Frost & Sullivan on Independent Power Producers Market
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Transcript of Frost & Sullivan on Independent Power Producers Market
cc Cristian Bortes
How to attract IPP investment into new projectsprojects
Middle East North Africa
16th May 2011Shrikanth S
© 2011 Frost & Sullivan. All rights reserved. This document contains highly confidential information and is the sole property of Frost & Sullivan.
No part of it may be circulated, quoted, copied or otherwise reproduced without the written approval of Frost & Sullivan.
Agenda for Presentation
• Determining and evaluating sources of equity
• Incentives for facilitating private interest
• Addressing obstacles to securing financing
• Offering low-risk, profitable opportunities
• Implementing strategies for mitigating risk
2
Agenda for Presentation
• Determining and evaluating sources of equity
• Incentives for facilitating private interest
• Addressing obstacles to securing financing
• Offering low-risk, profitable opportunities
• Implementing strategies for mitigating risk
3
Determining and evaluating sources of equity
• Analyzing ownership structure (articles of incorporation, shareholder’s agreement), financial statements, off-balance
sheet items.
• Evaluating the project sponsor’s track record, and background
• Assessment of technical expertise by studying the track record of power projects built and successfully
operated.
• Ability of management – qualifications, relevant experience, skills
• Assessment of financial strength of the sponsors
Analysis of Project Sponsor
4
• Audited accounts of project sponsors for last 5 years
• Particular emphasis on credit quality of sponsors and ability to meet contingent equity
• Sponsor’s commitment to the project
• Investment of significant resources (time, cash, personnel)
• Higher levels of equity investments
• Strategic relevance of the project (reputation, further orders)
• Covering Cost Overruns
• Providing Liquidity Support
• Maintaining minimum shareholding during life of financing facilities
• Does the project hinge on the expertise and drive of a single person or small number of individuals?
Determining and evaluating sources of equity
• Strong pipeline of projects due to fast growing economy and increasing power consumption.
• Growing demand for IPP based projects – international best practices in evaluation
• Critical evaluation of consortium partners (Trade off between proven and cost effective technologies)
Why determining and evaluating sources of equity is important?
Month Project Name Nation Project TypeProject
Status
Jan-11 Dabaa Nuclear Power Plant Project Egypt Build-Own-Operate Announced
Select Projects in Pipeline
5
Jan-11 Dabaa Nuclear Power Plant Project Egypt Build-Own-Operate Announced
Jan-11 Noor 1 Solar Scheme UAE Build-Own-Operate Announced
Jan-11 Taza Wind Farm Project Morocco Build-Own-Operate Announced
Nov-10 Abu Dhabi Waste to Energy Plant Project UAE Build-Own-Operate Announced
Nov-10 Amman East Independent Power Project Jordan Build-Own-Operate Bids Submitted
Nov-10 Iraq IPPs Iraq Build-Own-Operate Announced
Oct-10 Tamezghitene Solar Plant Project (Ouarzazate) Morocco Build-Own-Operate Bids Submitted
Oct-10 Dubai Energy from Waste Scheme UAEBuild-Own-Operate-
TransferAnnounced
Oct-10 Facility D IWPP Project Qatar Build-Own-Operate Announced
Oct-10 Sharjah Waste to Energy Plant Project UAE Build-Own-Operate Announced
Sep-10 Libyan Independent Power Plant Project Libya Build-Own-Operate Announced
Sep-10 Bahrain's Waste To Energy Scheme Bahrain Build-Own-Operate Announced
Jul-10 Fujairah 1 IWPP Reverse Osmosis Expansion Project UAE Build-Own-Operate Announced
Jun-10 Sur IPP Project Oman Build-Own-Operate Bids Submitted
Source: Frost & Sullivan
Agenda for Presentation
• Determining and evaluating sources of equity
• Incentives for facilitating private interest
• Addressing obstacles to securing financing
• Offering low-risk, profitable opportunities
• Implementing strategies for mitigating risk
6
Incentives for Facilitating Private Interest
Factors
Favorable Investment
Climate
Favorable Investment
Climate
Aspects Considered Degree of Importance
• Stability and consistency of macro economic policies
• Strong legal system – enforceability of contracts
• Scope for arbitration and dispute resolution.
• Offtaker backed by sovereign guarantee, and historical track record of offtaker (payments on time) & country rating by investment community.
