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FINANCING ASPECTS OF AN IPP

Crosby Asset Management (Pakistan) Ltd. Dubai February 20, 2005

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Presentation Outline
1. 2. 3. 4. 5. 6. 7. An Enabling Environment What has changed since 1994? The Power Purchaser Financing Requirements Financing the Transaction Security Package Conclusion

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An Enabling Environment
ETA/Al-Ghurair Group have recently concluded tariff negotiations with WAPDA. Like any other developer/financier what attracted the Group to invest was: Clear policy framework Political commitment to the process Need for new power Power purchaser capable of paying for purchases Presence of other successful IPPs

Besides power, the Group is actively pursuing opportunities in the oil & gas, fertilizer and the housing sector in Pakistan.
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What has changed since 1994?


Risk Perception for Pakistan in general and IPPs in particular has changed. Pakistan is characterized by a robust economy and a continuously improving credit standing. 11 years of IPP experience and the current shortfall in power has made people realize the importance of IPPs. Competitive Bidding is bound to ensure transparency and efficiency in the whole process.

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The Power Purchaser


Restructuring of WAPDA has led to a great improvement in its capacity to pay. In certain instances, WAPDA has made payments to IPPs even prior to the payment due date. Over the last 10 years, WAPDA has become more educated and developed a better understanding on issues related to IPPs. During our recent tariff negotiations, we have experienced remarkable understanding by WAPDA on a number of issues and their resolution.

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Financing Requirements
IPPs under the previous round were characterized by and criticized for their high project costs, which were primarily on account of: Bulk Power Tariff High equipment prices due to a supply constraint High Project Development Costs especially those related to legal & financing fees. Risk Premium associated with Pakistan

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Financing Requirements
Project costs and consequently tariffs are expected to be lower on account of the following: Size of the project ensuring economies of scale Lower prices of equipment Improved risk profile of Pakistan Lower project development costs due to the availability of local technical, legal & financial expertise and advice. Lower project costs are expected to reduce the risk associated with financing the projects and there should be sufficient availability of capital.

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Financing the Transaction-Equity


Profile of sponsors under the previous policy varied based on the project size. Participation of local sponsors was primarily in smaller projects up to 150 MW. Foreign participation was seen in larger projects such as Rousch, Uch, Liberty, Lalpir, Pakgen etc. A booming stock market will provide the sponsors opportunities of Private placement to local & international mutual funds/investment banks Partial exit from the project at attractive earning multiples.

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Financing the Transaction


The previous round of IPP financing was primarily through Multilateral agencies Export Credit Agencies International Trading Houses Vendors International Commercial Banks Main reasons were Low foreign exchange reserves Constant devaluation of local currency High interest rates in the domestic economy Liquidity constraints

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Financing the Transaction


Local financial institutions are expected to play a major role in the current round of IPP financing: Foreign exchange reserves are available to meet payment requirements Interest rates are significantly lower having recently touched all time lows Local banks are more educated as to IPPs and associated risks No liquidity constraints Greater appetite for large deals with longer tenors Local funding is also expected to ensure the political sustainability of the project.

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Financing the Transaction


Alternative financing structures to plain vanilla syndicate loans are now available in the form of: Listed Term Finance Certificates Special Purpose Vehicles (SPVs) Infrastructure Bonds Credit rating agencies have been operational in the country to provide an independent assessment of risk associated with the projects.

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The Security Package


Developers/financiers require that risks related to the project be properly managed and allocated. Means to mitigate risks are provided through a standard security package, which consists of Implementation Agreement with GoP Power Purchase Agreement Fuel/Gas Supply Agreement Turnkey EPC Contract O&M Contract Project Insurances

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Conclusion
ETA/Al Ghurair Group feel that the Government, the Power Purchaser and most importantly the public itself acknowledge the role of the private sector in power generation. With an economy growing at a rate of 7% per annum the supply of power is and will remain constrained. The Government has the political commitment and has developed clear policy guidelines to attract investment in this sector. The credit standing of both the country and the power purchaser have improved. A booming stock market, a liquid banking sector and availability of a standard security package will facilitate the financing of such projects.

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Thank You

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