Mitigating Risk in Infrastructure and Development Financing in the Philippines

Mitigating Risk in Infrastructure and
Development Financing in the Philippines
Susan Z. Prado
Executive Vice President & Chief Finance Officer
Development Bank of the Philippines
DBP is a 100% Philippine Government–owned universal
bank that is a pillar in both platforms of developmental
and commercial banking.
Direct
Lending
Nation-building thru
funding of priority
sectors such as
infrastructure and
logistics, social
services,
environment, and
Micro, Small and
Medium Enterprises
(“MSMEs”)
On-lending
of Official
Development
Assistance
(“ODA”)
funds
Primary on-lender of
ODA funds from
international
development
agencies to finance
medium to long-term
projects in priority
sectors
Active participant in PPP and Infrastructure projects
Arranger and/or Lender (sample projects):
 DepEd PPP for School Infrastructure Project I
 Tarlac-Pangasinan-La Union Expressway
 Boracay Water Supply and Wastewater Project
 Mactan-Cebu International Airport
 El Nido (LGU) Water Supply, Sewage and Wastewater Treatment Systems
 300MW Therma SouthCoal Power Plant in Davao
 54MW Trans-Asia Wind Power Plant in Guimaras
 3MW Hydro Plant in Benguet and 8WM Hydro Plant in Agusan del Norte
RISK ANALYSIS AND MITIGANTS
• Typical Infrastructure Financing is through the
use of Project Finance structures
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Project Finance Risk Matrix
Risk
Type
Mitigant/s
Pre completion
• Cost overruns
• Schedule Delays
• Fixed price turnkey contracts
• Warranties / penalties
• Financially strong and technically
capable contractors
• Review of schedule by
Independent engineer
Post completion
•
•
•
•
•
•
•
•
•
Revenue forecasts
Revenue build up
Operating Costs
Management Failure
Supply contracts
Offtake contracts
Market analysis
Strong operator/O&M partner
Performance guarantees
Project Finance Risk Matrix
Risk
Technical
Type
• Performance
• Environmental
• Safety
Mitigant/s
• Warranties / Incentives
• Proven technologies
• Experienced contractor /
operator
• Periodic reviews by
Independent Technical
Consultant
• Equipment performance
guarantees
• Public consultation and
approval
Project Finance Risk Matrix
Risk
Financial
•
•
•
•
•
•
Type
Mitigant/s
Structure: D/E ratio
Structure: risk/reward ratio
Foreign Exchange
Interest rates
Debt Service Cover
Cashflow
• Equitable ROE
• Acceptable cover ratios
(DSCR)
• Escrow and reserve accounts
• Dividend restrictions
• Loan syndication
• Insurance
• Financial derivatives / swaps
• Standby funding
arrangements
• Offtake / Supply Agreements
Project Finance Risk Matrix
Risk
Type
Mitigant/s
Legal
• Regulatory Framework
• Concession Agreement
• Experienced legal counsel
• Experienced transaction
advisors
• Clear documentation
Political /
Country
•
•
•
•
•
•
•
•
•
• Local knowledge particularly
on the political environment
• Clear regulatory regime
• Flexible tariff arrangements
that incorporate adjustments
for these types of events
• Involvement of multilateral /
bilateral agencies
• (Extended) political risk
insurance
Political stability
Change in law / regulations
Expropriation
Civil Unrest
War
Work Stoppages
Force Majeure
Political Intervention
Currency Controls
Risk Allocation Matrix (for PPPs)
Risk
Private Sector
Government
Construction
Liable for completion
Liable for delivery of required ROW
Market/
Volume risk; has flexibility to
adjust fares/fees up to a cap
• Ensures implementation of fare/fee
increases per contract;
Revenue
• non-implementation of increase =
payment of difference
Expense
Material Adverse
Gov’t Action
Controls efficiency and
optimization of operations/
maintenance
• Contractual adjustment of fares/fees
typically tied to CPI;
Burden of proof; subject to a
materiality threshold
Provides relief/compensation due to a
MAGA event
• Government ready to provide relief for
extra-ordinary movements in major
cost items (ex. power) via adjustments
in fees/fares or through other forms
Alternative Financing Structures:
• Corporate lending via bonds/notes:
– EDC Fixed Rate Bonds (for 87MW Burgos Wind Farm)
– Citicore-Megawide Fixed Rate Notes (for the DepEd
PPP for School Infrastructure Project I)
– First Gen Corp. Fixed Rate Notes (various power
projects and general corporate purposes)
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Key Issues in PPP Concessions
• Clear delineation of obligations for both Government (ex.