• Reformist nature of the government, vibrant power
sector with investment opportunities
• Stability and consistency of macro economic policies
• Strong legal system – enforceability of contracts
• Scope for arbitration and dispute resolution.
• Offtaker backed by sovereign guarantee, and historical track record of offtaker (payments on time) & country rating by investment community.
• Reformist nature of the government, vibrant power
sector with investment opportunities
Low High
1 52 3 4
7
Clarity on Policy
Clarity on Policy
Attractive contract
Attractive contract
sector with investment opportunitiessector with investment opportunities
• Precise obligations and responsibilities for stakeholders
• Establishment of targets for both renewable and non-renewable energy
• Gradual reforms in electricity sector to ensure financial sustainability of offtaker.
• Precise obligations and responsibilities for stakeholders
• Establishment of targets for both renewable and non-renewable energy
• Gradual reforms in electricity sector to ensure financial sustainability of offtaker.
• Attractive power purchases agreement and minimum purchase of power.
• Tariff not based on public sector plants
• Reliability and consistency of fuel supplied.
• Fuel supplied should be cost competitive with other fuel alternatives.
• Attractive power purchases agreement and minimum purchase of power.
• Tariff not based on public sector plants
• Reliability and consistency of fuel supplied.
• Fuel supplied should be cost competitive with other fuel alternatives.
Low High
Low High
1 52 3 4
1 52 3 4
Incentives for Facilitating Private Interest
Factors
Bidding ProcessBidding Process
Aspects Considered Degree of Importance
• Transparency in bidding process to encourage competition and lower prices
• Transparency in bidding process to encourage competition and lower prices Low High
1 52 3 4
Foreign Exchange risk
mitigation
Foreign Exchange risk
mitigation
• Foreign exchange risk if equipment sourced abroad (Government assumes foreign exchange risk)
• PPA linked to foreign currency
• % of debt financing in foreign currency.
• Foreign exchange risk if equipment sourced abroad (Government assumes foreign exchange risk)
• PPA linked to foreign currency
• % of debt financing in foreign currency. Low High
1 52 3 4
8
mitigation mitigation • Fuel prices in foreign currency
• Translation exposure of equity . Availability to low cost risk mitigation instruments are important.
• Fuel prices in foreign currency
• Translation exposure of equity . Availability to low cost risk mitigation instruments are important.
1 52 3 4
Other FactorsOther Factors
• Independent regulators to increase transparency and level playing field
• Single window clearance for expediting projects
• Provide option for merchant power
• Tax clearance for components
• Land sold/leased at concessional rates
• Credit enhancements and guarantees by multilateral agencies expected to reduce the cost of capital.
• Interest free loans offered
• Independent regulators to increase transparency and level playing field
• Single window clearance for expediting projects
• Provide option for merchant power
• Tax clearance for components
• Land sold/leased at concessional rates
• Credit enhancements and guarantees by multilateral agencies expected to reduce the cost of capital.
• Interest free loans offered
Low High
1 52 3 4
Agenda for Presentation
• Determining and evaluating sources of equity
• Incentives for facilitating private interest
• Addressing obstacles to securing financing
• Offering low-risk, profitable opportunities
• Implementing strategies for mitigating risk
9
7.5
17.0
12.4 13.6 12.9
14.8
12.0
14.1
16.2 16.2 15.3
16.2
13.4 12.8
9.4
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
Ave
rag
e M
atu
rity
of
Lo
an
s
(Ye
ars
)
Trends in Average Maturity of Loans, 1996 – 2010, Middle East North Africa
Addressing obstacles to securing financing
10
0.0
2.0
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Ave
rag
e M
atu
rity
of
Lo
an
s
Years
LIBOR + Basis Points
1996-2007 2008-2010
Loan Count (x)
Average Maturity (years)
Loan Count (x)
Average Maturity (years)
<50 bps 13 8.4 2 1.3
50-100 bps 35 16.3 5 6.5
100-150 bps 38 17.4 8 19.8
>150 bps 5 14.2 4 12.8
Lower average maturity of loansand increase in interest rates:leading to refinancing risks as theproject duration is notcommensurate with the loanfunding, and hence there is aneed to seek alternate sources offunding
Source: Frost & Sullivan
Rising Interest Rates
2.0 1.0 1.0
1.8 1.5 2.6
1.7 2.0 2.8
3.7 3.4
1.8 2.4
3.3 4.3
3.0
1.0
4.1 3.7
6.4 6.1
2.3
4.1
7.5
5.3
12.0 13.0
11.4
7.7
9.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
Ave
rag
e B
oo
k R
un
ne
rs a
nd
Tie
r 1
Ag
en
ts (
nu
mb
er)
Trends in average number of book runners and tier 1 agents of loans In power financing
Addressing obstacles to securing financing
11
0.0
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010Ave
rag
e B
oo
k R
un
ne
rs a
nd
Tie
r
Years
A marginal revival is noted in2010 compared to 2009 in thenumber of book runners and Tier1 agents. US Dollar is the mostpreferred currency amonglenders. Hence the initialpreference should be for USdollar based tranches
Currency
1996-2010
Average number of book runners
Average number of Tier 1 Agents
Euro 1.5 2.4
Moroccan Dirham 2.0 2.0
Saudi Riyal 1.5 3.8
US Dollar 2.7 9.2
UAE Dirham 1.2 5.0
Average 2.5 8.1 Source: Frost & Sullivan
Algeria2%
Bahrain1%
Egypt4%
Iran1%
Israel1%
Jordan0%
Morocco0%Oman
6%
Qatar11%
UAE44%
Total Loan Amount Borrowed By Countries during 1996-2010
Overcoming Political Unrest in
Middle East
• Need for faster growth and employment opportunities.• Need for faster growth and employment opportunities.
