Session 2 : International Infrastructure “Funding Tools”

OPTIONS FOR INFRASTRUCTURE

FINANCING
Regional and International Funding Agencies

Baghdad
November 21, 2009

Dr. Husain Al-Chalabi

 Agenda

• Introductory Remarks
• Infrastructural Projects
• Funding Tools
• Examples of Funding structure
• Preliminaries before Project Funding
• Timing for the Funding in the “Project
Implementation Cycle”
• Concluding Remarks
 Introductory Remarks

• Funds shy away from risky projects; appetite for investing

diminishes with risk and uncertainty
• Infrastructure projects “target” a blend of objectives:
strategic; social; economical with value addition and
sustainability; environmentally acceptable; synergistic with
the an overall development plan
• Major projects seek funding after the completion of the
Business Plan
• Quality Detailed Feasibility Study shortens the list of funding
tools most suited to the project
• All markets have Sellers and Buyers. The Project owner
[Enterprise] is the Seller and the Buyer is the provider of
funds to secure a share in the rewards from the project
 Sustainable Successful Socio-
Economic Development Strategy - Iraq

Ingredients:
• Need harmonious evolution of three integrated
policies:
– Public Investment program / includes the oil sector
– Macroeconomic fiscal & monetary stabilisation for control
of inflation
– Economic reform program / market liberalization /
Banking reforms
 Vision / Mission /
Implementation Strategy

• The fundamental ingredients for effectively

translating vision into reality:
– Political will and stability
– Security and the buy-in of the people
– Financial strength
– Technical and management skills
 Funding Tools

• Government of Iraq
• International (Sovereign supported) Agencies
e.g. World Bank, other Development Banks
• Private sector, including foreign investors and
creditors:
– Investment Trusts
– Pension Funds
– Private Equity
– Hedge Funds
– Insurance Companies and Banks
– Foreign Sovereign Funds
– Private investors
 Preferred Options for Funding

• Internal Funding: “Rating of project” excludes

Country risk
– Iraq's central bank [e.g. issue new treasury bills to
finance infrastructure projects]
– Any Pension Funds and Institutional investors
– Any private sector?
– Streamlining the operating cost of the Government

• With or without
– External Funding: “Rating of project” includes Country
risk
 Donor Pledges
• From May 2003 through June 2004, the Coalition Provisional
Authority (CPA) controlled $23 billion in Iraqi revenues and
assets, which were used primarily to fund the operations of the
Iraqi government
• The CPA allocated a smaller portion of these funds—about $7
billion—for relief and reconstruction projects
• Finally, international donors pledged $13.6 billion over 4 years (2004
through 2007) for reconstruction activities, about $10 billion in the form
of loans and $3.6 billion in the form of grants
• Iraq had accessed $436 million of the available loans as of March
2005
• As of the same date, donors had deposited more than $1 billion into
funds for multilateral grant assistance, which disbursed about $167
million for the Iraqi elections and other activities, such as education
and health projects

Source :-Coalition Provisional Authority (CPA) May 2003 through June 2004
Capital Market: Sellers and Buyers
Seller = selling the project
Buyers = paying to benefit from the reward

• Developments on the buy and sell sides of the capital market are
driving this market’s growth. On the sell side, projects are becoming
larger. Consequently their capital needs have increased substantially

• At the same time, the capacity of sovereign governments and

sovereign supported agencies, including bilateral and multilateral
lending agencies, to fund the debt portion of projects has diminished
9 Even strong sovereigns, with substantial capital resources, will
not be able to fund all their future capital needs internally and
therefore are looking externally
• Both government owned and privatised projects are considering using
project financing on smaller projects as a way to shed financing
and construction risks; and on a larger project as a way to reduce
operating risk as well
 Capital Market: Sellers and Buyers
Seller = selling the project
Buyers = paying to benefit from the reward

• On the buy side, traditional funding for project debit are being
augmented by direct investment from institutional investors. This
phenomenon can be traced to 3 developments:
– 1. Potential for contraction in bank liquidity; banks do not offer long
term amortization, which many projects in Energy and other
sectors require to be economically feasible
– 2. There are limitations in traditional private placement markets
[attractive for small projects]. Also legal documents and time are
burdensome for some projects
– 3. Institutional investors show growing interest in alternative quality
fixed income assets. The trend toward professional management
of pension and insurance company investment portfolio and the
decline in interest rates has increased investor demand for
alternatives. Preference – long term investment, coincides with the
terms of project finance debit [25 years]
 Capital Market: Sellers and Buyers
Seller = selling the project
Buyers = paying to benefit from the reward

