European PPP Report 2003
The UK Highways Agency (HA) has big plans for its latest design build finance and operate (DBFO) schemes. Very big. The two schemes which might come out next year could be worth at least £1.5bn each. That compares with the largest scheme the agency has awarded to date, the £240m Darrington to Dishforth (D2D) project which reached financial close in the spring. By Rod Morrison.
On 29th May 2003, financial close was achieved on the £32m initial phase of the East London & The City NHS LIFT (East London LIFT). East London LIFT is the first of the government's ambitious NHS Local Improvement Finance Trust (LIFT) PublicPrivate Partnerships to reach financial close. The first scheme to be built will be a new £7m One Stop Primary Care Centre at Church Road in Newham. Financial close will act as the springboard both for further transactions locally and the development of a new, multi-billion pound PPP industry sector. In this article, Michael Adam of Babcock & Brown explains the background to NHS LIFT and considers some of the most significant issues emerging to date.
Recent projects such as the HSL Zuid High Speed Rail Line in the Netherlands and the Channel Tunnel Rail Link (stage 1 of which was opened on 16 September 2003 on schedule and on budget) prove that the private sector is ready, willing and able to design, build and finance infrastructure projects in the rail sector, and yet the DBFT projects announced by the SRA as the way forward for infrastructure enhancement on the UK rail network are still not being delivered. In the case of the UK rail industry, it seems the T stands for trouble. By Peter Hall and Kate Kortenbout, Norton Rose.
The creation of Scottish Water in April 2002, as the successor body to three publicly owned regional water authorities, was a response to the need to make the industry in Scotland more efficient both in operational and cost terms. A unitary body was felt to offer the best opportunity to deliver these objectivesby the streamlining of many services and processes, whilst at the same time harnessing the experience and expertise of the existing skill base. In so doing it created the fourth largest UK water utility and twelfth largest company in Scotland. By John Telfer, head of PFI and procurement, Scottish Water.
Where would European project finance deal volume be without the Spanish road sector? A steady stream of single-asset, greenfield project financings was broken up earlier this year with a massive €1.6bn project-type deal to fund the Sacyr-led buyout of previously state-owned, multi-concession road company Empresa Nacional de Autopistas (ENA). Now greenfield deals should become the focus once again, as the state rolls out five new road projects with the total investment required in the range of almost E2bn. By Daniel O'Sullivan.
Since the Portuguese Government, back in 1995, initiated a comprehensive programme of road infrastructures, Portugal knew a booming in this particular area, attracting both international sponsors, financiers and different consultants. Until then, project finance had been used here and then in land marks projects such as the Second Tagus Crossing, the Pego Power Station or the Tapada do Outeiro Power Station. But never had such an aggressive program been put in place by a Portuguese Government. By Francisco Sa Carneiro, Monica Carneiro Pacheco and Tiago Ferriera de Matos of Vasconcelos, F Sa Carneiro, Fontes & Associados.
Despite a long political and legal tradition of private financing for public infrastructures, primarily with the use of concession agreements, France has taken on a significant reform initiative geared towards outsourcing public infrastructure development and the managementof public services. By Laurent Deruy, Partner, Head of Public & Environmental Law Department, Gide Loyrette Nouel, Paris.
Last month was a significant one for the German Ministry of Transport, Building and Housing (the BMVBW). September 12 marked its first publicly visible milestone in establishing toll road structures in Germany with the inauguration in Rostock of the first such scheme, a 700m-long tunnel connecting the west and the east banks of the Warnow river and thereby relieving the historic city from perpetual traffic congestion. Less than two weeks before, however, BMVBW efforts to implement a new tolling system for Heavy Goods Vehicles (HGVs) suffered a major setback, perhaps more noticed by the public than the Warnowquerung opening. By Winfried J Bartels, Vice President, Transport Infrastructure Division, DVB Bank AG, Frankfurt/Main.
Throughout Europe the public private partnership model of financing infrastructure is beginning to take a firm hold, with numerous school, road, prison and hospital projects using the technique. But there are some countries and sectors where the process has encountered obstacles. Michael Dunning investigates the problems associated with Italian healthcare PPPs and how lawyers, government officials and project financiers are beginning to find a path through the legal, political and cultural maze that has so far hindered the method.
Light rail and metro projects continue to be pushed as a transport solution across various cities and regions in western Europe. The sector however is still living up to its reputation as perennially troublesome, both for public sector planners seeking to implement these schemes and also for private sector project financiers charged with making their economics stack up or simply just seeking a slice of the action. By Daniel O'Sullivan.
