivoire, the Dominican Republic,Honduras, Indonesia, Jamaica, Jordan, Latvia, Panama, Tanzania, Thailand, Uruguay,and Vietnam. Sector firsts included an airport and a mass transit system.

• Continued financing in some strongly reforming countries, notably Argentina withfifteen approvals in fiscal 1995 and 1996. In the same period IFC also financed fivepower projects in Pakistan, another in the Philippines, helped arrange a majorsyndicated loan for Hungary’s telecoms company, and financed a Chilean railroad.

• PPI projects are being financed in low-income countries with higher risk, providingthey are well structured, with strong, committed sponsors and political commitment.IFC’s role in advising, structuring, and mobilizing commercial financing for PPIprojects is particularly strong in such countries.

• A sharp increase in privatization advisory assignments—including several in coun-tries new to infrastructure privatization, such as telecoms companies in Uganda andEcuador, a water/electricity company in Gabon, and a multi-sector assignment inHaiti.

Expanding Approvals

By June 1996, IFC’s Board hadapproved US$3.1 billion to helpfinance 148 projects costingUS$28.6 billion in forty develop-ing countries (see Table 2.1 andAppendix Tables A1, A2, and A3).Although IFC’s first privateinfrastructure project was financedin 1966, over 80 percent have beenapproved during a period ofdramatic growth in the 1990s (seeTable 2.2).1 IFC’s financing for itsown account remained at the samelevel in fiscal 1995 and 1996,although overall project size fell,because no new “jumbo” projectsover US$1 billion were financed infiscal 96. Two such projects were

2

Table 2.1: The Big Picture

Total project size (US$m) 28,648Number of projects 148Countries 40

IFC approvals (US$m) 3,072of whichFY67-90 437FY91-96 2,634IFC debt 2,536IFC equity 536

Average debt approval (US$m) 21Average equity approval (US$m) 7

Approved for IFC syndication (US$m) 3,857

Source: IFC.


approved during fiscal 95: a US$1.7 billion mass transit system for Bangkok and a US$1.4 billion Philippines powerplant. By comparison, barely US$1 billion was raised by all PPI projects in all developing countries by 1988. Theaverage project size of US$194 million masks huge variations: five projects have exceeded US$1 billion, whileseveral have been under US$20 million, including some cellular projects, ports and small power plants.

Syndicated loans rose sharply, with over US$2.5 billion approved in fiscal 1995 and 1996. Furthermore, severalnew, nontraditional participants have entered the syndication program during the past two years, including nonbankfinancial institutions such as GE Capital, the first involvement of insurance companies and commercial banks inother emerging markets, such as Korea and the Czech Republic (see Chapter 6).

In addition to financing PPI projects directly, IFC has helped sponsor four private equity funds targeted at infrastruc-ture, an agency line for telecoms projects, and most recently, a “mezzanine” debt fund that will invest mostlysubordinated debt in Asian infrastructure projects. Core investors in the Asian Mezzanine Infrastructure Fund, whichis cosponsored by Credit Lyonnais and Caisse des Depots et Consignations (a French development agency), areexpected to include large insurance companies. The fund is expected to be one of the first pooled investmentvehicles to convert equity commitments from foreign institutional investors into long-term debt investments ininfrastructure projects in developing countries.

Signed Commitments 2

Actual disbursement occurs only after a project is approved, investment agreements are signed (“commitment”), anddisbursement conditions are met. By June 1996, IFC had committed US$2.1 billion to 101 projects in thirty-fivecountries. The difference between approvals (US$3.1 billion) and commitments is mostly explained by the largenumber of recently approved projects where investment agreements had not been signed by June 1996. In addition,about US$150 million of financing has been dropped after approval, usually because the sponsors found alternativefinancing. Several projects also have been dropped prior to Board approval because sponsors found alternativefinancing, although in two cases governments decided to finance projects directly: Prague airport and a Turkishpower plant. The fact that sponsors go to the time and expense of securing approval for IFC financing and thenchange their plans shows how rapidly the PPI market is evolving.

Table 2.2: IFC Approvals in Infrastructure, 1966–June 1996

No. of Total project cost IFC net IFC syndicationsFY projects (US$m) (US$m) (US$m)

1967-87 7 517 78 41988 2 409 54 01989 6 704 109 401990 7 1,613 197 721991 6 876 102 601992 9 1,396 115 1471993 17 3,737 372 3091994 30 5,495 585 6991995 32 8,190 734 1,0011996 32 5,712 727 1,527

Total 148 28,648 3,072 3,857

Source: IFC.


Increasing Breadth 3

Although much of IFC’s PPI financing is in Asia andLatin America (see Figure 2.1), the share of otherregions is increasing. During the past two years, twoprojects were approved in Africa (including the region’sfirst private power plant in Côte d’Ivoire), seven inEurope (including the privatization of Latvia’s telecomscompany), and seven in the Middle East and CentralAsia, including a nationwide cellular system in Jordan.Well over half of the number of IFC’s PPI approvalshave been in Latin America, reflecting the region’s“deeper” infrastructure privatization. The proportion ofPPI approvals is smaller in volume, however, because ofthe large number of smaller projects in Central America.

Yet for encouraging PPI, country climates matter morethan regional characteristics because governmentcommitment largely determines the scope for privateentry. Eight countries account for two-thirds of IFC’sinfrastructure approvals (see Table 2.3). Until recently,in most countries these approvals have been concen-trated in one sector, such as telecoms in Hungary and power in the Philippines and Pakistan. Chile and Argentina areexceptions, with a wide sectoral spread of investments. India is a special case, as several IFC approvals (to existingprivate power companies) occurred in the late 1980s and early 1990s, before the Indian government instituted PPIpolicies. In 1994, however, IFC approved financing to three of India’s first independent power projects, althoughcommitments had not been signed by June 1996 because of long delays in negotiating power purchase agreements.

The bulk of IFC’s PPI approvals have been for power generation and telecoms projects (see Table 2.4). These broadclassifications hide considerable diversity however. For example, the telecoms projects include cellular systems (for

instance, Jordan, Tanzania), local networks (for example,Bangladesh, Hungary, Indonesia) and mainline operators(such as, Latvia, Venezuela). Similarly, the powergeneration plants include hydro plants, barge-mounteddiesel generators, coal and gas-fired plants, and onefueled by bagasse, a renewable waste product of sugarcane extraction.

Two of the projects in new sectors were also IFC’s firstPPI project in that country: an airport in Uruguay (seeBox 2.1) and a mass transit project in Thailand (see Box4.4 in Chapter 4). Another innovative project involvesthe expansion of a regional telephone network innorthern Bangladesh from 7,000 lines to 123,000 linesby 1999. The project, a joint venture between a localprivate telecoms company (which holds a franchise tobuild and operate fixed telecoms services in the region)and a foreign investor, will increase telephone penetra-tion in the region from 0.01 percent to about 0.2 percent

Table 2.3: Countries with Five or MoreIFC Approvals by June 1996

Total IFCNo. of project cost financing

Country projects (US$m) (US$m)

Argentina 29 5,605 562India 13 3,470 415Philippines 11 3,715 279Chile 11 2,143 229Pakistan 7 1769 214Colombia 7 359 76Mexico 6 484 47Hungary 5 1,667 138

Subtotal 89 19,213 1,959% of total 60% 67% 64%

Source: IFC.Note: Some of these projects were repeat approvals to the samecompany. Some were subsequently dropped.

Figure 2.1: Regional Distribution ofApprovals ( total = US$3,072 million )

Source: IFC.Note: [1] The Global Power Investment Fund.

LAC43%

Global [1]2%

Europe11%

CAMENA8%

Asia34%

Africa2%

Asia34%

Africa2%

LAC43%

Global [1]2%

Europe11%

CAMENA8%


PPI in Low-IncomeCountries

Well-structured PPI projectscan be financed in low-incomecountries, particularly withstrong sponsor support and thepresence of agencies such asIFC to add security. Nearly 60percent of IFC’s approvalshave been in low-income orlower-middle income coun-tries, where country coveragehas been broader (see Table2.5). Moreover, Argentina andChile account for two-thirds ofthe projects in the uppermiddle income group. Thirty-five projects costingUS$6 billion have beenfinanced in Côte d’Ivoire,Tanzania, Uganda, Zaire,

Zimbabwe, Bangladesh, India, Nepal, Pakistan, Sri Lanka, Vietnam, and Honduras.

By June 1996, IFC had approved financing for projects in five of the twelve poorest countries in the world:5

Tanzania (cellular telecoms), Vietnam (port), Uganda (cellular telecoms, and advising on privatizing main telecom),Nepal (two power plants) and Bangladesh (regional telecoms network). If per capita GDP figures were available forZaire, the country would probably also fall into this group (another cellular telecoms project).

The first private port to be financed in Vietnam illustrates characteristics that can help to mobilize financing in suchenvironments:

• Effective demand: the US$10 million proposed deep water port will relieve already severe congestion atSaigon port. Rapid economic growth has meant that container traffic grew by 60 percent annually between

Box 2.1: Airport Financing in Uruguay

Few airports have been fully privatized to date, such that private parties are responsible for investment and opera-tions of both terminal and airside facilities.4 The reasons for the relatively slow development of PPI in airportsinclude: governments’ reluctance to release direct control over airports, opposition from state-owned airlines, anddifficulties in forecasting traffic.

In March 1995, IFC’s Board approved financing for a US$31 million expansion of the Punta del Este airport inUruguay. Following competitive bidding, a twenty-year concession was awarded to the project company to build anew terminal and runway, as well as upgrade other airside facilities by 1997. The concessionaire will be responsiblefor all airport operations except immigration, customs, police, and traffic control, and will collect all revenues. Whyis Punta del Este airport a PPI front-runner? It is a holiday destination airport, so strategic considerations are mini-mal, the national airline has already been privatized and a growing market is projected to strengthen further. Passen-ger departure tax and airline fees (the concessionaire’s main sources of revenue) have been set in U.S. dollars and areindexed.

Table 2.4: Sectoral Split, 1966–June 1996

Total Of Totalnumber of which in project cost IFC net

Sector projects FY95-96 (US$m) (US$m)

Power generation 44 21 9,317 1,085Power trans/dist. 11 3 1,473 210Telecoms 41 15 9,347 876Ports 19 8 654 165Pipelines 8 2 1,238 162Water/waste 8 6 1071 129Railroads 4 1 175 47Roads 4 3 847 80Mass transit 2 2 1,668 70Airports 1 1 31 8Miscellaneous [1] 6 2 2,828 242

Total 148 64 28,648 3,072

Source: IFC.

Note: [1] Five infrastructure funds and one conglomerate.


1989 and 1994. The sponsors of the port have also been negotiating long-term contracts with large importersof specific products.

• Foreign exchange revenues: most of the port’s revenues will be in U.S. dollars, in accordance with interna-tional shipping practices.

• Strong sponsors: the foreign sponsors are major international dry goods suppliers and a shipping company.The local sponsor group are importers and a bank.

• Multilateral umbrella: IFC has helped introduce limited recourse project financing to the country, as well assupporting the participation of foreign sponsors and lenders. NORAD also provided a US$2 million loan.

Country income level appears to have little effect on project size; projects in low-income countries averagedUS$171 million, versus an overall average of US$184 million. As might be expected, mobilization rates were lowerin low-income countries: 6.5 versus an overall average of 8.3.

Country Risk

Attracting private financing to infrastructure is determined more by risk perceptions than by income levels. Giventhe long-term vulnerability of infrastructure projects to major political and economic risks, investors base much oftheir risk assessment on a country’s economic and political credibility. The Institutional Investor index is a proxyindicator of transfer risk.6 A score of under twenty-five (high risk) indicates little access to international financialmarkets, whereas over forty equates to reasonably good access. Depending on country conditions and repaymentrecords, Institutional Investor ranks some upper middle income countries as bearing more risk than low-incomecountries (for example, upper middle income Venezuela was rated 30.1, while India scored 45.8 in the March 1996survey).

Over a quarter of IFC’s projects have been approved in countries with virtually no access to private internationalfinancing (see Table 2.5). Three of the countries bearing the highest risk were Zaire (Institutional Investor risk score

Table 2.5: IFC Approvals by Country Income Level and Risk

No. of No. of Project cost IFC financing Avg. sizecountries projects (US$m) (US$m) (US$m)

by country income levelLow income 13 35 6,000 803 171Lower middle income 18 47 7,986 845 170Upper middle income 9 60 12,099 1,194 202Subtotal [1] 40 142 26,085 2,842 184

by Institutional Investor scoreMost risky (< 25) 18 36 3,529 546 98Medium risk (25-40) 20 70 16,310 1,642 233Lower risk (>40) 11 35 7,976 777 228Subtotal [2] na 141 27,815 2,965 197

Source: IFC.Notes: [1] Excludes regional projects.[2] The country total is not additive: some countries are counted twice because different projects were approved when the country fell into a differentrisk group. The total figures exclude regional projects and a few projects in countries without an Institutional Investor rating.


of 9.5 at the time of investment), Uganda (10.1), and Tanzania (15.2). In these countries private investors focused oncellular networks, where high demand and revenues during build-out mean that payback periods are relatively short.Other projects in countries with high risk include a port in Bolivia (risk score of 13.2), and power plants in Côted’Ivoire (17.0), Honduras (16.2—see Box 2.2), and Guatemala (18.8).

Projects in countries with greater risk are under half the size of those in countries with better credit, as investors testthe water. Similarly, mobilization rates are lower in countries with greater risk (5.5 versus an 8.3 average). Further-more, much of the funding in PPI projects in countries with risk comes from other official financing agencies. Thisapplies particularly to debt: PPI projects in Sub-Saharan Africa have included very little purely private debt.

Does PPI Improve Credibility?

Infrastructure privatization may have helped some countries to improve their credibility on international financialmarkets. Table 2.6 shows the four-year change in the Institutional Investor index to March 1996 for the countrieswhere IFC has financed the most PPI projects. This is far from a scientific test. Improving country credibilityinvolves more than privatizing infrastructure. And some countries, such as Malaysia, have been active in PPI, butIFC has not participated. Nevertheless, there seems to be some correlation between PPI and improvements in riskratings.

Figure 2.2 suggests that the effects may be most significant for countries with higher risks: PPI financings may helpput such countries “on the map” for foreign investors. The figure shows the Institutional Investor rating for allprojects in countries deemed to be a high risk (rated under twenty-five) at the time of the initial investment, andagain at March 1996. Almost without exception the ratings had risen, implying a fall in perceived country risk.

Box 2.2: Achieving Closure in a Difficult Environment

In December 1994 financing closed for the first independent power project in Honduras: the 60 MW, US$70 millionElcosa project. In December 1995 financing closed for a US$20 million expansion of Elcosa to 80 MW. The projectrepresented one of the largest private investments in Honduran history and mobilized the first commercial lendingfor the country in twelve years. Financing was finalized just one year after the power purchase agreement wassigned. The diesel-powered plant started operating in May 1995.

Honduras represents one of the highest risk country environments to see an IPP come to closure. Five factors enabledthe project to achieve financial closure quickly:

• MIGA extended expropriation, war, and civil disturbance cover to the main sponsor, who was then allowed totransfer the coverage to two new equity investors (which saved them spending time applying separately forsuch insurance). Separately, MIGA extended cover to two commercial banks that lent US$10 million each.

• The government guaranteed that the power offtaker, the state-owned national electrical utility, would meet itscontractual obligations.

• The government was motivated in part by severe energy shortages.

• A strong foreign sponsor participated—Wartsila—a company experienced in building and operating diesel en-gine-powered plants.

• IFC’s presence helped bring in the commercial banks, under a syndicated loan. Financing was also provided byFMO, the Dutch agency for financing private projects.

• Debt financing for the expansion was provided by IDB and DEG.


Advisory Projects

Advisory work is partly a leading indicator of futureinvestment trends. It is also important in itself: thecomplexity and political sensitivity of PPI projectsmeans that good quality advice can yield large payoffs interms of projects that are financially well-structured andwhich meet the needs of different stakeholders.

During the past three years IFC has become increasinglyactive in undertaking PPI advisory assignments. Thereare two broad categories:

• Project-related. Sponsors can retain IFC toreview a project’s financial and economic viability, toassess contractual arrangements, and to help structurethe project for financing. For example, in early 1995IFC was asked to undertake these tasks by thewinners of a concession to provide water and

sewerage services to a Brazilian city. Often such “buy side” assignments are undertaken in the context of apossible investment by IFC, should the project go ahead. IFC may also discuss with the government theregulatory or contractual framework for the project. In these circumstances IFC represents the investors’point of view, and it makes this expressly clear to government.

• Stand-alone advisory assignment. IFC also provides “sell side” advice to governments on how to privatizeexisting infrastructure enterprises. This advice ranges from sector strategy and the appropriate regulatoryframework, to the steps necessary to be taken to restructure the enterprise for sale, through to actually

Table 2.6: Changes in Risk Ratings,1992–96

Country Mar 92 Mar 96 Change

Argentina 23.6 38.4 14.8Philippines 25.7 38.1 12.4Chile 44.1 59.2 15.1Colombia 38.4 46.7 8.3Pakistan 28.0 29.5 1.5India: 37.6 45.8 8.2Hungary 41.7 43.6 1.9Mexico* 41.0 41.2 0.2

135 countries 37.5 38.9 1.4

Source: Institutional Investor.Note: Mexico's 1995 peso crisis meant that its rating fell by 5.7points in the year to September 1995.

Figure 2.2: Changes in Risk Ratings after PPI Investments

Source: Institutional Investor and IFC.

Projects

Inst

itutio

nal

Inve

stor

cou

ntry

risk

scor

e

0

5

10

15

20

25

30

35

40

Score at time of initial investment Score as of March 1996

Lower risk

Higher risk


advising on the sale process, including finding potential investors, tender, negotiation and sale closure. IFCoffers this service when it and the client government believe that IFC has something to offer the process thatother private advisers are not able to supply. Fees are charged on a commercial basis, and care is taken toavoid real or perceived conflicts of interest by not investing in the course of the same transaction.

Between fiscal 1993 and 1995, IFC started nine PPI stand-alone advisory mandates. There has been a sharp accel-eration in fiscal 96, with a further eight mandates signed (see Appendix Tables A5 and A6). The changing pattern ofdemand for IFC’s advice has matched the steady growth in the volume of infrastructure privatization worldwide. Ithas also focused increasingly on the most politically sensitive transactions, where the highest value is attributed toIFC’s neutrality as part of the World Bank Group. Recently signed mandates have included sectors such as water,with projects in Manila, Gabon, and Cochin, India, and electricity distribution in Peru and Pakistan. They have alsoincluded countries where perceived risk is high and government unease with privatization the greatest: for example,Haiti, Kenya, Ecuador, and Uganda. Finally, the advisory mandates have involved an increased amount of upstreamstrategy work—recommending how monopolies should be broken up, for example, before implementing a sale.

IFC’s PPI Pipeline

The “pipeline” of PPI investment projects which IFC staff are assessing seriously for investment has risen over thepast four years, from about US$3 billion of total capital costs in late 1992 to over US$11 billion in May 1996 (seeFigure 2.3). Among nearly forty potential projects in May 1996 were electricity generation projects in China,Indonesia, and Mexico, a renewable energy project, a water supply project, a fund to invest in water projects andseveral telecoms projects. Several countries where IFC has not previously financed any PPI projects are on the list(for example, Kazakhstan) as well as others where it has only financed one or two to date (such as Costa Rica,Tanzania). Advisory work has also increased: in May 1996, IFC was working on twenty-four PPI mandates incountries such as Uganda, Peru, Kenya, China, Venezuela, and India, compared with seventeen a year earlier.

Figure 2.3: IFC’s Private Infrastructure Pipeline

Source: IFC.Note: Three month moving averages.

Sep

-92

Mar

-93

Sep

-93

Mar

-94

Sep

-94

Mar

-95

Sep

-95

Mar

-960

2

4

6

8

10

12

Est

imat

ed p

roje

ct c

ost

(US

$ bi

llion

s)


Notes

1. “Infrastructure” as used in this paper includes power, telecoms, ports, roads, railroads, mass transit, airports, and water andsewerage projects. Shipping and road transport are not included. Many of the PPI projects financed by IFC before 1990were corporate credits; since then the majority have been project financings.

2. All parties sign the commitment agreement and IFC funds its obligations at this point.

3. These figures refer to approvals. Geographical and sectoral splits for IFC’s commitments to private infrastructure projectsare shown in Appendix Table A1.

4. Airport Infrastructure: The Emerging Role of the Private Sector (Ellis Juan, June 1995) lists some UK airports as fullyprivatized and Vienna and Copenhagen airports as partly privatized.

5. As defined by the World Bank in Annex Table 1 in the 1995 World Development Report.

6. Twice a year Institutional Investor polls 75 to 100 international banks to grade countries from 0 to 100, with 100 repre-senting the least chance of sovereign default. The analysis gives more weight to responses from banks with greaterworldwide exposure and better country analysis systems.


Project Performance

Does private participation in infrastructure yield efficient, customer-oriented infrastructureservices? Are consumers, government and investors all benefiting? What have been the mainproblems? By early 1996, forty-eight IFC-financed projects had completed construction andstarted operating (they are marked in Appendix Tables A1). Although the sample is still smalland new (especially in the context of the fifteen- to thirty-year agreements common in PPIprojects), the evidence suggests that:

• Construction performance is satisfactory. On average the projects were 3 percentunder budget and five months late (22 percent of the expected period). A much largersample of publicly financed infrastructure projects showed cost overruns of 10–23percent and 54–68 percent schedule overruns.

• Early operational performance is positive. Although it is too early to generalize,several projects have exceeded the performance requirements in their contracts.

• Stakeholders are positive. In countries where PPI projects have been financed, theyhave often been followed by more infrastructure deregulation and privatization. Thissuggests that the initial PPI projects are meeting the expectations of consumers andgovernments. These “demonstration effects” are working across countries as well asamong sectors.

• Unexpected events have (mostly) not been serious enough to derail projects. Althoughunexpected events have affected several projects, a combination of good projectstructuring, adjustments by investors, and flexibility by lenders (and sometimesgovernments) means that nearly all projects have remained operational. However, intwo projects concessions have been disputed and the government is paying its utility’sobligations in another project.

• The financial performance of IFC’s PPI portfolio has been satisfactory.

Construction

In IFC’s forty-eight completed PPI projects, costs averaged 3 percent under budget whileschedule overruns averaged five months on construction periods of about two-and-a-halfyears (see Table 3.1).1 Project completion performance was better in Latin America than Asia,and in telecoms and ports than power.

Eighty percent of projects came in at or under budget, while 60 percent were early or on time.The main reason for cost under-runs was the use of fixed-price, date-certain constructioncontracts by project companies, with associated bonuses and penalties. In some cases, strongcompetition by contractors for the civil works led to lower than expected bids (see Box 3.1),and the telecoms sector in particular has benefited from declining equipment costs. Inaddition, devaluation reduced local costs in U.S. dollar terms for some projects.

3


Smaller projects performed best in budget terms: projects under US$75 million averaged 5 percent under budget,compared with 2 percent overruns for projects over US$200 million. Time performance was more mixed, withprojects in the US$75–200 million range doing best. However, the small differences coupled with the low number ofprojects in each group suggest that the link between size and construction performance may not necessarily bestrong.

How do these performance figures compare with those of publicly funded projects? Using the 1,160 infrastructureprojects financed by the World Bank between 1974 and 1994 as a proxy for all publicly financed projects, averagetime overruns were 54–68 percent and cost overruns were 10–23 percent in dollar terms.2 While these projects differfrom IFC’s small and new sample of projects in many ways,3 the figures tend to suggest that private owners buildinfrastructure more efficiently than public managers.

Table 3.1: Construction Performance

Size Avg cost Avg time OverrunRegion No. (US$m) outturn (%) (months) (months)

Completed projects 48 143 -2.6 29.2 5.3

by region [1]Asia 15 175 1.1 43.9 7.6LAC 27 122 -6.0 23.3 4.7

by sector [1]Power 21 141 0.7 32.9 5.4Telecoms 12 250 -0.4 30.5 4.6Ports 7 29 -7.2 21.5 5.9

Source: IFC.Note: [1] Excludes categories with under seven observations.

Box 3.1: Construction Performance in Hydro Plants

The small size of several run-of-the-river hydroelectric plants helped them to reach financial closure. In some casesit made construction easier to manage, although there have been delays and cost overruns for some projects.

• In 1994 the 81 MW Aconcagua hydro plant in Chile was completed nine months ahead of schedule and 19percent under the US$89 million budget. Furthermore the capacity of the plant is about 12 percent higher thanoriginally expected. The positive outturn was ascribed to: i) careful project preparation; ii) high quality financialand administrative management, with clear objectives; iii) negotiated equipment contracts, based on three bestoffers; iv) use of medium-sized contractors trying to enter the market; and v) no work order changes authorizedwithout thorough verification.

• Hidrozarcas (14.5 MW) in Costa Rica was completed on time and within budget.

• Fabrigas (10 MW) in Guatemala was delayed by three months because of technical problems. It was 8 percentover budget.

• Kepez (47 MW) in Turkey was delayed by nine months when the original civil works contractor went bankruptand a new contractor had to be appointed. The final cost was 6 percent above the original estimate.


Construction performance matters for more than narrow financial reasons. It has a key political element. If PPIprojects come on stream quickly, blackouts end and waiting lists shrink, political commitment to further deregula-tion and private entry is likely to be strengthened. Conversely, high profile PPI projects that are late or over-budgetmay threaten the sustainability of the liberalization of infrastructure services.

Operating Efficiencies Beginning to Show

Although relatively few projects have had more than a year or two of operating experience, benefits are beginning toshow. This section uses examples from each sector to illustrate how consumers in particular are benefiting. Benefitsmay include:

• Increased capacity: switching lights on, reducing waiting lists for new connections, new services, shorterjourney times.

• Efficiency improvements: lower tariffs, reduced waiting periods for repairs, better customer service.

• Wider consumer choice: in many cases PPI projects offer new and alternative services (such as cellularservices, mass transit).

Rail

In an Argentine railroad, stiff competition from local truckers meant that average tariffs fell from US$11.32/ton atthe time of privatization in 1992 to US$9.61/ton in 1994. At the same time the concessionaire undertook a majorrehabilitation program, replacing and overhauling track, locomotives, and wagons. Improved availability of trackand rolling stock enabled the volume of business to boom: in 1994 the railroad carried 2.4 million tons of cargo,compared to just 0.1 million tons transported by the state-owned company in 1991, its last year of operation. Thegovernment also achieved fiscal benefits from railway privatization, with subsidies falling from US$1.3 billion in1989 to US$0.3 billion by 1994 (mostly to urban commuter lines).

Ports

In 1987, IFC helped finance a new port on Argentina’s Parana river. Terminal 6 quickly became the country’s largestoilseed by-product terminal, exporting over a quarter of Argentina’s production in 1995. Between 1987 and 1995,IFC financed three further expansions of the port. Demand rose for several reasons:

• As the first private entrant to an inefficient state-owned sector, Terminal 6 provided a welcome alternativefor exporters. The demonstration impact was rapid, with the government privatizing ports and allowing theconstruction of new private ports. Today over 80 percent of Argentina’s agricultural exports are shippedthrough private ports, of which Terminal 6 is the largest grain port.

• As the port’s throughput and efficiency increased, operating costs fell from US$1.50/ton in 1990 toUS$0.56/ton in 1995, enabling tariffs to be reduced.

• The 1992 privatization of a rail line leading to the port reduced transport costs and increased volumesarriving at the port.4

Water Supply and Sewerage

The concession awarded in 1993 to Aguas Argentina to manage the Buenos Aires water and sewerage system hasbecome a model that several other countries are considering emulating. Performance improvements have beendramatic. A 27 percent tariff reduction was implemented immediately, as one of the key criteria on which the


concessionaire won the bid. After two years of operation, 400,000 new water and 250,000 sewerage connections hadbeen made (many in low-income areas), drinking water quality improved measurably, average repair response timefell from 180 hours to 48 hours, and Buenos Aires experienced its first summer without water shortages in fifteenyears.

Power Generation

Since financing its first independent power plant in the Philippines in 1989 (see Box 3.2), IFC has approved overforty power generation projects. Several projects have been bid out, financed, and installed quickly to alleviatesevere power shortages. A short construction period and high availability rates are important for such plants. Abarge-mounted diesel plant in Guatemala delivered its first power ten months after the major sponsor, Enron, startedworking on the project. In the year to October 1995 the plant achieved an availability rating of over 90 percent, wellabove the 75 percent minimum stipulated in the power purchase agreement. The diesel-powered Elcosa plant inHonduras achieved availability of about 95 percent during its first six months in operation (see Box 2.2).

How much does private power cost? Comparisons are difficult: tariffs in power purchase agreements may include orexclude fuel costs, cover the costs of complementary assets such as transmission lines, contain incentive paymentsfor achieving availability or early completion, allow higher rates in earlier years, and so forth. Furthermore, lendersand sponsors build a risk-premium into the financing costs of early projects in countries with greater risk, whichmay fall as the credibility of the environment improves. Given these large caveats, broad orders of magnitude can bederived. In the base load thermal power plants financed by IFC in recent years, the cost of power (including fuel)has ranged from 4.7 to 7.3 U.S. cents per kWh, which is comparable with costs in OECD markets. Figure 3.1 showstariffs agreed for several Indonesian power projects scheduled to come on stream between 1997 and 2002. Inciden-tally it shows no significant differences in tariffs between projects whether they were competitively bid or directlynegotiated.

Box 3.2: Demonstration Effects: Philippines Power Plant

The Navotas 1 power plant was one of the first private power projects in a developing country. The 210 MW,US$41 million oil-fired gas turbine power plant was undertaken by Hopewell Energy (Philippines) Corporation.Hopewell signed a twelve-year contract to provide peak load capacity to the state-owned National Power Corpora-tion (NPC). Secondhand generators obtained from the USA led to significant cost savings.

Project construction began in January 1990 and was completed under budget in March 1991, but about six monthsbehind schedule. Delay was due to shipping damage to the generators during a typhoon. While the plant was origi-nally planned as a peaking facility, severe power shortages meant that it was operated at base load capacities. Despitegenerating several times the amount of energy originally envisaged, the plant’s operational indicators were impres-sive: availability over 87 percent and reliability over 95 percent.

Beyond setting an international precedent, the plant’s success has led to further liberalization in the country:

• The government accelerated privatization of the power sector. By 1994 the six- to ten-hour blackouts of 1991had ended, mainly due to new privately financed plants coming on stream. By 1998 the average age of thermalgeneration plants in the Philippines will be seven years, compared with twenty-three years in 1993.

• The restructuring of NPC has been accelerated, in preparation for full privatization.

• The government has embarked on PPI initiatives in other infrastructure sectors, such as telecoms (opened tocompetition in 1993) and water.


Power Distribution

In 1992, following a competitive tender, a concession to distribute electricity to two million people in northernBuenos Aires was awarded to Edenor. Results have been rapid:

• Electricity losses (due to outdated equipment, theft, and inadequate billing) fell from 30 percent beforeprivatization in 1992 to 17 percent in December 1995.

• In 1994, 70,000 customers with clandestine connections were legally connected. Many of the newlyconnected are in poorer neighborhoods. One follow-on to extending power and water to these areas is thatsocial services (schools, health clinics, and so forth) are now being provided and upgraded.

• Labor productivity rose to 522 customers per employee in 1994, compared with an expectation of 470 for1994, at the time of privatization.

Power Transmission

A privately constructed and operated 273 kilometer 500kV transmission line connecting a large hydroelectric plantin Argentina with the rest of the country’s network was completed on time in September 1994. Penalties are imposedon the concessionaire for downtime, with higher penalties for unplanned outages. Teething problems with the newline were sorted out quickly: the average penalty points imposed per month fell by two-thirds over the period fromJanuary to September 1995, compared with the first four months of operation in late 1994. Meanwhile powertransmission quadrupled, from 89,000 MWH/month in 1994 to 312,000 MWH/month in 1995.

Telecoms: Cellular

In several of the cellular telecoms projects that IFC has financed, market sizes have exceeded initial expectationsand competition has led to tariffs falling faster than originally expected. In 1990 Hungary awarded a fifteen-year

Figure 3.1: Tariffs Agreed in Indonesian Private Power Projects

Power tariffs in solicited and unsolicited projects(projects with tariff negotiations completed)

Source: Indonesian Department of Mines and Energy.

Expected start of operation

cen

ts/k

Wh

5.5

6

6.5

7

7.5

Solicited Unsolicited

1997 2002


concession to Westel to build an analog cellular network. When completed in December 1993 (on time, 6 percentunder budget), Westel had 40,000 subscribers, over 30 percent above the number originally projected. In 1994 thegovernment awarded two more concessions, this time to build a digital network. Tariffs fell sharply as competitionincreased—from US$0.40/minute in 1992 to US$0.25/minute in 1994. And the market expanded to reach 240,000subscribers by the end of 1995, equivalent to over 2 percent of Hungary’s population. Westel’s analog systemcontinued growing, albeit more slowly (reaching 70,000 subscribers in 1995), as the two digital networks capturedover half the market. Similar results have been seen in smaller and lower-income countries (see Box 3.3). InUganda, with a per capita GNP of US$180, the subscriber base to the new cellular network has grown faster thananticipated: by early 1996, after a few months of operation, the network had 1,700 customers, versus a target of1,000 by that date.

Telecoms: Mainline

Telecoms privatizationshave often been accompa-nied by new line installationand quality of servicetargets, which in turnrequire steep increases ininvestment. Although theprivatized companies wouldprobably have expandedservice anyway, explicittargets have served apolitical need. One of theconditions for the purchasein December 1993 of astrategic stake in Hungary’stelecoms company was toachieve 35 lines per 100population by 2002. Thisrequired expanding thenetwork at over 15 percent

Box 3.3: Dramatic Growth in El Salvador Cellular Network

Following a competitive tender, in 1992 the Government of El Salvador awarded a license to Telemovil to develop acellular network. The license set out interconnection fees and royalties to Antel, the mainline operator, allowedTelemovil to adjust its tariffs within international norms and was exclusive for the first five years. In 1993, IFChelped finance Telemovil’s US$7 million build-out plan; it was IFC’s first investment in the country for twenty-twoyears. It was expected that the market might reach 6,000 subscribers by 1997.

By September 1995 the number of subscribers had already reached 11,000, with another 800–1,000 being added eachmonth. Demand was expanding so rapidly that the company embarked on a further expansion plan to increase sub-scribers to 60,000 by 1999.

Spurred by the prospect of a new entrant to the market, the company has lowered its subscription and usage fees tolevels in line or lower than most cellular operators in emerging markets. Furthermore, the success of private entry tothe sector has prompted the government to announce its intention to separate the regulatory function from Antel andintroduce competition to basic telecoms services, and perhaps privatize Antel.

Source: Pyramid Research 1994.

Figure 3.2: Fast Line Growth Expected in Hungary

Hungary Poland Slovakia Romania Bulgaria0

2

4

6

8

10

12

14

16

18

Ann

ual %

gro

wth

in m

ain

lines

,19

92-9

7


per annum, which is much faster than projected growthrates in the remaining state-owned networks in Centraland Eastern Europe (see Figure 3.2).

In late 1991 the Venezuelan Government sold a 40percent stake in the national telecoms operator, CANTV,to a consortium led by GTE of the United States. Inreturn for a nine-year exclusivity period, the concession-aire was required to treble the size of the network, at acost of US$4.6 billion. Despite difficult macroeconomicconditions since 1992, including high inflation, reces-sion, and restricted access to foreign exchange, thecompany is meeting most targets (the main exceptionsbeing waiting time for a new telephone, which stillexceeds ninety days in parts of the country, and thenumber of public telephones installed). Customersatisfaction increased from under 30 percent beforeprivatization to over 80 percent by 1995 (see Table 3.2).

