Closing financing gaps in PPP projects – new approaches

March 13th 2012

Clive HarrisManager, PPPsWorld Bank Institute

Headline numbers on private infrastructure hides negative trends

• Investment in new projects in the first half of 2011 was the fourth highest since 2000.117 projects with private participation reached closing with investment commitments of US$42.9 billion

• But :– Excluding India and Brazil investment

in new projects would have fallen by 34%

– The number of developing countries with new PPI projects in the first half of 2011 (20) was the lowest number since the early 1990s

• Many markets finding commercial bank debt increasingly scarce and/or costly

• Bringing in new sources of funding e.g. from institutional investors has challenges

19

90

19

95

20

00

20

05

20

10

20

110

10

20

30

40

50

60

70

Investment in new PPI projects in developing countries implemented in the first semester of the year, by sector,

1990‒2011

Energy Telecom Transport Water and sewerage

2011 US$ billions*

Source: World Bank and PPIAF, PPI Project Database. * Adjusted by US CPI.

0 10 20 30 40 50 60 70 80 90

-0.05

0

0.05

0.1

0.15

Correlation between the predicted value of FDI/GDP and Country risk

Country Risk

FD

I/G

DP

0 10 20 30 40 50 60 70 80 90

-0.02-0.01

-1.04083408558608E-170.00999999999999999

0.020.030.04

Correlation between the predicted value of PPI/GDP and Country risk

Country Risk

PP

I/G

DP

Investment in private infrastructure correlates strongly with country risk

Source: Araya & Schwartz (2012)

0 10 20 30 40 50 60 70 80 90

-0.00700000000000001

-0.00200000000000001

0.00299999999999999

0.00799999999999999

0.013Energy Sector

Country Risk

PP

I/GD

P

0 10 20 30 40 50 60 70 80 90

-0.00700000000000001

-0.00200000000000001

0.00299999999999999

0.00799999999999999

0.013Telecom Sector

Country RiskP

PI/G

DP

Increasing government support to leverage private investmentSource: Best Practices in Public-Private Partnerships Financing in Latin America: the role of subsidy mechanisms (WBI, WB-LAC Govt of Spain)

Fiscal support to PPPs

Viability Gap Funds

(capital payments)

Availability Payments

Shadow Tolls

Project Preparation Funds

Concessional Loans

Guarantees

In-direct fiscal support

Direct fiscal support

Direct subsidies(focus of this study)

• Governments have to efficiently leverage private investment using their own balance sheets using direct and indirect fiscal support

• This presentation will review:• “Viability Gap Funds” and

similar mechanisms for providing subsidies

• Guarantee Funds• New financial instruments

designed to bring in institutional investors

www.pppnetwork.info

Rationale for subsidizing PPPsSource: Best Practices in Public-Private Partnerships Financing in Latin America: the role of subsidy mechanisms (WBI, WB-LAC, Govt of Spain)

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Economic Costs

Economic Benefit

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Economically viable

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Project Costs

Project Revenues

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Private Benefit

Public Benefit

Financially UN –viable

(viability gap)

Examples of subsidy schemes India – “Viability Gap Fund” Mexico - FONADIN— Fondo Nacional de Infraestructura Brazil’s Federal and State PPP Policy allowing for subsidies to

PPPs

Key Aspects: How are funds appropriated in the budget (capitalized fund vs

annual appropriations)? Who reviews requests and approves subsidies? What projects are eligible for subsidies? How is the amount of subsidy determined? When and how is the subsidy paid? What are related policies? (e.g. tariffs, contract length etc.)

7

India’s “Scheme for Support to PPPs in Infrastructure” Objective is to accelerate and increase PPPs in infrastructure Level of support - grant support up to 20% of project cost, 20%

additional support by sponsoring entity Resourcing - Scheme financed by annual provisions through regular

budgetary process, revolving fund established to ensure liquidity Eligibility –

Financing available to projects in eligible sectors with minimum 51% private equity

– Project company selected through open bid with award on basis of lowest grant support required

– Tariff fixed upfront – project must provide service against payment of predetermined tariff or user charge

Mechanics - Grant disbursed proportionate to balance debt and direct from MoF to project

8

India – VGF performance

Source: based on data from Government of India

115 projects of value $13.6 billion with VGF $ 2.6 billion received in-principle approval19 projects of value $ 1.1 billion with VGF $0.2 billion achieved financial close

• Predictability of funding• Market based

determination of VGF• 20% cap as a filter • Performance linked

disbursalBUT• Concentration of projects

in a few sectors

0

2

4

6

8

10

12

14

16

18

20Sector-wise distribution of projects

with final approval, 2006-12

Mexico – FONADIN

• Objectives:– Support private sector investment by providing financing, guarantees, and

subsidies to infrastructure– Participate in the evaluation, structuring and implementation of infrastructure

projects– Collaborate with public, private, and social sectors in the design,

construction, financing, operation and transfer of infrastructure, and in granting universal access

• Level of support - Maximum 50 percent subsidy

• Resourcing - Appropriated from state budget as capitalization of infrastructure funds (FINFRA and FARAC). Later transferred (US$3.3) billion to capitalize FONADIN

• Eligibility – – minimum 20 percent equity investment – Subsidy amount main bid variable, determined through competitive bidding– Subsidy paid out at dates defined in contract

• Mechanics - The subsidy is paid according to the payment schedule in the contract signed between the implementing agency and the private investor.