• The establishment of investor accepted criteria for

measuring project credit strength is most critical step
• Rating standards will be key, as they provide
independent benchmarks against which projects can be
assessed and project paper can be priced and traded
• Credible rating standards must be in place in-order for
broad market liquidity to develop
 Funding Tools – US Examples
• US Chamber of Commerce, October 2007, Dodd/Hagel National
Infrastructure Bank Act:
– Establishing the National Infrastructure Bank, a new method
through which the federal government would be able to finance
more effectively large capacity-building infrastructure projects of
substantial regional and national significance with public and
private capital
– Infrastructure projects with a potential federal investment of at least
$75 million would be brought to the bank's consideration by a
public sponsor. To determine an appropriate level of federal
investment, the bank would use a sliding scale that incorporates
conditions such as project location, cost, usage, and non-federal
revenue.
– Once a level of investment is determined, the bank would develop
a government-backed financing package that could include direct
subsidies, loan guarantees, and long-term tax-credit bonds

Remember: Governments may have Limitations: capacity to finance; capacity

and skill to develop/ implement/ operate; and/ or maximise focus on sustainability
 European Scenario
• In the development and reconstruction of Infrastructure
[e.g. roads], besides utilizing traditional funding methods
through public budgets or in combination with long-term
loans from institutions such as the EIB (European
Investment Bank) and EBRD (European Bank for
Reconstruction and Development), it is also possible to
apply either:
a. combined – partnership – funding (partnership
models for public and private sectors), or

b. purely private funding

and project completion from the preparation and
performance to operation and the future transfer to
the public sector
 Sustainable Development Network
World Bank- June 2007

• Despite increasing private investments, public funding still

accounts for the largest share of infrastructure finance in
developing countries
• Public funding is not sufficient, though, to close the gap
between infrastructure needs and available funds
• The World Bank is trying to mobilize more private capital
and close the funding gaps that impede so many
developing economies
 The World Bank Group
• The World Bank Group is made up of five affiliates:

– The World Bank is composed of the International Bank for

Reconstruction and Development (IBRD), and the International
Development Association (IDA)

– The International Finance Corporation (IFC) promotes economic

development by encouraging the growth of productive private
enterprises in developing member countries

– The Multilateral Investment Guaranty Agency (MIGA) promotes

the flow of foreign direct investments

– International Centre for the Settlement of Investment Disputes

(ICSID) provides facilities for the conciliation and arbitration of
disputes
 World Bank- Integrated Package

• The institutions are mutually supportive in

their mission of global poverty reduction
– The World Bank provides sovereign loans (through
IBRD), or concessional credits and grants (through
IDA) to developing countries for infrastructure, health,
education and other purposes
– IFC and MIGA offer market‐based financial products
primarily for private projects
– ICSID provides a dispute resolution facility
World Bank - Private Sector Support

• Developing countries are also investing significant

resources and government attention to reform their
infrastructure sectors and improve the efficiency of
infrastructure procurement and management, often
through private participation
• Private investors considering such participation will
analyze the risks involved (such as political and market
risks) when deciding whether to invest and how much
return they will need on that investment to justify taking
those risks
• Where the main conditions for infrastructure finance are
not sufficiently developed to attract private participation at
an affordable cost, guarantees can catalyze private capital
flows and reduce the cost of private capital to bridge the
infrastructure funding gap
 World Bank
• Public‐private partnerships (PPPs) offer alternatives to attract new
sources of private financing and management while maintaining a
public presence in ownership and strategic policy‐setting
• Can leverage public funds and offer advantages of contracting with
well‐qualified private enterprises to manage and deliver infrastructure
services
• They are not panaceas and they require clear goals and objectives,
good public leadership, and strong government institutional
capacities for effective implementation
• Experience has demonstrated that the best way to attract more private
capital into infrastructure is to provide a sustainable and credible policy
and regulatory framework
• Risk allocation – balanced in line with rewards – between the public
and private partners is key to the success of these partnerships. The
provision of new risk mitigation instruments and the deepening of local
capital markets also contribute to the sustainability of PPPs
World Bank – Tools / Risk Mitigation