Demonstration Effects

The development impact of successful PPI projects goes beyond improved service and increased capacity. Success-ful projects give policymakers experience, attract more investors, and build constituencies for further reforms.Demonstration effects show up via:

• Expansion of existing PPI projects. In several projects the sponsors have undertaken expansions shortly afterinitial construction was complete. Examples include ports in Argentina, Panama, and Vietnam; power plantsin Honduras and Côte d’Ivoire; and cellular projects in many countries.

• More new entry. In virtually every country where the first independent power project (IPP) has successfullyclosed financing, further IPPs have followed or are being planned (Table 3.3). And partly buoyed by thesuccess of the Terminal 6 port, in 1994 the Argentine government awarded five private operators twenty-five-year concessions to manage and develop terminals in the port of Buenos Aires.

Table 3.2: Meeting Telecoms Conces-sion Requirements in Venezuela

Required by Actual1995 1995

Net new lines 855,100 891,900Public telephones 28,400 25,250Call completion rates (%) local 54 59 national 41 46 international 43 52Customer satisfaction (%) 45 83

Source: CANTV.

Table 3.3: One IPP Leads to Another

Country First IPP Project Situation in June 1996 . . .

Costa Rica 1994 Hidrozarcas At least two other IPPs under development, including one windand one hydro.

Côte d’Ivoire 1994 Ciprel Third expansion of Ciprel to be privately financed (Stage IIbeing financed from IDA). Another IPP in preparation.

Guatemala 1993 Puerto Quetzal Two others approved for financing by IFC and one under nego-tiation (a geothermal plant).

Honduras 1994 Elcosa Another operational and government expected to bid out morecapacity in 1996.

Nepal 1996 Khimti Khola IFC approved financing for a second IPP in June 1996.Oman 1994 Manah Government has announced it will issue bids for two more IPPs.Philippines 1989 Navotas Over 20 IPPs built or under construction.


• “Deeper” privatization. Many countries that have promoted PPI to build new assets have begun the moredifficult process of privatizing existing assets. After mobilizing investment for new power plants, Pakistanhas embarked on a program to sell strategic stakes in several power generation plants and distributioncompanies (IFC is advising on the sale of Faisalabad Electricity Board). In other cases partial privatizationhas been followed by further reductions in state ownership. For example, after selling a 30 percent strategicshare of its telephone company in December 1993, the Hungarian government sold a further 37 percent staketo the strategic investors for US$852 million two years later.

• PPI extending to other sectors. In Argentina most infrastructure services at the federal level have been atleast partly deregulated and privatized since the initial privatization of the telecommunications company.After a successful program of private entry into the power sector, the Philippines government is preparing toprivatize Manila’s water and sewerage services. Mexico has embarked on a wide-ranging infrastructurederegulation and privatization program, encompassing ports, railroads, power generation, and telecommuni-cations.

Changes in Circumstances and Unforeseen Events

The picture is not all rosy. Large, long-term, politically high-profile investments are bound to face changes incircumstances and unforeseen events. This section reviews how sponsors, lenders and governments have reacted tounforeseen changes in several projects (see also Chapters 5 and 7).

Stronger than expected competition

While good for consumers, investors in several projects have borne low or negative returns to date because ofintense competition. In Sri Lanka, for example, four cellular operators compete directly in what has become one ofthe most competitive markets in the world. The low rates have led to a much larger overall market than originallyexpected (50,000 by 1995, compared with an expected 20,000 by 1998!) but the tariffs—among the lowest in theworld—are too low to enable the operators to cover their costs. Sponsors have invested extra funds to support theircompanies until the market consolidates. More generally, both governments and sponsors are adjusting their behav-ior as competition increases in cellular markets. Governments are issuing more competing licenses for cellularconcessions and investors are factoring competition into their market estimates and financial projections.

Box 3.4: A Revoked Concession

In April 1992, IFC’s Board approved financing for Millicom Costa Rica’s (MCR) project to expand its San Jose-based cellular network to all major regions of Costa Rica. With strong marketing and quality service, MCR managedto build its subscriber base steadily and enjoy net profits above original base projections.

In 1993, however, the union of the state-owned wireline operator (ICE), challenged MCR’s radio frequency conces-sion in constitutional court, arguing that only the state-owned wireline operator was allowed to provide cellularservice. The court, in a divided decision, ruled in the union’s favor but added that MCR was authorized to operate fora period of one year because it had built and established the cellular network in good faith. Despite its promisingmarket performance, MCR was forced to halt operations in May 1995.

In February 1996 MCR filed a lawsuit in the USA against the Republic of Costa Rica and ICE. It accuses thedefendants of wrongfully monopolizing the cellular market, unlawfully expropriating MCR’s property, and breach-ing contractual obligations.


A privatized Argentine railroad faced strong competition from the deregulated trucking industry, which reducedexpected freight volumes on the railway by over a million tons per annum. The company has responded by askingthe government to reschedule some of its mandatory investment commitments and to reconsider its annual conces-sion royalty. Negotiations are proceeding slowly.

Devaluation

Although many concession agreements link tariff adjustments to inflation or devaluation (or stipulate tariffs inforeign exchange terms), lags have affected some projects. In a water treatment plant in Mexico, for example, thetariff was linked to domestic inflation, which only increased with a lag, following the major devaluation in early1995. In the meantime, the project’s owners have used several methods to stay afloat. A six-month debt servicereserve account provided a partial buffer. And part of IFC’s financing included a subordinated loan, which could becapitalized under certain circumstances. This was done, and other lenders followed suit. The sponsors are alsoexploring ways of increasing water treatment volumes.

Table 3.4: Adverse Events and Outcomes

Project, country Event Costs borne by Response

Power generation, Six-month delay due to Sponsors initially, Insurance covered cost ofPhilippines damage to generators then insurance repair and some business interrup-

during shipment tion

Power generation, Drought affected cash flow Sponsors Construction of new plantsTurkey of hydro-based parent slightly delayed

company

Transmission line, Terrorist attack on Insurance Covered repair of substation, but notPeru substation business interruption

Hydro plant, Chile Flooding during Insurance Construction delayed fifteen days.construction Insurance covered repairs

Hydro plant, Chile Shut down during testing Equipment supplier Equipment supplier covered repairs.due to faulty installation and insurance Insurance covered loss of energy

Oil pipeline, Cost overrun due to higher Sponsors and Extra sponsor equity. Cost plusZimbabwe than expected inflation and consumers tariff structure may mean

structure of construction consumers will pay—but strongcontract competition

Port, Argentina Lower than expected Sponsors Expansion plans scaled backdemand due to poor slightlyagricultural production

Railway, Argentina Losses due to i) strike at Sponsors More equity put in to cover lossesport terminal; ii) reduction Lenders Slight increase in loanin grain shipments to former Government and Government allowed some invest-Soviet republics and bad consumers ment to be deferredweather

Source: IFC.


Weak sponsors

The winner of a concession to build a local telephone network in Hungary (a small U.S.-based telecoms operator)was unable to mobilize financing. The sponsor’s interest in the concession was later taken over by a stronger partner.

Inadequate performance of government-owned companies

In Argentina, a railroad project was adversely affected by inadequate handling capacity at the state-owned port at theend of its line. In India, the state-owned company supplying gas to a power project failed to meet the volumesstipulated in the supply agreements. The project company has procured gas from an alternative source and ischanging the generating plant to a dual system so that naphtha or other liquid fuels can be used as a back up to gas.In another country the government has taken over the payment obligations of the state-owned power purchaser to anindependent power generator. In Uganda the cellular network shut down for twenty-four hours when the electricityservice blacked out and the company’s backup generator failed.

Box 3.5: Selected Lessons from IFC’s Project Evaluation Reports

• Tariffs. One project assumed the company would be able to pass through cost increases via periodic tariffadjustments. Experience suggests that lags may occur, especially in periods of high inflation, and that eventualcost recovery may be incomplete. In another project tariff regulation was based on rates proposed by bidders atthe time of bidding. This ensured that the rates would be relatively low (as this was one of the criteria on whichthe bids were evaluated) but also reasonable for the operators.

• Management. Strong local management was a key success factor in one project. The company’s commitment toits employees was important, particularly because of the scarcity of appropriate management and technicalskills. Another project—a joint venture infrastructure facility serving several industrial partner owners—suc-ceeded because one sponsor took lead responsibility for overseeing the project company’s management.

• Competition. Where a new project’s viability depends on displacing existing alternative carriers, it may beoptimistic to assume that competitors will be forced out of the market by lower average cost-based pricing.Rather, competitors may aggressively price down to marginal operating cost. This may cause problems forprojects with higher fixed costs (such as for foreign debt service). In another project involving investment by arecently privatized telecoms company, basic service did expand very rapidly. But waiting lists remained higherthan expected, as more people signed up. Opening the market to new entrants might have attracted additionalinvestment.

• Equipment innovations. One project was very low cost because it used secondhand equipment. Technical riskswere mitigated through conservative financing, strong sponsor backstopping, and good insurance coverage.The low costs permitted a tariff structure for a peaking plant that provides adequate financial returns at a priceto the grid that rivals base load plants. Another project leased existing infrastructure to enable it to grow quicklyand inexpensively during its market entry stage.

• Contractual arrangements. Where fuel and plant supply, or both, are restricted to government monopolies, theproject company may have little scope for negotiating normal risk-sharing arrangements. This might be bank-able for a corporate credit but not for a new project company. Accordingly, governments need to promotecompetition in supply arrangements by liberalizing procurement restrictions and privatizing state monopolies.

• Conflicts of interest. Where potential conflicts of interest exist or where there is a public-private joint venture,the transparency of the contractual arrangements is critical. Contracts should be finalized prior to financialclose, and structured to ensure that they reflect the ability of each party to manage risk.


Government actions

Concessions have been disputed in two cases:an operating cellular project in Costa Rica(see Box 3.4) and a port in Pakistan. In bothcases sponsors have resorted to litigation. InBelize, a new government elected in 1993renegotiated key items in the project agree-ments originally signed in 1991 for a hydro-electric power project. In Zaire, the govern-ment built up arrears in its payments to acellular company. The government eventuallyagreed to repay the arrears over an extendedperiod. In Sri Lanka the government suddenlyimposed 98 percent import duties on cellularhandsets and raised the turnover tax ontelecommunications services from 5 to 20percent. Some projects have faced delays ingovernment decisions to raise tariffs in linewith previously agreed guidelines (forinstance, Latvia telecoms).

Delays in awarding permits can be anotherproblem. Prior to awarding constructioncontracts, the environmental clearance for a180 MW gas-based, combined cycle plant tobe built by the Tata Electric Company in Indiawas given quickly by the government ofMaharashtra and the Maharashtra StateElectricity Board, but was delayed for severalmonths by the Central Electricity Authority (CEA), which suggested an alternative proposal. Eventually the CEAagreed to the original project.

Well-meaning government actions can have unintended consequences. In an effort to promote road safety, theVietnamese government imposed a decree that restricted movement of containers by truck in areas with good roads.The result was a large backlog of containers at ports and a trebling of trucking prices.

Outcomes

This list of problems is formidable. Yet, with the exception of the cancelled concessions, the projects have survived.Indeed most are performing well, meeting investment and efficiency targets and achieving at least adequate financialrates of return. In most cases, investors have borne the effect of increased competition and—initially, pendinglitigation—adverse government actions. Devaluations have generally been passed through to consumers, althoughusually with a lag, so investors have suffered in some cases. Insurers have covered some risks. Governments havebeen flexible in some instances, rescheduling dates by which investment requirements must be achieved (forexample, in an Argentine railroad). Table 3.4 lists some examples of adverse events and how costs have beendistributed.

Where there have been political problems with projects, governments and investors have often worked together tofind solutions. After all, the stakes in, say, a high-profile infrastructure project, go far beyond the investment itself

Table 3.5: IFC’s Infrastructure Portfolio [1]

June 1990 June 1996

No. US$m No. US$m

Total 8 197 63 1,598

by regionAfrica - - 4 37Asia 5 177 14 530CAMENA - - 5 147Europe - - 9 183LAC 3 21 30 649Global - - 1 51

by sectorPower generation 1 21 26 754Power trans/distrib. 3 70 3 71Telecoms 1 84 18 461Ports 2 10 6 59Pipelines 1 12 2 20Rail - - 2 23Road - - 1 9Water - - 2 92Airports - - 1 8Miscellaneous - - 2 101

Source: IFC.Note: [1] Held portfolio. comprising disbursed and undisbursed balances of loansand equity.


because a hostile business climate can send a strong signal to all other actual and potential investors in the country.Equally, international investors (and their financiers) do not want to be associated with politically contentious, high-profile projects that go wrong, as this can jeopardize their long-term relationship with the government (important inthe context of twenty- to thirty-year concession agreements), as well as their chances of winning projects in othercountries. Incentives thus work towards finding solutions on both sides.

Lessons Learned from IFC Project Evaluations

Box 3.5 lists selected lessons from evaluation reports on ten infrastructure projects. IFC conducts detailed evaluationreports on about a third of its projects; the small number of infrastructure projects covered so far reflects a youngportfolio. The small sample size is not fully representative of IFC’s wider infrastructure experience; hence otherimportant lessons may emerge. Nevertheless, the sample includes a fair range of countries, project types, anddegrees of investor risk. Of the ten projects, seven involved new project companies, one was a post-privatizationexpansion, and three were expansion projects of established corporate operating companies. The projects werelocated in: Argentina (2), Chile, Guatemala, Hungary, India, Peru, Philippines (2), and Zimbabwe.

Financial Performance of IFC’s Infrastructure Portfolio

The value of IFC’s private infrastructure portfolio rose eightfold between 1990 and 1996, from eight projects in fivecountries totaling under US$200 million to US$1.6 billion in sixty-three companies in twenty-nine countries (seeTable 3.5). Most of the portfolio is too new to draw firm conclusions about financial performance. Few projects havebeen operating for more than a year or two: the average age of the portfolio at June 1996 was thirty-three months.And looking at the record of the few older PPI projects is of limited use, because most were undertaken in verydifferent country and regulatory circumstances. Nevertheless, some indicators give a picture that is broadly positive,even if tentative. All of IFC’s projects are given one of three portfolio ratings: “no problem,” “potential problem,” or“problem.” In June 1995 just two projects were rated as “problems” and three others as “potential problems.” All ofthese projects were small. Furthermore debt service was not in arrears on any of IFC’s PPI projects at June 1995. Atthe same date the rate of return on IFC’s equity investments in PPI projects was close to the average of 13 percentfor all of IFC’s equity investments, however most of the infrastructure projects are still too new for equity returns toshow up in full. Finally, at least one project has prepaid an IFC loan early and another has refinanced its loans withlocal banks. Both suggest successful financial performance and prospects.

1. Schedule overruns were calculated on the basis of actual completion versus that expected at IFC Board approval. In somecases there were delays in closing financing, rather than in physical implementation.

2. "Annual Review of Evaluation Results, 1994," World Bank 1995, annex table 1.17. Average cost and time overruns bysector were 54 percent and 15 percent for power projects (309); 68 percent and 23 percent for telecoms (90 projects); 67percent and 11 percent for transport projects (573); and 64 percent and 10 percent for 188 water projects.

3. World Bank projects are typically larger, more complex, last longer, often include institutional components that are com-pleted after the physical project, and use different procurement methods than many privately financed projects. Further-more, World Bank projects may not be an accurate proxy for publicly financed projects as a whole.

4. IFC also helped finance this railroad. Cargo hauled in 1994 rose by nearly 25 percent over 1993 to 3.5 million tons. Theaverage tariff fell by over 10%.

Notes


Achieving Financial Closure

The number of closures rose sharply in fiscal 1995 and 1996, compared with the two preced-ing years. Closure times, as measured from the time of formal IFC involvement, fell fromseventeen months in fiscal 1994 to eleven months in fiscal 1996. But wide disparities underliethe figures, and several high-profile projects have remained unclosed for long periods.

Varying closure speeds reflect differences in country commitment, investor experience andproject size. To generalize, closure has been faster for smaller projects, in countries with priorPPI experience or strong political commitment, and in projects with foreign exchange rev-enues. Delays have resulted from difficulties in resolving issues of risk allocation amongproject participants. This has taken longer where investors, lenders, or government officialswere inexperienced; political changes affected government’s commitment; anti-PPI vestedinterests were stronger than anticipated; or noncreditworthy suppliers or buyers were involved.

Financial Closure 1

Financial closure is the point at which the principal participants (sponsors, government,lenders) reach a formal agreement on the fundamental business structure of the project and theterms and conditions of the project’s financing plan. Achieving closure is difficult—innumerous cases concessions have been awarded but the sponsors were subsequently unable toraise financing. Closure is important because:

• Investment starts (assuming disbursement conditions are met).

• A dynamic link between transactions and policy evolution often starts. Politicians,civil servants, lawyers, engineers, investors, and lenders involved in a completedtransaction learn from experience. And completed transactions attract publicity thatspurs the interest of other investors and lenders.

Conversely, failure to close may send negative signals about the investment climate topotential investors, if government delays are the cause rather than poorly structured oruncompetitive project proposals. Developers may have a limited appetite for continuing costlypursuit.

One proxy of the time to close financing is the period between the formal start of appraisal byIFC (the Initial Project Review, IPR) and the commitment (signing) of funds. This measure isnot ideal. Sponsors will have done varying amounts of work on projects before approachingIFC; commonly one to two years bidding for projects, negotiating agreements, and obtainingapprovals. IFC sometimes commits its funds before the whole financing package is signed—and in a few cases IFC has subsequently canceled its commitment because closure with otherfinanciers could not be finalized. Nevertheless, the measure highlights some indicative trends.

4


Overall Results

The average period from IPR to signed commitment of IFC funds has been thirteen months for PPI projects (seeTable 4.1). Although the small sample means that the figures should be treated with caution, they suggest:

• A mixed picture on closure times. Despite a significant decline over the last three years in the averageclosure period, varying and complex factors specific to each project make for variations. This is partly dueto differences in experience among sponsors, lenders, and officials.

• Large projects often take longer to close. Larger projects tend to be more complex, attract closer politicalinterest, and involve more financing parties.

• Sectoral differences are insignificant.

Variations have been large. Several power plants closed rapidly, despite being located in countries perceived as high-risk by foreign investors (see Table 4.2). This was possible because of political commitment, spurred by powershortages, and combined with strong sponsors (see Box 4.1). After financing closed, many of the projects werecompleted within months.

The slow closures are a more diverse group. The Pangue hydroelectric project in Chile was delayed because of (1)an agreement between the project company and the electricity regulator to delay start up, to match projected demandbetter; (2) changes in sponsor company management post-privatization; and, (3) further consideration for theenvironmental and sociological aspects of the project. The Mexico wastewater project was slow to close because ofthe complexity of negotiating the first project in the country (and one of the first in the developing world).

Country circumstances can play a role in achieving rapid financial closure, but the results tend to be sector-specific(for instance, Philippines power, see Box 4.2). InArgentina, twelve IFC-sponsored PPI projects averagedthirteen months to closure. They were mostly large,complex privatization projects (electricity and waterdistribution, rail networks), or involved special risks (forinstance, a satellite launching project).

Issues in Reaching FinancialClosure

Achieving financial closure involves appraisal andnegotiation to meet the requirements of the three majorparties concerned: government, investors, and lenders.All parties need to expect sustainable benefits fromprivate entry. IFC’s experience suggests that severalissues have delayed a number of projects.

• Inexperience. Reaching financial closure requiresgood understanding of project financing techniques,infrastructure regulation and country risk. Whilegovernment officials, investors, and lenders maypossess expertise in one or two of these areas,relatively few do in all three. Delays can result from

Table 4.1: Closure Times

Closureperiod

No. (months)

All projects, FY91–96 71 13

by time periodcommitted FY94 12 17committed FY95 22 14committed FY96 18 11

by sizelarge (>US$200m) 20 15medium (US$75m–$200m) 13 12small (< US$75m) 30 13

by sectortelecoms 22 12ports 9 12power generation 26 13

Source: IFC.Note: Only includes projects which reached the commitment stage.


Table 4.2: Fast and Slow Closing Projects

Year Closure period Project sizeProject Sector Country committed (months) [1] (US$m)

over 20 monthsPangue Power Chile 1994 43 465Puerto Vallarta Water Mexico 1995 31 33Karachi Port Pakistan 1995 26 88Hidrozarcas Power Costa Rica 1994 23 17Lanka Cell. Telecoms Sri Lanka 1994 21 14N. Central Rail Argentina 1993 20 61

under 10 monthsSmith-Enron Power Dom. Rep 1995 4 204P. Quetzal Power Guatemala 1993 5 92Ciprel Power Côte d’Ivoire 1995 6 70Telemovil Telecoms El Salvador 1996 7 20N. Mindanao Power Philippines 1993 8 103AES Lal Pir Power Pakistan 1995 8 343Baria Serece Port Vietnam 1995 8 10Elcosa Power Honduras 1995 9 70

Source: IFC.Note: [1] The months between preparation of an IFC Initial Project Review and signed commitment of IFC funds to the project.

Box 4.1: Rapid Closing in Côte d’Ivoire Power Project

In July 1994, IFC was formally approached by a French-led consortium to finance the first independent powerproject in Côte d’Ivoire (and in Sub-Saharan Africa). Financing closed five months later and the 100 MW plant wasoperational by April 1995. Early results are good: in its first six months of operation the plant achieved 83 percentavailability, compared to a contractual requirement of 80 percent. How was this possible in a country with limitedaccess to international financial markets?

• Strong political commitment. The government had signaled its interest in PPI in 1990, when it contracted man-agement of the electricity sector to a private company. Following the resumption of economic growth after thedevaluation of the CFA Franc in 1994, and a drought that threatened hydro-based supply, new capacity wasneeded. The government negotiated a nineteen-year build-own-operate-transfer concession with the consortiummanaging the power company.

• Strong sponsors. The project was sponsored by two major French groups (SAUR and EDF) with long experi-ence in constructing and managing power plants, as well as management experience in the Ivoirean powersector.

• Multilateral financiers. The major lenders, two French official agencies (CFD and Proparco), were ready toproceed with IFC on board.

• Structuring. Convertibility and transferability of funds was an issue. An offshore escrow account was estab-lished with a float adequate for six months of debt service. The foreign debt repayment component is paiddirectly to a foreign exchange account.


unrealistic expectations or the need to adapt procedures (see Box 4.3). Good advisors can help reduce suchdelays.

• Government support arrangements. Where PPI projects are selling to or purchasing from noncreditworthystate-owned companies, and government reforms will take time to improve creditworthiness, financiers mayrequest government support, such as performance guarantees. While such guarantees can help to start thePPI process, they may be politically controversial. Delays in determining the availability and kind ofgovernment support have affected India’s independent power program.

• Intragovernment coordination. Several projects have been beset by delays arising from poor coordinationbetween different parts of government, both at the central level and between local and central government.Delays have tended to be longer when a regional government entity was awarding a concession, but neededpolicy agreement or financial support from central government to conclude the transactions.

• Size. Large projects may take longer to close because of the need for extensive public consultation, the largenumber of financiers required, and the complexity of coordinating numerous government agencies andtechnical studies (see Box 4.4).

• Assessing the market. This mainly affects transport projects (ports, railroads, roads, airports, and masstransit) and especially new investments, where there is no track record of cash flows. Lenders in particularare concerned about whether debt service will be covered in the event of lower-than-expected volumes andtariffs. They may require independent market assessments, use more conservative projections than those ofthe sponsors, and require some sponsor support to cover debt service in the event of inadequate cash flow.

• Lender security. Establishing mortgage claims over the physical assets of a project has been difficult in somecountries (Hungary, Poland) due to outdated provisions of the legal infrastructure (see Box 4.5). Weaknesses

Box 4.2: Learning from Experience: The Sual Power Project

IFC has financed four power projects in the Philippines. Taking the first project (the US$41 million Navotas project)from initial review to loan commitment took twenty-one months between October 1988 and July 1990. Much of thistime was spent by the sponsor, government officials, and lenders coming to terms with appropriate risk managementarrangements under a previously untested implementation framework. In contrast, appraisal and negotiation of theUS$1.4 billion Sual project took just ten months between October 1994 and July 1995, notwithstanding its size andcomplexity. The faster closure on Sual reflected the experience gained by all participants (including their legaladvisors) with previous transactions under the Philippine private power program.

Box 4.3: New Financial Participants: Going Up the Learning Curve

Delays can occur when a financial institution is financing private infrastructure on a limited-recourse, nonguaranteedbasis for the first time. Examples might include insurance companies, bilateral agencies, export credit agencies, andlocal financial institutions. Negotiations over risk allocation measures and security arrangements will usually takelonger with new participants, and this can affect the time to reach agreement on closure. For example, when syndicat-ing a PPI loan to insurance companies for the first time, IFC and the insurance companies both had to adapt theirprocedures slightly.


in laws relating to claims on intangible assets (such as concession agreements and other contractual arrange-ments) and the absence of efficient registries have also created problems for loan security. In a port inVietnam, for example, lenders were unable to take a mortgage over the assets, and instead secured partialsponsor guarantees.

• Sector specific issues. These include:

Interconnection rights in telecoms. Some projects have been delayed (for instance, in Poland) because thestate-owned operator took a long time to negotiate interconnection rights with private entrants.

Land development rights have been an issue on some toll roads. Another issue has been the need to securecomplementary government investments to connect the road or bridge to the network.

The regulatory regime for tariff adjustments has been a sticking point in several sectors, particularly in waterprojects, where tariffs tend to be below cost and adjustment has a high political profile. Similarly, negotia-tions on the level of road tolls has delayed closure on some road projects.

Matching fuel supply and power offtake contracts can hold up closure on power generation projects,particularly where fuel is being supplied by one state-owned company and power is being purchased byanother. Negotiations can drag on if key provisions in the fuel supply contract (such as tenor of the contract,political force majeure provisions, fuel price changes) are not aligned with those of the power purchaseagreement.

Box 4.4: The Bangkok Mass Transit System

At a cost of US$1.7 billion, the Bangkok Transit System is one of the largest infrastructure projects yet approved byIFC’s Board. It has also been one of the longest to bring to financial closure, due mainly to the scale of activityinvolved and the need to achieve consensus among the different groups of financiers. IFC started appraisal in Sep-tember 1993, undertaking detailed assessments of traffic volumes, the concession agreement, legal and regulatoryframeworks, and the social and environmental impacts. Public consultation procedures were initiated (lasting justover a year) to ensure that the environmental and social impacts of this high-profile project were properly handled.

Commencing in August 1995, negotiations were conducted among three groups of financiers: KfW (leading a syndi-cate of German and Austrian banks), Siam Commercial Bank (leading a syndicate of Thai banks), and IFC. The termsheet was agreed in February 1996 and agreements were signed in August 1996.

Box 4.5: Legal Frameworks

Inadequate legal infrastructure has contributed to delays in achieving financial closure in many projects. In Hungarya law that prohibits a change in a company’s articles of association within the first year after establishment createdproblems for a cellular telephone company that wanted to increase its equity base to pursue market growth. WithIFC’s assistance, the equity increase was eventually achieved, but only after a complex five-step operation thatinvolved shareholder loans, buyouts of the loans, equity transfers, and balance sheet reconfigurations. The process,which should have been straightforward, took six months and involved significant legal costs.


Notes

The Broader Perspective

It is likely that IFC’s experience covers projects that are more likely to achieve financial closure than the wholepopulation of potential PPI investments. Many of the sponsors who approach IFC have international experience,some have already been awarded a concession to develop and operate an infrastructure service, and a few areoperating in countries where governments have developed expertise in handling private entry. Yet many developers,financiers, and governments are still at the initial stages of entering the market for private infrastructure. The nextchapter discusses ways in which governments have managed the process of private entry.

1. The concept of closure applies more to projects financed on a limited-recourse basis (often greenfield projects). Existingfirms with a track record may access financing on a corporate credit basis.


Improving the Policy Framework

In most developing countries the economic costs of not deregulating infrastructure services toallow private entry and encourage competition are very high. The challenges are greatest inthose countries where infrastructure services are worst. Nevertheless, governments haveseveral options for improving infrastructure services. Defining the options and the scope forPPI will depend on political commitment, the strength of opposing groups, and investorinterest.

Establishing the right policy framework sets a basic foundation for PPI. Successful, sustain-able transactions require a policy framework that meets the interests of governments (actingon behalf of the public), sponsors, and lenders. Such a framework provides a base for success-ful transactions, which in turn can create a positive dynamic of more investor interest,consumer support, and further government liberalization. However, fully functioning regula-tory frameworks and international competitive bidding are not always necessary or possible,particularly in the early stages of promoting PPI.

Private entry is more likely to be successful and sustainable if governments use experiencedand impartial advisers and if transactions are transparent. Moreover, for concession agree-ments to remain viable over long periods, sponsors, governments, and lenders need mecha-nisms to deal with changing circumstances, develop competitive markets, and encourage thespread of local ownership.

Is PPI Worth the Trouble?

Reforms to promote PPI are politically and sometimes socially painful. The uneven record ofprogress so far reflects the differing degrees to which governments have succeeded inovercoming these hurdles. Opposition may come from employees of state-owned enterprisesworried about jobs, consumers about to lose subsidized services, or existing infrastructurefirms fearing increased competition. There are often concerns about foreign companies buying“strategic” infrastructure assets. In addition, transactions that fail or those that are perceived toreward investors too much carry political risks. So, while a successful PPI program canultimately yield political and economic benefits, in the short term political leaders run the riskof making unpopular changes.

Are existing infrastructure services so poor that they warrant such attention? Often, yes. In theearly 1990s, power blackouts of up to eight hours a day in the Philippines cost the countryover US$1 billion of lost output annually. Similar studies in India, Pakistan, and Colombiaestimated the cost of power outages at 1–2 percent of GDP. In Côte d’Ivoire it was estimatedthat a shipping monopoly added 42 percent to the cost of transporting bananas, compared tomore competitive services. In a 1992 sample of ninety-five developing countries, the waitingperiod for a new telephone connection averaged five years.1 Many firms internalize the costsof inadequate service: for example, Nigerian firms spend US$900 million annually on backupelectricity generators.

5


But blackouts and long waiting lists do not automatically generate political commitment to policy reform. IFC’sexperience suggests that:

• Political commitment does not have to be all-encompassing for PPI to start. Transactions can take placeinitially with enough commitment to simply give approval for the state-owned power company to contractan independent power plant.

• Specific events may spur commitment. For example, one president decided that the airline should be priva-tized after an airplane was impounded for nonpayment of its debts. In another country power sector reformswere spurred by a riot that occurred after a blackout during university student examinations.

• Political changes may accelerate PPI. Some incoming presidents have made PPI a part of their mandate,such as Argentina’s President Menem and President Ramos in the Philippines.

• The demonstration effect of neighboring countries is important. Successful transactions in “comparator”countries can encourage political leaders to emulate their neighbor’s initiatives. Thus after Guatemala’ssuccess with an independent power plant several other Central American countries encouraged independentpower producers.

Starting Point Affects PPI Options

Potential investor interest also affect the options for policymakers (see Table 5.1). Small, low-income countries withhigh risk and poor legal frameworks, and without exchange rate convertibility may face limited investor interest andeven less interest from foreign lenders. In such circumstances investors are likely initially to focus their interest onprojects that:

Table 5.1: Country and Project Factors Determining Investor Interest

Characteristic PPI is easier if . . . Because . . .

CountryCountry risk Low More investor interestCountry size Large More investor interestForeign exchange Convertible More foreign investor interestLegal framework Laws and precedents exist More comfort for lenders and investors

ProjectProject market “Wholesale” for example, to Lower political profile, fewer regulatory

a power company rather than issuesthe public

Cash flow stability Contractually set (take or pay) Comfort for lenders and investorsNew or existing? New construction, rather than Less politically contentious

privatization of existing assetsProject size Small enough to be simple Fewer parties involved—easier to finance

Large enough to attract investors Serious investors—easier to financeState-owned buyers Creditworthy Reduces lender and investor risk and sellersProject revenue Foreign exchange, such as port, Removes forex risk for foreign lenders and

airline, international telecoms investors


• Are small enough not to need large numbers of financiers.

• Sell services where demand is growing rapidly (for instance, cellular telecoms).

• Earn foreign exchange (such as ports).

• Sell to creditworthy “wholesale” purchasers (for example, independent power plants selling directly to largeindustrial firms).

• Have clear government support arrangements (such as guarantees of the payment obligations of state-ownedenterprises, permission for offshore foreign exchange accounts).

Most of the projects that IFC has financed in countries with low income and high risk have shared several of thesecharacteristics. Demonstrating strong political commitment through privatization can partly override investors’ riskperceptions, as illustrated by Argentina (see Box 5.1—although Argentina was not a low-income country and hadgood institutional capacity when it began its infrastructure privatization program).

Transition Paths

Governments have various choices for divesting ownership and introducing competition for and within infrastructuremarkets. Consumer gains tend to be largest where unbundling2 promotes competition and privatization is deepest.3

More countries have so far used private entry to build new assets rather than wholesale divestiture of existing assets(the first path in Figure 5.1). But even limited entry can create constituencies that press for further liberalization.After successfully promoting new power generation plants, the Philippines is preparing to privatize its National

Box 5.1: Financing Argentina’s Infrastructure

By June 1996, IFC’s Board had approved US$562 million to finance twenty-nine projects costing US$5.6 billion intotal in Argentina. These projects have covered power transmission and distribution, telecoms, railroads, gas distri-bution, ports, water, and a toll road. Four factors helped make this possible:

• Political commitment. In July 1989 the Menem Administration assumed office, after a decade of crisis that hadculminated in hyperinflation. In 1989 expenditure and losses by public enterprises (PEs) were equivalent to 13percent and 3.4 percent of GDP respectively. Starting with telecoms, the government used infrastructure priva-tization as a key part of its economic recovery program.

• A willingness to accept foreign investment in politically sensitive infrastructure sectors. The government recog-nized that foreign capital and expertise were essential if large investments and efficiency improvements were tohappen quickly.

• Exchange rate convertibility and parity with the U.S. dollar reduced foreign lenders’ concerns.

• The institutional capacity to implement new regulatory regimes, use various mechanisms to promote PPI andcompetition (for example, concessions), and learn from experience.

The political sustainability of Argentina’s PPI program has been strengthened by benefits shared between consum-ers, government, and investors. By 1993, after privatizing many major infrastructure services, total PE expenditurehad fallen to 4 percent of GDP, and the remaining PEs were making a small net surplus. Argentina’s investment ratemore than doubled from 8.1 percent of GDP in 1989 to 19.8 percent in 1994, with private investment accounting forall of the increase.


Political costs ofadjustment /

regulatory effort

Economicefficiency of

provision

Figure 5.1: Transition Paths in Infrastructure Privatization

Publicly owned regulated monopoly

Private entry allowed

Competitive / contestable private infrastructure provision

Divestiture

Unbundling & privatization

No unbundling, divestiture only

Unbundling / demonopolization

Unbundling & deregulation

Divestiture of SOE

HighLow

Low

High

Figure 5.2: Different Ownership Structures

Private investment

Extent of private participation

Note: Divestiture includes different ownership options. A government may sell all or part of its share in an infrastructure enterprise (and issue a license for theconcessionaire to operate them). Or government may retain the ownership of the underlying assets but issue a long-term licence to a private operator, includinginvestment obligations.