North America Report 2003
New LNG projects are in the planning stages from Alaska to Maine, and the latest ruling from FERC shows that the regulatory agency has no intention of getting in the way. This articles profiles the attempts of the Alaskan authorities to get its LNG scheme off the ground and reviews recent market developments including the progress of the first LNG financings to hit the US bank market. By Alison Healey.
The North American blackout of 14 August put 50m people in the dark, and some of them were project finance bankers. The blackout was caused by transmission glitches on Ohio's FirstEnergy lines, but the two-day crisis underscored for average Americans the importance of a robust power grid. The dark night also highlighted an opportunity for project finance bankers: a crop of transmission projects in need of funding, and a federal government that may be more willing, in an acute environment, to settle rights-of-way and financing issues that prevent rational investors from jumping into the sector. By Nicole Gelinas.
The US$635m SR125 South toll road in San Diego, California, reached financial close in May of this year and is now under construction. The road is needed and has very strong community, business and government support. Innovative use of private financing has enable construction of the road to be commenced a decade or more earlier than would otherwise have been the case, particularly in view of budget constraints currently being felt in the US at both Federal and State Government levels. The financial package successfully employed may provide a useful template for future US transportation infrastructure projects. By Nicholas James, divisional director, Macquarie Securities USA.
Infrastructure development throughout the world has been challenged in recent years by the global economic recession, political turmoil, and significantly constrained access to capital despite lower interest rates. In this atmosphere, toll road developments have been especially difficult to finance, owing in large part to the chequered history of many projects financed in the last decade. By Allan Marks, Dino Barajas and Jaime Rodriguez, members of the Global Project Finance Group of the international law firm of Milbank, Tweed, Hadley & McCloy LLP, Los Angeles office.
In May 2002, the province of British Columbia announced a new framework for capital asset management, and the formation of a new agency - Partnerships British Columbia - to promote, enable and help implement public private partnership projects. Today, there are five health and transportation projects underway in the procurement process as public private partnerships, with a combined value of CDN$2.8 billion, and several more projects under development. By Suromitra Sanatani, vice president, Partnerships British Columbia.
Competition for California's limited water resources has always been great. Anyone who has ever read about the ongoing Colorado River and Klamath Basin water crises, seen Roman Polanski's 1974 classic movie Chinatown or heard Mark Twain's supposed observation that "Whiskey is for drinking and water is for fighting over" can tell you that. By Nicole A Tutt, general counsel of Pajaro Valley Water Management Agency, and Brain F Chase, Nossaman Guthner Knox & Elliot.
Global Bonds Report 2003
With new projects being announced every day and experts predicting a record-breaking year for the installation of new wind power in the US, the FPL Energy American Wind bond deal has given credibility to the technology associated with wind power and an investment grade rating has opened the door for other wind developers to get involved in project finance. By Alison Healey.
Chile's private-sector Costanera Norte toll road project is a veritable melting pot: it features an Italian sponsor working with a Dutch bank, an American insurance company and a multi-lateral development bank to build a road in metropolitan Santiago. But financiers are quite discriminatory about one issue: in order to avoid the currency mismatch that has plagued so many other LatAm toll roads over the past decade, Costanera's upcoming bonds will be denominated in pesos and sold in the local markets to institutional investors.By Nicole Gelinas.
Project bonds have hardly emerged this year in Asia. However, what is becoming an increasing trend is the tapping of the debt capital market on a corporate basis by developers and project companies, especially those in the oil & gas sector and in the power sector. Minerva Lau reports.
The Malaysian bond market has been described in the past as the saviour of the country's project finance market when bank financing dried up in the wake of the 1997 Asian crisis. However the bond market today is undergoing a volatile correction. This may hurt sponsors in the short term but the fixed income market is still the most viable funding source for projects. By Sharon Klyne.
The market for UK private finance initiative (PFI) bonds is maturing and as such is facing some growing pains. Reduced underwriting fees, fluctuating investor markets, uppity rating agencies and even some bank loan competition are the challenges the market has had to face this year. But it has been a year of unprecedented high issuance, nearing £2.5bn thus far. By Rod Morrison.
Slow progress and setbacks continue to dog the evolution of the hoped-for European project bond market. Nevertheless, a few notable infrastructure funding issues have hit the market and a few more can definitely be pencilled in going forward. The most significant ones, however, are more hybrids of corporate and project elements than pure project deals.By Daniel O'Sullivan.