ROW delivery) and the Concessionaire
• Reasonable timetable for delivery of obligations
• Material Adverse Government Action provision  does it
adequately protect the Concessionaire?
• Termination payment provisions  are lenders
protected? Is there a haircut?
• Provision for delayed Government payment?  issue of
appropriations risk (ex. 2yr payment provision subject to
interest)
IN CLOSING…
Parting Thoughts
• Financing infrastructure development
– Contributes greatly to national development
– Requires proper understanding and allocation of the
risks and issues
– DBP can play key roles throughout the project
lifecycle
Infrastructure - Connecting Rural Urban Intermodal Systems
Efficiently (CRUISE) Program
JICA - Logistics Infrastructure Development
Project (LIDP)
• Bulk/cold chain and packaging, transport and distribution facility
•Road RORO Vessels & Terminal Facilities
•Toll/access/LGU Roads and maintenance equipment
• Airports
• Public Market
• Private corporations, LGUs, GOCCs, Cooperatives
• tenor up to 20 years/ 5 years grace
Infrastructure - Financing Program for the Water Sectors
JICA – Environmental Development Program
Philippine Water Revolving Fund
• Water Supply system
• Private Corporation, LGUs, Water Districts (WD), PFIs
• tenor up to 20 years/ 3 years grace
Infrastructure – Financing Program for Water Sectors
JICA - Environmental Infrastructure Support Credit
Program I and II
• Water supply system
• Private Corporation, LGUs, PFIs
• tenor up to 15 years/ 5 years grace
Infrastructure - Financing Utilities for
Sustainable Energy Development (FUSED)
JICA - Environmental Development Project (EDP)
Non Water
•Power generation and distribution (renewable energy)
• Private Corporations, LGUs, GOCCs, Cooperatives
• tenor up to 20 years/ 5 years grace
Environment - Green Financing Program
JICA - Environmental Development Project (EDP)
Non Water
•Solid/Hazardous/Health Waste Management
• Industrial Pollution Control Projects
• Private Corporations, LGUs, GOCCs, Cooperatives
• tenor up to 20 years/ 5 years grace
Environment - Green Financing Program
JICA - Environmental Infrastructure Support Credit
Program I and II
• Waste water treatment and sanitation
• Solid/healthcare/ hazardous waste management
• Industrial Pollution control
•Cleaner production waste minimization/recycling
• Private Corporation, LGUs, PFIs
• tenor up to 15 years/ 5 years grace
Environment - Green Financing Program
KfW –Credit Line for Solid Waste Management
• Solid waste management
• Private Corporations, LGUs
• tenor up to 12 years/ 3 years grace
Environment - Green Financing Program
KfW – Industrial Pollution Control Loan I and II
• Industrial pollution control projects
• mSMEs
• tenor up to 10 years/ 2 years grace
Retail Lending Program for mSMEs
JICA - Industrial and Support Services
Expansion Program II (ISSEP II)
• Manufacturing and support services
• Education strongly linked to SMEs
• Working capital
• <P200 M asset size before financing with loan limit of P100 M
• tenor up to 15 years/ 5 years grace (for working capital up to 7 years/ 3 years
grace)
Contact Information:
Susan Z. Prado
Executive Vice President & Chief Financial Officer
Development Bank of the Philippines
[email protected]
+63.2.818.9511 (trunkline)