BuildOperateTransfer

BuildOwn

OperateLeasing

ManagementContracts Divestiture

Low High


Power Company and Manila’s water system, and hasalready introduced competition to the domestic telecomssector.

Figure 5.2 shows different ownership structures, rangingfrom very limited private participation under a manage-ment contract through to devolving full responsibility forlong-term investment and operation of existing assets(“divestiture”).4 The difference between the “build-operate-transfer” and “build-own-operate” models islargely political. “Transfer” has been preferred wheregovernments are concerned about the political implica-tions of ceding control to private or foreign owners (forexample, the Philippines, Côte d’Ivoire, and Oman). Inpractice, if private firms operate the assets efficiently,these concessions may be re-bid at expiry.

Most of the projects financed by IFC so far haveinvolved the construction of new assets, structured asbuild-own-operate concessions (see Table 5.2). Experi-ence with companies after privatization has been intelecoms (Hungary, Latvia, Chile), power distribution,water supply, railroads, and ports (all Argentina).

Building Sustainability

Efficiency gains in PPI services may not necessarily ensure political or economic sustainability. There is a long(although mostly not recent) history of private infrastructure being nationalized. Sustainability may depend on howthe entry process is perceived, whether efficiency improvements continue in the longer term and how benefits areshared.

Advice

The complex regulatory issues, the wide range of risks faced by investors, the relative newness of the task, and thepotential conflicts of interest facing civil servants all mean that independent advice is important for governmentspreparing to liberalize infrastructure services. What is desirable in an adviser? A reputation for professionalism,integrity, independence, and neutrality is central. Previous experience in the sector and region, and preferably thecountry, are also prerequisites. Access to a network of potential investors, strategic or portfolio, is important.Advisers need to know what matters to potential bidders, but also to recognize that the government may be lookingfor more than better infrastructure services from private entry. Other objectives might include some local ownershipor development of capital markets, for example.

A growing and increasingly competitive industry of private sector advisers, investment banks, and consultants hasthe experience to provide professional advice. In addition, governments are becoming better at managing theiradvisers; separating advice on strategic sectoral structure, for example, from assistance to implement a sale. Never-theless, difficult judgment calls remain for governments:

• Investor interest/market trade-offs. It is often impossible to decide strategic policy independent of thetransaction. Judgments may need to be made about trade-offs between attracting investors and limitingcompetition through, for example, temporary monopolies (this has been done in several telecommunicationsprivatizations, for example).

Table 5.2: Number of Projects Financedby IFC

New Newbuild build Dives-

Sector BOT [1] BOO [1] titure [2]

Power generation 8 21 0Power distrib./trans. 0 6 3Telecoms 0 16 4Water 1 0 2Ports 0 6 1Rail 0 0 3Roads 0 4 0

Notes: Does not include repeat projects or those before fiscal 91.[1] BOT: build-operate-transfer; BOO: build-own-operate.[2] IFC investments with company after privatization. Several of theprojects retain some government ownership, but control for invest-ment and operations is vested with the private concessionaire for theterm of the concession.


• Fee structures for advisers. There is no perfect fee structure. Lump sum fees do not provide the adviser theincentive to maximize sales revenue and investor interest. Fees expressed as a percentage of sales value maynot encourage advisers to maximize competition as a monopoly fetches a higher price than several compet-ing firms. Promoting capital market development, or a scheme for getting broad popular ownership takestime, and advisers’ time is not free. Moreover, successful implementation depends as much on how theadviser manages the political side of the sale as on technical and financial competence (see Box 5.2).

• Mobilizing public opinion. High-profile infrastructure privatization often requires a major publicity effortamong the general public and the employees of affected state-owned firms to create a constituency forchange. Yet time may be short. This task needs to be handled transparently and carefully.

Transparency

Transparency on the part of both governments and investors helps build sustainability. Transparency has severalcomponents.

• Clarity. Governments can adopt clear procedures for awarding and operating concessions so as to get astrong investor response (for example, Pakistan’s policy framework for power generation projects, see Box5.3).

• Predictability. The government’s role in implementing its commitments predictably is important. This mightinclude, for example, undertaking tariff adjustments, meeting fuel supply commitments, or purchasing land.

• Competitiveness. Project fundamentals need to be able to withstand public scrutiny. This applies in thelonger term, not simply at the time of the transaction. Equally, however, governments should be aware thatsponsors of early projects may demand a premium for the costs and risks of being first.

Box 5.2: Advising the Philippines Government on Water Privatization

For the visitor to Manila in the early 1990s, its brownouts were an unmistakable manifestation of the power industry’sproblems. By 1995 the looming problems in the water and sanitation sectors were less apparent, but equally seri-ous—only two-thirds of the eleven million inhabitants of metropolitan Manila were connected to the water supply,and just 10 percent had sewerage connections. Water shortages were severe and growing. In response, in mid–1995,Congress passed the Water Crisis Act, granting the president emergency powers. IFC was appointed as the adviser inthe privatization of Manila’s water and sewerage services (MWSS) in November 1995. The challenge has been topersuade the unconvinced within the company, public, and Congress of the potential benefits of this extremelyvisible project. Three elements have proved key:

• Leveraging limited past experience. The approach has drawn from the lessons of the pioneering Buenos Airesprivatization. Visits to Argentina have been arranged for MWSS management, union officials, and Filipinomembers of congress to see firsthand how a successful water supply privatization can work.

• Recognizing the importance of public relations. Unlike the power projects, MWSS interfaces directly withmillions of current and potential consumers, who are concerned about the impact on tariffs and service quality.Communicating accurate and comprehensible information is important to help build a constituency for the sale.

• Developing local capacity. The seven teams of consultants involved in the project include three local firms—accountants, lawyers, and public relations experts. The latter are gaining experience which may be relevant ifthe model is replicated in other cities throughout the country. A workshop approach to strategy formulationwithin the team, and between the team and clients and constituents, has also contributed to open debate andincreased local ownership.


Transparency does not always equate to international competitive bidding. Under certain circumstances negotiatedentry (where the government negotiates directly with a particular sponsor) may be appropriate. Although most of theconcessions which IFC has financed have been subject to international competitive bidding (see Table 5.3), asignificant number have used other approaches, according to country and project circumstances:5

• International competitive bidding is more suited tolarge, long-lead-time projects, where governmenthas the capacity to manage the process and sponsorsdemonstrate widespread interest.

• Competitive negotiation. Here the governmentselects several shortlisted bidders using particularcriteria and then negotiates with each. In Pakistan,for example, the government set a hurdle rate forpower—based on a maximum tariff that it wouldaccept—and invited bids.

Box 5.3: Attracting Investors: Pakistan’s Policy Framework for Power Generation

Prior to 1994, the government of Pakistan’s policy on private power was based on a rate of return approach whichfocused on capping the return on equity. This cumbersome approach did not attract investors, so the governmentdecided to revise policy. It realized that it would need initially to rely heavily on foreign investors and lenders, andthat private investors would look for some government support, given (a) relatively high country risk; (b) state-owned power purchasers and fuel suppliers without strong credit records; and, (c) government involvement in tariffsetting. The key features of the revised policy framework introduced in March 1994 were:

• Choice of site, fuel, and technology open to project proposers.

• An average bulk power tariff of (a) an average of 6.5US¢ per kWh, over the first ten years and (b) a levelizedtariff of 5.9US¢ per kWh over the life of a project. The tariff is payable in Pakistani rupees but pegged to theU.S. dollar. A bonus is available for projects commissioned before the end of 1997. The tariff is split into acapacity price and an energy price. Fuel price changes are a “pass-through” item.

• Fiscal and related incentives. Private power companies are exempt from corporate income tax; import dutiesand sales taxes are not payable on power companies’ imports or sales; repatriation of equity and dividends isallowed; there are no local ownership requirements; there is foreign exchange risk insurance available from thestate bank.

• Model agreements. Model Implementation Agreements (IA), Power Purchase Agreements (PPA) and Fuel Sup-ply Agreements (FSA) were prepared.

• Government support arrangements. The government guarantees the payment obligations under the PPA of thestate-owned electricity utility and under the FSA of state-owned fuel supplier. Government will also covercertain political and governmental force majeure risks, provide protection against changes in certain taxes/duties, and ensure foreign exchange convertibility for the projects.

• One-window operation. A Private Power Board was set up to coordinate all interaction between government andinvestors.

The response was dramatic. Over 7,000 MW of IPP proposals were received before the government ceased issuingletters of support later in the year. Since then agreement has been reached on 3,000 MW of new capacity throughIPPs. IFC alone approved financing for five power projects between January 1995 and June 1996, and has starteddisbursement on three projects.

Table 5.3: Entry Approaches

Bidding method No. of projects

International competitive bidding 34Competitive negotiation 5Direct negotiation 17

Source: IFC.Note: Includes all projects where a concession was awarded. Thisalways occurred before IFC’s financing was put in place.


Table 5.4: Bidding Methods: Advantages and Disadvantages

Advantages Disadvantages

International competitive bidding If well structured, should be most Slow, expensive for bidders, maytransparent and lead to lowest cost. limit innovation, may still be vul-

nerable to corruption or collusion.

Competitive negotiation Some transparency. Can be struc- Some negotiation reduces transpar-tured to allow for direct competition. ency. Often requires advisers to helpAllows some innovation. set benchmarks and evaluate alter-

natives.

Direct negotiation Fast, cheaper for bidders, innovative. Lack of transparency may reducepolitical viability, may be highercost, risk of corruption.

Box 5.4: Cross-Sectoral Concession Laws Simplify Entry

Hungary, Chile, and the Philippines have enacted cross-sectoral concession laws and regulations to define entryconditions for private investors in infrastructure. The laws include:

• Clear rules on the sectors open to private participation;

• A definition of which government entity has authority to award concessions;

• Rules on the requirements for open competitive bidding; and

• Rules on the circumstances under which concessions may be modified or canceled.

Such laws may require complementary sector-specific legislation and more detailed specification of sector-specificnorms within concession contracts. But they enhance certainty for investors; reduce the scope for inconsistency,corruption and “capture” by interest groups; and signal government’s commitment to PPI.

• Negotiated entry or direct negotiation refers, for example, to the first power projects in the Philippines,Costa Rica, Guatemala. Negotiated entry has been used where knowledge is insufficient to specify terms fora competitive tender. The negotiation process has been used to learn what is required to obtain seriousprivate sector interest. It has sometimes been necessary at the start in sectors where expected private equityreturn is not obvious and the level of potential government support is unclear.

There are other reasons why some governments have used negotiated entry in early projects (see Table 5.4). Biddingis relatively slow, expensive for companies (even for small projects), and uncertain, especially in countries withouttrack records. International competitive bidding may not be a realistic option (at least for the first project) forcountries that are perceived as risky by investors, where there is no track record, which are offering small projectsfor private financing, or where there is urgency. These conditions apply to many of the countries where IFC hasfinanced projects. Negotiated bidding may result in higher returns for winning investors, but that partly reflects therisks of being first. Some countries (Philippines power) used direct negotiation for the first transaction and thencompetitive bidding for some subsequent awards. If a government decides to use direct negotiation, dealing withinternationally recognized sponsors (who have their reputations on the line) reduces the risks of projects not beingfinanced, or not performing adequately.


Legal Framework

Several countries with successful PPI programs have a clear legal framework for approval and award of concessions(see Box 5.4). They have also published detailed implementing rules that let all parties know the procedures to befollowed. Countries without a concession framework have encountered difficulties in project implementation,including bureaucratic uncertainties over which agencies have responsibility for approvals and the approval criteriato be applied.

Financing is easier to mobilize if the legal framework and concession contracts make adequate provision for thesecurity requirements of lenders. Lenders’ loan security packages often include a mortgage over a project’s land orfixed assets, the assignment of major agreements, such as the concession agreement, share pledges by the sponsor,and share retention agreements.

Foreign lenders often find it easier to finance concessions that include provision for arbitration under an internation-ally recognized set of rules and in a neutral location. For example, in a sample of seven power purchase agreements,all included provision for arbitration in countries such as Britain, Australia, France, and Singapore, under rules ofinternationally recognized bodies, such as the International Chamber of Commerce or the International Centre forthe Settlement of Investment Disputes.

Attracting Foreign Investors and Lenders

Initially, most countries have relied heavily on foreign investors and lenders to finance their PPI programs. Govern-ments may need to address several issues to stimulate interest and competition among foreign financiers:

• Foreign exchange convertibility. The mismatch between local revenues and servicing foreign debts worriesfinanciers. In the absence of general convertibility, some countries have agreed to set up offshore escrowaccounts or to guarantee foreign exchange convertibility for particular projects.

• Ownership requirements. Countries that mandate part local ownership in infrastructure enterprises mayreduce the interest of foreign investors.

• Asset security. Lenders seek to protect their interests through taking collateral security over project assets,usually in the form of a mortgage. In some countries, procedures for registering mortgages over land andfixed assets are not well established.

• Tariff subsidies and adjustment mechanisms. Subsidized tariffs are a major obstacle to foreign investors.Competitive entry based on the cost of delivered service is much more difficult if prices are artificially low.Many investors prefer sectoral price reforms to start before entry. Even if current tariffs are adequate, theymay be quickly eroded by inflation or devaluation. Automatic tariff adjustments that pass through certaincosts either wholly (for instance, fuel) or partly (for example, exchange rates) help to depoliticize thissensitive area.

• Contract enforcement and dispute settlement. Contractual undertakings form the basis of a project’s abilityto generate cash flow and service debt. It is important to investors and lenders that contracts be enforceableunder law.

• Creditworthy counterparties. Government support such as guarantees of contractual performance of state-owned utilities have been used in over half of IFC’s power generation projects. Difficulties have arisenwhere there were no mechanisms for national government support to support noncreditworthy municipalauthorities.


• Coordination. Reforms may be needed in several areas of government simultaneously; a single ministryworking on its own can only make limited progress. Some governments have set up high-level units tocoordinate policy reforms.

What should be the priority areas for reform? The answer depends on the urgency for improved service, the credibil-ity of the current economic environment, and the “deal-breaker” issues identified by investors and lenders. In somecases investor surveys and roundtables to encourage government-investor dialogue have helped to identify thecritical areas (see Box 5.5).

Specifying Government Requirements

Governments can help create popular support for private entry by specifying minimum investment levels in theconcession agreements, backed up by bonuses, penalties, and ultimately loss of the concession for failure to per-form. Such arrangements may help build political support for private entry as the public sees a concrete promise ofshorter waiting lists and better service quality (see Box 5.6).

Investors may demand temporary market protection in return—this has been common in telecoms projects, forexample. However there is some evidence that as governments become more experienced, the level of marketprotection offered is falling, as illustrated by three cellular projects in Sub-Saharan Africa:

• A cellular concession awarded by the government of Zaire in 1989 included exclusivity for a 30-year period.

• A fifteen-year concession awarded by the government of Uganda in 1993 was not exclusive, but UgandaPosts and Telecommunications Corporation agreed not to conclude another interconnection agreement for atleast two years.

• In Tanzania, a fifteen-year concession awarded by the government in 1994 was not exclusive, and a compet-ing license was issued the following year.

Box 5.5: Investor Perceptions

In Central and Eastern Europe, potential investors surveyed for the FIAS-sponsored round table in February 1996identified five main concerns:

• Discrepancies between official policies in favor of PPI and practical decisions taken during implementation.Many ministries were unwilling to concede majority foreign ownership.

• The unreliability of legal systems.

• Political instability, and its effects on tariff policies, currency stability, and convertibility.

• The lack of transparency and slow speed of project bidding and award procedures.

• Local funding constraints.

In China and Vietnam, investors attending country-specific round tables in 1994 and 1995 emphasized lack of a clearapprovals/negotiation framework, currency convertibility, and profitability limitations as their main concerns.

In several countries action has been taken to address the issues identified in the round tables. In China, for example,the government announced in early 1995 that it intended to put a new regulatory framework in place to attract foreigninvestment into the power and transport sectors. The State Planning Commission asked FIAS to advise on a draftdecree on concession projects involving foreign investors. By May 1996 regulations emanating from this work wereunder final review by the Legal Committee of the People’s Congress.


Box 5.6: Concession Requirements Stipulated by Governments

In addition to providing the company with the legal right to operate, a concession agreement often stipulates perfor-mance requirements. The concession agreement for a cellular telephone project in Hungary obligated the company toprovide nationwide coverage by 1996. Aguas Argentinas’ concession stipulates the proportion of Buenos Aires’population to be supplied with potable water and sewerage services by certain dates. In Mexico, the wastewatertreatment contract stipulates minimum effluent standards, with penalties to be imposed if these standards are not met.Power purchase agreements generally stipulate that capacity payments will not be made unless plants achieve certainlevels of capacity and plant availability.

Although such requirements may not always represent the most economically efficient option (for example, the costsof connecting a remote area may be more than those users would be prepared to pay), they are politically popular.Furthermore, the incentives for concessionaires to meet the stipulated requirements are strong. Financial penaltiesmay be imposed for nonperformance, and ultimately the government may revoke the concession. In addition manyconcessionaires have international reputations to uphold, and recognize the importance of building a long-term rela-tionship with the government.

Building Effective Regulation: Maintaining Convergence of Interests

If the interests of the government (representing consumers), sponsors, and lenders converge, then PPI projects willbe financed. Indeed, in well-structured, competitive projects the interests of government and investors converge:projects that are built on time and expand and improve service yield benefits to all parties. But what about thelonger term? It has been suggested that foreign-financed PPI projects in developing countries represent an “obso-lescing bargain”.6 The argument is that most countries prefer local ownership, especially in highly visible sectors;foreigners are only acceptable if the benefits overwhelmingly outweigh economic and political costs. While PPIprojects may deliver such benefits in the first few years, it is not clear that the benefits will still be perceived by thepublic or government in the long term. For example, infrastructure projects do not generally earn foreign exchangeor keep on introducing new technologies. Meanwhile, the “costs” of foreign ownership remain visible, in the formof tariff adjustments and dividend flows. This argument has been put forward as an explanation for the widespreadnationalization (and creeping expropriation) of foreign-owned infrastructure in Latin America and Asia during1950–1970.

This view may be too pessimistic, at least as long as governments are competing vigorously for foreign capital.Nevertheless political risks remain high in many markets. There are some approaches that foreign investors andlenders can use to reduce noncommercial risks (see Chapter 7). But government policies can also help:

• Writing detailed procedures for dealing with disputes or unforeseen events into concession agreements isuseful. For example, the power purchase agreement for a power plant in Côte d’Ivoire includes severallevels of procedure for dealing with disputes, with specified amounts of time to be spent at each level. Thisallows as much opportunity as possible for sorting out problems amicably.

• Effective regulation to encourage the development of competitive markets for the operation of infrastructureservices (for example, power pools as in Argentina) helps maintain strong incentives for efficiency gains,which in turn may influence public perceptions. Depoliticizing infrastructure regulation through indepen-dent regulators and clear rules can help.

• Promoting the development of local capital markets can help to spread ownership to the public (directlythrough public flotations, or indirectly through pension fund holdings), thereby creating broad domesticconstituencies for continued private ownership and responsible regulation.


1. These examples are taken from several Private Sector Assessments carried out by the World Bank and IFC, and the 1994World Development Report on infrastructure.

2. Unbundling by production, such as electricity generation, transmission, and distribution; by market, for instance, cellular,data transmission, international, long distance and local telephone services; and/or by region.

3. “Privatization” of existing infrastructure assets can occur in various ways: (a) full or partial sale of infrastructure assets withlong-term operating rights to provide service; (b) government retaining ownership of the underlying assets, but issuing long-term concessions for private investors to operate and invest in the service.

4. IFC does not finance management contracts or leases as they do not involve new private investment.

5. There are more shades of grey than this list implies. The complexity of most infrastructure projects means that some degreeof negotiation is used in all bidding procedures. And several countries that have used competitive bidding changed the rulesmidway through the process.

6. Wells and Gleason, “Is Foreign Infrastructure Investment Still Risky?” Harvard Business Review, October 1995.

Notes


Mobilizing Finance

Three trends are emerging in PPI financing:

• New sources. Insurance companies are starting to finance PPI projects in developingcountries. And official financing agencies, including export credit agencies, have setup programs to finance or guarantee private infrastructure projects.

• Commercial bank financing has risen in the last two to three years as more banksbecome familiar with PPI. One indicator is IFC’s expanding syndicated loan program.

• Local financing is increasing in some countries, although slowly and from a low base.In particular some sizable domestically owned infrastructure companies are begin-ning to emerge.

Two financing structure parameters identified in the 1994 IFC Infrastructure Report remainbroadly the same in this larger sample:

• An average 58:42 debt-equity ratio indicates substantial equity commitments arebeing made to attract debt. Put another way, lenders are ensuring that PPI projects arenot overleveraged.

• Two-thirds of project costs are being financed from foreign sources. Despite increasesin local financing in some countries, this ratio is not falling because IFC continues tofinance PPI projects in new countries with higher risk, where access to domesticlong-term finance is normally very limited and reliance is heavier on foreign financ-ing.

During the past two years IFC has focused on mobilizing more sources of debt by syndicatingto more banks and by bringing in nontraditional debt financiers. It has also worked with

international and domesticcofinanciers new to PPI financing,to give them enough confidence tofinance projects.

Debt-EquityStructures

The unweighted average debt-equity ratio of 58:42 for IFC’s PPIprojects (see Table 6.11 ) concealssome variations. There is moreequity in sectors facing significantmarket risk (for instance, rail-roads, toll roads) or where internal

6

Table 6.1: Debt–Equity Ratios

No. of Debt Equityprojects (%) (%)

Power generation 36 65 35Pipelines 8 65 35Telecoms 34 51 49Transport 25 53 47

All projects 115 58 42

Source: IFC.Note: Unweighted averages. Sectors with fewer than eight projectsare not shown, but are included in the total.


cash generation possibilities exist (see Box 6.1), or in both cases. Put another way: debt is easier to raise wherelenders perceive market risks as low. The “take or pay” power purchase agreements underpinning most independentpower projects have enabled them to mobilize more debt. Financial structures are defined more by project funda-mentals such as market risk than by country risk. Debt-equity structures in countries with different risk profilesshow no significant difference.

Foreign and Local Financing

On average, 67 percent of the financing in IFC’s PPI projects has come from foreign sources. Although this sampleis biased towards projects with international financing,relatively few PPI projects in developing countries havebeen financed entirely domestically. Few domesticfinancial markets yet match the cost or tenor of financingprovided by international markets.

PPI projects in countries with higher risk have moreforeign financing (Figure 6.1), probably because ofunderdeveloped financial markets. Countries are per-ceived as risky by foreign investors because of macro-economic instability (including debt arrears), or due tospecial factors such as war. Either way, domesticfinancial markets tend to be stunted.2 Five PPI projectsfinanced in Sub-Saharan Africa averaged a 89:11foreign-local split, while thirty projects in Asia averaged67 percent foreign and 33 percent local (Appendix TableA4 summarizes financing structures).

Financing Sources: Overview

Debt

The financing plans of 140 PPI projects3 costingUS$26.6 billion for which IFC has approved financing

Box 6.1: Equity Financing through Internal Cash Generation

Internal cash generation can be a significant source of financing for:

• Expansion projects undertaken by firms with existing cash flows. In a US$402 million investment plan by aprivatized electricity distribution company in Argentina, just under a fifth was financed from internal cash.

• Sectors where revenues start flowing early, and further construction can be financed partly from incrementalrevenue. Telecoms networks are the main example. The financing plan for a US$85 million cellular networkexpansion in Jordan includes a US$20 million contribution from internal sources.

Internal sources have accounted for about a quarter of the US$14 billion of “expansion” infrastructure projects fi-nanced by IFC. As more state-owned utilities are privatized it is likely that internal cash generation will become aneven more important financing source.

Figure 6.1: Risk and Local/ForeignFinancing

Source: IFC.Note: Grouped by Institutional Investor scores. Under 25=highestrisk (30 projects); 25–40=medium risk (52 projects); over 40=low-est risk (27 projects).

Highestrisk

Mediumrisk

Lowestrisk

0

20

40

60

80

100

Per

cent

72

28

69

31

56

44

% foreign % local


show that foreign commercial banks have provided a third of the US$16.1 billion of debt (see Table 6.2). Exportcredit agencies (ECA) and supplier credits accounted for a further US$3.7 billion of debt. Several ECAs have set upspecialist project financing units during the past two years, including the Japan and U.S. Eximbanks. Results havebecome evident quickly. For example, by March 1996, the U.S. Eximbank had approved US$2.7 billion of lendingto twelve projects and had a further twenty transactions worth US$4.7 billion in the pipeline. In 1995 export creditagencies from the UK, France, and the United States lent about US$800 million to the US$1.4 billion Sual powerplant in the Philippines. Other official financiers have recently also become much more active in private infrastruc-ture financing; Appendix Tables A7 and A8 list PPI projects financed by several multilateral and bilateral officialfinancing agencies during 1993–95.

A further US$2.7 billion of debt in IFC’s sample came from local commercial banks. Local mobilization dependsboth on domestic financial markets and the borrower. Domestic banks often prefer to finance companies withexisting cash flows, so utilities such as the Hungarian telecoms company or private electricity distribution compa-nies in India, have mobilized local financing. Sometimes local banks come into a project after it starts operating. Forexample, a Hungarian cellular telecoms company refinanced its IFC loan after the network had been in place forfour years.

Equity

Foreign sponsors provided a third of total equity, local sponsors a quarter, with the balance coming from internalsources (see Table 6.2). Some local sponsors are investing large sums; in five IFC projects local sponsors investedover US$100 million each. Their increasing importance reflects:

• Local firms diversifying into infrastructure as opportunities expand. Examples include the RPG group inIndia and Socma in Argentina (see Box 6.2).

• Privatization of utilities, which creates sizable locally owned firms (or part local).

• The desire of foreign sponsors to include local companies in their consortia, to reduce political risks. For

Table 6.2: Sources of Debt and Equity: IFC’s Projects

Total % of Total % ofDebt (US$bn) total Equity (US$bn) total

Foreign ForeignForeign commercial banks [1] 5.6 21 Private foreign sponsors 2.6 10Export credit agencies 2.0 7 IFC equity 0.8 3Supplier credits 1.7 7 Other multi/bilateral 0.1 0International bond [2] 0.5 2IFC loans 2.2 8 LocalOther multi/bilateral 1.3 5 Private local sponsors 2.8 10

Local publicly owned 0.0 0LocalLocal commercial banks 2.7 10 Internal cash generation 4.2 16Local publicly owned banks 0.1 0

Total debt 16.1 61 Total Equity 10.5 39

Source: IFC.Notes: [1]: Includes US$3.8 billion under IFC B-loans.[2] For the Bangkok mass transit project, but the issue had not been made by June 1996.


example, the consortium that manages the water supply concession in Buenos Aires has both local andforeign partners.

Commercial Debt: Why Is It Difficult to Mobilize?

Mobilizing an adequate volume and maturity of commercial debt is a key constraint in many PPI projects for severalreasons:

• High demand, cautious lenders. For sponsors to realize adequate equity returns, they need to mobilizesignificant volumes of debt—typically about two-thirds of the financing. Yet lenders have to be cautious.They face many of the same risks as equity investors, but without the upside potential. There are limits tohow far loan pricing can be pushed. In contrast, equity investors typically expect (although don’t necessarilyachieve) returns of at least 15–20 percent when they invest in developing countries. So lenders seek toreduce a project’s risks by negotiating the conditions under which they will participate. Many of the agree-ments associated with project financings are riskcontrol devices imposed by lenders. Lenders oftenhave the strongest say in how financing is to bestructured; how support agreements from sponsors,government agencies, and other contracting partiesare specified; and how security provisions coveringclaims on assets are set out (see Box 6.3).

• Mostly foreign, so extra hurdles. Because domesticfinancial markets cannot mobilize large volumes oflong-term debt, sponsors turn to foreign lenders. Butthis requires mitigating extra risks that the govern-ment controls, such as the availability of foreignexchange.

• Provisioning requirements. Scarred by the 1980sdebt crisis, commercial banks are now required byregulations in most OECD countries to makespecific country provisions for loans to certaindeveloping countries.

Box 6.2: An Infrastructure Conglomerate in Argentina

Through three subholding companies, Argentina’s Socma group invests in infrastructure, environmental services,telecommunications, and food. Following Argentina’s infrastructure privatizations, the companies have embarkedon investment programs totaling over US$700 million, including construction and operation of a toll road, gas distri-bution, and water supply. IFC invested US$15 million in one of Socma’s companies and provided the group with aUS$25 million loan. Construction of a major toll road that the group is managing has been completed.

Following the onset of the regional Mercosur trade agreement in 1995, the group is also considering expanding itsinfrastructure operations to other markets. This type of investment—from firms in one developing country to an-other—is increasing. For example, the consortium that purchased a 51 percent stake in Edesur, an electricity distribu-tion company in Buenos Aires, included three Chilean energy companies.

Box 6.3: Loan Security Packages

Lenders look first to the adequacy of a project’scash flow to service the loan, including under ad-verse scenarios. Loan security packages providea second line of defence. Typical elements in-clude:

• Mortgage on land/fixed assets

• Pledge of shares by the sponsor

• Share retention agreement

• Assignment of major agreements for con-cession and fuel supply

• Assignment of insurance proceeds

• Financial covenants


• A limited pool. Fewer than fifty banks worldwide have a strong tradition of project financing in developingcountries—although more have entered the market recently. Each bank has exposure limits to clients,sectors, and countries. And organizing syndications of lenders is time consuming and complex.

• Time profile of deposits. Commercial banks cannot prudently lend large volumes of long-term debt: thelongest international commercial bank loans are typically seven to twelve years. Yet many infrastructureprojects require long-term financing if the tariffs to service the debt are not to be prohibitive. Institutionalsources with long-term depositors, such as pension funds and life assurance companies, provide a bettermaturity—but are only now starting to lend in developing countries. These institutions have become majorfinanciers of PPI projects in some OECD countries. In the United States, for example, major insurersdeveloped their project financing capability in the market for independent power projects that emerged inthe 1980s.

• Restrictions on potential nonbank local lenders. Pension funds and insurance companies exist in manydeveloping countries and potentially represent a large source of PPI financing. Yet this potential is not beingmet. Many are publicly owned monopolies and are poorly managed. Many countries also require pensionfunds and insurers to invest mostly in government securities.

But there is a silver lining. While lenders’ requirements add to the time and complexity of arranging finance, the riskcontrols they impose often improve the chances of project success. These benefits show up in projects that are notoverleveraged, in realistic sponsor and government support agreements, in minimum cost overruns and in specifiedperformance standards upon project completion. These outcomes occur where investors have their own capital atrisk, where returns are linked to performance, and where contractual undertakings provide incentives. IFC’sexperience indicates that a combination of risk finance and performance-linked contracts provides the best chance ofachieving success with PPI projects.

Box 6.4: IFC’s Syndicated Loan Program

Most commercial lenders look for some risk cover when taking new long-term exposure to developing countries.IFC’s syndicated loans (the B-loan program) is one form of cover. Under a B-loan structure IFC becomes the solelender of record to the project, acting on behalf of both itself and participating banks. IFC is responsible for process-ing disbursements by participants, and for subsequent collection and distribution of loan payments received from theborrower. This structure offers several advantages to participating banks:

• Likely access to foreign exchange: While there are no guarantees of access to foreign exchange for debt service,no IFC loan, including the portion funded by participants, has ever been included in the general rescheduling ofa borrowing country’s foreign debt.

• A strong historical performance record: Despite investing in sometimes difficult country environments, IFC’sprojects have demonstrated a strong repayment record, with very few loan write-offs.

• Regulatory benefits: Partly on the basis of this record, bank regulators in most OECD countries exempt B-loanparticipants from country-risk provisioning requirements.

B-loan participation is not open to official lenders (including export financing agencies and official providers ofpolitical risk insurance) nor is it available to domestic lenders. Project loans from these sources are arranged on acofinancing basis.


Debt Mobilizationthrough IFC–SyndicatedLoans

IFC’s syndicated loan program (see Box6.4) to PPI projects began to take off infiscal 1992. Between fiscal years 1992 and1995, US$963 million of loans weresigned for twenty-five projects, with afurther US$691 million signed for elevenprojects in fiscal 1996 (see Table 6.3).

Over 100 financial institutions (nearly, but not quite all, commercial banks) from twenty-six countries have beeninvolved to date. Appendix Table A3 lists syndicated loans by the year in which they were signed.

The main participants have been from Europe (see Table 6.4). Several transactions have been supported by globalbanks such as BNP, HSBC, UBS, and ABN–AMRO. ING Bank of the Netherlands has been particularly active,lending US$185 million to thirteen projects. Some syndications have also been made to banks based in developingcountries, such as the Czech Republic, Jordan, Korea, and the Philippines.

Several syndications have served as path breakers (see Box 6.5). Two syndications to Aguas Argentina (the conces-sionaire providing water and sewerage services in Buenos Aires) were the largest to a private borrower in the countryin recent years: US$135m in November 1994 and US$173m in March 1996. In addition, one of the syndicationsrepresented the first time that a Japanese bank had lent to an Argentinian firm on a long-term basis since the 1980sdebt crisis. And a thirty-two-bank, US$300m syndication under preparation to an Indonesian telecoms project isexpected to be one of the largest to a private borrower in that country.

New Lenders: Insurance Companies

Several nonbank financial institutions, such as GE Capital and Transamerica Leasing, have recently participated forthe first time in IFC’s PPI syndicated loans. Since July 1995, however, a new breakthrough has been achieved, withseveral syndications of PPI projects to insurance companies. The large volumes of capital and long tenors offered byinsurers make this an important precedent.

• Sual power, Philippines. A US$40m loan with a sixteen-year tenor (an IFC B-loan record) was provided byPrudential Power to a nonrated greenfield project (see Box 6.6).

• Aguas Argentinas, waterdistribution, Argentina. IFC closed aloan with two insurers taking US$35mof exposure in twelve-year fixed-rateloans.

• Transconor, gas distribution,Argentina. The twelve-year, US$215million syndication signed in July1996 included fourteen U.S. insurancecompanies—the largest number todate.

Table 6.3: PPI Syndications Signed, FY92–FY96

1992 1993 1994 1995 1996

No. of projects 4 4 8 9 11Amount (US$m) 172 90 326 375 691Avg term (years) 7.0 7.5 7.2 7.4 8.6

Source: IFC.

Table 6.4: The Largest Syndications Participants

Country US$m Organization US$m

France 312 ING Bank (Netherlands) 185Netherlands 276 Société Générale (France) 74Germany 157 Swiss Bank (Switzerland) 73Switzerland 118 Crédit Lyonnais (France) 56United States 101 BNP (France) 55

Source: IFC.


Debt Cofinancing

About half of the debt in IFC’s projects comes from cofinanciers: official lenders, such as export credit agencies,multilateral and bilateral development institutions, domestic lenders, and foreign commercial lenders who partici-pate outside the B-loan program (Box 6.7 shows an example). Cofinanciers have played a larger role in IFC’s Asianprojects (accounting for over three-quarters of all debt) than in Latin America, where over half of the debt has comefrom IFC’s lending and syndications, on average.

In several cases other official lenders have indicated that they would not support a project without IFC participation.This was the case with the participation of the Japan Exim bank in one of Pakistan’s first private power projects,AES Lal Pir. The project reached financial closure quickly (just seven months after the main sponsor formallyagreed to develop the project), with the Japan Exim bank providing an untied guarantee for up to 95 percent of thecommercial loans (the first untied guarantee ever to a BOO power project).

