Post on 01-Apr-2015
Tools to Mitigate Risks in Tools to Mitigate Risks in Highway PPPsHighway PPPs
Ellis J. JuanInfrastructure Economics & Finance Department (IEF)
Workshop, PPP in Highways, April 3rd , 2006
Mobilizing Private Capital and Mobilizing Private Capital and Management into Infrastructure Management into Infrastructure DevelopmentDevelopment
IEF, April 2005 2
PC (project completion)
InvestmentInvestment
DebtDebt
EquityEquity
Toll Road PPP : Cash Flow Toll Road PPP : Cash Flow FluctuationsFluctuations (Proxy (Proxy for risk)for risk)
Basic StructureBasic Structure : :
Capital Markets:Capital Markets: Long-Term Financing Long-Term Financing
Cash FlowsCash Flows
US$US$
YearsYears
Repayment of Debt is based on project cash-flows (non-recourse to sponsors) Relatively high initial investments Need for longer debt tenors to justify IRR to sponsors
Repayment of Debt is based on project cash-flows (non-recourse to sponsors) Relatively high initial investments Need for longer debt tenors to justify IRR to sponsors
IEF, April 2005 3
PC (project completion)
Investment
Debt
Equity
Basic StructureBasic Structure : :
Capital Markets:Capital Markets: Long-Term Financing Long-Term Financing
Cash Flows (e)Cash Flows (e)
US$US$
YearsYears
Cash Flows Cash Flows realreal
Risk Mitigation products : Minimize cash flows Risk Mitigation products : Minimize cash flows downward fluctuations (ability to repay principal + downward fluctuations (ability to repay principal + interest)interest)
Key driver: Cash Flow predictability
Toll Road PPP : Cash Flow Toll Road PPP : Cash Flow FluctuationsFluctuations (Proxy for risk (Proxy for risk))
IEF, April 2005 4
Toll Road PPPs : Risk AssessmentToll Road PPPs : Risk Assessment
Completion Risk (engineering & construction cost / time cost control)
Operational Performance Risk (technical & operational know-how)
Environmental Risk (future liabilities, project delays, costs overruns)
Credit Risk (project leverage)
Inflation, interest rate and exchange exchange rate fluctuations rate fluctuations
Political Risk (expropriation, political violence, currency convertibility & transfer)
Regulatory RisksRegulatory Risks. (Government’s default on contractual obligations, i.e., pricing formulas, right of way – land acquisition risk, construction of alternate road, etc. )
Legal Environment (rule of lawrule of law, i.e., judicial system, regulatory procedures and arbitration)
Project Specific Risks (non-Project Specific Risks (non-sovereignsovereign
Country (Economy wide) Risks Country (Economy wide) Risks (sovereign)(sovereign)
Demand (traffic) Risk
Pricing Risk (regulated and non-regulated)
Environmental (past liabilities) Risk
IEF, April 2005 5
Key Stakeholders in the Risk Assessment and Risk Allocation of Toll Roads PPP Finance
Toll Road PPP Finance : Risk StructuringToll Road PPP Finance : Risk Structuring
ProjectCompanyProject
Company
ShareholdersShareholders
Lenders /BondholdersLenders /
Bondholders
OperatorOperator
Construction Contractor
Construction Contractor
GrantingAuthorityGrantingAuthority
Services PurchaserServices Purchaser
Shareholder’s Agreement
Concession Agreement
Purchase Agreement (e.g., shadow toll – government entity)
End-users
Traffic Demand
Construction Contracts
Operation & Maintenance Agreement (O&M)
Authority Right of WayAuthority
Right of WayLand acquisition and further transfer to PPP
IEF, April 2005 6
Toll Road PPP Finance : Risk StructuringToll Road PPP Finance : Risk Structuring
ProjectCompanyProject
Company
ShareholdersShareholders
Lenders /BondholdersLenders /
Bondholders
OperatorOperator
Construction Contractor
Construction Contractor
GrantingAuthorityGrantingAuthority
Services PurchaserServices Purchaser
Shareholder’s Agreement
Concession Agreement
Purchase Agreement (e.g., shadow toll – government entity)
End-users
Traffic Demand
Construction Contracts
Operation & Maintenance Agreement (O&M)
Regulatory RisksRegulatory Risks
Regulatory & Demand Regulatory & Demand RisksRisks
Completion Completion RisksRisks
Performance Performance RisksRisks
FX Risks and FX Risks and Refinancing Refinancing Risks Risks
Political and Macroeconomic Risks Political and Macroeconomic Risks
Authority Right of WayAuthority
Right of Way
Regulatory RisksRegulatory Risks
Land acquisition and further transfer to PPP
IEF, April 2005 7
Toll Road PPP Finance : Risk Mitigation Toll Road PPP Finance : Risk Mitigation
Non-sovereign Sovereign
Completion Risk
Performance Risk
Environmental Risk
Demand Risk
Political Risk
Regulatory Risk (inc.
Land Acquisitio
n Risk)
Macroeconomic Risk
Cost overruns and delays.
Revenue generation and operational costs increase
Hidden liabilities
Revenue generation
Expropriation, transfer, convertibility Cease of revenue generation
Revenue generation. Tariff Adjustment; Right of Way, Termination payment
Revenue generation. Devaluation / inflation impact of cash flows
High Low Low High Low High High
EPC Contract and performance bonds
Performance based contracts
Environmental Assessment
Traffic Minimum Revenue Guarantees / VPN ConcessionPartial Credit Guarantees
Political Risk Insurance
Concession Contract Partial Risk Guarantees
Local currency financing
Private Private Private Private/Public
Private /Public
Public N.D.