Asia Pacific Report 2003
As a landmark project in Indonesia, this transaction is expected to act as a catalyst for further investments and fund flows in the country. Bertrand Baot, director and deputy head, project and structured finance Asia for Credit Lyonnais, writes about the deal. Last April, Mitsui & Co and a group of four commercial banks - Bank of Tokyo- Mitsubishi, Credit Lyonnais, ING Barings and United Financial of Japan - have jointly finalised a US$200m 4.5 years limited recourse financing for the Blue Sky project, promoted by Pertamina, the Indonesian oil & gas company.
On February 14, 2003, the closing of the landmark US$2.7bn restructuring of the PT Paiton Energy power project (Paiton) demonstrated not only a textbook restructuring for all stakeholders, but once again reconfirmed this unique project's position as a bellwether of investor and policy attitudes and a paradigm of the fundamentals of the project finance craft.
An industry traditionally supported by imports with local demand met by products manufactured offshore, China's domestic petrochemical industry is coming into its own. With five major joint venture petrochemical sector projects either currently under construction or development the PRC, all strongly supported by the Chinese government, the country will become increasingly independent in terms of petrochemical products and derivatives. In fact, experts continue to forecast high local demand in the coming years. Strategically, the projects will enable China's domestic petrochemical market to substitute imported products with those eventually to be produced locally. By Najeeb Haider, director and Michael Lau, vice president at global project finance & structured Trade, Citicorp International Ltd, Hong Kong.
The Trans-ASEAN Gas Pipeline (TAGP) project envisages the creation of a trans-national pipeline network linking ASEAN's major gas production and utilisation centres. Once realised the TAGP will have the potential of linking almost 80% of the ASEAN region's total gas reserves and will embody a far-reaching expression of the region's energy interdependence and long-standing interest in the co-ordination of energy activities. There is still much to do however in order to realise the dream, not least in establishing a solid legal and regulatory basis upon which the TAGP could operate in the best interests of all those who would derive benefit from such a network. By Peter Roberts and Alex Cull, Jones Day, Hong Kong.
India is a net importer of oil and gas with some 70% of its crude oil requirements coming from the Middle East. The government has been making attempts to increase its oil production as well to diversify fuel sources such as LNG. Oil accounts for about 30% of India's total energy consumption. The majority of India's roughly 5.4bn barrels in oil reserves are located in the Bombay High, Upper Assam, Cambay, Krisha-Godavari, and Cauvery basins. By Sharon Klyne.
Sakhalin Energy should contract by year-end Far Eastern offtake for at least 50% of its planned LNG plant on Sakhalin Island, while the Russian government looks set to finally decide in September which route it will prioritise for an oil export pipeline to the Far East from Siberia. These developments underscore the growing importance of a notional eastern export corridor for Russian hydrocarbons, and project finance has a part to play in this new chapter of the Eurasian energy story. By Daniel O'Sullivan.
Much has been written about the restructuring of the power sector in China during the last year or so. However, one is forced to recognise that most of the market research was aimed at assessing the potential impact of the reform on the government-owned Chinese Listed IPPs. Foreign IPPs and international banks have had limited involvement in the restructuring process so far. But one area that offers some promises for foreign investors is the increasing emphasis by the Chinese government on the development of the country's gas resources, and the necessity of securing substantial gas-fired power generation as an anchor to this new sector. By Eric d'Esparbes, Nicolas Poulteney, Francis Lung, Yi Zhang and George He Zhu of the Independent Power Producers Forum* (IPPF).
The privatisation of the energy sector in the Philippines has been moving so slowly that it is pushing away potential investors. The still weak regional economy is not helping, and sentiment was made worse with the recent slate of bad news. International investors may soon find Indonesia a better option following the recent conclusion of talks with the postponed IPPs. Minerva Lau reports.
The Japanese PFI market has been growing much more rapidly than even the optimists amongst us had dared to hope, and this trend looks set to continue for the foreseeable future. A key driver has been the mounting budget deficit with tax receipts plummeting under the weight of the continued recession, hence reducing the ability of the government to resort to fiscal stimulus measures via increases in the already huge public works programme. A natural response to this is to see an increased role for private finance. But the increased use of private finance does not just reflect a search for new sources of cash. In addition, Prime Minister Koizumi has strong belief that the private sector is more efficient than the public sector, and so has been advocating a greater role for the private sector in areas which have traditionally been the preserve of the public sector. By Yumiko Noda, partner and Takahiko Inoue, director of Project Finance and Privatisation, PricewaterhouseCoopers ...