Box 6.5: A Record Syndication in Eastern Europe: Hungary Telecoms

In September 1995 IFC, EBRD, and Deutsche Bank jointly arranged a US$300m syndicated corporate loan to theHungarian Telecommunications Company (Matav). This will help finance Matav’s US$900 million 1995–96 invest-ment program. The financing package includes: (a) ten-year US$50m loans from both IFC and EBRD; (b) eight-yearloans totaling US$100m syndicated by IFC and EBRD; and (c) US$100m of parallel five-year loans provided di-rectly by commercial banks to Matav.

At the time the package represented the largest syndicated bank financing in Eastern Europe. A total of thirty-fivecommercial banks from ten countries took part in the syndication, including one from the Czech Republic. Thefacility was structured so as to enable Matav to continue to access the medium-term market without the umbrella ofmultilateral organizations, while encouraging commercial banks to extend the average maturity of their loans throughparticipations in the EBRD and IFC B-loans.

Box 6.6: U.S. Insurers Entering the International Market: Prudential

When America’s energy generation market was liberalized to allow entry to independent power producers in theearly 1980s, major insurance companies started financing power projects. Now they are starting to extend theiractivities to developing countries. Regulatory changes have helped: U.S. insurance companies can now invest up to20 percent of their assets in markets outside the United States and Canada, up from 6 percent a few years ago.

Prudential Insurance illustrates the trend. By 1995 it had lent US$4.5 billion to over 100 U.S.–based private powerprojects. Most of this was nonrecourse debt, provided both to greenfield projects and as take-out financing afterconstruction. As growth in the U.S. market has slowed, Prudential has looked overseas. It expects to have 10–15percent of its portfolio in non–U.S. markets within a few years, spread across several countries. Prudential looks forseveral aspects when considering a deal:

• A cooperative alliance with a multilateral agency such as IFC, to reduce risks.

• Strong track record of sponsors.

• Good economics: the project must make sense for the country as well as investors.

• A legal environment where contracts are enforceable.


Domestic Debt

Local banks are providing some loans to PPI projects. Indeed, in IFC’s PPI projects, local banks have contributed tofifty-five projects in twenty-one countries, accounting for just over 20 percent of total project debt. Much of this hasbeen concentrated in corporate loans to local utilities, such as private electricity companies in India and the priva-tized telecoms companies in Chile and Hungary. There are also examples of local banks providing financing to newprojects (see Box 6.8) In many cases the local banks were financing their first PPI project and so relied on IFC formuch of the necessary diligence. In the first Costa Rica independent power project, for example, IFC helped bringin a local bank, Banex. And IFC helped four local banks to lend US$15 million to the first independent powerproject in Oman.

Much still needs to be done, however, to enable more local debt to reach PPI projects. But the problems are notinfrastructure-specific. Long-term debt does not exist in many countries because: macroeconomic instabilitydissuades savers from holding domestic long-term financial assets; government ownership/regulation of financialinstitutions distorts financial markets; fiscal deficits crowd out private investment; and inadequate legal frameworksmake lending risky. Countries such as Malaysia and Chile have shown what policy reform can achieve:

Box 6.7: Debt Sources for a Nepalese Power Project

At 34 kWh per year Nepal has one of the world’s lowest per capita electricity consumption rates (India 300 kWh,China 580 kWh). Only 10 percent of the population has access to electricity. Nevertheless, rapid demand growth inrecent years has led to load shedding. In 1992 the Nepalese Parliament enacted legislation that allowed privateparties to build, own, and operate hydro power projects. In June 1994, IFC’s Board approved financing for the firstprivate project, a 60 MW run-of-the-river plant.

Financing closed in February 1996, after detailed negotiations over tariff levels. The US$140 million cost is financedpartly with US$99 million of debt. IFC is providing a US$28 million senior loan and a US$3 million subordinatedloan. The Asian Development Bank is lending US$31 million of senior debt and US$3 million of subordinated debt.The Norwegian aid agency, NORAD, is making a US$5 million loan and guaranteeing most of a US$29 million loanfrom Norway’s export credit bank. This project is the first time that NORAD has provided financing for a projectwithout requesting a government counter-guarantee. The Nordic Development Fund is also investing in the project—US$3 million in an income participation note. This is the first time that it has invested in a private project.

The successful negotiations on this project set a precedent: in June 1996, IFC’s Board approved financing for asecond hydro project.

Box 6.8: A Port in Panama

In December 1993 Panama’s Legislative Assembly approved a twenty-year concession for the country’s first privatecontainer port. IFC provided a US$25 million loan to the US$111 million project, and syndicated a furtherUS$35 million, including over US$20 million to two nonbank financial institutions: GE Capital and TransamericaLeasing. IFC’s presence also gave enough comfort for a syndicate of Panamanian banks to lend US$10 million to theproject, a first in Panama.

The terminal started operating in July 1994 with barge and roll-on/roll-off services. Container operations beganshortly thereafter in November 1994. By early 1996 market response had proven so strong that the sponsors wereproposing a further expansion of capacity, to be financed from internally generated cash.


• A stable macroeconomic framework, with low inflation and low fiscal deficits encourages private savings tobe used for private investment.

• Creating contractual savings vehicles—pension funds and insurance companies—helps to mobilize long-term domestic savings.

• Private infrastructure projects can serve as suitable assets for those contractual savings vehicles to hold.

In several countries IFC has helped to promote domestic savings mobilization through setting up pension fundmanagement companies and insurance companies (see Box 6.9).

Bond Issues

A few of the private infrastructure companies that IFC has financed have tapped international bond markets,although IFC has only been involved as an underwriter in one deal (a US$207 million revenue bond in 1992 for aMexican toll road that was already in operation). Some companies have approached IFC for financing, but laterdecided to use the bond markets (for instance, Telecom Argentina launched a US$500m seven year bond in 1993,and the M1/M15 toll road in Hungary was partly financed by a local bond issue underwritten by EBRD).

Although a few greenfield projects in developing countries have tapped international bond markets, bond financinghas mostly been available only to large projects with strong sponsor and government support arrangements (oftenpast the construction stage) in countries with an adequate sovereign rating. An unusual4 bond issue for a 185 MWbarge-mounted power plant in the Dominican Republic is an exception. In July 1994, IFC’s Board approved IFC andsyndicated loans totaling US$82.5 million towards the US$204 million project (the largest syndication for a privateproject in the country). In February 1996 the project’s sponsors, Smith-Enron, issued a ten-and-a-half-year,US$50 million bond guaranteed by the U.S. Maritime Administration (MARAD). This was the first time thatMARAD had financed a developing country project. The features that enabled the bond financing to close included:

• Security on the barges, which could be towed away in the event of a default.

• Confidence arising from the presence of official lenders (IFC, CDC, and DEG), strong sponsor support, andinternationally renowned equipment suppliers.

• Good economics: in 1995 the plant was the lowest cost independent power generator in the country, averag-ing 6.4 cents/kWh.

Box 6.9: Pension Fund Managers in Peru and Argentina

In December 1992 Peru approved a new private pension system modeled on that of Chile. It offered workers avoluntary option to opt out of the state-run pension system into a privately managed contribution-determined system.In September 1993, IFC invested US$0.7 million for a 7 percent share in one of the new pension managementcompanies. Two years later this company, Horizonte, had over 250,000 contributors, nearly a quarter of the 1.1 mil-lion subscribers to the new system. Horizonte had achieved a real annual return of 8.3 percent and had US$130 millionunder management. The overall system is well established, with over US$500 million under management and con-tinuing growth in the number of contributors.

In July 1994 Argentina instituted an integrated pension system that combines state provision with a new privatesystem. By late 1995 about four million people had subscribed to the new private system. Total funds under manage-ment had reached US$2.2 billion. After financing a feasibility study, IFC invested in one of the leading privatepension managers, Maxima. By 2004 Maxima expects to be managing nearly US$5 billion in pension funds.


Private Equity Funds

Most equity for PPI projects has come from primary sponsors, cosponsors (for instance, suppliers, financialinstitutions), and internal cash generation. Nevertheless, several private equity funds have been set up to investspecifically in infrastructure projects. And several other funds have been set up to focus on a country or region withan expectation of investing in some PPI projects. Private equity funds enable institutional investors, such as pensionfunds, to invest in PPI projects while retaining the benefits of risk diversification and professional fund manage-ment.

The funds have raised large sums from investors; approaching US$1.5 billion just for those in which IFC hasinvested. The only performance indicator available so far for the funds is their rate of investment, which has variedconsiderably (it will be another two to five years before the performance of returns is known). Some funds haveinvested rapidly and have raised further monies from investors. Other funds have invested more slowly thanoriginally envisaged. Three factors have affected investment rates:

• The pace of government privatization and reform, which determines the size of the potential investmentpipeline.

• Competition from other financiers. Some lenders demand equity as part of their price for supplying long-term debt, thus squeezing out opportunities for private equity funds. Fund managers have sometimes foundthemselves at a disadvantage where sponsors are seeking to finance a project with as few financing sourcesas possible, to reduce complexity, time, and costs.

• Fund manager experience and investor connections. Fund managers who bring good industry contacts—tocomplement financial contacts—are important (see Box 6.10). Experienced managers have proven able toadapt to external changes. For example, the Central European Telecoms Fund was originally expected toinvest heavily in local telephone concessions in Hungary. The concession winners demanded very highpremiums for outside equity investors, however, so the fund focused on developing local telecoms opportu-nities in Poland and the region.

International Portfolio Equity

Because private investment banks have generally been willing to underwrite international equity issues by infra-structure companies, IFC has restricted its underwriting work in the sector to pathbreaking projects. An ADR issue

Box 6.10: The Asia Infrastructure Fund

In 1994, IFC invested US$50 million in the Asian Infrastructure Fund (AIF), one of the first funds established totarget Asian infrastructure. IFC helped to structure AIF and define its investment policies and exposure guidelines.IFC’s presence as an initial investor and its shareholding in the fund’s manager increased AIF’s marketability, help-ing it to mobilize US$500 million from major institutional investors at its first closing. By end–1995 eleven invest-ments totaling US$538 million had been approved in power, transportation, and telecommunications projects inChina, the Philippines, Indonesia, and India. Investors were impressed: a further US$280 million was raised in early1996.

AIF’s success in mobilizing capital and closing deals is attributable both to the contacts of its sponsor group and itsmanagers’ business strategy. Priority has been given to projects with quality sponsors, to building businesses ratherthan investing in discrete projects, to involving local partners, developing projects from the earliest stages, and usingthe political confidence conferred by the participation of IFC and ADB in the fund.


in 1990 for CTC, the Chilean telephone company, was the first Latin American issue since the 1960s. And, theIndian power utility, Tata Electric Companies, was the first private company in the Indian power sector to accessinternational capital markets through a US$75 million GDR issue in February 1994, which IFC lead managed withGoldman Sachs.

However, the picture is broader. Access to portfolio equity for all issuers in developing countries has improvedsubstantially as local stock markets have opened up to international portfolio funds. IFC has invested in over thirtysuch funds between 1986 and 1995 and has played a major role in promoting them.5 The relatively large size andhigh profile of infrastructure companies means that their shares are often relatively liquid and attractive to portfoliofund managers. For example, the first foreign portfolio fund targeted at African markets, the Africa EmergingMarkets Fund, had by end-1995 invested in an electricity distribution company in Kenya, Air Mauritius, and twocompanies with interests in developing the port in Mauritius.

Mobilizing Local Portfolio Equity

The improvements in stock market size and liquidity that can arise from flotations of large infrastructure companiesare increasingly well recognized. Yet most flotations in developing countries have so far been confined to uppermiddle income countries, or telecoms companies, or both. One recent exception is the sale in early 1996 of KenyaAirways, which included an offering on the local market (see Box 6.11).

Very few greenfield PPI projects have included a public offering as part of their financing plan. One example amongIFC’s projects is an independent power project (IPP) in Oman—actually the first IPP in the Arab Gulf region. TheUnited Power Company was established in 1994 to construct a 90 MW power plant and 186 kilometers of transmis-sion lines to nearby towns. In late 1994 the company offered 40 percent of its capital on the Oman Securities Marketin a US$30 million issue. The issue was oversubscribed by about 10 percent and the allocation was made such thatsmall shareholders received their full bids. Other local financiers also contributed to the US$222 million financingpackage: local sponsors contributed US$16 million of equity and local banks lent US$15 million.

Box 6.11: Privatizing Kenya Airways

In the early 1990s Kenya Airways was saddled with debt after years of losses. As the situation approached crisispoint, the government decided to take drastic action and replaced the entire board, giving it a mandate to privatize theairline. Over the next three years the board restructured the airline’s operations, management and labor force. It thenapproached IFC to cement these changes through privatization.

The government wished to achieve a politically acceptable ownership pattern, balancing the benefits of a foreignstrategic partner against the desire to have local majority ownership. This was a business imperative as well: bilateralroute rights depend on the airline being owned substantially by Kenyans. IFC identified a divestiture policy to meetthese objectives. In January 1996 a 26 percent stake was sold to a strategic partner, the Royal Dutch Airline KLM.

Kenya Airways’ shares were then listed on the Nairobi stock exchanges, in an offering that was substantially over-subscribed. Kenyan institutions and individuals acquired 34 percent of the shares, international investors 14 percent(in addition to KLM’s 26 percent), airline employees enrolled in a special program to purchase 3 percent and thegovernment of Kenya retained 23 percent. The privatization involved the largest public offering on the Nairobi StockExchange and was the second largest privatization to date in Sub-Saharan Africa. Kenya Airways now has moreshareholders than any other company in the country—the domestic offering was eventually taken up by 113,000different shareholders, of whom 78,000 received the minimum shareholding of around US$200. Many Kenya Air-ways’ employees also subscribed to the offering, independently of their special program.


Table 6.5: PPI StimulatesForeign Direct Investment

Cumulative FDI1990–94

(US$ per capita)

Hungary 671Estonia 295Czech Republic 289Slovenia 178Latvia 92Slovak Republic 84Lithuania 46Poland 40Croatia 38Albania 38Romania 26Bulgaria 22

Source: IFC.

Accessing International Capital andDomestic Market Development

Private financing of infrastructure, access to international capitalmarkets, and the development of domestic financial markets oftenoccur in parallel. Infrastructure companies are often among thelargest firms in a country. Their high profile and relatively stablecash flows make them attractive to local and foreign lenders andinvestors. If they are publicly traded their securities are usuallyamong the most liquid on the domestic market. Infrastructureprivatization offers opportunities to the local population to partici-pate in the domestic stock market. Figure 6.2 shows that theincreasing size of stock markets in developing countries in recentyears has been paralleled with a quadrupling in the share ofinfrastructure stocks on those markets, from under 5 percent in1989 to just under 20 percent by 1995. Infrastructure privatizationhas clearly played an important role in the expansion of thesemarkets.

The large size of PPI projects and their high political profile meansthat they can serve as “credibility markers” for foreign investors.For example, Hungary has received by far the highest foreign direct

investment per capita in Central and Eastern Europe partly because of its broadly-based program of infrastructureprivatization6 (see Table 6.5). PPI-related projects account for a high share of the largest foreign investments in thecountry to date. Furthermore the figures in Table 6.5 exclude privatizations of electricity and gas companies made in1995, as well as a further sell-down of the government’s share of the telecommunications company.

Figure 6.2: Infrastructure Stocks in Emerging Markets

Source: Emerging Markets Database, IFC.

1989 1990 1991 1992 1993 1994 19950

500

1,000

1,500

2,000

Tot

al c

apita

lizat

ion

(US

$bi

llion

s)

Total capitalization (US$bn)

0

5

10

15

20

25

Infr

astr

uctu

re s

tock

s as

% o

f to

tal

cap

% infrastructure stocks


Notes

Appendix Table A12 shows some indicators relating to access to international capital and stock market developmentfor ten developing countries that have promoted PPI in recent years. Despite considerable differences betweencountries and changes from year to year, it is apparent that countries enjoy increasing access to internationalfinancial markets and a developing local stock market. PPI is not solely responsible for these changes, but it isclearly contributing.

1. The weighted average was similar: 61:39. The number of projects for which debt-equity ratios were calculated is slightlybelow IFC’s total, because transactions such as rights issues were excluded.

2. The association between low income countries and lower shares of local financing is weaker than the high country-risk—low local-financing correlation. This suggests that low-income countries maintaining macroeconomic stability are likely tohave better developed financial sectors and to be able to raise some local financing for private infrastructure projects.

3. Excludes infrastructure funds, approvals for rights issues, and other nonproject approvals.

4. Because MARAD is a U.S. government agency, the project did not access private capital markets. Nevertheless, it was thefirst time that MARAD had financed a developing country project.

5. See "Investment Funds in Emerging Markets," IFC's Lessons of Experience Series, No. 2 (September 1996).

6. Hungary FDI per capita figures are high for other reasons, such as its privatization strategy, which focused on the sale ofstrategic stakes to investors. Other countries that have done this, such as Estonia, also have high FDI per capita. But PPIdrove Hungary’s FDI figures up significantly further.


Managing Project Risks

Efficient risk allocation and mitigation are central to bringing infrastructure projects tofinancial closure and to providing appropriate incentives during construction and operation.Efficient risk allocation occurs where risks are assumed by the party best able to managethem. Projects may still be financeable if some risks are not allocated according to thisprinciple, but costs—and ultimately tariffs—will be higher. Sponsors and lenders expecthigher rewards for assuming higher risks.

Mobilizing debt is particularly sensitive to having adequate risk management mechanisms inplace. With at-risk debt supplying over half of project costs, achieving financial closure canbe stalled if the risk management needs of lenders are not met. Critical areas for lendersinclude market risk, noncommercial risks, insurance arrangements, force majeure provisions,and sponsor and government support arrangements.

Project financing has hitherto been a fairly specialized field. For PPI to continue spreadingrapidly, more government officials, investors, and lenders will need to become familiar withthe risk mitigation and management techniques used by project financiers. Although more PPIprojects are being financed (even in difficult country environments), there are still manyproject proposals and awarded concessions that have not been financed. While some projectsmay not be viable, others are experiencing delays because the relevant players are inexperi-enced in structuring risks to create financeable projects. This chapter reviews project riskmanagement techniques used in PPI projects financed by IFC. Given the importance of debtmobilization, the discussion focuses on risk management from a lender’s perspective.

Lenders Face Three Risk Phases

Lenders judge the need for risk management in line with their level of exposure to a project.Three separate phases of risk are usually identified (see Figure 7.1):

• Construction. The project company draws down the majority of the loan to financeconstruction activity, equipment purchase, and other preoperating costs. This phasecan last several years, depending on the size of the project.

• Project start-up. During this phase equipment is tested, raw material inputs areordered, project staffing is completed, and marketing starts. Loan exposure may riseslightly during this phase due to working capital requirements and final payments tocontractors and equipment suppliers. Initial sales from project start-up enable loanpayoff to commence. This phase usually lasts around six months.

• Operation. Risk exposure declines as the loan is repaid. The length of this phase andthe rate at which exposure declines depends on the repayment terms of the loanagreement. The average term of IFC loans to infrastructure projects has been justunder eleven years, made up of an average grace period of three years and a repay-ment term of eight years.

7


The level of exposure faced by lenders does not necessarily correspond directly to the risks involved. Specificstrategies are adopted at each stage of the project’s life either to reduce the likelihood of adverse events or to layrisks off to parties best positioned to manage them.

Lenders view each risk in consideration of threats to either the project’s cash flow or its security arrangements. Theprinciples of project risk management are the same for infrastructure as for other projects, although infrastructurepresents some additional difficulties. Box 7.1 lists some project risks and risk management arrangements. Althoughthe list looks formidable, lenders focus on two key issues:

• Predictability of cash flows. Projects facing severe market, nonpayment, or regulatory risks need carefulstructuring.

• Track record. How credible and experienced are the main players: the project’s sponsors and suppliers, thepurchasers of the project’s services, and the government regulating the environment in which the project isoperating?

Several of the risks described in Box 7.1 may be judged as severe for many PPI projects. Noncreditworthy state-owned suppliers or off-takers are common, the regulatory environment is weak or evolving in most infrastructuresectors in most developing countries, and foreign exchange issues crop up in many projects. The response oflenders in turn depends on their appetite for risk, appraisal capacity, experience, and existing exposure profiles.

• Institutional investors have a lower appetite for risk than commercial banks. They prefer PPI projects withexisting cash flows and strong sponsors in countries with convertible currencies. They may rely partly onrating agencies for appraisal and may prefer participation from official financing agencies such as IFC tohelp mitigate political risks.

• Commercial banks have more appetite for risk, but may vary widely in their appraisal and lending capaci-ties.

• Official financing agencies may have more lending capacity and appetite for risk (reflecting their man-dates), but appraisal capacities and risk-pricing strategies are evolving.

Figure 7.1: Project Risk Phases

Loan

exp

osur

e ($

)

Time

Engineering & construction

phase

Start-up phase

Operationsphase


Box 7.1: Risk Management in Project Finance

Risk to lender Risk mitigation arrangements

Project Performance Prefer strong, experienced sponsors with significant equity stake.• High cost of service Competitive entry. Concession agreement stipulating costs and service quality stan-

dards, backed up with penalties. Comparison with other similar projects.• Sponsors sell out Share Retention Agreement to tie original sponsors to the project.

Project Completion Seek sponsor support until physical and financial completion certified.• Delays Construction/equipment supply contracts. Specify performance obligations with pen-

alty clauses. Trade-offs between international and local contractors.• Cost overruns Project Funds Agreement with main sponsors. Include contingency and escalation

amounts in original cost estimates.• Site availability Land Use Agreement

Technology Prefer tried and tested technologies.• Nonperformance Performance bond/guarantee from equipment suppliers on quantity and quality. Op-

eration agreement linking operating performance to compensation

Fuel/other inputs• Fuel Supply contracts specifying quantity, quality, and pricing. Match term of supply con-

tract to term of off-take commitment. “Pass through” fuel price changes. Consideralternative supply arrangements and on-site storage.

• Skilled labor Training provided by equipment suppliers and technical advisers

Market risk Undertake independent market assessment. Off-take contract specifying minimumquantities and prices (take or pay arrangements). Conservative financing structure.

Payment risk Sell output where possible to creditworthy buyers. If buyer not creditworthy, considercredit enhancements such as (a) government guarantees of contractual performance (ifbuyer is state-owned); (b) direct assignment of part of the buyer’s revenue stream; (c)escrow account covering several months debt service.

Financial• Debt service coverage Financial Support Agreement until D-E ratio reduced to safe level. Use ‘worst case’ to

set up-front D-E ratio. Escrow accounts with debt service reserve.• Security Mortgages and negative pledges on project assets. Assignment of concession agree-

ment and other relevant agreements. Share pledges.• On-going compliance Staged disbursements. Disbursement conditions and loan covenants.

Accident/Loss Insurance policies and force majeure provisions

Country Environment Risks lower where governments have adopted a clear policy framework for privateentry, and where broader sectoral reforms have started.

• Expropriation IFC accepts this risk (otherwise political risk insurance)• Regulatory interference Contractual arrangements—but some risk will remain.• Concession revoked Transparent initial award process. Some local ownership. Buyout clause.• Legal framework Change in law risk assumed by government. Contract arbitration in neutral location

under rules of international body (for instance, ICC)• Environmental approval Independent assessment. Agree on guidelines, monitoring, and reporting; include in

loan covenants.• Foreign exchange Agreement with central bank for forex availability. Offshore escrow account. Tariff

adjustment mechanisms to maintain foreign exchange equivalent value of tariff. In-crease share of local financing.


Construction and Completion Risk

Private lenders will not generally accept construction or completion risk. Instead they look to strong, experiencedsponsors for support arrangements and contractors to whom the risks can be laid off. For example, in the JamaicaOld Harbour Diesel power project a turnkey construction contract between the project company and Wartsila Dieselincludes a fixed-price, date-certain contract with guaranteed output, and fuel and lube oil consumption. WartsilaDiesel will be liable for liquidated damages should the project fail to meet the completion schedule or guaranteedperformance. In addition, the project company is providing completion support.

Sponsors deal with completion risk by:

• Using fixed-price, date-certain turnkey construction contracts containing provisions for liquidated damagesif the contractor fails to perform (and bonuses for better than expected performance).

• Taking out business start up and other commercial insurances.

• Building a contingency amount into the financing plan.

• Building in excess capacity to create headroom to meet contracted output levels in the event of technicaldifficulties.

• Maintaining standby credit facilities.

If a member of the sponsor group is also a supplier to the project there may be a potential conflict of interest. Thiswill be reduced if the project’s regulatory framework defines tariffs directly, rather than in relation to a rate of returnon investment (in which case there might be an incentive to increase investment costs). Lenders can also mitigatethe risk by:

• Undertaking independent reviews of contracts between the project company and the supplier to ensure thatthey are “arms-length” and broadly competitive.

• Requiring the project company to sign fixed-price, date-certain construction contracts, with penalties fornonperformance.

• Requiring sponsors to retain their ownership of the project company through the operational stage.

Operational Risk

The main operational risk is that the asset does not operate efficiently. Concession agreements often link paymentsto required performance levels, such as minimum power plant availability, new telephone or water connections, tollroad/bridge capacity or fault repair times. For example, the power purchase agreement for a power plant in Omanstipulates that project will have to pay penalties if the plant does not meet a 95 percent availability level during peakseason and 90 percent annually. Lenders generally require project companies to cover operational risk throughagreements with equipment and input suppliers, maintenance agreements, and business interruption insurance (suchas for fuel supply agreements to a power generator). Where the technical skills needed to ensure efficient operationreside with the lead sponsor, lenders may require a minimum ownership agreement. Governments have the sameinterest. For example, the terms of the Buenos Aires water concession require the designated technical operator tomaintain at least a 25 percent share in the consortium. In addition the consortium was required to post aUS$150 million performance bond as a guarantee of its operational obligations


Operational risk may arisethrough delays or failurecaused by other parties.Where the party responsiblefor the connection is agovernment agency, theobligations of that agency andremedial actions in the eventof failure to perform, may beset out in the concessionagreement. For example in thePhilippines Pagbilao powerproject startup was delayed bysix months due to the inabilityof the state utility to makegrid connections on time. Theissue was resolved in anegotiated settlement betweenthe project sponsor and theutility.

Because some operational riskis unavoidable, lenders seek toprotect their position throughloan covenants designed toensure that the borrowermanages the project in afinancially responsiblemanner (see Box 7.2).

Market Risk

Projects operating in unregulated competitive markets (for instance, some cellular operators) face market size risk,price risk, and payment risk (see Table 7.1). At the other extreme, power plants with take-or-pay contracts from asingle buyer face payment risk. Market risk is affected by market structure and buyer creditworthiness. Lenders useseveral strategies to reduce their exposure to market risk:

• Independent appraisals. When assessing cellular projects, for example, IFC examines how cellular marketshave evolved in other similar countries, and uses conservative assumptions for overall market size andmarket share of the project company. Also, market assessments may need to be extended to infrastructurethat links to the project. In a rail project, for example, IFC did not foresee that difficulties in turnaroundtimes in a port at the end of the railroad might affect the traffic on the line. A port expert might have sug-gested a complementary investment in warehousing facilities, to expand the railroad’s market share.

• Limiting debt exposure. Debt-equity ratios are lower for transport projects (averaging 53:47 in twenty-fiveprojects) than for many independent power projects (averaging 65:35 for thirty-six projects) because theyface greater market risk.

• Sponsor guarantees. Lenders may request partial sponsor support to service the debt until the project iscertified as physically and financially complete (limited recourse financing) or full sponsor guarantees

Box 7.2: Loan Covenants

IFC requires borrowers to sign agreements that govern the use of project fundsand the assumption of new liabilities during the loan’s term. Loan covenantshelp protect the ability of the project to service its debt out of cash flow. Theyinclude:

• Minimum debt service coverage ratio (DSCR)• No cash dividends if current ratio falls below a certain amount• Capital expenditure not to exceed a given amount per year• No additional long-term debt if long-term debt-to-equity ratio exceeds a

certain amount• Short-term debt not to exceed a fixed percentage of receivables and in-

ventories• No guarantees in excess of a certain amount

DSCRs measure a project’s debt service obligations relative to its cash flow,and indicate whether it can service its debt. Projected DSCRs at IFC loanapproval have been:

Projected Projected Projectedavg. DSCR avg. DSCR lowest

in year 1 in year 2 DSCR

Power generation 2.2 1.8 1.4Telecoms 2.9 2.8 1.5

Overall average 2.6 2.3 1.5

In all sectors, debt service coverage falls after the initial years as principalrepayments commence after grace periods end.


(corporate financing). In an Argentine railroad where revenues fell below expectations due to stiff competi-tion from road haulers, full sponsor guarantees have ensured continued debt service.

• Escrow accounts. These enable debt servicing to continue in the face of a temporary fall in revenues. A six-month debt reserve account was established for a wastewater treatment plant in Mexico; this proved usefulafter the peso devaluation reduced the foreign exchange equivalent of the plant’s revenues. A debt reserveaccount for a power plant in Côte d’Ivoire goes further: it is offshore and denominated in foreign exchange.

• Standby letters of credit. Issued by the purchaser in favor of the project, these serve the same purpose as adebt reserve account. In a Honduran power plant the power purchaser issued a US$4 million standby letterof credit to the project.

• Government guarantees of contractual performance. Where payment risk is due to a noncreditworthy state-owned entity, sponsors and lenders may request government guarantees of the entity’s payment obligationsunder contracts signed with the project (see Box 7.3).

Table 7.1: Market Risks

Market Structure Risk type Infrastructure examples

Single buyer, take-or-pay agreement Payment risk Power generation, gas pipelineSingle buyer, no take-or-pay agreement Demand risk Power generation in open competition

Payment risk Power transmissionMany buyers, no competitors Demand risk Water, power distribution

Payment risk Monopoly telecoms, port, bridgeMany buyers, and competitors Demand risk Competitive power, telecoms, port, road

Payment risk

Box 7.3: Government Performance Guarantees to Independent Power Projects

All but two of the independent power projects financed by IFC to July 1996 have been underpinned by long-termpower purchase agreements (the exceptions being a plant in Chile and another in the Czech Republic). In over 80percent of these projects the power off-taker is a state-owned utility. Government performance guarantees of thestate-owned utility’s contractual payment obligations have been provided in the majority of these projects. Investorsand lenders have sought the guarantees under two interlinked circumstances:

• Where the state-owned utility was perceived not to be sufficiently creditworthy.

• Where the tariffs charged by the state-owned utility are set by government agencies, rather than by independentregulatory bodies.

The payment obligations of a state-owned utility purchaser typically include: (a) capacity and energy payments; (b)buyout in the event of termination due to a political force majeure event of a payment default by the state-ownedutility; and, (c) damages, under certain circumstances.

No government performance guarantees have been issued where the buyer is a private utility. And power purchaseagreements with private utilities do not generally have buyout clauses.

Government performance guarantees are a transitional device. They enable new investments to proceed while buy-ing the government time to implement the measures that will obviate their need: tariff reform, utility privatization,and independent regulation.


• Governments sometimes bundle an existing asset into a concession to give lenders more confidence. Forexample, in 1995, IFC’s Board approved financing for a toll road in Argentina comprising: (a) the improve-ment of the existing 16 km Ricchieri Highway which connects Buenos Aires to the international airport; (b)construction of a new 31 km road, the Ezeiza-Canuelas Highway; and (c) their operation. Combining agreenfield and existing toll road allows the company to collect revenues during construction—thus givinglenders more comfort about debt service. The existing road has enjoyed high levels of untolled traffic in thepast thus providing some confidence in traffic projections.

Noncommercial Risks

Most PPI projects are heavily exposed to noncommercial and political risks, at both the country and project level.Noncommercial risks arise where investors and lenders have concerns about the stability and consistency of thegovernment’s economic and political policies that could affect the prospective investment. While some risks, such asexpropriation or convertibility risk, apply to many projects financed by foreign investors others, such as paymentrisk or regulatory risk, are more infrastructure-specific (see Box 7.4).

Box 7.4: Noncommercial Risks

Risks applying to most projects sponsored by foreign investors

• Convertibility/transfer. The risk that earnings generated in local currency can not be converted into foreignexchange in a timely manner and transferred abroad to meet debt service obligations and pay dividends.

• Legal framework. The risk that contracts and other undertakings may not be enforceable, that legal provisionsfor loan security may not be in place, and that effective dispute settlement procedures may not be adhered to orexist.

• War and civil disturbance. The risk that the project will be affected by politically motivated acts of war or civildisturbance.

• Expropriation. The risk that government may expropriate the assets of the company without due compensation.“Creeping” expropriation—a series of acts over time which have an expropriatory effect—is a variation.

Risks faced by PPI projects due to the close involvement of government agencies

• Payment risk. The risk that a government-owned utility may not pay for project outputs.

• Performance risk. For example, the risk that a government agency fails to deliver fuel to a power project or failsto acquire land as per a concession agreement. Negotiating inter-connection agreements with state-owned op-erators is a major issue in telecoms projects.

• Tariff risk. The risk that tariffs will not be adjusted in accordance with a pre-agreed formula in a contract, or byregulators.

• Subsidized competition risk. The risk that private infrastructure operators will not be allowed to compete onequal terms with government-owned utilities.

• Permit risk. The risk that, for example, environmental or safety permits will be withheld.

• Change of concession risk. The risk that government breaks a concession arrangement and insists on renegotia-tion of terms.


Project sponsors or lenders cannot remove these risks entirely. But several mechanisms have been used to mitigatethem:

• Contractual provisions. Specifying “automatic” formulas in contracts or regulatory regimes for adjustingtariffs in the face of inflation or devaluation (or defining tariffs in foreign exchange terms) may help todepoliticize tariff adjustments. For example, Hungary uses a price cap tariff adjustment regime for regulat-ing telecoms tariffs. Subject to government approval, tariffs can be increased twice a year by the change inthe Producer Price Index, with a six-month lag. In addition, tariffs can be increased if the Forint is devaluedfaster than the change in the PPI, with the following formula: if the difference is under 5 percent then noadjustment is allowed; if over 5 percent then tariffs may be increased by two-thirds of the difference. Whilethis may provide considerable assurance, it is no panacea: governments may still decide to ignore contrac-tual agreements. Specifying buyout clauses, including damages if the government defaults, partly addressesthis concern.

• Focusing on lower-risk projects. Projects that generate foreign exchange revenues (for instance, ports,airports, international telecoms) mitigate convertibility risk. Projects that supply services for which there isdemonstrable excess demand (for example, power plants where there are blackouts, early cellular projects)are likely to be lower risk. Most of the projects that IFC has financed in risky countries have fallen intothese categories. Projects that sell their services into “wholesale” markets (for example, power plants sell todistributors, ports to shippers) are less likely to be subject to political interference than those which supplyretail customers.

• Innovative structuring. Several power projects are located on barges that can be towed away if necessary.

• Partnering with local investors (or the government). Developing a project in partnership with a localinvestor may reduce political risks for a foreign investor. Some project sponsors have taken this further, anddeliberately sought to spread local ownership more widely through partial public offerings (for example, inOman and Pakistan). Some institutional investors follow a similar strategy: for example, the managers of theAsia Infrastructure Fund target investments where foreign investors are aligning themselves with localfirms.