Project finance markets for power wereimproving late 2010, however in 2011, thepolitical crisis again resulted in uncertaintydue to fears of contagion effect.
2011
Addressing obstacles to securing financing
12
11%
Saudi Arabia29%
Tunisia1%
44%• Need for faster growth and employment opportunities.• Improved infrastructure (access to electricity and
water)• Lack of trust of people in the Government‘s ability to
address the issues and hecnce confidence buildingmeasures vital
• Need for faster growth and employment opportunities.• Improved infrastructure (access to electricity and
water)• Lack of trust of people in the Government‘s ability to
address the issues and hecnce confidence buildingmeasures vital
Direct Fallout on Project Funding is higher cost of
capital and increasing penetration of the local
population in the workforce
United Arab Emirates, Saudi Arabia and Qatar are most successful in implementation of IPP models. Abu Dhabi’s IPP model is the most bankable.
Source: Frost & Sullivan
Overcoming obstacles for
Support
Finance
Why project is undertaken, why project finance? Simplicity of contracts is important.
Demonstrate government supports and public commitment.
Incentivise private sector to share risks and returns
Before bidding for the project, the investors and equity providers should be able to identify risks, sensitivity of investment metrics under several scenarios of capital expenditure, operations. Clarity on this vital aspect will improve bidding.
Before bidding for the project, the investors and equity providers should be able to identify risks, sensitivity of investment metrics under several scenarios of capital expenditure, operations. Clarity on this vital aspect will improve bidding.
Addressing obstacles to securing financing
13
obstacles for securing financing Allocation
and
Assessment
Framework
Risk allocation to the party which can best most mitigate, manage individual risks
Create bankable projects which minimizes downside risk to project sponsor andmaximises certainty to project lenders
Clarity on framework (implementation agreement, PPA agreement, fuel supply agreement, water supply agreement, land lease agreement, technical service provider agreement, engineering procurement and construction contract, financing agreement, guarantees from multilaterals)
Clarity on framework (implementation agreement, PPA agreement, fuel supply agreement, water supply agreement, land lease agreement, technical service provider agreement, engineering procurement and construction contract, financing agreement, guarantees from multilaterals)
Type of Funding
Outlook for 2011
Key Trends expected in 2011PoliticalStability
Political Instability
International Commercial Banks
In regions where political and economic stability is high, growth in mini perm based loans, improvement in tenors, and stabilized margins, growth in syndicated loans, increased interest in renewable energy investments. In regions where instability is prevalent, it is difficult to predict.
Export Credit Agencies
ECA is likely to play a vital role in IPP especially in Egypt, Tunisia, Jordan, Lebanon, and Yemen. Competitive interest rates (Commercial Interest Reference Rate) is expected to lower the cost of capital
Addressing obstacles to securing financing
14
International FinancialInstitutions (IFI)
IFI is expected to be active in 2011 as they guarantee products (covering specific political and non-political risks) and insurance to underwrite risk in medium long term . Expected to help in mobilizing of the funds for project completion for longer duration at low interest rates.
Sovereign Wealth FundsExpected to show greater interest in the investment of domestic power projects. Matches the long term investment horizon objectives.