Risks
Cash Flow effect
Impact
Risk Mitigation Instrument
Provider
IEF, April 2005 8
Demand and Tariff Risk: Rolling GuaranteeDemand and Tariff Risk: Rolling Guarantee
Rolling Guarantee
• A partial credit enhancement product providing a guarantee of a specified number of interest and/or principal payments, on a rolling forward basis – i.e. the guarantee rolls forward to the next installment date automatically (if no claim has taken place) or upon payment by the issuer of a previous claim -- so that the guarantee covers a rising share of remaining debt service.
• For a toll road project where investors perceive a potential risk associated with a variation in the debt service coverage due to slow traffic, delays on tariff adjustments or both at some point within the overall bond tenor, or are uneasy about a period of heavy investments (i.e., rehabilitation), the rolling guarantee will smooth out the repayment profile and reduce investor concerns about potential timing/cash flow issues.
IEF, April 2005 9
Debt / Service
Coverage Ratio
1.51.5
1.01.0
Outstanding Principal
Years
N N + I
Rolling Guarantee
DSCRDSCR
Demand and Tariff Risk: Rolling GuaranteeDemand and Tariff Risk: Rolling Guarantee
N + 2
IEF, April 2005 10
Demand and Tariff Risk: PCG + MonolinerDemand and Tariff Risk: PCG + Monoliner
Traffic MinimumRevenue Guarantee(Granting Authority)
Traffic MinimumRevenue Guarantee(Granting Authority)
Layer of Lower Credit Risk Quality
(PCG)
Layer of Lower Credit Risk Quality
(PCG)
Partial Credit Partial Credit Guarantee Guarantee MLAMLA
(a portion of the credit loss on the transaction, -- debt service)
Future Flows Securitization of Tolls
Mitigation of the lower credit risk quality and improving the transaction rating attracts participation of Monoline Monoline Insurers to provide a Insurers to provide a “wrap”“wrap” on the whole transaction, improving further the transaction credit rating.
BBB Credit Rating
AAA Credit Rating
IEF, April 2005 11
Financial MarketsFinancial Markets
Risk Mitigation Providers Risk Mitigation Providers
Multilateral Development Banks and Donors (Aid, lending and guarantees) Export Credit Agencies (ECAs) Private Insurance & Guarantors
Political Risk Insurance Financial Guarantee providers (i.e., monoliners, specialized risk support) Derivatives
Cross-border Debt MarketsCross-border Debt Markets Global Financial Markets Driven by risk & return balance Highly sensitive to political –economic
volatility (i.e., financial crisis 1997-2001) Bank markets : have not quite return to
developing countries infrastructure finance Capital markets : depth and liquidity. Risk
& return oriented (new participants). Volatile.
Local Currency Debt MarketsLocal Currency Debt Markets Domestic savings capacities Bank Markets. Short-term nature. Depth
and liquidity dependent upon financial sector reform and competition.
Capital markets. Depth and liquidity dependent upon social and safety net reform (pensions, insurance, etc.) and adequate securities regulatory framework
IEF, April 2005 12
WBG: Risk Mitigation Framework
SovereignRisks
Investors / Financial Institutions
Non – SovereignRisks
IFC
• Partial Credit Guarantees
• Hedging Products
• Risk sharing facility
• Securitization
• Investment Guarantee
MIGA IBRD / IDA
• IBRD / IDA Partial Risk Guarantees
• IBRD Enclave Guarantee
• Partial Credit Guarantee
• Policy Based Guarantee
World Bank Risk Mitigation Instruments
IEF, April 2005 13
IFC MIGA IBRD/IDA
Products Partial Credit GuaranteesHedges for clients (interest rate, currency and commodity swaps)
Non-commercial political risk insurance
PRG – IBRD & IDAPCG & PBG – IBRD Only
Clients Private sector investors, lenders for private sector projects
Private sector investors, lenders for private projects
Private lenders for public projects
Loans Yes Yes Yes
Equity (Quasi-Equity)
Yes Yes No
Coverage (Risk) Full and timely payment of principal and/or interest up to a specified amount - IFC covers all risks that may result in non-payment of a client’s obligations.
•Currency convertibility and transferability•Expropriation •War and Civil Disturbance (incl. terrorism and sabotage)•Breach of Contract
Government contractualObligations including:• Currency convertibility and
transferability• Expropriation• Political Violence• Breach of Contract • Regulatory • Subsidy payment (e.g. OBA)
Guaranteed Percentage
Determined on a case by case basis (credit risk driven).
Debt: up to 95% Equity: up to 90%
Up to 100% of a tranche
Comparison of World Bank Group Risk Mitigation Instruments
IEF, April 2005 14
Comparison of World Bank Group Risk Mitigation Instruments [Contd.]
IFC MIGA IBRD/IDA
Eligibility Must be a member country Must be a member country Must be a member country
Tenors Market based but IFC’s involvement can lengthen tenors
Up to 15 years (20 years in some cases)
Market based
Limits Based on client’s needs Project: up to $110mm (net)Country: up to $420mm (net)
Based on project and country needs and CAS allocation.
Priority Areas of Focus All IFC recipient member countries.Providing long-term local currency financing and development of domestic capital markets.
• Africa• IDA eligible countries• South-South investments• SMEs
• Infrastructure• IDA eligible countries
Government Counter Guarantee
No No (through the MIGA Convention)
Yes – for IDA in the event borrower is not the sovereign,
a sovereign guarantee may not be required.
Public Sector Projects No No Yes
Areas of Collaboration Joint project preparation, environmental analysis, Board processing, etc.