• Involving official financing institutions. Different types of official financing institutions offer various typesof security to project sponsors, as well as some costs, such as bureaucratic processing procedures. Someinstitutions (including IFC) offer assurance by their presence as investors and lenders, their track record ofgood project performance, and not having been included by host governments in debt reschedulings.Agencies such as the Overseas Private Investment Corporation (OPIC) or the Multilateral InvestmentGuarantee Agency (MIGA) (see Box 7.5) provide political risk insurance for financiers. The World Bank’sguarantee scheme, which involves a counter-guarantee from the host government, provides assurance tolenders on specific risks such as the contractual performance of state-owned enterprises. In mid–1996, IFC’sBoard approved the first project to blend a World Bank guarantee and IFC financing—the Uch powerproject in Pakistan (see Box 9.2 in Chapter 9).

• Careful identification of force majeure events (and procedures to be followed in their event) and comprehen-sive insurance arrangements.

Force Majeure

Force majeure provisions define the events that are beyond the control of either party, and their occurrence giveseither party the right to suspend obligations under the contract. Force majeure events usually fall under two groups:


Box 7.5: Insuring Political Risks with MIGA

MIGA’s political risk guarantees (insurance) to private infrastructure companies have expanded sharply in recentyears. As well as offering lenders and investors coverage against four specific political risks (currency transfer,expropriation, war/civil disturbance, and breach of contract), MIGA’s multilateral status means that its participationin a project enhances confidence that the investor’s rights will be respected.

By June 1996, MIGA–insured private infrastructure projects had facilitated over US$3 billion in foreign investmentsin Argentina, Chile, China, the Czech Republic, Honduras, Indonesia, Jamaica, Pakistan, the Philippines, and Uganda.Most of this activity has occurred in the last two years. In 1995 and 1996, for example, MIGA issued guarantees forseveral equity and debt participants in the first and second privately financed power plants in Jamaica. The secondproject, a 74 MW barge-mounted diesel plant at Old Harbour, was also financed by IFC. Construction was completedin nine months and the plant is producing power.

MIGA’s private infrastructure insurance seems likely to expand further: in March 1996 the agency had 300 applica-tions for guarantees in over sixty developing countries, equivalent to about 30 percent of its total applications.

• Domestic political events, such as war, riot, sabotage, radioactive contamination, general strikes, lapses ofconsent, and changes in laws that affect the project.

• Nonpolitical events or “acts of God,” such as natural disasters, fire, epidemics, or strikes.

Sometimes a third category of political events occurring outside the country is also considered (for instance, strikesin a supplier country preventing delivery of equipment on time).

Lenders aim to ensure that all risks have been identified, analyzed, and allocated. This is not an exact science, andgovernments, lenders, and project sponsors often negotiate extensively over force majeure provisions, even if itmeans amending a signed power purchase or fuel supply agreement. In some cases a lender may determine that theproject sponsor’s risk exposure might best be handled through improved insurance. Such caution may be appropri-ate where the right to suspension under force majeure occurs only if the affected party could not reasonably haveforeseen the adverse events when the agreement was signed or could not reasonably have avoided the events.Provisions such as this make a thorough insurance review an integral part of force majeure negotiation.

Insurance Arrangements

Lenders have a well-defined set of requirements for insurance arrangements (see Appendix Box A1). In IFC’sexperience, projects have been able to incorporate most of the “desirable” features required by lenders. But somedifficulties have arisen (see also Box 7.6):

• Contractor-controlled insurances. In two cases where the contractor arranged the construction insurances,ensuring that lenders’ requirements were met involved lengthy negotiations with contractors whose primaryconcern was additional costs. Eventually, the insurance arrangements were amended, but at the expense ofconsiderable time and effort. In addition, Delay in Start Up insurances cost more than they would have hadthe owner made the arrangements.

• Market capacity constraints. For some risks the cost of available capacity is escalating as the size ofprojects increases. Insurance capacity for risks such as earthquake, volcanic eruption, and typhoon dependon project location, its existing risk profile, and underwriters’ exposure in the country or region.


Box 7.6: Insurance Disputes

Damage to equipment or machinery during transit to a project site does occur, and in most instances insurance claimsare settled with little undue impact on project implementation. In the case of the Hopewell Navotas power project inthe Philippines, however, the insurance claim for typhoon damage to turbines during shipping resulted in a disputethat was resolved only after a period of two years. The dispute could have led to a serious delay in project commis-sioning had the sponsors not covered the losses out of their own pocket.

While IFC requires sponsors to take adequate insurance coverage, there is no additional requirement to providebridging funds in the event of a drawn-out insurance dispute. Where an insurance payout delay does occur, a sponsorwho is committed to the project will be more likely to take necessary steps to ensure project implementation. This isone reason IFC places considerable reliance on its assessment of the sponsor.

• Changes in the insurance market. International underwriters have either withdrawn or are reducing cover inseveral areas. For example, take-or-pay obligations are not being insured, and insurers have argued thatprincipal repayments should be excluded from debt service cover because they can be rescheduled.

• Technology risks. Where underwriters consider technology to be untested, no insurance is provided duringthe crucial testing period. The solution is for the manufacturer to be contractually bound to cover whatwould otherwise be uninsurable.

• Local legal requirements. Although most countries expressly prohibit the placing of insurances directlyoutside the country, arrangements whereby local insurers effectively “front” internationally reinsuredprograms are usually permitted, with the local insurer retaining a small percentage. Difficulties sometimesarise when local insurers seek to retain more than the level with which lenders are comfortable.

• Costs. Weighing lenders’ requirements against sponsors’ desire to contain costs is an ongoing issue. Delay instart-up insurances in particular attract high premiums, and sponsors try to contain costs by keeping indem-nity periods low and deductibles high.

Experience has shown that if insurance issues are discussed early with sponsors, coverage is usually more compre-hensive. Sponsors are encouraged to retain the services of professional brokers or consultants, and lenders usuallyrequire certification of the adequacy of insurance arrangements by an independent insurance adviser. In somecountries insurance markets have looked to IFC and other lenders to increase the awareness of, and need for, themore sophisticated insurance products, which insurance buyers would not otherwise use.


Environmental Management

Today there is greater awareness by governments, multilateral agencies, nongovernmentalorganizations (NGOs), and the general public that economic development and environmentalsustainability are inseparable. In turn, private firms in both industrial and developingcountries increasingly view environment as a business concern affecting products, markets,technologies and long-term sustainability.

The long-term viability of private infrastructure projects is closely linked to environmentalquality. The issue for project sponsors is not simply to comply with environmental standards,but rather to develop a deliberate strategy linking long-term profitability to sound environ-mental management. Lenders such as IFC encourage sponsors to deal with environmentalissues in PPI projects in the same way as other factors affecting business viability: asopportunities for adding value to the investments. Projects in which IFC invests must meethigh environmental standards. From a business perspective, this provides:

• Lender and sponsor comfort: PPI sponsors that abide by environmental guidelinesand demonstrate how to manage environmental risks are more attractive to investorsand lenders.

• Demonstration effects: Companies competing for PPI projects are likely to emulatesuccessful projects where good environmental management resulted in improvedefficiency, lower risks, increased access to and lower cost of funds, and greaterprofitability.

IFC’s broad approach to environmental management encompasses eco-efficiency, wasteminimization, social issues, avoidance of contamination, health and safety measures, andmaintenance of good relations with local communities. IFC also assists private investors inproviding solutions to local environmental challenges—clean water supplies, wastewatertreatment, and waste management. IFC also plays a proactive role in catalyzing privateinvestments in renewable energy projects and alternative energy technologies that areenvironmentally more benign. For this, IFC uses its own resources and funds from theGlobal Environment Facility administered by the World Bank.

Disclosure and Consultation

IFC has carefully established procedures to guide its operations and address environmentalmatters. In 1994, after consulting staff, shareholders, clients, and NGOs, IFC implemented arevised environmental review procedure that clearly defines the roles and responsibilities ofstaff and project sponsors, and strengthens requirements for public disclosure of environ-mental information about proposed projects (see Box 8.1).

Sponsors of category A projects must consult with local groups and interested parties duringthe preparation of the environmental assessment, which is subsequently released to the

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public. Local laws and customs affect the forum used for the consultation process as well as the method used ofnotifying local groups of the availability of environmental information. These methods have included newspaperannouncements, public hearings, and direct contact. Consultation techniques include official review committeesestablished by local regulatory requirements, social acceptance surveys, and meetings with village elders. Meetingswith elders are common in areas where local communities are primarily illiterate.

In the Philippines, for example, social acceptance surveys in the affected community are mandatory during prepara-tion of the environmental impact statement, and formed the basis for public hearings on the Sual Thermal powerplant. In another case, during planning for construction of a toll highway in Argentina, meetings were held with localofficials and NGOs, and a sample survey of the families to be relocated was conducted to determine the socialimpact of the resettlement. At IFC’s suggestion, an NGO was created in cooperation with the municipality tofacilitate relocation of families, and to act as an intermediary between affected families and local and nationalauthorities.

Project sponsors often recognize that extensive consultation can help build support among local residents andemployees. The winner of a concession to provide water and sewage services to the city of Limeria in Brazil has todate conducted eleven public meetings with residents to solicit feedback. At the same time the company has built aclassroom to train its workers in personal health and safety and to enable them to install and maintain safety equip-ment. As part of their public consultation process, the sponsors of a small run-of-the-river 36 MW hydro project inNepal conducted a detailed household survey of every dwelling in the project area. This was followed with twopublic meetings to ensure that local people were fully involved. The population in the project area is low, and fewfamilies will need to be relocated (with compensation in cash or land, as preferred). Mitigation measures identifiedhave been incorporated into the construction contract.

Box 8.1: IFC Environmental Disclosure

Environmental disclosure requirements were incorporated into a general disclosure policy adopted by IFC in 1994.The policy aims to balance the private sector’s need for confidentiality with the public’s right to know about issuesaffecting it and involving the use of public funds. Under the policy a “Summary of Project Information” (SPI)document is prepared for all IFC projects. The summary includes the environmental category of the proposed invest-ment, an overview of environmental issues, and possible mitigation measures. These summaries are issued throughthe World Bank’s Public Information Center at least thirty days prior to project consideration by the IFC Board.Projects are classified according to their potential environmental impacts:

• Category A. Projects with potentially diverse and significant impacts due to causes such as emissions, hazards,ecological disturbances, significant land use or habitat modifications, or relocation of people. In fiscal 1995, sixof IFC’s infrastructure approvals fell into this category: four power projects, a toll road, and a mass transitsystem. These projects require a detailed environmental assessment with significant public consultation carriedout by the project sponsor. IFC’s environmental staff visit all category A sites and review the assessment prior toits release to the World Bank’s Public Information Center. The Environmental Assessment is issued at least sixtydays before Board consideration.

• Category B. Projects that have a limited number of environmental impacts for which there are performancestandards, guidelines, or design criteria to mitigate impacts. An Environmental Review Summary focuses onkey issues identified by IFC, sponsors, or local authorities, and the measures to address them. In fiscal 1995,sixteen of IFC’s infrastructure approvals were category B, including power, port, airport, water supply, andtelecommunications projects. The Environmental Review Summary is issued at least thirty days prior to Boardconsideration.

• Category C. Projects that normally do not result in an environmental impact and thus do not require an environ-mental review. An example is B-loan increases to previously approved PPI projects (three in fiscal 1995).


World Bank and Host Country Environmental Requirements

IFC adheres to the World Bank’s policies and guidelines regarding environmental, health, and safety matters. TheBank’s Environmental and Occupational Health and Safety guidelines address specific matters, such as liquideffluents, air emissions, and worker safety concerns. Operations and facilities in which IFC invests must alsocomply with national and local environmental and health safety laws and regulations.

World Bank guidelines apply to IFC’s investments in all countries. In countries where local laws and regulations(and their enforcement) are not yet well developed, the use of World Bank standards can provide countries withguidance in their efforts to improve environmental laws. This in turn helps to establish more consistent standards tobe met by project developers. In some countries where IFC invests, local laws and regulations are well developed.After conducting an environmental, health, and safety audit of US West’s joint venture cellular telecoms operation inHungary, consultants from the U.S.-based parent company rated the company’s standards very highly, using interna-tional comparators.

Sometimes a lack of understanding by project sponsorswill contribute to procedural delays. Most IFC sponsorsare aware of environmental management issues, oftenthrough business experience in the industrializedcountries. However, IFC has rejected a number of projectproposals in which sponsors from industrialized coun-tries have sought financing for projects with lowerenvironmental standards than would be required of themat home. This does not always prevent these investmentsfrom going ahead, but growing awareness amongcommercial lenders of potential legal hazards makes itmore difficult to finance environmentally unsoundprojects.

Adjusting to environmental requirements may also bedifficult for some businesses based in developingcountries who seek to move into private infrastructurefor the first time. Few businesses in developing countrieshave direct experience with the often demandingenvironmental requirements of infrastructure projects,and additional time is sometimes needed to work towardscost efficient environmental solutions. While improvedunderstanding of environmental issues and opportunitiesis occurring gradually among local business groups,difficulties still arise when local sponsors fail to assessthe importance of addressing environmental issues earlyduring the project development stage in order to maxi-mize eco-efficiency and minimize costs.

Adherence to environmental standards is not withoutcost, even though the initial effort and expenditureinvolved may be small compared with the benefits overthe project’s life span. An important issue for sponsors isto find cost efficient ways of meeting environmentalrequirements, not only in the selection of technology butalso in dealing with social issues (see Box 8.2).

Box 8.2: Addressing Social Issues

Many project sponsors exercise corporate respon-sibility in developing programs that will benefitcommunities. The Khimti Khola project is a 60MW run-of-the-river (no reservoir) hydropowerproject in central Nepal. The project will bringelectricity to a large number of people in the re-gion, provide a community-based utility with long-term use of a 500-kilowatt minihydro plant de-signed to provide power during construction, andmake initial funds available for rural electrifica-tion. The project sponsors have also been involvedin a community program that should help to raisethe living standards of the local population.

Sponsors consulted with local communities andestablished an environmental program to providethem with the skills to gain sustainable benefitsfrom the project. A nonformal education program,consisting of a series of fourteen-month courses,has been scheduled over a five- to six-year pe-riod. The first seven-month course focuses on lit-eracy and numeracy and the follow-up course isdesigned to develop practical skills. As of 1996,over 200 people had completed the fourteen-month program.

The project established women’s community-based cooperatives to help develop small enter-prises. Eight community forest user groups andtwo nurseries have also been created, where27,000 seedlings have been developed, more than20,000 of which have been planted in the com-munity forest. The community school has beenrelocated, improved, and expanded, and anotherhas been built for power plant workers’ and somelocal children.


Some aspects of environmental management are becoming relatively straightforward. In many projects (particularlyunder IFC’s category B), the preparation of an environmental analysis can be undertaken in around three months.Preparation of environmental assessments for category A projects may require more time due to the need forbaseline data collection, the number of potential impacts to be assessed, and the need to define a project specificenvironmental management plan.

The time taken for regulatory assessments, including public hearings to review environmental (including social)concerns, varies depending on the circumstances of the project. Major power stations that involve installation ofprimary fuel loading facilities, transmission line construction, emission discharge, and displacement of indigenouspeople will—in virtually all cases—require lengthy regulatory proceedings and public hearings. Similarly, road orrail projects located in densely populated urban areas will also require extensive proceedings simply because of thenumber of people directly and indirectly affected.

Legal Documentation and Supervision

IFC builds legal covenants on environmental performance into loan agreements signed with the project sponsor.Concession agreements signed between the project company and the government may also contain explicit environ-mental requirements. In the Philippines, where IFC has approved four power projects, energy conversion agree-ments signed between private power developers and the National Power Corporation incorporate (a) a scheduledetailing the information to be included in the environmental assessment; (b) warranties that bind the developer toconstruct, operate and maintain the facility “in accordance with internationally accepted environmental standardsadopted in the Philippines;” and, (c) general conditions that refer explicitly to an “Environmental ComplianceCertificate for the Power Station.”

The terms of the thirty-year concession to supply water and sewerage services to a city in Brazil include detailedspecifications to improve service coverage and quality, including targets for expanding water distribution andsewage collection by specific dates; building reservoirs and treatment plants; reducing unaccounted for water from36–25 percent and upgrading water quality to Brazilian and World Bank standards. The concession specifies indetail the penalties that will be imposed on the concessionaire if these targets are not achieved.

IFC has developed a strategy to improve the supervision of projects under implementation. Measures include moresite visits to ensure compliance with the World Bank’s environmental guidelines and policies; assessments of thevalue and quality of advice given to sponsors on environmental issues during project development and appraisal;advice to project sponsors on measures to improve performance in these areas during implementation; and identifi-cation of the need for any additional assistance from the Corporation.

Transferring Good Environmental Practice

In the past, many private firms tended to perceive environmental requirements as costs that reduce profitability.During the 1990s, this perception has gradually shifted towards viewing environmental management as an effi-ciency measure. IFC has had a positive experience with many project sponsors who understand that sound environ-mental management makes good business sense. This link is strongest where the sponsor has a clear long termcommitment to the project and envisages doing more than one project in the country.

In one Pakistani project undertaken by AES at Lal Pir, the sponsors took the initiative to introduce a carbon offsetprogram in which a given area of trees will be planted for every ton of carbon dioxide produced by the power plant.In Sual, Philippines, the project sponsor proposed an alternative project site to one chosen by the national utilitybecause there were (a) fewer people requiring resettlement; (b) less impact on the view from nearby communities;and, (c) access to deeper water, requiring no dredging.


Some companies also recognize that the additional costs of environmental controls need not necessarily be a burden.Where there is an opportunity to build more than one power plant at a given site, for instance, companies may findthat environmental control saves money. For example, the unit cost of air emission controls can be reduced bylocating several power plants at the one site. The reduction in emissions from each plant creates air-quality head-room for additional plants, with substantial cost savings compared with installing plants at separate locations (seeBox 8.3).

Infrastructure’s Link to Social and Public Policy Issues

Through more transparent disclosure and consultation policies and better understanding of environmental guidelines,IFC, project sponsors, local communities, and governments are better able to anticipate social and environmentalissues surrounding infrastructure projects. Not only are participants better able to mitigate the negative effects ofprojects but, in several cases, they directly or indirectly improve local social, environmental, and economic situa-tions.

One example of improved social conditions can befound in Aguas Argentinas’ management and operationof greater Buenos Aires’ water and sewage system wherebenefits did not stop at improved water quality andbetter service. Connections were made to poorerneighborhoods for the first time which, in turn, helpedspur social services in these areas such as schools andhealth clinics. Similar improvements in service areoccurring in electricity distribution in the city, where theintroduction of proper pricing and billing of power hasenabled the number of connections to be expanded (seeBox 8.4).

IFC policies require that sponsors make adequateprovision for resettlement costs as part of projectdevelopment. The aim is to ensure that adequatecompensation is paid to inhabitants of the project siteand that they are no worse off as a result of resettlement.One difficulty for some project sponsors is in distin-

Box 8.3: A Positive Business Approach

In Pakistan, approximately 49 percent of electric power is generated by coal, oil, or gas-powered thermal powerplants. Scrubbers and other air pollution control devices have not been standard equipment. Pak Gen, a 337 MW oil-fired power plant, developed by the AES Corporation of the United States, will be the first oil-fired plant to beequipped with scrubbers, which significantly reduce sulfur dioxide emissions. Pak Gen will be located next to theexisting Lal Pir plant, also owned by AES, in central Pakistan. Lal Pir complies with World Bank environmental,health, and safety guidelines, as well as those of Pakistan.

Although the emission levels of Pak Gen and Lal Pir would each individually comply with World Bank emissionguidelines, one of the major environmental concerns in the development of Pak Gen was the cumulative effect of thetwo plants on air quality. Under certain conditions, emissions from the two plants could potentially have exceededthe World Bank’s allowable emissions for SO

2. To ensure that this situation will not occur, AES Pak Gen will be

equipped with a scrubber.

Box 8.4: Utility Privatization Leadsto Demand-Side Efficiency

In 1994, IFC approved an investment in Edenor,the newly privatized power distribution companyserving the northern half of Buenos Aires. Oneimportant issue addressed in the project’s envi-ronmental review was the increased efficiency ofconsumption through proper pricing of electric-ity. Because of clandestine connections, faultymeters, and subsidies on electricity, many Bue-nos Aires residents paid for none or only part ofthe energy consumed. It is estimated that whenthe full cost of electricity is billed to them, theirconsumption will decline by 40 percent. As of May1995, Edenor was progressing according to plan,with 73,000 clandestine connections legally con-nected in 1994.


guishing between indigenous inhabitants of the project site and people who move in on the expectation of a compen-sation payment. In some projects the number of “inhabitants” in the project area has increased more than tenfoldsince IFC interest became public. In one project proposal, trucks began unloading bricks and timber for constructionof dwellings within days of an inspection visit by IFC. Project sponsors may also have difficulty assessing whoseconcerns to respond to in cases of resettlement and local disturbance. There have been situations where traditionalinhabitants have presented one view, new arrivals another view, government officials a differing view, and NGOssomething different again. Reconciling these different claims presents sponsors with a significant challenge, and onewhere a dialogue among all groups is essential to reach an acceptable solution.

Future Directions

The infrastructure sector presents significant environmental challenges and opportunities for private firms asdemand increases throughout the developing world. Environmental issues are, potentially, among the most contro-versial and sensitive issues considered in investment decisions, and particularly so in infrastructure projects. Theincreasing transparency of the project review process has heightened awareness of the issues involved. IFC iscommitted to situating itself at the leading edge in resolving these issues by creating and implementing innovativesolutions for the private sector.

IFC will continue to emphasize to sponsors the value of considering environmental issues and opportunities veryearly in project design. And IFC will increase its emphasis on addressing the social dimensions of projects. Onefocus of IFC’s future work will be to identify more commercially viable renewable energy projects. IFC has alreadyfinanced several hydro projects and a biomass project (see Box 8.5), and is currently considering several windenergy, small hydro, biomass cogeneration, and geothermal plants in different regions.

IFC is also evaluating creation of a Renewable Energy and Energy Efficiency Fund. The fund would be designed toinvest in smaller grid-connected renewable energy projects (less than 50 MW) as well as off-grid or mini-gridprojects in remote or rural areas. A feasibility study for the fund, with support from several of IFC’s principalshareholders, indicates that favorable market conditions appear to exist for this type of initiative. IFC is alsoexploring with organizations such as the World Business Council for Sustainable Development and private investorsthe scope for investments in carbon offset pilot projects that mitigate greenhouse gas emissions.

Box 8.5: Financing Renewable Energy in Guatemala

In January 1996 IFC’s Board approved financing for a 70MW expansion of two bagasse-based cogeneration plants inGuatemala. The plants are owned by sugar processors, but they sell part of their capacity to a power distributionutility. IFC helped the gestation of the project by:

• Financing a feasibility study covering both technical and financial issues.

• Suggesting changes to the power purchase agreement to make it more financeable.

• Helping the companies to design an environmental upgrade program to control particulate emissions during thepart of the year when bagasse is used as a fuel, and SO

2 emissions during the remaining part of the year.

A 24 MW geothermal power plant in Guatemala is currently under consideration for IFC financing. The US$66million project is being developed with an Israeli geothermal equipment manufacturer. The electricity generated bythe project will be sold to the national electricity utility under a twenty-five-year power supply agreement. It will beGuatemala’s first geothermal power plant, opening the way for further development of the country’s substantialgeothermal resources. It will also be IFC’s first investment in geothermal power.


Conclusions and FutureDirections

Recent Lessons

Private participation in infrastructure is here to stay. As more developing countries havestarted to open up their infrastructure sectors to private financiers, the policy debate hasevolved from “whether to” to “how to.” However implementation has not been easy oruniformly successful. The uneven pace and geographical distribution of private entry toinfrastructure reflects different levels of political commitment and investor perceptions ofcountry risk.

IFC has advised governments on divesting infrastructure assets, worked with investors tostructure successful projects, and helped mobilize commercial finance in environmentsperceived to be risky. The Corporation’s infrastructure project approvals have encompassed awidening range of countries and subsectors. IFC’s experience suggests that private participa-tion brings with it efficiencies in construction and operation. The majority of projects in itsportfolio have been completed at or under budget, with minimal time overruns. They have alsobegun to demonstrate operating efficiencies in terms of improved delivery and cost of services.And, although it is early yet, financial performance has been satisfactory. Two key lessonsarise from IFC’s experience:

• Successful transactions help policies to evolve. By giving policymakers, investors, andfinanciers experience, and through building domestic constituencies for furtherchange, successful transactions encourage further sectoral liberalization. Thesedemonstration effects are being strengthened as time reveals the efficiencies inconstruction and operation yielded by private investors and increased competition. Inmany countries there has been both a “widening” of private participation, withpioneering private projects being followed by further projects in the same countries,and a “deepening” of privatization of existing assets.

• With political commitment, private infrastructure projects can be financed even inrelatively difficult environments, or when per capita incomes are low, provided thatthey are properly structured to match rewards to risks. The special “comfort” roleplayed by multilateral agencies such as IFC is largest in such environments; by sharingsome of the political risks, they can help lower financing costs.

These positive results need to be viewed in context. Although the infrastructure projectsfinanced by IFC have generally performed well to date, most are still in early stages ofoperation. Furthermore, in some countries negotiations on potential projects have dragged onfor years without financial closure. A key issue in the progress of many projects has been theallocation and management of risks between governments and private investors. Experiencehas proven that a transparent policy framework is important in achieving financial closure.And, as experience has increased, the time taken to bring projects to financial closure has

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generally fallen. Individual projects have faced significant delays, however, particularly in countries relatively newto private participation.

The unavailability of debt remains a significant constraint in many private infrastructure projects. Given the size offinancing needs for these projects, particularly in relation to the size and maturity of financial sectors in emergingeconomies, foreign lenders play a critical role. Commercial lenders are concerned particularly by the noncommercialrisks that feature prominently in many private infrastructure projects. Thus achieving financial closure dependssignificantly on the ability of governments to introduce stable regulatory regimes and contractual arrangements thatmitigate these risks enough to make them fair to all parties.

The process of private entry into infrastructure can most usefully be viewed as a transition path. Although wide-ranging policy reforms are often necessary to provide for sustainable private entry, political constraints can preventthese from being implemented quickly. At the same time, developing countries facing severe power shortages or portcongestion cannot afford the costs of delay. How can governments make progress? IFC’s experience suggests that animportant priority should be to close one or two initial transactions successfully. This builds experience among allparties and starts the dynamic of developing constituencies for more far-reaching reform. Achieving financialclosure requires a focus on measures to mitigate and share noncommercial risks through the use of appropriatecontractual arrangements. Initial options in the framing of concession arrangements and entry conditions (forexample, competitive bidding versus negotiated entry) may be limited but are likely to widen once the first fewprojects have been implemented. Once the process gathers momentum, and policy reforms take root, governmentscan focus on increasing the competitive structure of the sector, so as to put private participation on a more sustain-able basis.

IFC has helped projects achieve financial closure by mobilizing commercial debt, by syndicating to banks throughits B-loan program, and by bringing in nontraditional debt financiers. In addition, IFC has supported several privateequity funds set up to invest in infrastructure projects. Its syndicated loans to infrastructure projects have increasedsignificantly since 1992, both in terms of financing volume and numbers of participant financial institutions.Participant lenders have taken comfort both from IFC’s presence to help mitigate noncommercial risk and its abilityto ensure sound project structures incorporating appropriate risk-management strategies. A key element of this is toensure an allocation of commercial and noncommercial risks between the contractual parties that is consideredreasonable by all.

Environmental requirements are not an insurmountable hurdle to private investment. Companies have learned tomanage environmental risks in the same way as other business risks. Additionally, recent experience has prompted ashift in perception to viewing environmental management as a sound efficiency measure.

The Future

Several trends identified here seem likely to continue for several years: private infrastructure financing in morecountries and sectors, more privatization of existing assets, and more sources of financing becoming available. Butmore fundamental changes are likely, particularly in the countries that have liberalized and privatized the furthest.Many of the projects financed today reflect the transitional state of partly reformed infrastructure sectors. Whenreforms are complete, it is likely that future investments will be quite different from those of today. Three maintrends seem likely to develop further:

Stronger competition within infrastructure markets. This has happened already in markets for telecoms and transpor-tation services, and is quickly spreading to other sectors, such as power. Privatization and unbundling of nationalpower utilities mean that the days of the single power purchaser or the single power price are numbered. In somecountries regulators are fostering competition by loosening restrictions on the right to buy and sell power. Forexample, in Argentina at privatization, customers using over 5 MW were free to choose suppliers; now the limit is


only 100 kW. Competition is being spurred partly by technological changes, but more importantly by new ap-proaches to regulation.

What will competition mean? Although there is no single model for how a competitive market for infrastructure willwork, there are probably some common features that these markets will share (see Box 9.1). First, there will be aclear separation of the roles of regulator and operator. Second, project sponsors will increasingly be those willing totake both implementation and market risk, rather than those who merely manage implementation risk. Third,governments that expose investors to market risks will come under pressure to reform markets that supply suchprojects, such as state-owned fuel supply monopolies, for example. And fourth, local investors are likely to play alarger role in investments than at present. After all, they are in the best position to know what is needed in theircountries to do business over the long term.

• More projects will be at the subnational level where local or provincial agencies are the proposed contract-ing parties. This presents some important challenges. If the privatization of transport, water, and wastesectors is to accelerate, it will depend on the creditworthiness of municipal and provincial governments.Ultimately this requires the reform of local finances. In the meantime, there may be some scope to designcredit enhancement and risk sharing packages in the more attractive projects and regions.

• Domestic savings are likely to play a bigger role in financing private infrastructure projects. The develop-ment of domestic capabilities to manage, participate in, and finance private infrastructure projects isimportant to broaden the constituency of PPI, enlarge the pool of funding, and mitigate foreign exchangerisk. In industrialized countries, and increasingly in the more mature reformed developing countries, one ofthe largest sources of financing for investment is the utility’s own cash flow. But additional funding willhave to come from the domestic capital markets. This will require a strong macroeconomic framework, anda solid financial infrastructure, as well as attractive investment opportunities.

Box 9.1: Taking Market Risk: A Czech Power Plant

When investors have enough confidence in a country and the policy framework they will bear significant amounts ofrisk, including foreign exchange risk and market risk, in a power generation project. In July 1996 IFC’s Boardapproved financing for what is expected to be the first majority private power plant in Eastern Europe. The EnergyCenter Kladno Generating project involves the environmental upgrading and expansion of a 28MW district heatingplant into a 332MW cogeneration plant that will sell electricity to a local steel mill and the local grid, and hot waterto the city of Kladno.

The plant will sell electricity and steam first to a steel mill at the prevailing national industrial tariff. There is nopower purchase agreement (PPA) for this output, making this partly a “merchant” plant. In effect the sponsors aretaking the risk that the (only partly privatized) national electricity utility, CEZ, will maintain industrial tariffs atunsubsidized levels. This risk is mitigated by several years of consistent tariff increases by CEZ; and a large environ-mental upgrading program that will require CEZ to borrow extensively from private financiers, thus pressuring it tomaintain what is the best nonsovereign credit rating in Eastern Europe.

Capacity not likely to be required by the steel company will be committed annually to the local distribution gridunder a twenty-year power purchase agreement at a price slightly below what the distributor pays CEZ for power.Tariffs are in Czech crowns and are not indexed to the foreign currency portion of the loans.

Apart from demonstrating that efficient cogeneration can supply electricity at very competitive rates, the project willdemonstrate a readily replicable environmental solution to reducing the emissions of the country’s district heatingand power plants. It will also support the development of domestic financial markets—local banks are contributingover half of the senior debt for a longer term than has hitherto been available. This will also mitigate the project’sforeign exchange risk.


Many of these changes will occur only slowly, especially in countries that have only just started to liberalize andprivatize. IFC’s role, in conjunction with other parts of the World Bank Group, will be to use its advisory, structur-ing, and mobilization capacities to:

• Broaden the reform process, through supporting demonstrator projects;

• Complement the markets in more mature countries; and

• Build domestic financing capabilities.

What does this mean in practice? Some recent work provides possible pointers. Where countries are at an early stageof preparing to liberalize infrastructure services IFC can help to inform the policy debate by providing advice aboutwhat has worked in other countries, often through round tables and seminars undertaken in conjunction with FIASor the World Bank. Where decisions to privatize have been made in principle, IFC can help structure transactions.Helping demonstrator projects to achieve financial closure will remain a core part of the Corporation’s work; it isexpected that government reforms will gradually enable more projects to be financed in Sub-Saharan Africa, NorthAfrica, the Middle East, and the former Soviet Union. Further liberalization in some larger countries, such as Chinaand Brazil, may also expand opportunities for private financing significantly. Demonstration effects also arise fromfinancing projects in infrastructure sectors where private financiers have not yet penetrated deeply, such as localtelecoms providers, power and water distribution companies, and transport facilities (for example, airports androads).

In appropriate cases, projects can be financed by blending IFC’s financing instruments with others from the WorldBank Group. IFC’s financing has been combined with MIGA guarantees (for example, a power project in Honduras)and the World Bank’s new guarantee instrument (Pakistan power project—see Box 9.2).

IFC’s financial mobilization activities are likely to extend further towards nontraditional financing sources such asinsurance companies, as well as mobilizing “mezzanine” financing. One of the most important roles for IFC’sprivate infrastructure promotion efforts will be to continue helping countries develop the capacity of domesticfinancial markets through promoting private pension funds, insurance companies, domestic mutual funds, local bondmarkets, and rating agencies.

Box 9.2: A Blend of World Bank Group Financing: Pakistani Power Project

In May 1996, the $630 million Uch power project in Pakistan reached financial closure with assistance from IFC anda partial risk guarantee provided by the World Bank. This was the first time that a World Bank guarantee of this typehad been provided, and the first guarantee operation to be undertaken in collaboration with IFC. The US$75 millionpartial risk guarantee provides support for a debt service default resulting from the nonperformance of specificcontractual obligations entered into by government agencies—in this project the power purchase agreement and thefuel supply agreement.

The project set several financing precedents. IFC mobilized its largest syndicated loan to Pakistan at US$75 million.And the partial risk guarantee helped mobilize a syndicated US$75 million commercial bank loan with a fifteen-yearterm—the longest maturity to date for a commercial financing package in Pakistan.

The 586 MW Uch project is the fifth private power project financed by IFC in Pakistan since the launching of theprivate power program in March 1994. The project consists of a gas-fired, combined cycle plant using natural gasfrom a nearby field.


