investing and financing options & risk mitigation framework for infrastructure sector

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Agenda:

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• Investing in Infrastructure Sector in Myanmar

• Financing Options for Infrastructure Sector

Options for Infrastructure Finance

How to Structure a Project Finance

• Risk Mitigation Framework for Infrastructure Sector

• Effective Risk Management in Infrastructure Sector

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Investing in Infrastructure Sector in Myanmar

• Demand of Infrastructure Development: Myanmar’s infrastructure sector is rapidly developing But a significant gap in infrastructure development Myanmar was ranked 139 out of 148 countries for its’

competitiveness, with its’ infrastructure quality ranked at 141 (Source: WEF, Global Competitiveness Report)

According to the Logistic Performance Index (LPI) published by the World Bank, Myanmar was ranked 133 out of 155 in 2012

Myanmar needs US$320 billion in infrastructure development alone (Source: McKinsey Global Institute)

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Investing in Infrastructure Sector in Myanmar • Required for infrastructure investment in all sectors: road,

power, port, telecommunication, industrial zones, etc… • Investment opportunities in each specific sector:

Roads: Under the Framework for Economic and Social Reforms, immediate priority will be given to infrastructure projects improving land connectivity and transportation links with regional economies to boost economic integration

Railways: Under the same framework, the Government has also committed to improving the quality of railroad sections connecting important economic centres in the country to promote regional equity and as part of the Singapore-Kunming Rail Link project

Ports: These have the potential to become regional transportation hubs serving markets in China, India and the Indo-China region. Deep water ports are currently being jointly developed at Dawei and Kyaukphyu and there is interest in developing ports in Thilawa, Sittwe, Kalegauk and Bokpyin

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Source: KPMG’s Myanmar Infrastructure report

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Investing in Infrastructure Sector in Myanmar • Investment opportunities in each specific sector:

Airports: Plans have been announced by the Government to add two international airports in central Bago and in the Dawei special economic zone. Plans have also been released to redevelop Yangon and Mandalay airports

Energy & Power: Myanmar’s power sector is underserved and investments in energy generation, alternative energy and pipelines are coming in rapidly. Opportunities exist for investments in the generation, transmission and distribution of power

Telecommunications: To increase mobile phone density and internet penetration, a Information and Communications Technologies (ICT) Master Plan has been announced along with plans for new telecommunication and Cyber laws and the privatization of state-owned Myanmar Post and Telecommunication

Special Economic Zones (SEZ): Three key SEZ projects have been announced – the Dawei Special Economic Zone, Kyaukphyu Economic and Technology Zone and the Thilawa Special Economic Zone near Yangon. Seven new local industrial zones will also be added

Social infrastructure: The Government has committed to undertaking education sector as well as healthcare sector reforms

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Source: KPMG’s Myanmar Infrastructure report

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Financing Options for Infrastructure Sector

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Financing Options for Infrastructure Sector

• Financing Options for Infrastructure Finance: Government investment funding and preferential policies

Official Development Assistance (ODA)

Loan from commercial banks or financial institutions

Public Private Partnership (PPP)

Clean Development Mechanism (CDM)

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Financing Options for Infrastructure Sector • Government investment funding and preferential

policies: Infrastructure investments account for high GDP

percentage State budget financing big investment projects Preferential policies from Government: Fiscal credibility Price subsidies Feed-in tariff (FIT)

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Financing Options for Infrastructure Sector • Official Development Assistance (ODA): Financing Programs

from World Bank; ADB; IMF; other countries’ ODA funds (e.g. Japan, European Union, Sweden, Germany, France, USA, etc…) Non return ODA Preferential loans

• Loan from domestic and international commercial banks or financial institutions: Traditional financing source; Preferential policy to loan for RE projects

• Clean development fund of investment funds

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Financing Options for Infrastructure Sector • Innovative Financing Options: Public Private Partnertship (PPP): Alternative financing source A means to enable the development or improvement

of energy in infrastructure through the participation of private and government entities

• Why PPP is attractive as an off-budget mechanism for infrastructure development?