• Where markets and institutions are not sufficiently

developed to attract private participation, innovative risk
mitigation instruments and applications can help to bridge
the infrastructure funding gap
• The World Bank provides practical tools to help address
specific market and policy risks and leverage larger
amounts of private‐sector investment.
• The International Bank for Reconstruction and Development
(IBRD) and the International Development Association (IDA)
give guarantees to catalyze private finance for infrastructure
• Example of these products: partial risk guarantees (PRGs)
and partial credit guarantees (PCGs)
World Bank - Leverage “AAA” Balance
Sheet
• If clients lack an investment‐grade credit rating, they are often
denied access to tools for addressing this vulnerability, or pay
prohibitively high prices
• For many governments, this challenge is further compounded
by weak currencies, underdeveloped local financial markets,
and lack of institutional capacity to manage financial risks.
• To assist clients in managing currency risk, interest rate risk,
commodity price risk, liquidity risk (cash flow and rollover),
and credit risk, the World Bank offers a menu of products and
services that leverage the institution’s AAA‐rated balance
sheet,
• This provides clients with effective risk management tools at
very competitive prices to help reduce financial vulnerability
and achieve a more desirable cost/risk structure to maximize
the developmental impact of specific projects
News: Infrastructure Fundraising Hits A
Wall October 19,2009
• In total, 25 infrastructure funds either abandoned fundraising or put it on hold
in the 18 months ended June 30, according to Preqin, a London-based
research group. Ten infrastructure funds have been abandoned so far this
year, according to Preqin.
• For some institutional investors, the issue is liquidity. Their experiences with
the credit crisis could make them hesitant to lock up more capital for another
decade, sources say.
• The majority of the larger infrastructure funds are being sponsored by huge
institutions, such as banks or insurance companies, that are having financial
troubles of their own, he said. This could be preventing them from the
traditional practice of investing in their own funds, he added.
• And some global institutional investors prefer funds raised by independent
infrastructure investment management firms
• Some in the industry say a good alternative would be to raise publicly traded,
REIT-like infrastructure funds in the U.S. Real Estate Investment Trusts
(REITs) are tax efficient investment vehicles that invest in commercial and
residential properties. They were introduced to the UK in January 2007 and
are common in other countries, particularly the USA and Australia.
 Availability of Capital & Funding
• Is Capital and Funding Available?
– Yes
• When do you need it?
– Get your team to define the road map for the project.
– Identify your strategy for meeting the challenges throughout the
“Life Cycle of the Project”
– The normal time for funding, activation of the first tranche, is on the
selection of the EPC
• Who provides it?
– Bank
– Private placement lending
– Capital markets
– International Agencies
– Sovereign Funds
– Trading Houses

Appetite for lending diminishes with risk and uncertainty

 Preliminaries Of Project Funding

• Do you have suitable business plan?

• Is the plan backed with credible “Bankable
Detailed Feasibility Study” ?
• Are you looking for Project Finance or Borrowing
against Sovereign Guarantees?
• If you are looking for Project Finance, What is
your project?

If you have a good project and market it effectively,

Funding is not a challenge
 Guidelines: Project Developers /
Investors
• Project Finance Rating : Rating is more focussed on the timelines of
payment than the ultimate payment after an event of Default.
Different from the Banks, where the emphasis is on the ultimate
payment. Note timelines of payment are linked to ultimate payment
• Seven Individual Rating Factors . Overall Rating depends on the
interrelation of the factors [important for risks and credit strengths]
– Output Sales Contract [Off-take Agreement].
– Products revenues
– Raw material cost and supply risks
– Structure
– Technology risk
– Off-taker credit strength
– Projected financial results
 Tailoring to Target Audience
• Tailor your business plan to the target audience--A business plan
serves a number of purposes and you may have to modify information
depending on your target audience.
• Your bank will be interested in:
– how you intend to repay a loan or overdraft
– what you are going to do with the money
– how the loan will help the business to grow
– what other loan or debt commitments you have
– Most lenders operate a credit-scoring system. Make sure you give
up-to-date and relevant information.
• Tell potential investors about:
– what you are going to do with the money
– when and how you are going to pay it back
– the expected return
– your other sources of funding
– your management's track record
– Include a detailed forecast of your profits and cash flow.
Stages for Capital Projects

Development of Project Plan and Scope

Funding SWEC
Importance of Total Quality Management
 Concluding Remarks

• There is a need to organise skilled resources to

develop project definition acceptable to the providers of
Funds
• Provider of Funds will need the comfort that all the risks
and uncertainties are quantified and plans for mitigating
such events are in place
• External Funds are available; but the cost of funds and
procedural time to secure them ,may encourage the
Project Sponsors to focus on “Belt tightening” options
and more reliance on Domestic options
 Concluding Remarks

• The robustness of the project attracts funding, whether the

project is sponsored by National Entity or a Foreign Partner
• The primary effort should be on following the accepted
international approach for development of projects
• Funding has not been an issue for projects meeting the
credit rating and well thought out plans & strategies
throughout the Life Cycle of the Project
• Funding using Sovereign Guarantees is a recipe for “poor
project development” that end up as an economic burden
[regret investment]
THANK YOU