AppendixTables

Table A1: IFC Infrastructure Projects, 1966–June1996Table A2: IFC Approval and Commitment SummariesTable A3: Syndicated Loans to Private Infrastructure ProjectsTable A4: Financial Structures of PPI ProjectsTable A5: IFC’s Advisory Work to Governments in Private Infrastructure, FY89–96Table A6: FIAS–Sponsored Private Infrastructure Round Tables, 1993–96Table A7: Multilateral and Bilateral Financing of Private Infrastructure Projects in

Developing Countries, 1993-95Table A8: Summary of Multilateral and Bilateral Financing of Private Infrastructure

Projects in Developing Countries, 1993-95Table A9: Private Infrastructure Projects in Developing CountriesTable A10: Proportion of Foreign Finance in Infrastructure Privatizations, 1988–94Table A11: Loans to Private Infrastructure Projects, 1990–95Table A12: PPI and Capital Markets Country Indicators, 1990–95

Box A1: Insurance Arrangements for Infrastructure ProjectsBox A2: Subjects Covered In IFC’s Project AppraisalBox A3: Toll Road Concession AgreementsBox A4: A Guide to Power Purchase Agreements

88919293959899

103

104106107115

108110112118


Table A1: IFC Infrastructure Projects, 1966–June 1996

Commit- Project IFC IFC IFCApproval ment size loan equity total

FY Country Company Sector date date (US$m) (US$m) (US$m) (US$m)

1967 Philippines Meralco I* power distribution 9/15/66 9/15/66 94 8 4 121970 Philippines PLDT I* telecoms 9/15/69 9/15/69 180 5 51977 Colombia Promigas I* pipeline: gas 11/15/76 12/15/76 55 13 2 151981 Korea Taihan Bulk* port 9/2/80 12/3/80 28 4 3 61981 Peru Conenhua* power transmission 5/15/81 11/15/81 18 5 51986 Philippines PLDT II* telecoms 6/12/86 11/14/86 120 30 301987 Argentina Terminal 6:I* port 1/15/87 5/27/87 22 6 61988 Philippines PLDT III* telecoms 12/17/87 2/11/88 96 24 241988 Philippines Meralco II* power distribution 6/15/88 9/15/88 313 30 301989 India Ahmedabad Electric* power generation 4/11/89 5/30/89 83 20 201989 Philippines PLDT IV* telecoms 5/31/89 11/6/89 455 30 301989 Argentina Terminal 6: II* port 6/1/89 9/1/89 11 3 31989 India Tata Electric I* power transmission 6/15/89 7/20/89 80 35 351989 Philippines Navotas* power generation 6/22/89 7/11/90 41 10 1 111989 Colombia Promigas II* pipeline: gas 6/22/89 6/28/89 35 10 101990 Chile CTC I* telecoms 6/14/90 12/15/90 221990 Chile CTC I* telecoms 6/14/90 12/3/90 1,104 80 801990 India Tata Electric II* power generation 6/26/90 10/2/90 274 60 601990 Turkey Kepez Elektrik* power generation 6/28/90 10/18/90 68 25 251990 India Calcutta Electric I* power transmission 6/28/90 2/1/91 92 20 201990 Chile Puerto Coronel port 6/28/90 40 5 3 81990 Argentina Terminal 6: III* port 6/28/90 10/11/90 13 4 41991 Chile Aconcagua I* power generation 12/27/90 8/26/91 82 14 6 201991 Bolivia Central Aguirre* port 12/28/90 7/2/91 5 2 0 31991 Mexico Cedetel* telecoms: cellular 6/11/91 10/22/91 70 13 1 141991 India Bombay Suburban* power generation 6/13/91 6/28/91 653 50 501991 Zaire Telecel* telecoms: cellular 6/17/91 9/24/91 19 6 61991 Chile Puerto Ventanas port 6/28/91 46 5 5 101992 Zimbabwe Petrozim* pipeline: oil 7/25/91 9/19/91 67 17 171992 Chile CTC II* telecoms 11/14/91 11/19/91 258 01992 Colombia Promigas III* pipeline: gas 2/25/92 7/2/92 51 15 151992 Hungary Westel* telecoms: cellular 3/31/92 6/8/92 82 15 151992 Costa Rica Millicom telecoms: cellular 4/9/92 7/16/92 10 3 1 41992 Argentina FEPSA I* rail 4/9/92 2/24/93 55 11 2 131992 Mexico Toluca Toll Road* toll road 5/14/92 6/22/92 314 10 101992 Jamaica Telecoms of Jamaica telecoms: swap 6/5/92 12 12 121992 India Caclutta Electric II* power generation 6/23/92 6/17/93 548 30 301993 Chile Aconcagua II* power gen: rights issue 9/1/92 9/1/92 14 2 21993 Argentina Nuevo Central* rail 11/5/92 6/2/93 61 10 3 131993 Chile Pangue power generation 12/17/92 10/22/93 465 70 5 751993 Sri Lanka Lanka Cellular* telecoms: cellular 12/22/92 1/28/94 14 1 11993 Mexico Telecom Golfo telecoms: cellular 12/22/92 45 9 91993 Argentina Impsat-Arg telecoms: data/sat 12/22/92 52 6 2 81993 Chile CTC * telecoms: hedge 12/24/92 7/15/93 14 14 141993 Mexico GOTM* port 12/30/92 9/2/93 21 5 2 71993 Belize Belize Electric Co* power generation 12/30/92 6/28/93 59 15 151993 Philippines Pagbilao* power generation 1/7/93 4/22/93 888 60 10 701993 Philippines Northern Mindanao* power generation 1/15/93 4/16/93 103 15 5 201993 Argentina FEPSA II rail 2/4/93 111993 Guatemala Puerto Quetzal* power generation 3/23/93 3/31/93 92 20 201993 Argentina Yacylec* power transmission 6/1/93 10/15/93 135 20 201993 Latin America Scudder Fund fund 6/3/93 6/3/93 200 25 251993 Argentina Telefonica telecoms 6/22/93 1,475 60 601993 Pakistan Karachi Cont. Term. port 6/30/93 1/25/95 88 12 2 14


Table A1: IFC Infrastructure Projects, 1966–June 1996 ( cont. )



1994 El Salvador Telemovil* telecoms: cellular 7/6/93 4/11/94 7 2 0 21994 Venezuela Terquimca port 7/7/93 14 3 1 41994 Argentina Tucuman power feasibility 7/7/93 2 0 01994 Argentina Transconor/Gasinvest pipeline: gas 7/20/93 530 25 20 451994 Argentina Edenor* power distribution 8/5/93 5/3/94 402 45 451994 Colombia Promigas IV* pipeline: gas 9/30/93 6/17/94 41 5 51994 Hungary Hungary Telecom* telecoms 11/2/93 11/18/93 470 30 301994 Hungary Papatel* telecoms 11/22/93 12/14/93 14 3 1 41994 Colombia El Bosque Port port 12/23/93 20 6 61994 Mexico Biwater/CTAPV* wastewater 12/30/93 10/26/94 33 7 71994 Costa Rica Hidrozarcas* power generation 1/6/94 5/27/94 17 4 41994 Sri Lanka Lanka Cellular* telecoms: rights issue 1/27/94 1/28/94 17 2 21994 India Tata Elec IV* power gen: underwriting 2/7/94 3/1/94 751994 Asia Asia Infra. Fund fund 3/24/94 11/2/94 753 50 501994 Chile Pangue II power gen: B loan increase 3/29/94 501994 Argentina Aguas I water/sewerage 4/6/94 11/10/94 329 38 7 451994 World GPIC fund 4/14/94 12/9/94 1,010 51 511994 Argentina Edenor II power dist: B loan increase 4/14/94 81994 E.Europe CETAL telecoms 4/27/94 4/30/94 100 20 201994 Guatemala Fabrigas* power generation 5/18/94 8/5/94 17 7 71994 India GVK Power power generation 5/31/94 9/1/95 291 40 8 481994 Philippines Northern Mindanao power gen: swap 6/8/94 23 0 01994 Oman Manah Power power generation 6/10/94 1/25/95 236 15 4 191994 Uganda Clovergem telecoms: cellular 6/23/94 11/1/94 16 5 1 61994 Poland Sprint Polska telecoms 6/28/94 11/1/94 165 25 8 331994 Nepal Khimti Khola power generation 6/28/94 1/31/96 126 28 3 311994 India ILFS Ltd. infr leasing 6/28/94 8/22/94 80 25 1 261994 India Neyveli Power power generation 6/28/94 450 30 18 481994 Hungary Westel 900 telecoms: cellular 6/28/94 3/21/95 160 35 4 391994 Russia Russian Telecom telecoms 6/30/94 12/12/94 40 8 81995 Honduras Elcosa* power generation 7/5/94 10/24/94 70 14 2 161995 India Ib Valley power generation 7/19/94 721 50 20 701995 Argentina Nahuelsat* telecoms: satellite 7/21/94 5/31/95 240 30 5 351995 Latvia Lattelekom telecoms 9/20/94 3/7/95 237 16 161995 Tanzania MIC Tanzania Ltd. telecoms: cellular 9/23/94 7/14/95 4 1 0 11995 Argentina Aguas water/sewage: increase 9/28/94 52 01995 Dominican Rep. Smith Enron * power generation 10/22/94 11/1/94 204 32 321995 Panama Manzanillo Terminal* port 11/1/94 12/21/94 103 25 251995 Cote d’Ivoire Ciprel Power* power generation 11/3/94 11/17/94 69 17 1 181995 Mexico GOTM II/Mex. Puertos* port 12/20/94 1/27/95 1 1 11995 Argentina Socma conglomerate 12/22/94 3/2/95 385 25 15 401995 Brazil Globocabo telecoms: cable-tv 1/3/95 3/30/95 290 35 10 451995 Pakistan Karachi Cont. Term. II port 1/6/95 22 01995 Pakistan Kohinoor power generation 1/19/95 1/24/95 139 25 6 311995 E.Europe CETAL telecoms: agency line 2/21/95 100 33 331995 Pakistan AES Lal Pir power generation 3/20/95 4/7/95 344 40 10 501995 Philippines Sual Thermal power generation 3/23/95 7/12/95 1,402 30 18 481995 Uruguay Consor Aeropuert airport 3/28/95 7/19/95 31 8 81995 Argentina R-E-C Toll Highway toll road 3/30/95 161 20 201995 Honduras Elcosa* power gen: rights issue 4/13/95 4/27/95 1 1 11995 Jamaica Old Harbor Diesel power generation 6/1/95 99 22 2 241995 Argentina Edenor power gen: swap 6/9/95 9/22/95 4 4 41995 Vietnam Baria Serece Port port 6/14/95 6/22/95 10 3 31995 Argentina Terminales Portuarias port 6/16/95 11/1/95 50 10 2 12


Table A1: IFC Infrastructure Projects, 1966–June 1996 ( cont. )



1995 India RPG Communications telecoms 6/21/95 87 8 81995 Thailand BTSC mass transit 6/22/95 1,648 50 501995 Hungary Hun Telecom II telecoms 6/22/95 9/4/95 940 50 501995 Jordan Jordan Telephone telecoms: cellular 6/28/95 10/29/95 85 15 3 181995 Turkey Arcelik - KOC power gen/waste 6/30/95 10/12/95 16 8 81995 Turkey ENTEK - KOC power generation 6/30/95 130 25 251995 Turkey TDD - KOC power generation 6/30/95 10/12/95 7 2 21995 Argentina Aguas II water/sewerage 6/30/95 3/22/96 540 40 401996 Argentina Edesur power distribution 7/6/95 328 40 401996 Pakistan Gul Ahmed Energy power generation 7/10/95 7/24/95 138 30 4 341996 Guatemala Puerto Quetzal power gen: swap 8/9/95 9/15/95 1 1 11996 Dominican Rep. Smith Enron power gen: swap 8/31/95 9/15/95 2 2 21996 Argentina Aguas water: swap 9/14/95 10/1/95 4 4 41996 Poland Gaspol port for LPG (gas) 10/19/95 10/20/95 60 20 5 251996 Argentina Terminal 6 S.A.: IV port 11/29/95 4/16/96 20 11 111996 Pakistan AES Pak Gen power generation 12/11/95 12/20/95 349 20 10 301996 Argentina Aguas water: B loan increase 12/14/95 391996 Guatemala Concepcion Pantaleon power generation 2/8/96 83 25 251996 El Salvador Telemovil II telecoms: cell 2/22/96 3/7/96 20 8 81996 Argentina Edesur II power trans: B loan increase 3/14/96 01996 India Calcutta Electric II power dist: B loan increase 3/22/96 371996 Indonesia Praimindo telecoms 3/28/96 624 50 8 581996 Venezuela CANTV telecoms: tel & cell 4/9/96 6/7/96 872 75 751996 Pakistan UCH Power Ltd power generation 5/14/96 691 56 561996 Bangladesh ITC Ltd telecoms 5/22/96 107 15 0 151996 Thailand BTSC II mass transit - equity 5/24/96 20 20 201996 China Fairyoung Ports port 6/14/96 82 14 5 191996 Brazil Lightel telecoms 6/14/96 299 25 10 351996 Colombia Buga-Tulua-La Paila toll highway 6/19/96 100 10 5 151996 Brazil Aguas de Limeira S.A. water/sewage 6/19/96 71 17 1 181996 Brazil Globocabo telecoms: B loan inc./rights 6/19/96 360 8 81996 Sri Lanka Asia Power (Priv.) Ltd. power generation 6/24/96 62 13 3 151996 Nepal Up. Bhote Koshi Hydro power generation 6/24/96 98 21 3 241996 Chile FEPASA rail 6/25/96 48 21 211996 Colombia Promigas V pipeline: gas 6/26/96 58 10 101996 Argentina Aguas III water/sewage 6/26/96 3 15 151996 Argentina Western Access Toll toll road 6/26/96 272 35 351996 Bolivia Telecel telecoms: cell 6/27/96 65 15 151996 Asia Asian Mezz. Infr. Fund fund 6/28/96 400 50 501996 Argentina Transconor II pipeline: gas 6/28/96 402 45 45

Total (148 projects) 28,648 2,536 536 3,072

Note: * denotes projects reaching physical completion or already completed by June 1996.


Table A2: IFC Approval and Commitment Summaries, 1966–Present*

IFC IFC IFC IFC IFC IFCNumber of Project loan equity total Number of Project loan equity total

projects size (US$m) (US$m) (US$m) projects size (US$m) (US$m) (US$m)

by regionAfrica 5 175 46 2 47 5 175 47 2 48Asia 38 11,173 849 190 1,039 25 6,815 572 101 673CAMENA 9 2,090 213 38 251 7 1,377 154 38 192Europe 15 2,588 241 92 333 13 2,359 185 75 260LAC 80 11,612 1,187 164 1,351 50 6,869 748 90 838World 1 1,010 0 51 51 1 1,010 0 51 51Total 148 28,648 2,536 536 3,072 101 18,604 1,706 357 2,062

by sectorPower Generation 44 9,317 945 139 1,085 32 6,872 709 92 801Power Transmission 11 1,473 206 4 210 8 1,138 169 4 172Pipelines 8 1,238 140 22 162 5 249 53 2 55Air 1 31 8 0 8 1 31 8 0 8Mass Transit 2 1,668 50 20 70Port 19 654 136 29 165 13 431 103 14 117Rail 4 175 42 5 47 2 116 23 3 26Road 4 847 75 5 80 1 314 14 0 14Telecoms 41 9,347 714 162 876 30 6,121 493 93 586Water/Waste 8 1,071 121 8 129 4 906 85 7 92Miscellaneous 6 2,828 100 142 242 5 2,428 50 141 191Total 148 28,648 2,536 536 3,072 101 18,604 1,706 357 2,062

by fiscal year1967-87 7 517 69 9 78 7 517 59 8 681988 2 409 54 0 54 1 96 24 0 241989 6 704 108 1 109 3 431 56 0 561990 7 1,613 194 3 197 3 545 77 0 771991 6 876 90 12 102 8 2,267 262 1 2631992 9 1,396 112 3 115 8 897 83 7 901993 17 3,737 302 70 372 11 2,081 178 46 2241994 30 5,495 348 237 585 14 1,792 150 68 2181995 32 8,190 614 120 734 25 5,019 422 194 6161996 32 5,712 645 82 727 21 4,960 396 32 427Total 148 28,648 2,536 536 3,072 101 18,604 1,706 357 2,062

Note: *to June 1996 for approvals, May 1996 for commitments

Approvals Commitments


Table A3: Syndicated Loans to Private Infrastucture Projects

Syndicated No. ofFY signed Country Borrower Sector (US$m) participants

1992 Chile Aconcagua power: generation 6 1Chile CTC telecoms 113 4Mexico Cedetel telecoms: cellular 37 4Zimbabwe Petrozim pipeline:oil 16 14Subtotal 172

1993 Argentina FEPSA rail 20 3Colombia Promigas pipeline: gas 15 1Costa Rica Millicom telecoms: cellular 4 5Guatemala Puerto Queztal power: generation 51 1Subtotal 90

1994 Argentina Edenor power: generation 128 15Argentina Yacylec power: transmission 45 11Chile Pangue power: B loan increase 100 20Columbia Promigas pipeline: gas 25 4Costa Rica Hidrozarcas power: generation 6 1El Salvador Telemovil telecoms: cellular 2 1Philippines Hopewell Power power: generation 11 1Philippines N. Mindanao power: generation 9 1Subtotal 326

1995 Argentina Aguas Argentinas water/waste 135 15Dom. Republic Smith-Enron power: generation 50 2Honduras Elcosa power: generation 36 5Mexico GOTM port 3 1Oman Manah Power power: generation 57 12Panama Manzanillo port 35 3Philippines N. Mindanao power: hedge 13 2Poland Polska Telecoms telecoms 45 7Vietnam Baria Serece port 2 1Subtotal 375

1996 Argentina Aguas water/sewage 173 21Argentina Nuevo Central rail 15 2Argentina Terminal 6 S.A. port 7 1El Salvador Telemovil telecoms: cellular 12 1Hungary Hungary Telecoms telecoms 50 35India CESC Limited power: generation 67 7Pakistan AES Pak Gen (Private) power: generation 50 4Pakistan Kohinoor power: generation 37 6Pakistan Uch Power power: generation 75 3Philippines Sual Thermal power: generation 196 32Uruguay Consorcio Aeropuertos airport 10 3Subtotal 691

Total FY92–96 1,654


Table A4: Financial Structures of PPI Projects

These tables summarize the financial structure of the private infrastructure projects that IFC has helped to finance,using three measures:

• debt versus equity• local versus foreign financing• financing source: from IFC itself, syndicated by IFC, other private financiers, and official financiers

The tables group these structures by region, sector, year of approval, country risk level, country income level andwhether the project was an expansion or greenfield. The total number of observations varies slightly for each groupof categories, as some projects do not fall within the categories (for example, funds, rights issues) or indicators arenot available (for example, not all countries have a risk rating).

No. of % % % % % % % IFC %IFCprojects debt equity local foreign private official own syndicated

by regionAfrica 5 65 35 11 89 44 22 30 5Asia 30 65 35 33 67 57 18 16 8CAMENA 8 62 38 18 82 55 14 15 16Europe 12 49 51 39 61 61 7 24 8LAC 60 55 45 36 64 54 4 21 21Total 115 58 42 33 67 55 9 20 15

by sectorPower Generation 35 65 35 28 72 46 18 21 15Power Transmission 8 64 36 40 60 62 8 19 11Pipelines 8 65 35 42 58 52 3 20 25Air 1 45 55 42 58 42 0 26 32Mass Transit 1 70 30 50 50 97 0 3 0Port 17 52 48 37 63 55 3 30 13Rail 3 55 45 37 63 44 0 29 26Road 3 55 45 37 63 65 2 11 22Telecoms 34 51 49 33 67 62 8 17 13Water/Waste 4 59 41 27 73 56 8 17 19Miscellaneous 1 70 30 37 63 78 3 11 8Total 115 58 42 33 67 55 9 20 15

by fiscal year1967 1 63 37 33 67 87 0 13 01970 1 70 30 48 52 98 0 3 01977 1 73 27 73 27 73 0 27 01981 2 67 33 52 48 61 9 23 61986 1 86 14 14 86 14 61 25 01987 1 60 40 75 25 75 0 25 01988 2 49 51 58 42 58 25 17 01989 6 68 32 57 43 65 8 26 11990 6 53 47 52 48 66 11 23 11991 6 60 40 38 62 56 6 26 121992 7 57 43 38 62 59 4 18 191993 13 50 50 31 69 55 10 17 181994 19 59 41 37 63 56 8 20 161995 26 61 39 25 75 51 14 19 161996 23 54 46 22 78 50 6 21 23Total 115 58 42 33 67 55 9 20 15


by Institutional Investor score0-25 30 60 40 28 72 47 14 25 1425-40 52 57 43 31 69 55 7 18 2040+ 37 56 44 44 56 62 8 20 10Subtotal 109 58 42 33 67 55 10 20 16

by income levelLow income 29 65 35 25 75 54 15 20 11Lower middle 40 60 40 36 64 51 10 23 15Upper middle 45 51 49 38 62 60 5 18 17Subtotal 114 58 42 34 66 56 9 20 15

by project statusExpansion 55 56 44 41 59 60 6 19 15Greenfield 58 59 41 27 73 51 13 21 15Subtotal 113 58 42 34 66 55 9 20 15

Note: Due to rounding, some percentages may not total 100%

Institutional Investor country rating (0 = worst, 100 = best)

Table A4: Financial Structures of PPI Projects ( cont .)

No. of % % % % % % % IFC %IFCprojects debt equity local foreign private official own syndicated


Argentina Aerolíneas 1989 IFC advised the government of Argentina on valuation in the partialArgentinas privatization of Aerolíneas Argentinas.

Belize Belize City Port 1993 IFC received a mandate from the government of Belize to provide ad-vice on the privatization of the Belize City Port. Phase II started butIFC involvement terminated before sale.

Colombia Central 1994 IFC advised the government on the formulation of privatizationHidroeléctrica strategy of a hydroelectric generating plant located south of Bogotáde Betania.

Ecuador Emetel 1996 Mandate signed to assist the Telecommunications Modernization Com-mission of Emetel.

Gabon SEEG (Water /Power) 1996 The government of Gabon has appointed IFC as lead adviser for thepreparation and implementation of the privatization of the provision ofwater and electricity services for the country. Société d’Energie et d’Eaudu Gabon (SEEG) is the public utility that presently has the exclusiveconcession for production, transportation, and distribution of water andelectricity in Gabon. IFC’s role includes designing a privatization strat-egy, preparing sales documentation, marketing to potential investors,and negotiating with selected investors.

Haiti Democratization 1995 IFC is continuing work with the government of Haiti on the democra-Program (9 cos) tization of nine state owned enterprises that represent key economic

sectors encompassing power, telecom, transport, finance, construction,and agribusiness. Under a contract funded mainly by USAID, the de-mocratization process is expected to increase public access to basicinfrastructure services and reduce dependence on government financesby the state-owned enterprises. IFC will also assist the government todevelop mechanisms to ensure that the benefits of enterprise privatiza-tion flow to the most disadvantaged segments of the population.

India CWIS (Water) 1996 IFC is advising the government of Kerala in the establishment of aBOT/BOOT water supply project that would provide water services tomajor industrial consumers in the Greater Cochin Industrial Area. Thisproject is the first of its kind in India and is expected to serve as amodel for replication. The project also represents an important step inthe attraction of increased private sector participation in the modern-ization of India’s infrastructure.

Kenya Kenya Airways 1994–1995 IFC helped the government of Kenya in the privatization of KenyaAirways. Twenty-six percent of Kenya airways was sold to a majorinternational airline, with further shares sold to international financialinvestors and the Kenyan public. This landmark transaction was thefirst privatization of an African airline and represented the largest-everpublic offering on the Nairobi Stock Exchange.

Pakistan FAEB (Power) 1996 The government of Pakistan has appointed IFC as lead adviser in theplanned privatization of Faisalabad Area Electricity Board (FAEB). Theproposed privatization is a first for an electricity distribution networkin Pakistan and is part of a wider government initiative to restructureand privatize the power sector. This privatization of one of the eightarea electricity boards would be a critical step toward the complete

Table A5: IFC’s Advisory Work to Governments in Private Infrastructure, FY89–96

Country Project Year Description and IFC Task


restructuring of the sector. The government wishes to introduce a pri-vate sector operator/investor to FAEB in order to provide the necessarycapital expenditures, improve operational efficiency and reliability, andserve as a model for other area boards.

Peru Electrolima 1993–1995 IFC advised the government in the structuring and implementation ofthe privatization of this electricity generation and distribution companyserving metropolitan Lima. Sixty percent of the distribution companywas sold in August 1994 to two international consortia and 60 percentof the generation company was sold to an international consortium inNovember 1995.

Peru Edelnor 1995 IFC provided the government a fairness opinion on the purchase priceof the 60 percent of the Northern Lima electricity distribution companyprivatized in 1994, in the content of offerings to employees and Peru-vian population.

Peru Chancay and Cañete 1996 The government of Peru appointed IFC as financial adviser in the pri-(Power) vatization of two small power companies: Chancay (north of Lima)

and Cañete (south of Lima). One of the companies, Chancay, was suc-cessfully privatized in January 1996. No bids were received for Cañete.This company is likely to be merged with other regional distributioncompanies when they are privatized.

Philippines Philippines 1989–1990 After conducting a comprehensive review of PAL, IFC designed a de-Airlines (PAL) tailed debt-reduction and privatization program to enable PAL to achieve

financial viability with a new ownership structure. PAL subsequentlyimplemented the program, although IFC was not involved in the priva-tization transaction.

Philippines MWSS (Water) 1996 The government of the Philippines, as part of a broader governmentinitiative to improve the water services in the Philippines, has appointedIFC as lead adviser on the planned privatization of Metropolitan Water-works and Sewerage System (MWSS). In that function, IFC coordi-nates, supervises, and integrates the input of specialist consultants.MWSS provides water and sewerage services to the Metropolitan Ma-nila area, comprising eleven million potential customers. Of the totalpopulation, 67 percent have connected water service while only 10 per-cent have sewerage connections. The latter poses significant environ-mental and public health hazards. MWSS produces close to 2.5 millioncubic meters of water daily, but supply is intermittent and nonrevenuewater loss is almost 55 percent.

Sri Lanka Air Lanka 1992 IFC assessed Air Lanka’s financial capacity, reviewed options onrefleeting, and planned to assist Air Lanka in the privatization transac-tion itself. Government chose not to implement privatization.

Trinidad Trinidad & Tobago 1994 IFC advised the government on the sale of the generating assets of the& Tobago Electricity Commision commission. Two companies, Southern Electric and Amoco Trinidad

Power Resources Corporation, won through an international biddingprocess.

Uganda UTL 1995 IFC is providing assistance to the government of Uganda on the priva-tization of Uganda Telecom Limited (UTL) and the preparation for thesale of a license to a second network operator. IFC is coordinating with

Table A5: IFC’s Advisory Work to Governments in Private Infrastructure, FY89–96 ( cont. )



IBRD on the preparatory phase of developing the necessary legal andregulatory framework. IFC will define the divestiture strategy, market,negotiate, and close both transactions with foreign strategic investor(s).

Venezuela Gen. Advisory (Power) 1996 In its effort to privatize the electrical sector in Venezuela, the Venezu-elan Government has appointed IFC to act as general adviser on theprivatization of Venezuela’s state-owned electricity sector. The workentails sequencing the sale for the various electricity companies, coor-dinating the work of investment banks in the selling strategies, and imple-menting the transactions for these companies.

Venezuela Isla Margarita (Power) 1996 IFC is assisting with the privatization of an electric utility—IslaMargarita. The aim is for the privatization to serve as a model for futuretransactions in the sector.

Zimbabwe Affretair 1993–1994 IFC helped the government to evaluate the viability of this nationalcargo airline, and to restructure it.

Table A5: IFC’s Advisory Work to Governments in Private Infrastructure, FY89–96 ( cont. )



Table A6: FIAS–Sponsored Private Infrastructure Round Tables, 1993–96

Date

December12–13, 1993

November7–8, 1994

September14–15, 1995

February8–9, 1996

March28–29, 1996

Location

Bangkok,Thailand

Beijing,China

Hanoi,Vietnam

Vienna,Austria

Entebbe,Uganda

Region

South andEast Asia

China

Vietnam

Central andEastern Europe

Southern andEastern Africa

Issues

Review the region’s private sectorinfrastructure experience; examine the hostcountry policy environment to regulate andpromote private infrastructure investments.Discuss possible future trends and policyimplications.

Review China’s experience in attractingFDI into infrastructure; examine theexperience in other countries and evaluatethe particular obstacles encountered inChina. Develop policy options to overcomecritical constraints.

Review Vietnam’s experience in attractingFDI into infrastructure; examine theexperience in other countries and evaluatethe particular obstacles encountered inVietnam. Develop policy options toovercome critical constraints

Discuss the impediments to a strongerinvolvement by foreign investors in theregion’s infrastructure; examine theelements of an attractive enabling environ-ment; consider the necessary policyframework and institutional capacity.

Examine the role of FDI in Africa’sinfrastructure; review the experience indifferent regions; review the obstacles topromoting and implementing privateinfrastructure in the region. Develop policyoptions to overcome these constraints.

Participation

29 officials from 12 countries;19private sector executives;10representatives from multilateralorganizations

38 government officials; 13private sector executives; 8representatives from multilateralorganizations

25 government officials; 17private sector executives; 5representatives from multilateralorganizations

25 officials from 11 countries; 17private sector executives; 22representatives from multilateraland bilateral organizations

33 officials from 16 countries; 21private sector executives; 16representatives from multilateralorganizations.


ADB 1993 ILFS Ltd.* Asia India Misc. Leasing company na 15 15ADB 1993 Fauji Oil Terminal CAMENA Pakistan Port Marine oil terminal/port oasim 82 19 19ADB 1993 Batangas Power Corporation Asia Philippines Power 123 27 27ADB 1993 Pagbilao* Asia Philippines Power 700 MW coal-fired BOT 888 40 40CDC 1993 Almacandora de Exportacion LAC Nicaragua Port Warehousing 3 1 0 1CDC 1993 Fauji Oil Terminal CAMENA Pakistan Port Marine oil terminal/port oasim 82 18 1 19CDC 1993 Grenada Electricity Services LAC Grenada Power Power generation 27 9 6 15CDC 1993 Hub Power Co. Ltd. CAMENA Pakistan Power 4X323 MW oil-fired (BOO) 1,829 19 19EBRD 1993 M1-M15 Toll Highway Europe Hungary Road Toll highway 428 137 7 144EID/MITI 1993 Hub Power Co. Ltd. CAMENA Pakistan Power 4X323 MW oil-fired (BOO) 1,829 96 96EID/MITI 1993 Pagbilao* Asia Philippines Power 700 MW coal-fired BOT 888 150 150IFU 1993 PECORSA LAC Argentina Power Electricity from wind power 1 0 0 0IFU 1993 DRTG Europe Russia Telecoms 12 3 3IFU 1993 Moravska-Spolenost Europe Czech Republic Water/Waste Waste treatment 0 0 0IFU 1993 SSHL Europe Czech Republic Water/Waste Waste treatment 1 0 0IIC 1993 Hydroelectrica Platanar LAC Costa Rica Power 15 MW hydroelectric 20 6 6JEXIM 1993 Pagbilao* Asia Philippines Power 700 MW coal-fired BOT 888 220 220MIGA 1993 Cointel LAC Argentina Telecoms Inv. in priv. of national telecoms 15 15CDC 1994 John Fernandez Ltd. LAC Guyana Port Redevelop wharf space/port 4 2 2CDC 1994 Hydroelectrica Platanar LAC Costa Rica Power 15 MW hydroelectric 20 4 2 6CDC 1994 Jamaican Private Power Company LAC Jamaica Power Power generation fossil fuel 14 10 1 11CDC 1994 Jamaican Private Power Company LAC Jamaica Power Power generation fossil fuel 130 10 7 18CDC 1994 Zanzibar Telecoms Ltd. Africa Tanzania Telecoms 26 8 3 10CDC 1994 Clovergem* Africa Uganda Telecoms Cellular 16 4 1 6CESCE 1994 Yacylec* LAC Argentina Power Power transmission 135 13 40 53CFD 1994 Ciprel* Africa Côte d’Ivoire Power 100 MW station 69 14 14CFD 1994 Hidroelectrica de Cahora-Bassa Africa Mozambique Power Power transmission 149 17 17DEG 1994 EXOLGAN LAC Argentina Port Container terminal 11DEG 1994 Rio Lajas LAC Costa Rica Power 12 MW station 4DEG 1994 Smith Enron Cogeneration* LAC Dominican Rep. Power 185 MW power fossil fuel 204 10DEG 1994 DECASA LAC Guatemala Power 20 MW station 6DEG 1994 Elcosa* LAC Honduras Power 80 MW diesel power plant 70 7DEG 1994 Ferrosur LAC Argentina Rail Railways 40 10DEG 1994 CTC* LAC Chile Telecoms Telephone company 10DEG 1994 PLDT* Asia Philippines Telecoms Telephone company 455 10DEG 1994 Iskratel Europe Slovenia Telecoms Telecomunications systems 13DEG 1994 Camtainer S.A. Africa Cameroon Transport Container/Transport 1EBRD 1994 Eurotel Prague Europe Czech Republic Telecoms Expansion w/e-mail 4 4EBRD 1994 Kabel Net Europe Czech Republic Telecoms Install, dev. & oper. cable service 39 11EBRD 1994 CETAL* Europe Europe Region Telecoms Agency line for telecom priv. 128 65EBRD 1994 Mobil Telesystems/GSM/900 Europe Russian Federation Telecoms GSM 900 Network 421 42EIB 1994 Gas Natural Ban S.A. LAC Argentina Power Modernization of dist. network 196 59 59EIB 1994 CTC LAC Chile Telecoms Network mod. and ext. 937 96 96FMO 1994 Edenor* LAC Argentina Power Power distribution 400 10 10FMO 1994 Aguas LAC Costa Rica Power Power generation 17 2 2FMO 1994 Puerto Quetzal* LAC Guatemala Power 110 MW diesel 92 13 13FMO 1994 Elcosa* LAC Honduras Power 80 MW diesel power plant 70 11 11IFU 1994 Fibcom Ltd. Asia India Power Power transmission systems 8 1 1IFU 1994 Inreco Poland Europe Poland Road Road maintenance 0 0 0IFU 1994 Kelet-Nograd-Com Europe Hungary Telecoms Telecommunications 69 4 1 5IFU 1994 Pannon GSM Europe Hungary Telecoms Cellular 215 4 4

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Table A7: Multilateral and Bilateral Financing of Private Infrastructure Projects inDeveloping Countries, 1993–1995