The Pusan New Port project (the project), a marine container terminal and logistics hub, is being constructed in Busan, the Republic of South Korea (South South Korea). The project is one of several projects designated as priority infrastructure projects by the South Korean government under the Act on Private Participation in Infrastructure of South Korea (PPI Act). Pusan Newport Co Ltd (PNC), a joint-venture company established by some of the largest conglomerates in South Korea with Samsung Group as the lead sponsor and CSX World Terminals of the US as sponsor and operator. By Simon Black, partner and Geoff O'Dea, associate at Allen & Overy, Shin Kim, vice president & treasurer at Samsung Corporation and Ki Hoyung Choi, general manager, finance & accounting at Samsung Engineering & Construction.
The road sector has been identified as one of the key infrastructure bottlenecks impeding economic growth in India.
It has been two years since Beijing was selected as the host city to the 2008 Games of the XXIX Olympiad. And the prosperous capital city of China is celebrating the occasion, to show to the world that the place is healthy, after being devastated by the SARS outbreak. Preparations are now in full swing, as the Beijing government and its people look forward to host a great and green Olympic games. Minerva Lau reports.
Global Clean Energy Report 2003
Tractebel has gone out to banks for proposals on financing for its US LNG assets, marking the first real venture into LNG project financing in North America. Several projects in Mexico and in South America are also gearing up for financing, buoyed by prices that have stayed at more than double historical prices of US$2/mmbtu and a greater demand for the clean-burning fuel on the part of power producers and industrial manufacturers. By Nicole Gelinas and Alison Healey.
Wind power project finance in the US is at a temporary standstill now as Congress prepares to debate the extension of the production tax credit (PTC). Wind power advocates are pushing for legislation and transmission investment to stabilise the industry and facilitate investment. By Alison Healey.
Private-sector power companies invested more than US$5bn in Brazil's electricity sector since Brazil's government opened the industry to international players in the mid-1990s. But all that money was no match for the last few years of mandatory power rationing, currency devaluation and a new presidential administration. Expected regulatory changes this summer add more uncertainty to the sector. By Nicole Gelinas.
The natural gas is fast becoming the favourite fuel in the region. It is considered the most clean and efficient of fossil fuels. Thus, it is the preference of environmentalists whose voice has become loud enough to cause delay and cancellations of projects intended to run on coal. A number of LNG projects are now currently being pursued in the region. Minerva Lau writes.
Australia is making a push into the renewable energy sector in a concerted attempt to reduce its gas emissions level. The government has devised a scheme that places a legal obligation on wholesale retailers and purchasers to acquire a certain amount of their energy requirement from renewable sources. This legislative scheme is the factor driving the development of the sector, writes Sharon Klyne.
The English language is rich in phrases of nautical origin. 'Between wind and water' is one of the lesser known. Its literal provenance is a reference to that part of a ship's side which was sometimes above water and sometimes submerged, and where a shot received during battle could therefore lead all too rapidly to a sinking ship. As a result, 'between wind and water' came to mean anything which was at a particularly sensitive or vulnerable point. By Melville Haggard, executive director, Impax Capital.
Wind power in Italy remains a relatively small sector - just under 800MW in operation, compared to the multiple GWs seen elsewhere. It made an early impact in project financing terms, however - the 16-year L731.5bn (€378m-equivalent) transaction closed in 2000 to fund the 283MW IVPC4 project was the largest wind project funding worldwide at the time. Deal flow has however faltered since then, in tandem with the cost-plus certainties of the old CIP6 renewables offtake contract being phased out in favour of a new green certificate system. The new system has not been tested in the project finance market - until now, with another wind project leading the way. By Daniel O'Sullivan.
Wind power has arguably been the prime driver of project finance deal flow in Spain over the last few years. There have been even more deals than in the country's busy road sector, helping to fund a boom that has made Spain number two in wind energy generating capacity worldwide. Now, however, the market is maturing and this brings new pressures and realities to be faced by sponsors and bankers seeking to close deals in the future - including a jumbo transaction for what should be the country's second-largest wind-farm. By Daniel O'Sullivan
Over the past year the world's attention has been fixed squarely on the Middle East and its hydrocarbon reserves. Some believe that the latest gulf war was purely and simply an attempt to wrest control of Iraq's oil and gas reserves and place them firmly in the hands of Western oil firms - an attempt to reduce the influence of the House of Saud's power on world oil supplies. However, this has meant that there has been little focus on another burgeoning oil and gas oasis - West Africa. And it is developments in this part of the world that could loosen the Middle East's grip on the world oil market, a mouth-watering prospect for the world's hydrocarbon hungry nations. By Michael Dunning.
