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Government’s Role in Private Participation in Electricity Sector

Motoyuki TAKAHASHICouncilor, Economic AffairsEmbassy of Japan in Iraq

“Opportunities for Infrastructure Financing in Iraq” Nov. 2009

The case project used in this presentation (Amman-East IPP) is financed by Japan Bank for International Cooperation, an International Wing of Japan Finance Corporation

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Importance of Private Investment promotion in Infrastructure

Crucial for various investment activities.Economic growth, and to the welfare of people as the ultimate goal.

Government alone cannot fulfill the growing demand for infrastructure services in an effective and efficient manner. Promotes confidence in Investment Climate

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Rational Investment plan over years for infrastructure.Consistency over years in investment promotion and policy commitment.AccountabilityLaws and Regulations

We expect the Government to have…

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Government’s Role, a Contrast in Two Cases

Government Owned Project:Government bears many risksCan reduce the number of parties concernedProject may enjoy lower financial cost and lower construction cost.

IPPGovernment plays a crucial role to reduce risksfor concerned parties. Sometimes it shares risks.The more reduction of risks, the lower the financial and construction cost.

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Structure of an IPP

Borrower andProject Company

EPCcontractor

Sponsors Lenders

Fuelsupplier Off-taker

HostGovernment

Facility Operator

EPCcontract

Equity Loan

O&M contract

Fuel SupplyAgreement

e.g. Take-or-pay

License,Concession,

etc.

Gov. support,Incentive,etc.

Power PurchaseAgreement

Guarantor

Guarantee

Guarantee on PPA

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Jordan’s IPP Experience

1989: GOJ started to expedite Structural Adjustment by IMF/WB’s advice1997: GOJ adopted a policy to separate and corporatize its power sector into Generation/Transmission/Distribution.1998: Central Electricity Generation Co. was established.1999: Electricity Regulatory Commission was established. 2004: GOJ decided to privatize CEGCO2006: Amman-East IPP awarded to AES and Mitsui & Co.2007: Amman East IPP Finance Close, CEGCO was privatized2008: Amman East IPP Commissioning

A decade of preparation for the first IPP

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Amman East IPP in JordanB.O.O. Project, Power Purchase for 25 yearsFinance Close to Commissioning: 16 months.Capacity 375 MW, Gas Combined CycleSponsor: AES Oasys Ltd. and Mitsui & Co.Borrower and Project Owner: AES-Jordan PSCLenders:

Japan Bank for International Cooperation (JBIC: USD 110 mil)OPIC-USA (USD 70 mil)SumitomoMitsui Banking Corporation of Japan (USD 45 mil), with IBRD’s Partial Risk Guarantee

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Key to the Success in Amman East IPP (1/2)

1. Strategic Aspect:A) Contribution to Regional StabilityB) Sound and assured investment return of the Project.C) Market Potential (Jordan and its neighbors)D) GoJ’s commitment to transparent and transparent

economic policy

GoJ welcomed OPIC-USA, JBIC, and the World Bank ‘s involvement.GoJ already had good track record of developing electricity sector by official financial sources.

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Key to the Success to Amman East IPP (2/2)2. Government Commitment

A) Related laws were ready, after application exercise made through separation of Central Electricity Generation Company (CEGCO).

B) Jordan Investment Board and other related organizations for FDI were supportive.

C) Terms of the Project was realistically defined.D) Bidding Process was well-prepared/ documented.

Accountability assured.E) GoJ secured the Power Purchase AgreementF) Related infrastructure was built on time, and

started to operate (Fuel Supply, Water Supply, and Transmission)

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Government plays important roles in IPP in many ways 1/5

(1) as an authority to initiate project:to plan the project, and attract local and foreign investors, and actually to initiate the project.

(2) as authority to grant license/approvals, etc.:to grant business/investment licenses, approvals relating to project (construction and operation), etc. in timely manner.Environmental Clearance

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Government plays important roles in IPP in many ways 2/5

(3) as a contractual party to Project:to perform (or supervise related governmental entities to perform) contractual obligations properly.