App.Agency date Project name Region Country Sector Description


IFU 1994 Raba-com Europe Hungary Telecoms 29 2 1 3IFU 1994 Arcodan Asia India Telecoms Cable-TV systems 2 0 0IFU 1994 Segetrans S.A. LAC Chile Transport 1 1 1IFU 1994 DanBalt Trans UAB Europe Lithuania Transport Spedition & transport 0 0 0 0IFU 1994 Ailinco LAC Argentina Water/Waste Treatment of hazardous waste 16 1 1IFU 1994 EKO-Chlebicov Europe Czech Republic Water/Waste Waste management 3 1 1IFU 1994 Regios Europe Czech Republic Water/Waste Waste management 4 1 1IIC 1994 San Lorenzo/Conelectricas LAC Costa Rica Power 15 MW hydroelectric 23 3 3IIC 1994 Fondelec-Energy & Elec. Fund LAC Regional Power Inv. fund for private power 30 5 5IIC 1994 Impsat LAC Colombia Telecoms Private satellite network 48 3 1 4JEXIM 1994 Hub Power Co. Ltd. CAMENA Pakistan Power 4X323 MW oil-fired (BOO) 1,829 135 135JEXIM 1994 Leyte Geothermal Asia Philippines Power 440 MW geothermal power 1,334 185 185JEXIM 1994 Metrovias Subway LAC Argentina Rail Purchase passenger cars 9 9JEXIM 1994 PLDT* Asia Philippines Telecoms Outside plant network 320 55 55MIGA 1994 Transener S.A. LAC Argentina Power Priv. of Transener S.A. 15 15MIGA 1994 PMCL CAMENA Pakistan Telecoms Cellular 7 7MIGA 1994 PMCL CAMENA Pakistan Telecoms 17 17OPIC 1994 Bechtel Group, Inc. CAMENA Algeria Pipeline Natural gas pipeline 55 55OPIC 1994 Enron Corp. LAC Colombia Pipeline Natural gas pipeline 100 100OPIC 1994 CMS Generation Co. LAC Argentina Power Electric power generation 30 30OPIC 1994 WRB Enterprises, Inc. LAC Grenada Power Power generation 8 8OPIC 1994 Dabhol Power Company Asia India Power Power generation 100 100OPIC 1994 Dabhol Power Company Asia India Power Power generation 100 100OPIC 1994 Ib Valley* Asia India Power Power generation 720 150 150OPIC 1994 Ib Valley* Asia India Power Power generation 720 75 75OPIC 1994 Mission Energy Company Asia Indonesia Power Power generation 200 200OPIC 1994 California Energy Company Asia Philippines Power Power generation 70 70OPIC 1994 CE Luzon Geothermal Power Co. Asia Philippines Power Power generation 40 40OPIC 1994 CE Luzon Geothermal Power Co. Asia Philippines Power Power generation 100 100OPIC 1994 Citibank/Enron/1st Nat. of Boston Asia Philippines Power Power generation 69 69OPIC 1994 Visayas Geothermal Power Co. Asia Philippines Power Power generation 75 75OPIC 1994 Trakya Elektrik Uretim ve Ticaret Europe Turkey Power Electric power generation 85 85OPIC 1994 LG&E Energy Systems, Inc. LAC Venezuela Power Power generation 65 65OPIC 1994 CTI Comp. de Tele. del Interior LAC Argentina Telecoms Cellular 200 200OPIC 1994 United International Holdings LAC Brazil Telecoms Cable television 20 20OPIC 1994 Monor Telefon Tarasag RT Europe Hungary Telecoms 30 30OPIC 1994 Westel 900* Europe Hungary Telecoms Cellular 45 45OPIC 1994 Telecel Madagascar, S.A. Africa Madagascar Telecoms Telephone system 9 9OPIC 1994 Andrew Corporation Europe Russia Telecoms 8 8OPIC 1994 Andrew Corporation Europe Russia Telecoms 5 5OPIC 1994 International Business Comm. Europe Russia Telecoms Satellite telecommunications 25 25OPIC 1994 Mid-Com Communications, Inc. Europe Russia Telecoms 38 38OPIC 1994 RTDC Europe Russia Telecoms 125 125OPIC 1994 SFMT, Inc. Europe Russia Telecoms 60 60OPIC 1994 Adelphia Communications Int. LAC Venezuela Telecoms Cable television 8 8OPIC 1994 Radio Movil Digital Venezuela LAC Venezuela Telecoms Mobile radio communications 8 8OPIC 1994 Citibank Colombia-Nassau LAC Colombia Transport Transportation equipment 9 9OPIC 1994 Citibank, N.A. LAC Jamaica Transport Air terminal construction 90 90Proparco 1994 Ciprel* Africa Côte d’Ivoire Power 100 MW station 69 12 12Proparco 1994 A Company CAMENA Tunesia Road Installation of toll gates 6 6Sinvest 1994 Autopistas del Sol LAC Argentina Road Toll highways 325 2 2

Table A7: Multilateral and Bilateral Financing of Private Infrastructure Projects inDeveloping Countries, 1993–1995 ( cont. )


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Sinvest 1994 Pianimpianti Maroc CAMENA Morocco Water/Waste 0 0 0Swedfund 1994 Pannon GSM Telecoms. Europe Hungary Telecoms Cellular 215 5 5Swedfund 1994 Comvik International Vietnam Asia Vietnam Telecoms 90 4 4USEXIM 1994 Mahanagdong Asia Philippines Power Power generation 320 200 80 280USEXIM 1994 Upper Mahiao Asia Philippines Power Power generation 229 168 57 225CDC 1995 Kingston Wharres Ltd. LAC Jamaica Port Transport port/terminals 0 0 0CDC 1995 Oasion Intl. Container Term. CAMENA Pakistan Port Transport port/terminals 11 11 11CDC 1995 Comp. de Electric. de Puerto Plata LAC Dominican Rep. Power Power generation fossil fuel 74 13 13CDC 1995 Smith Enron Cogeneration* LAC Dominican Rep. Power 185 MW power fossil fuel 204 19 19CDC 1995 Sual Thermal* Asia Philippines Power Power generation fossil fuel 1,402 34 34CGIC 1995 Aounda Power Station Africa Congo Power Power gen. and trans. 50 15 35 50COFIDES 1995 Autopistas del Sol LAC Argentina Road Toll highways 325 2 2DEG 1995 Terminales Portuarias* LAC Argentina Port Container terminal 50 2EBRD 1995 M5 Motorway Europe Hungary Road Private toll road 468 154EBRD 1995 Deltav Rt Europe Hungary Telecoms Capital expenditure program 210 38EBRD 1995 EMITEL Rt Europe Hungary Telecoms Exp. and dev. of local networks 85 15EBRD 1995 Matav - Investel synd. loan facility Europe Hungary Telecoms Expansion & mod. of network 994 68EBRD 1995 United Telecommunications Inv. Europe Hungary Telecoms Exp. and dev. of local network 300 59EBRD 1995 Slovakia Telecom Europe Slovenia Telecoms Information program 306 46 46EBRD 1995 Muncipal Services Multi-project Europe Regional Water/Waste Gas/Sanitary/Water supply 300 90ECGD 1995 Manah Power CAMENA Oman Power Power gen and trans. 205 27 27ECGD 1995 Sual Thermal* Asia Philippines Power 2X600 MW coal-fired power 1402 445 445EIB 1995 Aguas Argenginas LAC Argentina Water/Waste Rehab and expansion of system 253 90 90EID/MITI 1995 Paiton Power Asia Indonesia Power 2X615 MW coal-fired 2,500 360 360EID/MITI 1995 AES Lal Pir* CAMENA Pakistan Power 362 MW oil-fired (BOO) 343 73 73EID/MITI 1995 Geothermal Plant Asia Philippines Power Power generation 65 8 8EID/MITI 1995 Flag Bermuda LAC Telecoms 561 405 405FMO 1995 Terminales Rio de la Plata LAC Argentina Port Port 80 8 4 12FMO 1995 Societe National d’Electricite Africa Congo Power Power distribution 9 2 2FMO 1995 Smith Enron Cogeneration* LAC Dom. Repub. Power 185 MW power fossil fuel 204 15 15FMO 1995 Ferrosur LAC Argentina Rail Railways 40 10 10IDB 1995 Terminales Portuarias* LAC Argentina Port Container terminal 50 10 10IDB 1995 LITSA LAC Argentina Power Power trans. (Yacyreta) 177 43 43IDB 1995 Tilaran LAC Costa Rica Power 20 MW wind turbine 30 7 7IDB 1995 Elcosa* LAC Honduras Power 80 MW diesel power plant 70 11 11IDB 1995 Samalayuca LAC Mexico Power 690 MW power generation 643 75 75IFU 1995 Ghana emulsion Africa Ghana Road 5 1 1IFU 1995 Male Water & Sewage Co. Ltd. Asia Maldives Water/Waste Water & sewage systems 23 5 5JEXIM 1995 Paiton Energy Asia Indonesia Power 2X615 MW coal-fired 2,500 540 540JEXIM 1995 AES Lal Pir* CAMENA Pakistan Power 362 MW oil-fired (BOO) 343 231 231JEXIM 1995 Pak Gen Power* CAMENA Pakistan Power 337 MW oil-Fired (BOO) 349 108 108JEXIM 1995 Tel Networks Ex. LAC Argentina Telecoms Network extension 700 80 80KfW 1995 Asia China Power Power generation 180KfW 1995 Asia Philippines Telecoms 181MIGA 1995 Elcosa* LAC Honduras Power 80 MW diesel power plant 70 2 2MIGA 1995 Elcosa* LAC Honduras Power 80 MW diesel power plant 70 4 4MIGA 1995 Elcosa* LAC Honduras Power 80 MW diesel power plant 70 6 6MIGA 1995 Elcosa* LAC Honduras Power 80 MW diesel power plant 70 9 9MIGA 1995 Elcosa* LAC Honduras Power 80 MW diesel power plant 70 9 9MIGA 1995 Jamaican Private Power Company LAC Jamaica Power 60 MW diesel power plant 26 26MIGA 1995 Jamaican Private Power Company LAC Jamaica Power 60 MW diesel power plant 3 3



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MIGA 1995 Jamaican Private Power Company LAC Jamaica Power 60 MW diesel power plant 1 1MIGA 1995 Jamaican Private Power Company LAC Jamaica Power 60 MW diesel power plant 12 12MIGA 1995 Jamaican Private Power Company LAC Jamaica Power 60 MW diesel power plant 8 8MIGA 1995 Tintaya Asia Philippines Power 231 MW geothermal plant 30 30MIGA 1995 Autopistas del Sol LAC Argentina Road Toll highways 325 5 5OPIC 1995 Termobarranquilla LAC Colombia Power 750 MW combined cycle power 738 150 150OPIC 1995 TECO Power Services Corp. LAC Guatemala Power Oil-fired power generation 154 154OPIC 1995 Paiton Power Asia Indonesia Power 1230 MW coal-fired power 2,500 200 200OPIC 1995 Caterpillar Financial Services Corp. LAC Jamaica Power Oil-fired power generation 3 3OPIC 1995 Old Harbour Diesel* LAC Jamaica Power Oil-fired power generation 50 50OPIC 1995 Magma/Visayas Power Asia Philippines Power Geothermal power generation 200 200OPIC 1995 Ogden/International Generating Asia Philippines Power Coal-fired power generation 100 100OPIC 1995 Enron Corp. Europe Turkey Power Gas-fired power generation 200 200OPIC 1995 Mission Energy Company Europe Turkey Power Gas-fired power generation 80 80OPIC 1995 GTE LAC Argentina Telecoms Cellular 175 175OPIC 1995 Citibank, N.A. LAC Brazil Telecoms Cable television 13 13OPIC 1995 Motorola, Inc. LAC Brazil Telecoms Telephone trunking system 1 1OPIC 1995 Andrew Corporation Europe Hungary Telecoms Telephone system upgrade 60 60OPIC 1995 International Telcell, Inc. Europe Hungary Telecoms Cellular 9 9OPIC 1995 Westel 900* Europe Hungary Telecoms Cellular 25 25OPIC 1995 TK Tel, Ltd. CAMENA Kyrgyzstan Telecoms Cellular 25 25OPIC 1995 International Telcell SPS Europe Latvia Telecoms Cable television network 4 4OPIC 1995 International Telcell SPS Europe New Ind. St./E. Eur. Telecoms Cable television network 26 26OPIC 1995 Andrew Corporation Europe Russia Telecoms Voice/data communications 3 3OPIC 1995 Andrew Corporation Europe Russia Telecoms Fiber-optic telecommunications 7 7OPIC 1995 Andrew Corporation Europe Russia Telecoms Fiber-optic telecommunications 10 10OPIC 1995 Andrew Corporation Europe Russia Telecoms Telephone services 8 8OPIC 1995 RTDC* Europe Russia Telecoms 75 75OPIC 1995 ICF Kaiser International Holdings Asia Philippines Transport Light rail transport system 150 150Sinvest 1995 ENECOR LAC Argentina Power 28 0 0Swedfund 1995 Mobile Telecommunications Ltd Africa Namibia Telecoms Celular: Phase I 18 2 2 4USEXIM 1995 Termobarranquilla LAC Colombia Power 750 MW combined cycle power 738 162 162USEXIM 1995 Paiton Power Asia Indonesia Power 1230 MW coal-fired power 2,500 540 540USEXIM 1995 Samalayuca LAC Mexico Power 690 MW power generation 643 477 477USEXIM 1995 Sual Thermal* Asia Philippines Power 2X600 MW coal-fired power 1402 182 182USEXIM 1995 Marmara Europe Turkey Power 500 MW gas-fired plant 544 241 241



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Notes: *Denotes projects financed by IFC as well.These figures have been collected from annual reports of official financing agencies and, in some cases, direct correspondence. Coverage is not complete in terms of organizations,financing details obtained or time periods (particularly 1995). However, the list does provide an indicative measure of the increased participation of official financing in PPI financing.Where the same project was financed by several agencies, a common project size was used.



projects (US$m) (US$m)

by year1993 18 1,585 7891994 89 8,917 3,5211995 82 11,761 6,965Total 189 22,264 11,275

by agencyADB 4 101CDC 15 184CESCE 1 53CFD 2 31CGIC 1 50COFIDES 1 2DEG 11 83EBRD 12 736ECGD 2 472EIB 3 245EID/MITI 6 1,092FMO 8 74IDB 5 146IFU 17 27IIC 4 18JEXIM 9 1,563KfW 2 361MIGA 16 169OPIC 55 3,727Proparco 2 18Swedfund 3 13USEXIM 7 2,107Sinvest 3 3Total 189 11,275

by sectorMiscellaneous 1 0 15Pipeline 2 0 155Port 10 230 86Power 92 13,988 7,932Rail 3 40 28Road 8 1,226 314Telecoms 58 6,179 2,305Transport 6 1 251Water/Waste 9 599 188Total 189 22,264 11,275

by regionAfrica 11 340 125Asia 38 8,478 5,347Bermuda 1 561 405CAMENA 16 2,818 847Europe 46 4,560 1,939LAC 77 5,506 2,611Total 189 22,264 11,275


projects (US$m) (US$m)

Table A8: Summmary of Multilateral and Bilateral Financing of Private Infrastructure Projects inDeveloping Countries, 1993–95


Of whichTotal cost Cost

Country projects known (US$m)

by regionAsiaBangladesh 1Cambodia 1 1 10China 48 33 15,828India 18 11 4,248Indonesia 11 7 5,226Laos 1Malaysia 31 23 17,360Maldives 1Myanmar 1Philippines 51 49 11,223Solomon Islands 1South Korea 6 3 4,437Sri Lanka 4Thailand 12 8 9,419Vanuatu 1Vietnam 2 2 715Subtotal (16 countries) 190 137 68,465

CAMENAAlgeria 3 1 2,800Bahrain 1Egypt 1 1 1,500Kazakhstan 2 1 17Morocco 5 4 2,967Pakistan 6 4 3,908Tunisia 1 1 97Turkmenistan 1 1 80United Arab Emirates 1Yemen 2Subtotal (10 countries) 23 13 11,369

LACArgentina 70 61 26,845Belize 2 1 32Bolivia 7 4 1,103Brazil 4 2 509Chile 22 11 1,960Colombia 11 6 591Costa Rica 2 1 20Dominican Republic 4 3 265El Salvador 3 1 74Guatemala 3 2 107Guyana 1Honduras 4 2 104Jamaica 3 3 369Mexico 80 63 24,438Nicaragua 2 1 0Panama 2 1 8Peru 4 4 2,915Trinidad & Tobago 3 1 112Uruguay 3

Venezuela 5 3 2,000Subtotal (20 countries) 235 170 61,453

AfricaBenin 3 1 15Botswana 1Burkina Faso 1 1 4Burundi 1Cameroon 3 1 300Cent. African Rep. 2Chad 1Côte d’Ivoire 5 4 280Djibouti 1Equatorial Guinea 1Ethiopia 1Gabon 4Gambia 1Ghana 3 1 185Guinea 7 1 1Guinea-Bissau 1Madagascar 3Mali 2Mauritania 1Mauritius 2Mozambique 5 1 5Namibia 1 1 32Niger 1Nigeria 2 1 900Sao Tome & Principe 1Seychelles 1Sierra Leone 3South Africa 12Sudan 1Tanzania 2 2 8Togo 2Uganda 2 1 16Zaire 2Subtotal (33 countries) 79 15 1,747

EuropeBelarus 5 3 20Bulgaria 2 1 42Czech Republic 7 1 1,450Estonia 6 3 3Hungary 7 6 2,452Latvia 2 1 160Lithuania 2Poland 6 2 380Russia 15 3 200Slovak Republic 1Turkey 5 5 1,828Ukraine 2 1 500Subtotal (12 countries) 60 26 7,035

Table A9: Private Infrastructure Projects in Developing Countries, 1990–December 1995




Source: World Bank PPI Database.Note: This database is maintained by the Private Participation in InfrastructureGroup in the World Bank (contact Ben Shin, 202–473–2057). The informationis drawn from published sources such as major newspapers and industry news-letters. While giving the best overall picture (particularly about pending projects),there are two limitations with the data:

• Coverage is limited by whatever biases the published sources might have,such as towards larger projects or particular regions or sectors.

• Financing figures are incomplete. Costs and financing sources are notknown on some projects, and in some other cases it is not known whetherprojects have achieved financial closure.

by region (summary)Asia 190 137 68,465CAMENA 23 13 11,369LAC 235 170 61,453Africa 79 15 1,747Europe 60 26 7,035Total 587 361 150,068

by sectorGas 32 23 9,989Power 196 156 50,593Telecom 133 46 41,428Transport 180 114 32,035Waste 20 13 8,774Water 15 5 1,444Other 11 4 5,804Total 587 361 150,068

Table A9: Private Infrastructure Projects in Developing Countries, 1990–December 1995




Table A10: Proportion of Foreign Finance in Infrastructure Privatizations, 1988–94

1988 1989 1990 1991

Of which Of which Of which Of whichTotal foreign Total foreign Total foreign Total foreign

Infrastructure sector (US$m) (US$m) (US$m) (US$m) (US$m) (US$m) (US$m) (US$m)

Telecom 325 150 212 46 3,690 1,203 5,800 1,532Power 106 45 2,108 441 59 4 364 76Gas distribution 0 0 0 0 0 0 0 0Railroads 0 0 0 0 0 0 159 49Road infrastructure 0 0 0 0 300 0 0 0Ports 0 0 0 0 0 0 0 0Water 0 0 0 0 2 0 0 0Subtotal 431 195 2,320 487 4,051 1,207 6,323 1,657

closely related privatizationsAirlines 367 367 473 351 1,926 1,094 269 191Road Transport 0 0 0 0 13 10 40 2Shipping 0 0 0 0 10 10 181 150

All Infrastructure 798 562 2,793 838 6,000 2,321 6,812 2,001Foreign share 70% 30% 39% 29%

1992 1993 1994

Of which Of which Of whichTotal foreign Total foreign Total foreign

Infrastructure sector (US$m) (US$m) (US$m) (US$m) (US$m) (US$m)

Telecom 3,007 485 1,269 340 6,725 1,864Power 2,996 1,138 1,767 946 1,645 630Gas Distribution 1,905 1,400 105 68 651 143Railroads 217 153 0 0 0 0Road Infrastructure 0 0 0 0 0 0Ports 13 9 274 116 4 2Water 175 0 50 0 0 0Subtotal 8,313 3,186 3,466 1,470 9,026 2,639

closely related privatizationsAirlines 1,472 430 820 183 763 264Road Transport 19 11 54 47 90 61Shipping 14 12 45 42 247 133

All Infrastructure 9,818 3,639 4,385 1,742 10,126 3,097Foreign share 37% 40% 31%

Source: World Bank.Note: A database on all privatizations is maintained by the International Economics Department in the World Bank (contactAndrea Anayiotos 202–473–3920). The latest two years on the database are published annually as an annex in the World DebtTables. The figures on privatization of infrastructure enterprises have been drawn from this database.


Table A11: Loans to Private Infrastructure Projects, 1990–95

1990 1991 1992 1993

No. of No. of No. of No. ofUS$m Co’s US$m Co’s US$m Co’s US$m Co’s

by sectorAirline 80 4 687 7 406 12 425 3Communications 446 4 998 11 643 11 3,179 9Electrical Utility 117 2 75 2 1,241 5 2,126 25Motorway Operator 464 3 1,040 6Shipping 419 5 835 7 171 5 1,389 15Transportation 9 2 36 2 54 3Water & Sewerage 106 2 124 2Subtotal Infrastructure 1,535 20 2,595 27 2,603 37 8,338 63

Oil & Gas 2,072 10 2,522 15 1,557 24 3,015 30Other 8,222 182 8,896 305 12,882 317 14,842 383Subtotal 11,829 212 14,014 347 17,042 378 26,196 476

by regionAfrica 0 0 428 1 13 1 142 2Asia 1,062 12 1,105 12 1,890 23 6,409 34Camena 6 1 0 0 92 1 15 1Europe 0 0 0 0 118 2 324 7LAC 467 7 1,061 14 490 10 1,448 19Subtotal Infrastructure 1,535 20 2,595 27 2,603 37 8,338 63

1994 1995

No. of No. ofUS$m Co’s US$m Co’s

by sectorAirline 1,027 4 383 5Communications 2,034 26 3,250 36Electrical Utility 4,785 36 8,950 60Motorway Operator 98 2 1,177 12Shipping 1,234 31 2,715 66Transportation 166 2 158 4Water & Sewerage 180 5 1,094 10Subtotal Infrastructure 9,523 106 17,726 193

Oil & Gas 2,555 18 3,160 35Other 20,606 485 28,400 535Subtotal 32,683 609 49,286 763

by regionAfrica 172 3 41 3Asia 5,825 53 10,280 105Camena 854 7 859 22Europe 280 9 2,925 26LAC 2,391 34 3,622 37Subtotal Infrastructure 9,523 106 17,726 193

Source: Capital DATA Loanware.Note: This database provides information on international loans, including those to infrastructure projects. It con-tains detailed information on borrowers and financing characteristics and is updated weekly.


Box A1: Insurance Arrangements for Infrastructure Projects

Insurance is an integral part of the security package for project finance and particularly so for infrastructure, wherethe size and complexity of projects necessitates a careful and thorough analysis of risks, exposures, and correspond-ing insurance requirements.

The obligations arising from project-related documents and contracts (such as implementation agreements, powerpurchase agreements, fuel supply agreements, EPC contracts, concession agreements, and O&M agreements) andtheir implications, are all taken into account in the formulation of minimum insurance requirements.

Scope of Insurance Coverage

The following basic policies (in addition to all statutorily required insurances) are typical of the requirements forprojects:

Construction Phase

• Construction All Risks, based on full contract value and covering the risks of physical loss or damage to thecontract works until project completion.

• Marine All Risks, covering the transit of plant and equipment from suppliers’ premises to the project site.

• Delay in Start-Up, which covers continuing fixed expenses (including debt service) and loss of anticipated netprofit in the event of delay in project completion, as a result of insured loss or damage during the marine transitor construction.

Operational Phase

• All Risks of physical loss or damage to assets, based on replacement value.

• Machinery Breakdown (defined as “sudden and unforeseen mechanical and electrical breakdown).

• Business Interruption following physical loss or damage to contract works or to equipment in transit.

• Third-Party Liability

Lenders’ Insurance Requirements

Although there is no blueprint of standard requirements for infrastructure projects, as programs should ideally betailor-made to suit the requirements of each case, the following is a list of desirable features from a lender’s perspec-tive:

• “Owner or Principal Controled” insurance program. It is very important that the sponsor, and not the contractor,arrange and control the insurance program. The owner needs to ensure that the program meets the requirementsof the financing agreement, to which the contractor is not usually a direct party. An owner should have controlover the choice of insurer and nature and extent of cover. Owner-controled programs are usually more costeffective and allow ease of administration and control. And the involvement of a sole lead insurer eliminatespotential conflicts that would arise if more than one insurer is involved in the construction insurances.

If the contractor arranges the construction physical damage insurances, an owner may find it difficult, if notimpossible, to arrange the Delay in Start-Up insurances separately. Even for a turnkey contract an owner canarrange the insurances. Some contractors may add insurances in the overall turnkey contract price, withoutspecifying the actual cost.


• Broad Form insurance program. Policies should be based on international— as opposed to local—wordings.And manuscript policies are preferable to “off-the-shelf” versions.

In many developing countries, insurance markets are still evolving and the breadth and sophistication of coversrequired by lenders is not yet available in most local markets.

• Reinsurance of the program into the international market, with a small retention by local insurers is recom-mended. Participation by domestic insurers is desirable. Selection of the insurer should be based on size andcapacity. The identity and retention levels of reinsurers require monitoring.

• For projects faced with high exposure to natural hazards, for example, earthquake, volcanic eruption, and thelike, full value insurance as opposed to loss limits should be arranged, to the extent that such cover is available.

• Inclusion of the full range of “Bankers Clause,” such as inclusion of lenders as insured parties, waiver ofsubrogation, nonvitiation, assignment, loss payee provisions, and noncancellation. The intent of a nonvitiationclause is to ensure that the interests, rights, and benefits of lenders are not prejudiced in the event that thesponsor or any one of the other insured parties breaches a policy warranty, condition, or terms, or fails to dosomething that is required of them. In addition to being named as “Sole Loss Payees,” lenders require assign-ment of all insurance policies. This strengthens the lenders’ position by giving them preferential creditor statusin the event of insolvency of the insured.

Box A1: Insurance Arrangements for Infrastructure Projects ( cont. )


Project Description

• Proposed ownership structure and sponsors’ in-formation

• Legal status of project and status of governmentapprovals

• Project’s comparative advantages

Capital Investment

• Project site(a) Size and location of project site (land)(b) Infrastructure requirements(c) Legal agreements for land use rights

• Civil works and buildings

• Major and auxiliary equipment(a) Estimated requirements and costs—imported

versus local and duties(b) Potential suppliers/contractors

• Project management—plant construction and su-pervision services

• Pre-operating requirements and costs

• Contingencies (physical) and escalations (finan-cial)

• Initial working capital requirements

Project Schedules

• Construction, start-up, operations

• Expenditures

• Funding

Production Process

• Production technology versus state of the art

• Scale and scope of production(a) Rated capacity and comparison with optimal

sizes(b) Expected operating efficiency(c) Frequency of shut-downs, changeovers(d) Previous experience with technology

• Production process(a) Plant layout and production flow diagram(b) Critical operations/bottlenecks(c) Options for future expansion or modification

• Production requirements and costs (per unit)(a) Raw materials—sources, quality, local versus

domestic(b) Consumables(c) Utilities—sources, reliability(d) Labor(e) Maintenance(f) Fees and royalties(g) Expected changes in operating efficiency

• Annual capital investment

• Quality control

• Environmental impact(a) Description of environmental impact(b) Plans for treatment of emissions and disposal

of effluents(c) Occupational health and safety issues(d) Local regulations—plans for compliance

• Technical assistance agreements(s)(a) Status of negotiations—proposed terms(b) Patents and proprietary technology(c) Training and support for plant staff

Marketing and Sales

• Product definition

• Competitive position of product/company(a) Product advantages versus competition (current

and future)(b) Project’s target market(s)

• Market structure(a) Demand—domestic versus foreign, current ver-

sus future(b) Supply—domestic versus foreign, current ver-

sus future—capacity, cost position, strategy(c) Marketing and sales practices(d) Market trends in future—new products, etc.(e) Projected market share by segment

• Marketing/sales arrangements and fees

Management and Personnel

• Organization chart and manpower requirements

Box A2: Subjects Covered in IFC’s Project Appraisal


• Personnel practices

• Management targets and incentives

• Management agreement

Financing

• Capital structure(a) Proposed debt/equity structure(b) Equity (1) Shareholder structure

(2) Long-term plans—stay private/gopublic(3) Quasi-equity—subordinated debt,and so forth

(c) Debt (1) Long-term debt/working capital(2) Domestic/foreign(3) Desired terms and conditions(4) Funding sources already identified

• Margin and breakeven analysis(a) Unit cost structure as percentage of unit sales

price(b) Cash and full-cost bases(c) Fixed and variable costs

• Financial projections(a) Projected financial statements—income state-

ments, cash flows, balance sheets(b) Clear statement of all assumptions(c) Sensitivity analyses under different scenarios

Copies of Legal Documents

• Joint venture agreements

• Articles of association

• Government approval documents/business license

• Land certificate/red line map

• Mortgages, if any

• Loan agreements

• Major contracts including(a) Off-take arrangements to the sponsors, if any(b) Technical assistance agreements

Box A2: Subjects Covered in IFC’s Project Appraisal ( cont. )


Box A3: Toll Road Concession Agreements

The following is a summary of key points contained in toll road concession agreements signed between privateproject developers and government agencies. It is drawn from several concession agreements that IFC has reviewedin the course of appraisal. It is meant to be illustrative, rather than exhaustive. Each concession agreement will varyaccording to the particular circumstances of the road to be constructed, rehabilitated, or maintained, and how respon-sibilities are allocated between government and the concessionaire—namely, which party is responsible for finaldesign and which for connecting roads. Particular care is needed in drafting sections that might serve as biddingcriteria, for instance “lowest average toll rate,” and “minimum government contribution.”

Clause 1. Definitions and Interpretation. A list of the definitions of terms appearing within the Concession Con-tract.

Clause 2. Concession Rights and Obligations. A summary of the general rights and obligations awarded to theConcessionaire by the relevant Ministry in accordance with the relevant Act. Included in this Clause may be refer-ence to the Concessionaire’s responsibility for undertaking work at their own cost and risk, and without recourse toGovernment credits or loan guarantees. Where the Concession Contract places financial burdens on the Ministry, thisClause may include a statement that such financial obligations shall be backed by the full faith and credit of the State.The clause may also specify annual Concession Fees, land ownership/title arrangements, and arrangements regard-ing construction of competing roadways or bridges in the vicinity of the works.

Clause 3. Concession Company. This outlines requirements for the establishment of the Concession Company, itsregistration as a legal entity, and the Company’s minimum registered capital.

Clause 4. Pre-Concession Period and Effectiveness. The Pre-Concession period commences on the date of theConcession Contract and lasts until the Effective Date. This clause specifies the obligations of the Concession Com-pany during the Pre-Concession period in terms of company registration, preparation, and submission of design forapproval, entry into the Construction Contract, entry into the Shareholders Agreement for subscribing the initialregistered capital of the Concession Company, and preparation of the manual for construction works. The Conces-sion Company will also during this period use all endeavors to raise funding for the project to achieve FinancialClosing.

This clause also outlines the Ministry’s obligations during the Pre-Concession period. The Ministry shall provide allreasonable assistance to the Concessionaire in its applications for the Specified Consents and perform other actionsrequired by the Concession Agreement such as allocation of land and Right of Way.

The Effective Date may be defined in several ways, including: achievement of Financial Closing; or delivery of thesite by the Ministry with Vacant Enjoyment together with the necessary rights of way. If the Effective Date is notreached within a fixed period (usually twelve to fourteen months) of the date of the Concession Contract, the validityof the Concession Contract shall cease in its entirety, unless provision is made for the parties to agree to an extension.The Ministry may reimburse the Concession Company its direct costs incurred during the Pre-Concession periodshould the Ministry fail to complete the acquisition of land or should any Relevant Authority refuse to grant any ofthe Specified Consents. After the Effective Date, the clause specifies the time period over which the registered capitalof the Concession Company should reach certain minimum values.

During the Pre-Concession period, an Environmental Impact Study (EIS) will be undertaken, to be carried out eitherby the Concession Company or the Ministry. The EIS will be in accordance with relevant laws or decrees.

Clause 5. Independent Engineer. This provides for the appointment of an independent engineer for the period of theconstruction works. The independent engineer will report directly to the Ministry, the Concession Company and tothe Lenders or the Lenders’ Representatives. The costs of the independent engineer may be borne entirely by theConcession Company.

Clause 6. Acquisition of Site. This provides for site acquisition, vacant enjoyment, roadworks, and public utilities.The Ministry may at its own cost acquire the land and deliver vacant enjoyment of the land, being in ownership of thestate, together with the necessary rights of way to the Concession Company. The Ministry absorbs site acquisitionrisk.


Clause 7. Financial Statements and Reporting. This provides for appointment of auditors by the ConcessionCompany, the right of the Ministry to inspect works, provision by the Concession Company of periodic reports, andprovision of information regarding lenders and creditors to the project.

Clause 8. Construction Works. This clause may specify the last date of commencement of construction works(usually not more than thirty days from the Effective Date) and the period for completion of works. Construction willbe in accordance with the Approved Design and subject to inspection by the independent engineer.

Clause 9. Inspection and Commissioning. The independent engineer will inspect the works at the completion ofconstruction and will issue a completion certificate subject to satisfactory inspection.

Clause 10. Tolls. The initial tolls will be specified in the Annex. Revisions to tolls will be made in accordance witha formula set out in a separate Annex. This clause will set out the procedures to be followed by the ConcessionCompany in applying to the Ministry for a toll revision, and any exemptions to toll collections (such as ambulances,police vehicles, army vehicles, and so forth).

Clause 11. Operation and Maintenance. This clause specifies the obligations of the Concession Company in rela-tion to operation and maintenance of the road or toll bridge. The clause may require the Concession Company todeliver to the Ministry a Maintenance Bond. The clause may outline the rights of the Concession Company to under-take secondary developments within the site.

Clause 12. Profit Sharing. This clause may provide for a profit sharing arrangement between the Concession Com-pany and the Ministry, usually after the Company shareholders have received a specified minimum return on equity.The Ministry’s earnings from profit sharing may or may not be earmarked for specific development expenditures.

Clause 13. Liability, Insurance, and Force Majeure. The Concession Contract will contain one or several clausesoutlining liability with respect to users and third parties, insurance coverage, and provisions for force majeure,hardship and material adverse governmental action. Provision for an arbitral tribunal in the event of a dispute be-tween the Concession Company and the ministry may be made.

Clause 14. Termination. This clause provides for the rights of either party to serve notice of termination of theConcession Contract on the other party and to receive compensation under specified circumstances.

Clause 15. Extension. This clause will specify the term of the Concession Contract (usually twenty-five to thirty-five years from the Effective Date) and will provide for arrangements whereby an extension of the Contract may beeffected.

Clause 16. Assignment and Substituted Equity. This clause prohibits either party from assigning its rights orobligations without the prior written consent of the other party, with the exception that the Concession Company maydo so for the purpose of creating a security interest in its assets in order to finance the project. The clause mustprovide that the holder of any security so created shall not be prevented or impeded by the Ministry or Governmentfrom enforcing such security in accordance with its terms. The clause may also provide for the right of the Ministryto continue the Concession Contract with a Substituted Entity and for the right of the lenders to nominate a Substi-tuted Entity in the event of loan default.

Clause 17. Governing Law. The rights and obligations of the parties under or pursuant to the Concession Contractshall be governed by and construed in accordance with the laws of the country. This clause will also refer to disputesettlement and arbitration procedures.

Clause 18. Language. This clause will nominate the language(s) of the Concession Contract, and, in the event ofthere being more than one language, which language version shall prevail when there are differences.

Clause 19. Miscellaneous. Other provisions not covered above.