Global Infrastructure Report 2003
English cricket batsmen Geoff Boycott was famous for playing the ball with a very straight bat. Life was not very exciting when Geoff came to the crease but he scored a lot of runs. Do the monolines match up to Geoff's boring, sensible standards?
With the selection of a preferred bidder on the William Osler Health Centre in Ontario, Canada is moving forward with its pilot program in hospital ppp. The appeal of the scheme will soon be tested as The Healthcare Infrastructure Company of Canada looks to put funding in place quickly. By Alison Healey.
Many of the architects of the UK's largest public-private partnership deals have been quietly setting up shop in the US looking to take advantage of the opportunities that may stem from the combination of aging infrastructure and budgetary constraints. The list of projects moving forward in scattered across sectors and states. By Alison Healey.
Mexico and its neighbour to the north have developed a symbiotic relationship since Canada, the US and Mexico ratified the North American Free Trade Agreement (Nafta) nearly a decade ago. But 10 years of free trade have effected only marginal improvements to the infrastructure underlying one basic universal need in Mexico: fresh drinking water and wastewater treatment. Public- and private-sector players on both sides of the border are still looking for innovative ways to improve the water supply for Mexicans who don't have the tax base to build state-of-the-art systems from the ground up. By Nicole Gelinas.
"There is an urgent need to upgrade existing infrastructure" in the transportation sector in Latin America "and to establish more efficient systems to administer operation and maintenance," officials from the Inter-American Development Bank said at a recent investors' meeting. While nations throughout the LatAm region are in need of transportation investment, international and private-sector investors are most likely to focus their interest on some of the more financially stable nations in the region, including Chile, Colombia, Mexico and Peru. By Nicole Gelinas. ____________________________________________________________
There is a bit of a lull in the Australian PPP market at the moment as the market waits for results to be known on tenders or for the deals to be launched. Indeed the market is still in its infancy, and continual deal flow has yet to be established. By Sharon Klyne. ____________________________________________________________
Attitudes in Japan towards the private finance initiative have been changing. There is now a more open acceptance to the partnership between the government and the private sector in developing public projects. It started at the local and prefectural levels, but now, the central government, too, has actively joined the bandwagon. Minerva Lau reports.
Korea has historically been identified as an immature market. However, the government's commitment to infrastructure, established framework and recent market events are evidence of Korea's progression through the developing phase. By John Walker, president and CEO, Shinhan Macquarie Financial Advisory, Brad Kim, manager, Shinhan Macquarie Financial Advisory and Adam Ballin, executive, Shinhan Macquarie Financial Advisory. __________________________________________________
The public roads sector in India is experiencing a lot of activity, no small part due to political backing from as high up as the Prime Minister's office. The programme is a mammoth undertaking which requires massive input of funds as well as continued political support. By Sharon Klyne.
Major steps have been taken in recent weeks towards realising the initial financial basis for Infrastrutture SpA (I-SpA), the Italian state agency created to help fund strategic infrastructure projects around the country but focused for now on completing construction of the Italian high-speed rail network, the Treno Alta Velocita (TAV). Three banks have now been appointed as lead arrangers on the E3bn-plus first tranche of a planned €28bn programme of I-SpA debt to fund the TAV specifically. Key questions however remain about exactly how these borrowings will be accounted for by the government, which has expressed its desire to see them held off-balance sheet. By Daniel O'Sullivan.
Reaching close on the first public-private partnership (PPP) in the Irish road sector, the N4/N6 Kilcock-Kinnegad scheme, was an important milestone for the tendering agency, Ireland's National Roads Authority (NRA). The agency has endured considerable criticism from the wider project finance market that the risk allocation in the Irish road deals is unbankable - however, the N4/N6 sponsor, Cintra-led Eurolink, and its funders BBVA and SCH are themselves obviously content that the terms can support a viable financing. By Daniel O'Sullivan.
