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







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







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







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


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


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


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.


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.


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


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







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







18

Implementing strategies for mitigating risk

19

Future Legislation


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


21

Thank you

22