(e.g. off-taker, fuel supplier, sometimes to be a party of Product Sharing Agreement)

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Government plays important roles in IPP in many ways 3/5

(4) as a party to:Construct and maintain (or to arrange as such) related infrastructure in timely and proper manner.

(e.g. transmission network, fuel supply network, port facilities, fuel facilities, etc.)

be in charge of land acquisition

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Government plays important roles in IPP in many ways 4/5

(5) as a consistent policy maker:Better not to change important energy related policies, laws, or regulations substantially and adversely at least during loan period.

Fuel Supply and Power Purchase AgreementFavorable treatment of the project

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Government plays important roles in IPP in many ways 5/5

(6) as a supporter of the project :Non binding support/comfort to Lenderskeep related entities financially healthyRecognize and announce the importance of projectgive various kinds of support to the Project

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Risk Sharing and Government 1/4Proper Risk Sharing, Balanced Structuringare keys for IPPSharing risks among the

GovernmentSponsorsBorrowersLendersand other relevant project participants

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Risk Sharing and Government 2/4Who should take risks?

Who can control and manage the risks should take it. If it is the Government, then the government should.

How to mitigate risks (e.g.)support from the host government and/or Sponsorscapable parties’ commitment insurancescovenantsoff-take contractcash/account control (expenditure, dividend,etc.)Lenders’ step-in rights, etc.

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Risk Sharing and Government 3/4(1) Political Risk

Radical political movement, and expropriationCountry’s securityForeign Currency convertibility and remittancechange in project related laws and policy (inconsistency), etc.Insufficient sharing of policy or information among governmental sector

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(2) Commercial/Economic Riskfuel/feedstock supply risk (Government Involved)environmental risk (Government Involved)inflation risk (Government Involved)exchange rate risk (Government Involved) sponsor riskcompletion risk (- EPC contracts, especially on Lump-sum, Turn-key basis (LSTK).)operation riskmarket/price fluctuation riskinterest rate risk

Risk Sharing and Government 4/4

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IPP, Expensive? (1/2)Maybe and Maybe not.

Indirect Cost for due diligence, analysis, legal documentation (Many, many agreements !!!!)Risk taking for operation over years.Lenders ask for higher interest rate because of uncertainty over cash flow.Fees, for financial arrangementLonger negotiations, documentation timeDefinite period EPC contract

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IPP, Expensive? (2/2)But…IPP may operate more efficiently than governmental sector.In case of Amman-East IPP, PPA price was competitive.

Such price was achieved through various risk-mitigating measures, including involvement of official lenders.

It also provides opportunity for private sector’s activities.

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What do lenders trust for repayment?

IPP Project: future stream of cash flow as a source of repayment.

Sovereign loan (including Japan’s O.D.A. loans or IBRD/IDA loans):

future stream of economic and financial returnfrom the project, directly and indirectly.

Somewhat, they are similar in their trust for future. Neither of them does not only depend on credit rating of government today.

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Japanese O.D.A. Loans or IBRD/IDA Loans for Government Owned Projects, what we care? (1/2)

Accountability, ConsistencySound Overall Policy (Macroeconomic, Development)Sector Policy (Investment, Capacity tariffs, subsidies, sector reform, privatization, etc.)Demand and SupplyPricing Policy, Financial and Economic Analysis

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Japanese O.D.A. Loans or IBRD/IDA Loans for Government Owned Projects, what we care? (2/2)

Relationship with Related Projects and InfrastructureEnvironmental Clearance, Land AcquisitionInstitutional Arrangements for Implementation (who is in charge of what?)Project Description (Site Condition, Scale of the Project, Specifications)Implementation/Maintenance/Operation CapacityOther Technical Assistance

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Conclusion?Governmental sector requires similar capacity and characteristics for both IPP and government owned project.IPP is challenging, and not an almighty answer.IPP requires mature sector structure, and mature investment environment as a whole.Government must reduce risks, and sometimes to share risksGovernment must develop sound sector investment plans.construction and operation of official projects develop capacity of MoE/RMEK, and confidence to potential investors.

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