Mexico – FONADIN performance

• In its first two years, FONADIN has approved U$1.3 billion in subsidies for projects with a total cost of U$3.4 billion. The complete portfolio of projects receiving fiscal support from FONADIN (including loans and guarantees) is U$13.9 billion

• From 2008 onward, total investment in projects receiving direct subsidies has been about US$3.4 billion. This is just over one-third of total investment in PPP projects in all sectors (US$9.5 billion)

• Challenges:– Lack of pipeline and well-

prepared projects– FONADIN has other

instruments and pressure to provide support via guarantees and subordinated debt

$0

$4,000

$8,000

$12,000

$16,000

$20,000

Highway Highway Urban Transport

Urban Transport

Highway Railway

PPP

Inve

stm

ent (

US$

mill

ion)

Subsidy Amount

Private Investment

Financial Closure

In Tender In Preparation

2# of projects

11

13

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Financial guarantees

• A financial guarantee covers timely payment of interest and repayment of principal to the buyers (holders) of a debt security– Wraps– Partial Credit

Guarantees– Before the 2008

financial crisis, monoliners provided guarantees to mitigate payment risks

Brazil – guarantee schemes• Federal PPP Guarantee Fund (FGP):

– Guarantee only government payments– In case of default the FGP covers payments 45 days after it is due or 90

days if the outhory does note reconized the debt with a formal justification.– The guarantee is provide free of charge. – Challenge:

• The guarantee is available only after the contract is signed, so bidders are not considering their effects in their bids.

• Only for federal PPPs and pipeline has been weak at the federal level

• Sub-national governments in Brazil have set up structures to provide credit enhancement to PPP projects: – Bahia - the creation of the Agência de Fomento do Estado da Bahia S/A-

DESENBAHIA (Development Agency of the State of Bahia S/A) has allowed the state resources to be transfered in a separate bank account, whose specific aim is to guarantee PPP contracts where the state of Bahia is to act as a public partner.

– Special entities (trust) created that acts as the revenues pass-through, which supports the commitments of the States.

Mexico – guarantee schemes

• BANOBRAS currently offers : i) “Timely Payment Guarantees” (Garantías de Pago Oportuno (GPO)) and ii) Contract Payment Enhancement Guarantee (CPEG)

– GPO are guarantees of timely payment of principal and interest: only one in a refinancing transaction closed in May 2008 for the State of Mexico for c. USD 2 billion

– CPEG: BANOBRAS has issued only one of these guarantees, in 2009, in the form of a “Line of Guarantees” in favor of the State of Mexico, applicable to different PPS projects.

• FONADIN also offers guarantees:– Pari Passu: disburse only a portion of the insufficiency of funds with other lenders– Last Payment: will be the last to disburse the guarantee, after other guarantees have been

honored.– Mixed: A combination of first-loss and pari-passu guarantees.– With a limit of 50% of the payment.

• Challenge:– Construction risk, if there is construction involved, the guarantee can be committed in

advance but would not become “active” until the project has completed the construction and earned the right to receive payments.

– Guarantees are not well known in Mexico, and BANOBRAS (the financial operator) is perceived as a lender more than a guarantor.

Innovative approaches for PPP financing

• Four financial instruments have been created in Latin America in order to support the PPP programs and crowd in new sources of financing:

– Infrastructure bonds funded mainly by pension funds. Implemented in Chile to fund most of the PPPs projects before the financial crisis. After the crisis, pension funds are still financing PPPs when these include an income guarantee in the contract

– CRPAOs (Certificates for advance of works) issued by the Government of Peru (GOP) and funded by pension funds and other institutional investors. The transaction is a securitization of the CRPAOs. Five PPP projects have been funding with CRPAOs between 2006-2008. The certificates are unconditional and irrevocable obligation of the GOP. CRPAOs are transferable

– CR RPI, is a variant of CRPAO but noT issued by the GOP, and are supported in a trust. This is a mechanism created to fund PPPs in the Health Sector and are funded by pension funds

– CKDs (structured equity securities), issued with the rules applicable to Mexican mandatory pension funds and securities regulations to be listed on the Mexican Stock Exchange. CKDs can fund equity (through investment funds) or debt for individual project, and cover not only PPP projects

Role of pension funds in PPP financing: the Latin America Case

• Latin America pension plans manage significant amounts of resources (between 15% and 60% of GDP depending on the country, BBVA source).

• Pension funds invest in infrastructure projects (directly and indirectly), with between 6% to 19% of the total portfolio and between 1% to 4%of GDP.

• Challenges:– Administrative and legal

restrictions can affect the key actors in the PPP processes.

– Risks are not adequately assigned/assessed.

Ensuring value-for-money• Increased levels of support required place an

extra emphasis on achieving value-for-money• Renewed attention on:

– Strengthening PPP frameworks– Structures for decision-making that improve

transparency– Increasing public sector capacity

• More attention needed on:– Contract management capabilities to ensure

efficient project delivery– Project appraisal and screening methodologies

Thank you and questions

Clive Harrischarris@worldbank.org