Box A3: Toll Road Concession Agreements ( cont. )


Annexes

In addition to the main body of the Concession Contract there will usually be Annexes detailing provisions of theContract. An illustrative list is as follows:

1. Agreements2. Design Procedures3. Form of Commencement Certificate4. Form of Completion Certificate5. Main Terms of Construction Contract6. Forms of Material and Workmanship Warranty7. Guarantee Bonds8. Site Description9. Specified Consents10. Subscription of Minimum Registered Capital11. Duties of the Independent Engineer12. Scope of Work13. Environmental Permits and Approvals14. Initial Toll Rates15. Toll Increase Formula16. Form of Maintenance Bonds17. Insurance During Construction18. Insurance During Operation

Box A3: Toll Road Concession Agreements ( cont. )


Table A12: PPI and Capital Markets Country Indicators, 1990–95

Country / Measure 1990 1991 1992 1993 1994 1995

ArgentinaAccess to International Capital:Institutional Investor country rating 18.3 20.2 26.2 32.6 37.3 38.8Net foreign direct investment $m 1,836 2,439 4,179 6,305 1,200 3,900Bonds/loans raised on int’l. capital markets $m na 725 1,529 6,473 5,716 3,947Domestic Capital Market Indicators:Stock market capitalization $m 3,268 18,509 18,633 43,967 36,864 37,783Liquidity: turnover as % of capitalization 26.1% 26.1% 84.1% 23.5% 30.8% 12.2%Private Infrastructure Indicators:Infrastructure stocks as % of total capitalization na 24% 49% 47% 23% 25%Foreign loans to private infrastructure companies $m - - 64 660 844 1,395

ChileAccess to International Capital:Institutional Investor country rating 37.8 41.1 45.9 51.5 54.9 57.4Net foreign direct investment $m 590 523 699 841 1,795 2,300Bonds/loans raised on int’l. capital markets $m 285 na 350 775 80 903Domestic Capital Market Indicators:Stock market capitalization $m 13,545 27,984 29,644 44,622 68,195 72,928Liquidity: turnover as % of capitalization 9% 6% 7% 7% 7.7% 15.2%Private Infrastructure Indicators:Infrastructure stocks as % of total capitalization 35% 49% 51% 59% 50% 49%Foreign loans to private infrastructure companies $m - 25 - - - 375

ColombiaAccess to International Capital:Institutional Investor country rating 33.7 36.6 37.2 40.4 44.4 46.5Net foreign direct investment $m 500 457 790 850 950 naBonds/loans raised on int’l. capital markets $m na 200 na 621 1172 553Domestic Capital Market Indicators:Stock market capitalization $m 1416 4036 5681 9237 14028 17893Liquidity: turnover as % of capitalization 5.0% 5.0% 9.8% 7.9% 15.6% 8.5%Private Infrastructure Indicators:Infrastructure stocks as % of total capitalization 0% 1% 1% 0% 0% 0%Foreign loans to private infrastructure companies $m - - - 150 763 1,113

HungaryAccess to International Capital:Institutional Investor country rating 43.6 40.9 42.3 44.8 46.2 45.0Net foreign direct investment $m 0 1,462 1,479 2,349 1,100 4,200Bonds/loans raised on int’l. capital markets $m 987 1,378 1,446 5,071 2,541 3,076Domestic Capital Market Indicators:Stock market capitalization $m na 505 562 812 1,604 2,399Liquidity: turnover as % of capitalization na 23.2% 6.8% 12.2% 16.8% 14.7%Private Infrastructure Indicators:Infrastructure stocks as % of total capitalization na na na na na 12%Foreign loans to private infrastructure companies $m - - - 244 100 512


IndonesiaAccess to International Capital:Institutional Investor country rating 48.0 50.4 50.5 51.5 51.5 52.4Net foreign direct investment $m 1,093 1,482 1,777 2,004 2,100 4,500Bonds/loans raised on int’l. capital markets $m 5,462 5,639 2,641 3,726 6,199 5,463Domestic Capital Market Indicators:Stock market capitalization $m 8,081 6,823 12,038 32,953 47,241 66,585Liquidity: turnover as % of capitalization 49.4% 42.8% 32.4% 27.8% 25.0% 21.6%Private Infrastructure Indicators:Infrastructure stocks as % of total capitalization 0% 0% 0% na 5% 10%Foreign loans to private infrastructure companies $m - - 524 - 299 2,510

MalaysiaAccess to International Capital:Institutional Investor country rating 60.5 62.0 62.9 64.8 67.6 69.1Net foreign direct investment $m 2,333 3,999 4,469 5,000 4,300 5,800Bonds/loans raised on int’l. capital markets $m 730 512 1,271 1,612 3526 2,397Domestic Capital Market Indicators:Stock market capitalization $m 48,611 58,627 94,004 220,328 199,276 222,729Liquidity: turnover as % of capitalization 22% 18% 23% 94% 63% 35%Private Infrastructure Indicators:Infrastructure stocks as % of total capitalization 12% 26% 30% 31% 26% 25%Foreign loans to private infrastructure companies $m 261 - 246 1,135 3,224 1,609

PakistanAccess to International Capital:Institutional Investor country rating 30.0 27.0 27.7 27.7 29.7 30.7Net foreign direct investment $m naBonds/loans raised on int’l. capital markets $m naDomestic Capital Market Indicators:Stock market capitalization $m 2,850 7,326 8,028 11,602 12,263 9,286Liquidity: turnover as % of capitalization 8% 8% 12% 16% 26% 35%Private Infrastructure Indicators:Infrastructure stocks as % of total capitalization 18% 25% 19% 14% 13% 29%Foreign loans to private infrastructure companies $m - - 92 15 836 530

PhilippinesAccess to International Capital:Institutional Investor country rating 25.9 24.5 25.2 28.0 32.9 36.8Net foreign direct investment $m 530 544 228 763 1,000 naBonds/loans raised on int’l. capital markets $m 715 na na 1,250 1,164 673Domestic Capital Market Indicators:Stock market capitalization $m 5,927 10,197 13,794 40,327 55,519 58,859Liquidity: turnover as % of capitalization 21% 15% 23% 25% 25% 25%Private Infrastructure Indicators:Infrastructure stocks as % of total capitalization 11% 21% 22% 38% 26% 22%Foreign loans to private infrastructure companies $m - - - 706 626 1,512

Table A12: PPI and Capital Markets Country Indicators, 1990–95 ( cont. )

Country / Measure 1990 1991 1992 1993 1994 1995


Table A12: PPI and Capital Markets Country Indicators, 1990–95 ( cont. )

Country / Measure 1990 1991 1992 1993 1994 1995

ThailandAccess to International Capital:Institutional Investor country rating 62.3 62.5 61.3 60.8 62.2 63.8Net foreign direct investment $m 2,444 2,014 2,116 2,400 2,100 naBonds/loans raised on int’l. capital markets $m 1,465 1,907 2,718 5,550 7,910 5,171Domestic Capital Market Indicators:Stock market capitalization $m 23,896 35,815 58,259 130,510 131,479 141,507Liquidity: turnover as % of capitalization 96% 84% 124% 67% 61% 40%Private Infrastructure Indicators:Infrastructure stocks as % of total capitalization 2% 3% 3% 16% 20% 18%Foreign loans to private infrastructure companies $m 293 - 20 2,900 256 811

TurkeyAccess to International Capital:Institutional Investor country rating 41.4 42.7 43.9 45.1 41.9 40.9Net foreign direct investment $m 684 810 844 636 850 naBonds/loans raised on int’l. capital markets $m 2,498 2,280 4,580 5,763 851 2,428Domestic Capital Market Indicators:Stock market capitalization $m 19,065 15,703 9,931 37,496 21,605 20,772Liquidity: turnover as % of capitalization 31% 55% 82% 62% 100% 248%Private Infrastructure Indicators:Infrastructure stocks as % of total capitalization 4% 4% 7% 3% 8% 12%Foreign loans to private infrastructure companies $m - - - - - 2,326

Sources:Institutional Investor magazine. Twice a year Institutional Investor polls 75-100 international banks to grade countries on a a scale of 0 to 100, with 100 representing the leastchance of default. The responses are weighed to give more importance to responses from banks with greater worldwide exposure and more sophisticated country analysissystems.

Financial Flows and the Developing Countries, World Bank. FDI figures are preliminary for 1994 and estimated for 1995.

Emerging Market Database, IFC.

Captial DATA Loanware.


Box A4: A Guide to Power Purchase Agreements

This annex provides an overview of issues that should be addressed in a Power Purchase Agreement (PPA) betweena Purchaser (often a state-owned electricity utility) and a privately owned power supplier (the “Company”) con-structing a power plant. It emphasizes issues that might be of concern to lenders. The paper does not address allissues that might arise in negotiating a PPA, but provides examples of ways in which they were addressed in existingpower projects. In this example, the project is assumed to be a base load thermal plant financed partly with foreignloans and equity (it could be modified to accommodate mid-range or peaking thermal or hydro plants). This exampledoes not cover credit enhancements that might be required if the power purchaser is not creditworthy. The discussionis organized by the section headings that might be found in a typical PPA. Much of the detail of a PPA is oftencontained in annexes; a list of those commonly found is also provided.

ARTICLE I - DEFINITIONS

Defines all the capitalized terms used in the PPA and annexes, or cross-references to the section in the PPA where theterm is defined. Often complex terms (e.g., Force Majeure, Monthly Tariff) are defined in the text of the PPA.

ARTICLE II - SALE OF CAPACITY AND ENERGY

2.1 Obligations to Provide Contract Capacity and Electrical Output Specifies that the Company must make avail-able to the Purchaser not later than the specified commercial operation date (COD),1 the contracted capacity ofeach unit and deliver energy to the Purchaser in accordance with the PPA. The Company will commit to makeeach unit available by the COD, to ensure that each unit meets specified operating characteristics, to operate andmaintain the plant over the term of the PPA and to comply with the Purchaser’s despatch instructions (seeSection 8.2).

2.2 Obligation to Pay for Available Capacity and Electrical Output The Purchaser will be required to pay a monthlytariff for the available capacity and the electrical output generated by the plant. The most common approach isa “two-part” tariff, separated into capacity and energy components. The capacity charge is designed to recoverthe plant’s fixed costs2 and the energy charge covers fuel costs.3 Energy costs are usually incurred only if theplant is despatched by the Purchaser, whereas fixed charges are payable if the capacity is available but notdespatched and, under specified force majeure events, even where capacity is not available. The detailed tariffprovisions are often contained in an annex.

The tariff methodology should satisfy several objectives if the PPA is to be bankable: (1) be sufficiently clear toallow potential investors to calculate the project’s likely cash flows; (2) generate sufficient revenues to cover thefixed and variable costs of the project, including debt service; and (3) generate sufficient revenue to yield aminimum ratio of earnings to payments of principal and interest to satisfy lenders’ criteria. The tariff method-ology should also meet the country’s regulatory requirements and result in an economically satisfactory andpolitically acceptable price of electricity.

2.3 Third Party Sales Generally, the ability to make third party sales, particularly where the Purchaser creditworthi-ness is questionable, enhances the financeability of a project.4 It may benefit both the Purchaser and the Com-pany, if the Company were permitted (but not obligated) to sell excess capacity and energy not despatched bythe Purchaser. Because the PPA generally constitutes a take-or-pay obligation of the Purchaser, the proceeds ofthird party sales can reduce the Purchaser’s monthly tariff payments. Alternatively, the Company, as agent forthe Purchaser, might sell available capacity and energy to a third party in return for a negotiated agency fee fromthe Purchaser.

Another approach would be to allow the Company, after it has delivered a notice of termination to the Purchaserbased on failure of the Purchaser to comply with payment or other obligations under the PPA, to sell part of theplant’s contracted capacity and energy to any third party. The revenue would be set off against amounts due tothe Company from the Purchaser under the PPA.

2.4 Deemed Commissioning; Deemed Generation Developers and lenders expect a mechanism in a PPA whichenables a deemed commissioning to occur where a unit is ready but cannot be commissioned because of speci-fied events. These events are typically breaches by the Purchaser of its obligations (e.g., failure to completeinterconnection or transmission facilities or to provide energy for commissioning) and certain force majeure


Box A4: A Guide to Power Purchase Agreements ( cont. )

events. The capacity payments are generally determined on the basis of a specified deemed availability. ThePPA should set out the point at which deemed commissioning occurs and when it ceases. These provisions oftenrequire an independent engineer5 to certify when a unit would have passed the relevant test but for the occur-rence of specified events. In addition, PPAs often include a “deemed generation” provision whereby the Pur-chaser makes capacity payments to the Company for capacity which would have been available but for speci-fied force majeure events, generally political events.

2.5 Liquidated Damages

2.5.1 Damages for Delays If a unit fails to pass its performance tests by the commercial operation date, the Com-pany may be required to pay the Purchaser liquidated damages of an agreed amount per day up to a cap.6

Sometimes the damages increase after a specified number of days of delay. Lenders will examine the impact ofliquidated damages on debt coverage ratios. The Company should not be required to pay damages if the delayresults from events beyond the control of the Company, such as certain force majeure events or failure by thePurchaser to comply with specified obligations.

Another approach is to provide that inordinate delay by the Company that is not excused should allow thePurchaser to terminate the PPA. From the independent power developer’s point of view, however, the powerseller should receive and be required to apply liquidated damages from the contractor to either complete theunits or to redeem project debt in order to adjust fixed charges payable thereafter under the PPA.

2.5.2 Damages for Underperformance Liquidated damages are often payable when a plant fails to meet specifica-tions, particularly contracted capacity tests. The relationship between liquidated damages and provisions al-lowing the Purchaser to terminate the agreement for failure to meet such tests needs to be carefully considered.The parties may wish to consider, for example, whether the Company’s failure to meet a contracted capacity testcould lead the Company to terminate the tests and pay liquidated damages to the Purchaser. The liquidateddamages could be measured by the difference between contracted capacity and the actual percentage of con-tracted capacity demonstrated in testing. The Purchaser might prefer an underperforming unit to a terminationright which would require the Purchaser to buy out the project (see Section 5.3).

2.6 Testing Performance testing should be objective and designed to confirm levels of contracted capacity, reliabil-ity and fuel efficiency or heat rate. Testing should be certified by an independent engineer. Receipt of theengineer’s certificate should become the trigger for the commencement of capacity payments unless an earlier“deemed” commissioning has occurred (see Section 2.4). The PPA should specify the consequences of anyinability to complete testing due to unavailability of testing power or transmission facilities.

2.7 Company’s Purchase of Power; Pre-commissioning Power These provisions oblige the Purchaser to provide tothe Company energy required for construction, commissioning, maintenance and start-up. Often the tariff forelectricity supplied to generating companies for such purposes is the applicable tariff for industrial companies.In addition, the Company would look to the Purchaser to purchase “pre-commissioning power” — power gen-erated by a unit during testing after its synchronization — generally at a price which would cover the Company’sfuel cost associated with producing such pre-commissioning power.

ARTICLE III - CONDITIONS PRECEDENT

PPAs often set out conditions precedent to the effectiveness of each party’s obligations under the PPA (and certainother obligations may not be conditional7 ). Conditions to the Company’s obligations under the PPA may include(1) receipt of good, enforceable leasehold interest to the site; (2) receipt of certain governmental authorizations andclearances; (3) obtaining comfort regarding receipt of approvals not received as of the date of execution of the PPA;(4) if applicable, government assurances relating to currency convertibility, availability of fuel etc; (5) if applicable,receipt of government guarantee of the payment performance of the Purchaser; and (6) execution of the constructioncontract and certain other project agreements. Conditions precedent to the Purchaser’s obligations may includereceipt by the Purchaser of (1) corporate documents (e.g., articles of association and board resolutions) and (2) evi-dence of the Company’s receipt of necessary governmental approvals.


The Company will usually wish to make financial closing a condition precedent to its obligations, whereas thePurchaser will expect that any conditions precedent to the Company’s obligations be satisfied within a certain periodor the Purchaser shall have the ability to terminate the PPA without liability. Lenders will require that the PPAspecify when the obligations of the parties commence. There should be no ambiguity as to whether any provision inthe PPA is effective and enforceable. Accordingly, lenders will prefer to make all obligations effective as of the dateof execution of the PPA. Open-ended commitments for either party can be avoided by including provisions allowingtermination if, after specified dates, certain key events have not occurred (such as financial closing).

ARTICLE IV - PRE-OPERATION PERIOD

Pre-operation obligations frequently include a “reasonable efforts” obligation by the Company to obtain necessaryconsents and approvals, and by the Purchaser to provide reasonable assistance to the Company in obtaining theconsents and approvals. The Company’s other pre-operation obligations may include (1) appointing the constructioncontractor and an operator; and (2) providing copies of the construction and O&M contracts to the Purchaser. ThePurchaser may be required to provide the Company with title to the site and construction water, power and otherservices.

Some advisors have recommended that a Purchaser should have the right under a PPA to approve project contracts.Developers and lenders will prefer to avoid this, as the Purchaser may not have sufficient resources to review theseagreements in detail. The Purchaser is perhaps better served by clear construction and operational performancecriteria in the PPA for the Company to adhere to; the PPA could also include appropriate incentives. It will be theobligation of the Company to contract with construction contractors and operators to see that these criteria are met.The Purchaser’s concerns about the enforceability of the Company’s obligations can also be addressed throughrequirements for performance bonds under the PPA in favor of the Purchaser. The pre-operations provisions gener-ally also provide the Purchaser with the right to observe construction progress of the project.

A PPA will often provide, as part of the pre-operating obligations, for the Purchaser and the Company to agree onoperating procedures. These include methods of day-to-day communication, key personnel lists, clearances andswitching practices, outage scheduling, capacity energy reporting, etc. If the parties are able to agree on such oper-ating procedures before the execution of the PPA, they could be included in a schedule to the PPA.

ARTICLE V - TERM AND TERMINATION

5.1 Term Defines the date on which the agreement becomes effective and the period after which it will terminate.The provision will also provide extensions for specified force majeure events and may also include proceduresfor a request by either party for an extension (in which case tariff calculations should be defined for the extendedterm). Lenders will insist that the PPA’s term be a few years beyond the period, permitting the Company togenerate sufficient cash flow to retire the project’s debt.

5.2 Termination In the event of default, the nondefaulting party will have the right, subject to certain cure rights forthe defaulting party and lenders and other limitations,8 to terminate the agreement and exercise certain otherrights. In addition, continuation of force majeure events beyond a specified period (see Article XI) could alsotrigger a right of either the Company or the Purchaser to terminate the PPA. Lenders will generally prefer tolimit the number of the termination events.

Events giving rise to a termination and/or buy-out right for the Company typically include (1) dissolution of thePurchaser; (2) failures by the Purchaser to observe payment obligations and maintain letters of credit or othersecurity; (3) breaches of other obligations by the Purchaser under the PPA; (4) government guarantees (if any)or implementation agreements ceasing to remain in force; and (5) repudiation by the Purchaser of the PPA. ThePurchaser typically has the right to terminate the PPA and/or exercise its buy-out rights if: (1) the Company failsto achieve financial closing by a specified date; (2) the Company fails to achieve commercial operations of theunits by specified deadlines (generally subject to extensions for certain events); (3) the Company abandons theproject; (4) the Company breaches its obligations under the PPA; and (5) the Company is dissolved.

Termination provisions generally include requirements for notice by the party wishing to invoke terminationand/or buy-out, followed by a consultation period between the parties and a period during which the defaulting



party may attempt to cure the default. Such cure right is usually accompanied by a cure period (in addition tothe cure period provided to the nondefaulting party) in favor of the lenders if the Company defaults.

5.3 Buy-out Price Generally, the termination provisions lead to a buy-out by the Purchaser which can be triggeredby either party depending on the termination event. Lenders will wish to ascertain that all outstanding debt beincluded in the buy-out price. However, where the Purchaser’s credit is in question, buy-out will be consideredof limited value by developers and lenders, unless supported by government guarantees.

The PPA should provide a methodology for calculating the buy-out price. In some PPAs this is specified as acombination of: (1) a discounted cash flow valuation based on the estimated net present value of the Company’expected cash flows over the remainder of the PPA plus a specified residual value of the plant; (2) a constructionperiod evaluation consisting of a specified percentage of equity subscriptions paid into the Company plus anallowed return on the equity at a specified rate; (3) a terminal evaluation set at a specified percentage of theplant’s depreciated replacement cost; (4) the Company’s outstanding long and short-term loans and any accruedinterest and financing fees; and (5) transfer costs. Each component is scaled according to the reason for termi-nation, with the highest buy-out price following a Purchaser default and generally none in the event of expiry ofthe PPA. Intermediate buy-out prices can be negotiated for terminations caused by different force majeureevents. An appraiser may be appointed by the parties to calculate the buy-out price.

ARTICLE VI - REPRESENTATIONS AND WARRANTIES

The representations and warranties in a PPA typically include the organization and valid existence of the Purchaserand the Company, the legal and binding nature of the obligations constituted by the PPA, the absence of certain legalproceedings that might adversely affect the ability of the parties to meet their obligations, and the due authorizationof the PPA by the parties. Sometimes, a project might require additional representations and warranties, frequentlycovering environmental issues, or on land owned by the Purchaser, for example.

ARTICLE VII - UNDERTAKINGS

A PPA generally contains additional undertakings/covenants from each party. The Company’s undertakings mightinclude obligations to: (1) use reasonable efforts to obtain financing for the project; (2) use reasonable efforts tonegotiate fuel supply agreements,9 a construction contract and financing documents; (3) use reasonable efforts toobtain government authorizations; and (4) operate the plant in accordance with the Purchaser’s despatch instructionsand prudent utility practices. Typical covenants of the Purchaser include (1) to provide, by or before a specifiedcommercial operation date, interconnection and transmission facilities; (2) to assist in identifying and preparingapplications for government authorizations; (3) to assist the Company in negotiating and executing the financingdocuments; and (4) to cooperate with the Company with respect to the Company’s obligations and rights under thePPA. The PPA should set forth the consequences of a failure to comply with any such obligations.

ARTICLE VIII - PROJECT OPERATION

Issues typically include scheduled outages and maintenance outages, operations and maintenance, emergencies andrecord keeping.

8.1 Scheduled Outages and Maintenance Outages Prior to the commercial operation date (COD), the Company willbe required to submit its desired schedule of scheduled outage periods for the first full maintenance year aftercommissioning. The PPA should also provide for a date by which the Company must submit its desired sched-ule of outage periods for each subsequent year. Generally, longer notice is required for years subsequent to theCOD. The PPA may also set parameters on when the scheduled outage periods should occur.

The PPA will generally provide for a period during which the Purchaser may object in writing to a requestedschedule and propose an alternative schedule. The Company will often insist that scheduled outages shouldoccur only at times determined in accordance with this procedure and that the Purchaser should not require theCompany to schedule outages in a manner or time outside the technical limits of the plant, or inconsistent withprudent utility practices or manufacturer’s recommendations, or which would pose risk of damage to the plant.



The Purchaser’s maintenance program for interconnection facilities and transmission facilities should also becoordinated with the approved scheduled outages for the plant. Frequently, the Purchaser will also be prohib-ited from discriminating against the Company in favor of other plants when the Purchaser schedules and re-schedules outages.

The PPA will also address “maintenance outages”, defined as an interruption or reduction of generating capabil-ity (excluding scheduled outages) that cannot be postponed until the next scheduled outage. An abbreviated setof procedures requiring oral notice within 24 hours (or a similar period) to the Purchaser usually is provided formaintenance outages.

8.2 Operation; Despatch This sets out procedures for issuance by the Purchaser of despatch instructions to theCompany and for the degree of despatchability allowed to the Purchaser, if any. These provisions usuallyprovide that the plant’s despatch procedures shall be in accordance with despatch procedures for similar plantson the Purchaser system. Typically the despatch instructions should take into account the characteristics of theplant, the overall system condition and requirements, and the conditions and characteristics of other powersources available to the purchaser, in setting out appropriate and equitable despatch instructions. The PPA canalso provide the Purchaser with the right to request that the plant be shut down. In turn, the Company willexpect limitations on this right as well as indemnification for costs incurred in shutting down and restarting theplant and any increased costs incurred in connection with the shut down. The Company will also reasonably askfor a lead time in which to restart the plant, in accordance with the relevant unit specifications.

These provisions may also provide that the Company shall not be required to operate the plant other than inaccordance with prudent utility practices and specified technical limits. The Company may also be asked to usebest efforts to employ qualified personnel from the country and to institute training programs for such person-nel.

8.3 Emergency Plans; Supply of Power and Emergency The PPA will generally call for each party to establish plansfor an emergency, such as local or widespread electric blackout and voltage reduction to effect load curtailment.During an emergency, the Company may be required as soon as possible after a request from the Purchaser tosupply such power as the plant is able to generate, consistent with prudent utility practices and specified techni-cal limits of the plant, and, at the Purchaser’s expense, make reasonable efforts to reschedule any outages or tocomplete work during the outage to restore power as soon as possible. Other limitations and parameters on theability of the Purchaser to direct the Company to perform emergency related operations (such as cold starts,emergency maximum loading or deloading) may be included.

8.4 Record Maintenance Each party will be required to keep the records necessary to administer the PPA, includingan accurate and up-to-date operation log at the plant. The provisions will generally require maintenance of suchrecords for an agreed period after their creation.

8.5 Interconnection, Metering Standards and Testing The PPA should contain provisions providing for exchangesof information concerning the plant’s design, the interconnection and transmission facilities, the allocation ofresponsibility for construction, and interconnection, easements and rights-of-way, protective devices and thetesting of interconnection and transmission facilities. Specifications for the meters to be used for the projectshould be set forth, as well as responsibility for maintaining the meters, providing regular metering results,checking meter accuracy, etc.

ARTICLE IX - PAYMENT

This specifies procedures for invoicing, the method and amount of payment, resolving disputes relating to invoices,security for payment, and rights to set off.

9.1 Invoicing This section should establish a payment date by which the Purchaser must pay the Company themonthly tariff payment for a given month. It should also specify the manner in which invoices are to beprovided by the Company. Generally, commencing with a month following the date on which synchronizationfor the first unit occurs, the Company will be required to submit to the Purchaser by a specified date an invoice



stating the available capacity, the energy delivered to the Purchaser, the aggregate variable charges and the totalmonthly tariff payment. The invoice should include reasonably detailed calculations in accordance with thePPA; an example of a tariff calculation in a schedule to the PPA is often helpful. Other charges, fees andreimbursements payable by the Purchaser to the Company are generally billed separately. If the tariff calcula-tion procedures call for an annual adjustment, such as for fluctuations in foreign exchange rates, the provisionswill generally provide for invoicing at a specified time(s) each year for such amounts.

The agreement will provide for the form of payment, such as direct payment or wire transfer to an accountdesignated by the Company10 to the Purchaser. Any delayed payment charges should also be specified. Noticeof disputes relating to an invoice should be given promptly. Lenders often expect the agreement to provide thatthe Purchaser pay the invoice when due, though it may be entitled to a repayment after any invoice dispute isresolved. The waiver of set off rights may also be included.

9.2 Security for Payment The PPA may require the Purchaser to cause a bank acceptable to the Company to issue tothe Company one or more irrevocable, unconditional standby letters of credit to ensure short term liquidity. ThePPA will generally provide that the letter of credit shall at all times be in a specified amount, usually tied toprojected tariff payments for a specified period, using certain assumptions regarding load factors and otherelements of the tariff calculation to calculate the amount. Typically, the Company may draw upon such letter ofcredit if the due date for an invoice has passed without payment or if a replacement letter of credit has not beendelivered to replace an expiring or partially drawn letter of credit.11 Failure to replace a letter of credit fullycould result in addition of interest to the invoice until such time the letter of credit is fully restored.

ARTICLE X - LIABILITY AND INDEMNIFICATION

These provisions state that neither party shall be liable to the other for damages except as specified. The Article alsorequires for each party to indemnify the other for losses resulting from negligent acts of the indemnifying party,except to the extent (1) such losses are caused by any act of the indemnified party and (2) the indemnified parties arecompensated by insurance or specified agreement. The parties may also agree not to assert claims for indemnifica-tion until the aggregate amount of all claims exceed a minimum amount. The indemnity provisions will generallyprovide the indemnifying party with the option to assume and control the defense of claims for which the indemnify-ing party acknowledges its obligation to provide indemnification.

ARTICLE XI - FORCE MAJEURE

Treatment of force majeure in PPAs is highly contentious and many approaches have been used. A PPA shouldclearly classify force majeure events, specifying the impact of each event on the obligations of the parties, in particu-lar on the payment obligations of the Purchaser and the construction, completion and operational obligations of theCompany. The parties might consider the following approach:

11.1Categories An event of force majeure is any event that prevents any party in the performance of its obligationsunder the PPA, but only to the extent that the events are not within the reasonable control of the affected partyand could not have been avoided with reasonable care. A non-exhaustive list includes:

(1) Specified non-political events:12 such as natural disasters, labor difficulties and contractor failure;(2) Domestic political events including war, revolution, terrorism, political sabotage, changes in law affecting

the project, expropriation, unjustified denials of governmental authorization and certain interruptions infuel supply (if fuel risk is borne by the utility);13

(3) Foreign Political Events including generally the same events in category (2) but occurring outside thecountry concerned.

Generally the following conditions shall not constitute an event of force majeure unless the existence of suchcondition is the result of an event of force majeure:a. late delivery of plant, machinery, equipment, materials, spare parts or consumables for the project, orb. a delay in the performance of any contractor.



11.2Notices/Duty to Mitigate This provides procedures for notification by the party claiming force majeure to theother party and imposes a duty on the party affected by the force majeure to use reasonable efforts to mitigatethe effects of the force majeure.

11.3Effect on Obligations The Article provides that neither party shall be liable for any failures in complying with itsobligations under the PPA (though the obligation to make payments which are payable14 should be excluded) ifthe failure was caused by force majeure events. The period allowed for performance by the affected party of itsobligations under the PPA is extended day-for-day (plus additional periods to compensate for demobilizationand remobilization).

11.4Buy-out Consequences of Force Majeure Events If the construction or the operation of the plant is adverselyaffected for a certain continuous period due to the occurrence of a domestic political event, either party candeliver a notice to the other party and, subject to dispute resolution procedures and time limits, terminate thePPA. Upon termination, the Purchaser will be obligated to buy out the project (see Article V).

ARTICLE XII - TAXES

Taxes are generally passed through to the Purchaser under the tariff. In addition, there should be provisions address-ing administrative matters relating to taxes, including requirements for the Purchaser to support all applications bythe Company for exemptions from domestic taxes and an obligation on the part of the Company to take reasonablesteps to ensure that its liability on taxes is minimized,15 and procedures for resolving any dispute of claims by theCompany for a payment in respect of taxes under the tariff provisions.

ARTICLE XIII - CHANGE IN LAW

The PPA should address the impact on the tariff in the event of a change in applicable law or its interpretation whichaffects the Company. “Applicable law” is frequently defined to include any act, decree, regulation, notification, ororder having the force of law. “Change in law” is defined to include any new enactment, amendment, modification orrepeal of any applicable law as well as any change in the interpretation of the applicable law (either through decisionsby courts or by government). Some PPAs in such circumstances have required an automatic adjustment of the tariff,subject to the approval of the regulatory agencies; other PPAs may require that the parties meet to attempt to amendthe PPA to pass on the impact in the tariff payment. In the absence of agreement, the dispute resolution procedures inthe PPA would apply. While various approaches to the allocation of risk of change in law are taken in PPAs, lenderswill require that the cash flows of a project required for debt service be protected against such changes through tariffmodifications.

ARTICLE XIV - DISPUTE RESOLUTION

Dispute resolution provisions should generally provide for good faith negotiations followed by arbitration underinternationally accepted rules16 in a third country. The provision should specify the applicable rules, the number ofarbitrators, the place of arbitration, the language of the arbitration proceedings, the nature and enforceability of theaward, and the appointing and administrating authority. In addition to arbitration, the PPA may also allow referral oftechnical matters to an expert for quicker resolution.

ARTICLE XV - NOTICES

This Article sets forth the details for providing notices under the PPA, as well as provisions for changing noticeaddresses for the parties.

ARTICLE XVI - MISCELLANEOUS

These may include an assignment provision restricting assignment by either party to the PPA. Lenders will generallyrequire that the Company assign its rights under the PPA to lenders and that the Purchaser enter into a direct agree-ment with the lenders relating to such assignment and certain other issues. The Purchaser or the regulatory agenciesmay wish to provide for an assignment of the PPA to an entity which results from future privatization of the Pur-



chaser. Because of concerns for the privatized entity’s operational criteria and creditworthiness, lenders often at-tempt to spell out the operational and financial parameters of the privatized entity in hopes of ensuring that thePurchaser’s payment obligations under the PPA will be properly assumed and performed. The miscellaneous provi-sions should also address the governing law of the agreement, severability clause, a waiver of immunity by thePurchaser, and confidentiality provisions.

SAMPLE ANNEXES/SCHEDULES

• Permits and authorizations• Technical limits and parameters• Interconnection• Commissioning and testing specifications• Metering standards and testing• Buy-out price• Insurance• Determination of availability• Outages and emergencies• Tariff calculations

1. The commercial operation date is often based on the financial closing date and should be extended by delayscaused by the Purchaser’s breach of obligations and certain force majeure events.

2. Fixed charges in a two-part tariff usually include all fixed costs associated with the project, including fixedO&M costs, insurance costs, administrative costs, financial costs, taxes, and return on equity. (The fixedcomponent of fuel transport charges may also be included.) It could be expressed in local currency and/orforeign currency.

3. The energy charge is also known as the “variable charge” and may include variable operating and mainte-nance costs.

4. Third party sales also promote the interchange of power, the expansion of transmission systems and improveoverall system efficiency. All such direct sales could be interruptable by the Purchaser, unless the Purchasernotifies the Company of a reduction in the Purchaser’s system demand for an extended duration. In suchcase, the Company could contract to make its excess capacity available for the corresponding duration.

5. Lenders often require the Company to engage an independent engineer to report on construction progress andto provide certification on construction, testing (usually a condition of loan disbursement) and operations.Sometimes the independent engineer also mediates technical disputes between the parties.

6. If liquidated damages are imposed, they should reflect the actual damages expected to be suffered by thePurchaser (e.g., in respect of its outlay on the interconnection and transmission facilities).

7. Such obligations include, for the Company, using its best efforts to achieve financial closing, to obtainconsents and approvals, to conduct preliminary studies etc., and, for the Purchaser, the transfer of title to thesite, obtaining consents and approvals and assisting the Company in doing the same.

8. The lenders will expect to enter into a direct contractual relationship with the Purchaser, whereby thePurchaser agrees (i) to make payments to the Company directly into an account designated by the lenderswithout right of credit or right of set-off; (ii) to provide to the lenders reasonable notice and cure rights; (iii)to accept in the event of a default, as a substitute for the Company under the PPA, any reasonable agent for


Notes


the lenders or any reasonable purchaser of the Company upon a foreclosure sale, provided that such personshall assume all of the Company’s obligations under the PPA; and (iv) to afford the lenders an opportunity toremedy the event giving rise to a termination notice prior to termination of the PPA. Also, it may be necessaryto negotiate with the Purchaser further provisions to address issues of concern to the lenders arising after thePPA is signed.

9. Lenders will focus on fuel supply risks and how such risks should be managed and mitigated. They willconsider the reliability and credit of the fuel supplier, the adequacy of the fuel source, the existence of analternative fuel supplier, the consequences of non-supply (for example, whether this should be a forcemajeure event under the PPA), and also transportation, storage and disposal risks. The liquidated damagespayable under the fuel supply agreement will also be relevant. Finally, lenders may investigate whether fuelor alternate fuel could be imported into the country.

10. Lenders will generally require that payments of invoices be made directly to an account controlled by atrustee or security agent or over which the lenders hold some form of security.

11. Some PPAs look to the establishment of escrow accounts funded by the Purchaser’s receivables (or liens oversuch receivables) from specified customers for additional liquidity security.

12. To the extent insurance is available at a reasonable cost to cover the occurrence of any of the natural events,the Company will be asked to undertake to insure such risks.

13. Lenders will also examine whether the force majeure arrangement under the fuel supply agreement isproperly reflected in the force majeure section of the PPA, in order to leave no gap in the allocation of fuelrisks. If, for example, the fuel supplier will be excused from its obligation to supply fuel under the fuelsupply agreement due to government actions, the lenders are likely to require that the unavailability of fuel bea political force majeure event for the Company in the PPA.

14. Although the occurrence of a force majeure event may prevent a payment obligation from arising, once a sumdoes become payable, the payment obligation will not be excused by force majeure.

15. The developers will also be considering the tax implications under their home tax regime.

16. The most often used arbitration rules are those of the International Chamber of Commerce (ICC) and theUnited Nations Commission on International Trade Law (UNCITRAL). Depending on the parties involvedin a dispute, the arbitration rules under the Convention on the Settlement of Investment Disputes betweenStates and Nationals of Other States (through the International Centre for Settlement of Investment Disputes -ICSID) may also be suitable.



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