Bucharest, April 4, 2006Bucharest, April 4, 2006

Black Sea Energy ConferenceBlack Sea Energy Conference

Public-Private Partnership in CEE Public-Private Partnership in CEE

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World Bank Group and Energy Sector

Introduction to IFC’s Advisory Services

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The World Bank GroupThe World Bank Group

WORLD BANK

GROUP

WORLD BANK

GROUP

ICSIDICSID

IDAIDA MIGAMIGA

«World Bank»

CASCAS

IFC IFC IBRDIBRD

Our Department

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WBG in ECA – Selected Current ActivitiesWBG in ECA – Selected Current Activities

US$14.6 billion World Bank active portfolio in ECA region, of which:

US$4.4bn in 95 projects in infrastructure and energy

US$4.4 billion IFC active projects in ECA region, of which:

US$350m in infrastructure

US$160m in energy

US$5.0 billion FY05 World Bank program for the region, of which:

US$600m for Romania alone

US$1.3bn for infrastructure and energy

In 2004/05 IFC invests in the region approximately:

US$600m in infrastructure projects, of which

US$500m in power and gas projects

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IFC Global Portfolio - Private EnergyIFC Global Portfolio - Private Energy

Gas Power TOTAL

No. of Active

Projects

17 61 78

Countries 12 30 33

IFC Investment

(US$ mm)

1,921 2,550

Syndicated Loans (US$

mm)119 2,111 2,229

Project Cost (US$ mm)

3,253 11,729

14,982

629

78 active projects in the energy sector in 33 countries

Financed US$15.0bn total project cost

Invested US$2.5bn in debt and equity

Syndicated US$2.2bn loans

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Constraints to Attracting Private Constraints to Attracting Private International CapitalInternational Capital

International power companies have more or less withdrawn from emerging markets in recent years

Issues in Developed country markets:– Enron collapse– California crisis– Trading and accounting scandals– Negative perception of international investments by

stockmarkets– Stock market downturn– Access to debt and equity capital limited

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Constraints to Attracting Private Constraints to Attracting Private International Capital (contd)International Capital (contd)

Issues in Developing country markets:

– Latin America: Argentine crisis, Brazil devaluation/power rationing/sector uncertainty, Mexican political deadlock, Chilean gas import restrictions

– East Asia: Slowdown after 1997 crisis, no progress in sector reform

– South Asia: Dabhol cancellation, limited sector reform

– Europe: Focus on EU accession– Africa: Opportunities are smaller and riskier

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Investment needs too large for Governments

Slow earnings growth in EU will draw investors out

Big EU corporates will lead – will hit financial limits

Region is building record of strong economic growth

Missed the PF Boom: no legacy of large losses Countries in this region are first place to look Acquisition costs a fraction of what they paid elsewhere

Big progress made on tariffs, regulation etc.

Current Context in SEECurrent Context in SEE

Strong grounds for optimism: few projects…

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Key Success FactorsKey Success Factors

Sector Fundamentals

Contractual Arrangements

Government Support

Legal Framework

Regulatory Framework

Adequate tariff levels and consumer payment discipline

Balanced contractual arrangements and high standards of transparency

Government commitment to performance of the off-taker and other contractual undertakings

Legal framework enforceable and conducive to private sector activities

Independent and transparent regulatory institutions

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New Models NeededNew Models Needed

Must change risk / reward balance in some sectors

Where regulatory framework unproven :World Bank’s Partial Risk Guarantee

Where regulatory framework inadequate:Concessions with regulation through the contract

Where economic & commercial returns diverge:PPPs: to reduce risk and/or raise returns to investor

Longer term, incentivised Management Contracts Where uncertainty is so great required return too high

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Why are PPPs taking front stage?Why are PPPs taking front stage?

Availability of public capital remains constrained due to deficits and/or prudent fiscal management

Availability of private capital also constrained: investors generally more risk-aware than previously and less willing to take risks in emerging markets

Yet huge capital needs remain in infrastructure, education and health care, for development and for competitiveness

Efficiency gains from private sector involvement are believed to be considerable.

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Rationale for PPPsRationale for PPPs

Can make projects viable where economics and risk are more difficult

Bring private sector efficiency in sectors/project which do not achieve cost recovery

Better use of “hard earned” Public Money, i.e.:– More projects for given amount of funds– Focus on more social projects / complex risks

Value for Money

13Partial Government Subsidy Can Be Partial Government Subsidy Can Be ImportantImportant

PPPs in some areas will increasingly need some degree of government subsidy to:– Avoid ‘rate shocks’ for consumers– Share financial risk with investors – Kick start major projects in difficult investor

environment Success of future PPPs will depend on structuring

public subsidy in a manner which:– Secures political and public support– Is fiscally feasible and sustainable– Eases transition to full cost recovery rates for public

services

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Today’s Challenges for PPPsToday’s Challenges for PPPs

Cautious investors, and little appetite for project finance risk

Need solutions to regulatory uncertainty Mobilise local investors and financing Newly emerging generation of failed attempts to

introduce PPP Overcoming public resistance More attentive Trade Unions Media more alert and playing a political role

BUT GOING BACK TO THE PAST IS NOT AN OPTION

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PPPs and IFCPPPs and IFC

World Bank and Energy Sector

Introduction to IFC’s Advisory Services

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Advisory Services to Governments Advisory Services to Governments to structure and implement PPPsto structure and implement PPPs

Dedicated Department specialized in providing advice on the structuring and implementation of PPPs in infrastructure worldwide.

