Emerging Market Infrastructure. Emerging Market Infrastructure

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1 Amman, Jordan February,2010 Overseas Private Investment Corporation James Polan Vice-President Presentation Outline Background Origins & Mission Activities & Exposure Products Financing Political Risk Insurance Private Funds The Current Market Observations Return to Fundamentals 1

2 What is OPIC? US Government Agency established in 1971 Development agency with origins in USAID and Marshall Plan Subject to re-authorization every 4 years Mission Support US private sector investment in emerging economies Promote economic growth and development of emerging markets Complement not compete with private sector Be self-sustaining: projects supported must be commercially viable What Does OPIC Do? Offers long-term financing and/or political risk insurance to help U.S. companies invest in emerging markets and developing countries Support US private sector investment in emerging economies ᅳ Financially sound and benefit host country ᅳ Foster private initiative and competition ᅳ No adverse effects on US economy ᅳ Positive or neutral effects on host country economy and environment ᅳ No human rights or worker rights violations 2

3 What Has OPIC Done? Mobilized over to $200 billion of investments in emerging markets Created over 800,000 host country jobs Supported over $71 billion in US exports and over 270,000 US jobs Current (as of March 31, 2009) exposure of $12.3 billion ᅳ Largest regional exposure is in Latin America: 27.4% OPIC Products Finance ᅳ Loans & Loan Guarantees ᅳ Structured Finance & SME Finance Political Risk Insurance ᅳ Coverage to US equity, lenders and capital markets Equity Investment Funds ᅳ Seed capital for private equity funds 3

4 OPIC Finance Loans or loan guarantees to private sector companies or projects (no government control) with an appropriate US connection, which includes: ᅳ US equity at risk (minimum of 25% of total shareholding) ᅳ US debt at risk (US financial institution taking project risk) ᅳ Significant involvement of US entity over life of project (such as US hotel operator) Greenfield or expansion projects Privatizations or acquisitions with improvement requirements Refinancing or recapitalization loans if with significant capex Multi-year capital expenditure programs Longer-term working capital requirements OPIC Finance Flexible Structures: Corporate or project financing Up to lower of 75% of project cost or $250 million per project Tenors commensurate with economics of project Tailored disbursements and amortization Fixed or floating rate, generally over US Treasuries Primarily US Dollar lender 100% OPIC retention = no syndication risk Subordinated structures in unusual circumstances Added flexibility via 3rd party funding intermediary 4

5 OPIC Political Risk Insurance Coverage for equity, lenders, and capital markets investors Inconvertibility and Transfer Risk ᅳ Inability to convert local currency into hard currency and repatriate Political Violence Risk ᅳ Losses from war, revolution, insurrection, or politically based civil strife Expropriation Risk ᅳ Losses from expropriation, nationalization, or confiscation by a foreign government, creeping expropriation Breach of Contract, Government Non-payment ᅳ Protection against sovereign or parastatal defaults Current Market Observations Effects of global liquidity constraints and economic downturn on emerging markets infrastructure: Revisiting asset viability, valuations and cashflow ᅳ Governments, investors, and public and private sector lenders Reprioritizing allocation of limited capital ᅳ Governments, investors, and public and private sector lenders Reassessing infrastructure priorities and concessions ᅳ Governments More regionalization of private sector investment and financing ᅳ Greater dependence on public infrastructure investment ᅳ Banks stay close to home and focus on best clients Heavy reliance on multilateral and bilateral financing ᅳ For both public and private sector projects 5

6 Current Market Observations Infrastructure projects that progress are likely to include: Equity ᅳ Experienced sponsors with proven technical and financial strength ᅳ Relative to recent history, more guaranties and lower leverage ᅳ Long term partnership perspective Debt ᅳᅳᅳᅳ Greater reliance on local and regional banks as international commercial banks restrict amounts and tenor Co-lending between multi and bi-lateral institutions, possibly including term subordination to commercial banks (if any) More security, tighter covenants Market disruption clause (not directly relevant to OPIC) Back to Project Financing Fundamentals Risk identification and quantification ᅳ Up-front detailed analysis of all potential country, commercial, technical, contractual and legal risks during project s life cycle ᅳ Reliance on top quality seasoned experts in each field Allocate risk and proper mitigant to party best able to undertake obligation and manage risk ᅳ Single most important protection to get through the rough times ᅳ If it s not right, fix it before the contract is signed Precedents are not applicable ᅳ Covenant-lite period has passed ᅳ Not many deals getting done, and for each the circumstances are unique 6

7 Fundamentals: Risk Identification and Assessment Key risks that make or break projects: Country: economics/currency, political stability, judicial regime Legal and regulatory frameworks for country and sector Transparency of concession s bid process and award Sponsor s financial and performance wherewithal Construction: EPC terms and contractor s financial and technical capability Cash flow: credit of users, sector, financial and counterparty guarantors Operation period: technical, commercial, insurance Fundamentals: Balancing Public vs. Private Sector Risks Appropriate division of obligations ᅳ Project-specific given sector constraints, political will, and economic realities Realistic expectations of technical and financial performance ᅳ Reasonableness of proposed end-user tariff increases ᅳ Government structure for any direct or indirect support based upon prudently achievable revenue and cost forecasts ᅳ Protection from evolving cheaper technology and future sector changes Public sector temptation to micro-manage and control ᅳᅳ Heavy handed approvals during construction acting as an owner managing EPC Infringement upon owners rights to control day-to-day operations Government responsible for uninsurable force majeure ᅳ Indemnity should cover all entities within government and include all political force majeure ᅳ Play or pay: non-performance repayment of all debt and equity ᅳ International arbitration 7

8 Case: Al Manakher Power Plant Project: Jordan s first IPP and project financing Challenges: No experience with project financing and international practices Sector in incipient stage of transition and regulation Risk imbalances in initial Concession terms; reluctance to assume key political risks Government inclination to micro-manage and control all aspects of project implementation Best practices Concession protected from evolving sector rationalization Lenders facilitated adjusting concession for appropriate risk allocation and remedies Financing structured with all international standards; roadmap for future IPPs Government adoption of international concession practices for balanced concession oversight and assumption of risk Thank You For Further Information Contact Peter Ballinger peter.ballinger@opic.gov 8