Islamic FundsSukuks (Shariah-compliant bonds) is expected to complement other funding. However, competitive rates compared to commercial banks, and quicker execution of the project considered important to strengthen its role.
Domestic Commercial Banks
Increasingly participating in loan syndication.
International Project Bond Market
May play a minor role
Decrease Same LevelsIncrease
Compared to 2010 Prediction for 2011
Agenda for Presentation
• Determining and evaluating sources of equity
• Incentives for facilitating private interest
• Addressing obstacles to securing financing
• Offering low-risk, profitable opportunities
• Implementing strategies for mitigating risk
15
Offering low-risk, profitable opportunities
Managing Managing
Government Perspectives :• Quicker execution of projects• Setting performance & operational
benchmarks for power plants
• Redirecting public money for development
• Improve quality of service & access • Tariff management & power reforms• Encouring private sector participation in
power sector & transfer of risks• Perception of International community &
attracting investments
Business Interests:• Profitable opportunites in
addressing growing demand for power sector
• Clear policy framework • Supporting legal structure
enforcing contracts• Greater transparency reducing risks
and cost of capital• Fair bidding process
• Increasing government confidence
Stakeholders Management – A Balancing Act
16
Managing ExpectionsOf Several
StakeholdersIn the IPP model
Managing ExpectionsOf Several
StakeholdersIn the IPP model
attracting investments• Technology transfer
• Increasing government confidence
and future business opportunities.
Lenders Objectives :• Due diligence of counterparties
(reputation, credit worthiness, financials – on balance sheet & off balance sheet)
• Stable financials with predictable cash flow projects (ability to pay O&M costs, interest, taxes, and repayment of loans)
• Project risk analysis, risk allocation, and risk mitigation strategy
• Covenents for lender protection• Minimum Debt Service Coverage• Debt repayment schedule
• Other Financial Covenants
Other Stakeholder’s Preferences:• IPP (Agreement period, tariff rate
PPA, performance penalties and provisions [step in rights in event of defauls]),
• EPC contractor’ - (Turnkey contract agreement [fixed-price contracts], performance bonds, insurance, liquidated damages, incentives for early completion)
• O&M agreements• Feedstock supplier agreement
Role of Government
• Project Champion to help internal process support
Structuring Customized Model Institutional Framework
• Trade off - faster Implementationversus optimum structuring.
• To measure risk andcommensurate cost of capital
Creating conducive environment for low risk, profitable opportunities
Offering low-risk, profitable opportunities
17
• Flexibility of Financial contracts to
changing needs
• Risk insurance and currency financing
to attract maximum competition,
• Exogenous factors
• Mutually beneficial arrangements for
both the Government and other
stakeholders (comparison of private
and public power plants)
• Development of capital markets
• Improvements in Corporate Governance
• Matching duration of project financing to
project payback
• Encourage competition and reduce PPA
tariffs by promoting fair bidding process
• Structure encouraging selection of right
stakeholders
internal process support
• Establishment of IPP division to enable quicker execution & centralization of process.
• Risk allocation among stakeholders
• Incentives & penalties based onmeasurable performance parameters
commensurate cost of capital
� Dispute resolution & arbitration
� Clarity on legal aspects andtimeline for reforms
Other Other CharacteristicsCharacteristics
Other Other CharacteristicsCharacteristics
Agenda for Presentation
• Determining and evaluating sources of equity
• Incentives for facilitating private interest
• Addressing obstacles to securing financing
• Offering low-risk, profitable opportunities
• Implementing strategies for mitigating risk
18
Implementing strategies for mitigating risk
19
Future Legislation
Implementing strategies for mitigating risk
Key Project Risks
Type of Risks
Key Risks Construction Risks Operations Risks
Project is not completed as per schedule with the allocated budget at the requisite performance standards either due to variance in projected
Project generates lower than expected productivity or net electrical
output due to unplanned outages and/or failure to meet the
20
Risks Mitigation
Type of Riskseither due to variance in projected
costs, production delays, performance inefficiencies.
and/or failure to meet the performance standards set in the
contract
• Proven technology, strong contractor
• Turnkey Contract Agreement –Lump sum fixed price contract
• Insurance policies and liquidated damages
• Early completion incentives • Monitoring independent engineer
report on construction progress
• Fixed fee with performance based incentives
• Warranties, guarantees, experienced operator
• Operational guidelines and penalties/termination for performance failure
Implementing strategies for mitigating risk
21
Thank you
22