• Common type of PPP: Build Operation Transfer (BOT)

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Financing Options for Infrastructure Sector • Build Operation Transfer (BOT):

A common PPP model: A private entity receives a franchise from the private or public sector organization to finance, design, construct, and operate a facility for a specified period of time, after which the ownership is transferred back to the funding entity

Many other variants such as Build-Transfer-Operate (BTO), Build-Own-Operate-Transfer (BOOT) and Build-Rehabilitate-Operate-Transfer (BROT)

• BOT form is widely used in the infrastructure development projects in Myanmar

• BOT Rules in Myanmar: Under the Foreign Investment Rules of Myanmar: BOT means Building, Operating and Transfer from the business operator to the

relevant person at the expiry of the contract term While BTO means Building, Transfer from the business operator to the relevant

person after the building and operating the business. 11

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Financing Options for Infrastructure Sector • BOT Rules in Myanmar:

In the real estate project, if the land is directly leased by the Government to the project developer, the project is usually conducted under a BOT

In the power plant projects, after the feasibility study is approved, the project developer will negotiate and sign with the Government a Memorandum of Agreement (MOA) which is importantly a BOT contract

Memorandum of Agreement (MOA): A short form agreement without the detailed concession

In general, the concession depends on the nature of the investment project. For example: In power project, the concession is usually in about 25-30 years. The road BOT contract may be 40 year term for the local investors and 60 year term for some international investors (from the start of operating period until the end of transfer period

• Myanmar Government’s support to BOT project: – Tax exemption for imported construction materials – Provision of construction materials which is able to be provided by the Government with a

price rate of the Government – BOT project can make a loan from the local banks for funding the project performance

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Financing Options for Infrastructure Sector • How to Structure a Project

Finance: Definition of Project Finance: The

financing of long-term infrastructure, industrial projects and public services based upon a non-recourse or limited recourse financial structure where project debt and equity used to finance the project are paid back from the cashflow generated by the project (International Project Finance Association (IPFA) )

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Source: Thompson Reuteur 2012 report

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Financing Options for Infrastructure Sector • How to Structure a

Project Finance: A project financing structure

involves many equity investors as well as the bank or other lending institutions that provide the loans to the project operation

Normally, each project will create a special purpose entity, thereby indemnifying other assets owned by a project equity investor from the detrimental effects of a project failure

Risk identification and allocation is the key component of a project finance

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Risk Mitigation Framework for Infrastructure Sector

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Risk Mitigation Framework for Infrastructure Sector In the infrastructure sector, major projects

have the risks, e.g. cost overruns, delays, failed procurement or unavailability of private financing that may cause the failure of infrastructure project

To complete a successful infrastructure project, it must have a risk management approach from the initiation, financing and execution of the project

Risk management framework is a basic conceptual structure that is used to address the risks faced by for an infrastructure project

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Risk Mitigation Framework for Infrastructure Sector Risk Management Framework: Risk Identifications Risk Assessment Risk Mitigation Implementation of mitigation plans Review and monitoring of mitigation plans

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Risk Mitigation Framework for Infrastructure Sector Effective Risk Management in

Infrastructure Sector : • Project risk management must be a core element of

project selection, planning and design and also continuous in the whole life cycle of the project

• For the on time completion of infrastructure project, the effective risk management must be applied to the project implementation projects

• Creating an effective risk management system is to understand the qualitative distinctions among the types of risks that the infrastructure projects may face

• The infrastructure project managers must forecast and plan for risks within the whole life cycle of the project

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Thank you very much!

Contact email:

[email protected]

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DUANE MORRIS SELVAM MYANMAR

No. 10 Phoyazar Street, 15 Ward,Baukhtaw Yankin Township Yangon Suite, Myanmar

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investing and financing options & risk mitigation framework for infrastructure sector

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