We have been at the forefront of advisory services in the transportation, water, municipal infrastructure, power, telecommunications sectors.

Our staff are transaction specialists. They are all experienced in the key elements of PPP transactions, and in planning and managing the transaction process.

We undertake pioneering transactions– First, difficult, political, reform-based, innovative

– Over 100 advisory assignments in more than 67 countries

– Capital mobilized post-transaction since 1995: US$4 billion

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PEP-SE infrastructurePEP-SE infrastructure

IFC’s Advisory Services’ structure dedicated to South East Europe with support by donors

Operating in: Albania, Bosnia Herzegovina, Bulgaria, Croatia, Macedonia, Romania and Serbia & Montenegro

Funding commitment from:– Austria, Italy, the Netherlands, Norway, Switzerland,

USA and IFC Mandate: development of infrastructure in the

region via the increased participation of the private sector PPPs

Spanning all types of infrastructure Started operations in July 2005

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Advisory TeamAdvisory Team

Technical/MarketConsultants

Local/Intl. Legal Consultant(s)

PEP SE Infrastructure

Accounting/Tax Consultant(s)

Social/PR Consultant(s)

ProjectCompany

Civil Society &Other Stakeholders

Government

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A Difficult Balancing Act Between A Difficult Balancing Act Between StakeholdersStakeholders

Government

FinancingSources

Investors/ Operators

Consumers

Advisor

Communication

Transparency

Competition

Efficiency

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A Structured ApproachA Structured Approach

Phase I: Preparation Phase II: Implementation

Step 1

Team

Mobilization

Step 2

Options

Strategy

Step 3

Framework

Reforms

Step 4

Closing

Transaction

Institutional Building

Institutional Building

Institutional Building

Communication-----Communication-----Communication----Communication

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Public Funding of PPPs : ExamplesPublic Funding of PPPs : Examples

With Different Approaches to Public Funding

Consumers: SPUG, Philippines

IDA and donors: Pamir, Tajikistan

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An Example: Philippines SPUGAn Example: Philippines SPUG

New PrivateProviders

Electricity Cooperative

RevenuePower

Energy Regulatory

Commission

Regulatesrates & services

Rates set at affordable level - the Socially Acceptable Generation Rate (SAGR) -

and increasing in real terms

Selected on a competitive basis – True Cost Generation Rate (TCGR) = lowest bid price

Improved reliability - Supply standards contractually agreed + performance

guarantees

Surcharge

Power Sector Asset and Liabilities Mgmt

Corporation

Output BasedSubsidy

All End-Users

Sets

No DeficitSubsidy = TCGR - SAGR

PowerSupply

Agreement

Agha Khan Foundation for

Economic Development

Swiss Govt.

Govt. of Tajikistan

$10mil., 40 years, at 0.75%

Pamir Energy

Co.

IDA Spread Account

Swiss Grant Account

Lifeline tariff of .25cents/kWh

Average tariff of 2.1cents/ kWh instead of 4.65cents/ kWh

$4.5mil., 10 years,

$8.2mil. equity

$3.5mil. equity

Example: Tajikistan, Pamir Private Power Project

Residential Consumers

$4mil.

IFC

IDA

$10mil., 20 years, at 6.00%Output-based Financing of

Lifeline Tariffs $5mil. grant

Consumers

Average subsidy of 1.85cents/kWh per month for 50 kWhs in summer and 200 kWhs in winter

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What is needed to succeed What is needed to succeed

Understanding of public interests and ability to balance public/private issues

Capacity building of governments to increase their capacity in structuring and managing PPPs

Transparency and Communication Oriented towards development objectives – e.g.

social focus Knowledge of investors’ market & confidence of

investors Integrated approach / synergies within the other

players Leverage international experience elsewhere Public Dissemination and PR campaigns

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PEP SE Infrastructure: Contact PEP SE Infrastructure: Contact DetailsDetails

THANK YOU

Contact Details:Angelo Dell’Atti, General Manager

PEPSE InfrastructureInternational Finance Corporation

World Bank Group

Tel: +359 2 9697207Fax:+359 2 9697222

E-mail: adellatti@ifc.org