Isreal's Housing & Construction (H&C) says it brought a unique solution to an infrastructure problem that plagued successive Czech governments. The firm led an international consortium that made an unprecedented bid and inked a contract to build an 80-kilometer high-speed motorway on a crucial link of a north-south European transport corridor around the eastern Czech city of Ostrava. Yet what was supposed to be a model public-private partnership ended acrimoniously when the government pulled out of the D47 motorway contract in April. By Scott MacMillan.
Project finance has penetrated almost all of the world's major sectors, in all of the world's populated continents. Yet in the sub-Saharan African water sector the model has at best been used sparingly and at worst could disappear altogether. Michael Dunning uncovers the reason behind project finance's spluttering appearance on the African water scene. __________________________________________________
February 97: Millbank Tower. Our keen political noses having scented the possibility that Labour might win the forthcoming election, we visit the command centre to talk about likely policy on the Underground. Meet two impressively bright assistants plotting a future for the Tube and considering what should go into the manifesto. We are asked to write a paper on how to bring in capital without privatising, and how to regulate the system in the public interest.
Middle East & Africa Report 2003
Oman Polypropylene LLC is due to make its first drawdown under its new project finance loan facility at the beginning of August 2004, just four months after the launch of the RFP into the bank market. This is an impressive achievement as the complexity of the financing was not lessened by the relatively small size of the financing, US$240m, due largely to the fact that the transaction was structured along very traditional project finance lines. By Darren Davis, manager of GCC Business Group, Project Finance, Arab Petroleum Investments Corporation (Apicorp) which acted as financial advisor to Oman Polypropylene LLC.
The Arab Gas Pipeline took another major step forward in July when financial close was achieved for the latest 393 km section in Jordan. The Arab Gas Pipeline, an ambitious project to establish a regional gas network, has moved rapidly forward from an outline agreement in 2001 to first gas deliveries in southern Jordan in 2003. The latest section, the Jordan Gas Transmission Pipeline, will supply gas to power and industrial customers in Jordan and bring the pipeline close to the Syria border by 2006. By Nic Braley (Charles River Associates), Tim Armsby (Trowers & Hamlins) and Alan Cairns (Mapstone), advisors to the Government of Jordan.
July 20th 2004 was an auspicious date in the development of the Omani power sector for two reasons. First, it marked the signing of the Project Agreements for the Sohar Power and Desalination Project (the project) with a consortium led by Suez-Tractebel. The project marks the latest development in the power sector for the Sultanate of Oman, building on the significant benchmarks of the first development of an IPP in the Middle East (Manah IPP 1994), the introduction of 100% privately owned generating companies (as against the more familiar 40% private ownership within the GCC) and the privatisation of the integrated generation and distribution facilities in the Dhofar Province (Salalah). By Peter Conway at SG CIB who headed the consortium of advisers (namely SG and Bank Muscat, Denton Wilde Sapte and Fichtner) to the Government of the Sultanate of Oman for the Sohar Power and Desalination Project.
The Gulf region could be the next big securitisation market. Could be. Two securitisations which recently reached financial close, Abu Dhabi Power Bond and Emaar Properties, show the potential. In addition the backdrop for the development of the market could not be better. But the market still lacks real depth as a capital markets hub and the development of the securitisation market will be tied to attempts to deepened liquidity. Does this matter to project financiers? Yes. By Rod Morrison*.
Islamic project finance is still in its infancy but it has opened up a substantial new line of liquidity for projects. Given it is in its early days, most Islamic deals are part of larger financings and utilise the structuring work on the rest of the deal. The Islamic funders will then match the cost of funds on the other elements of the deal and ensure the Islamic tranche follows Shaira law.
The security situation in the Middle East has progressively deteriorated since the early 1990s. The invasion and occupation of Iraq have fuelled support for Islamic extremists, while the Israeli-Palestinian conflict has also provoked anti-Western fervour in the region. In this context, coupled with Middle Eastern countries' various internal problems, it is of little surprise that there is a clear trend towards a growth in terrorist activities in the region. There are clear risks for the future, but the manner in which they materialise will depend very much on the effectiveness of states' counter-terrorism strategies; Arab states' willingness and ability to implement political and economic reforms that combat the conditions that give militant Islam its durability; and finally, the tackling of regional issues that foster Islamic extremism. By Steve Wright, associate analyst at international business risk consultancy Control Risks Group.
Between now and the end of the decade LNG production from West Africa is set to quadruple, from the existing 9mtpy currently onstream via Shell-led Nigeria LNG (NLNG), the sub-Saharan's only project to date, to 39.6mtpy anticipated from a spread of new capacity in Nigeria, Equatorial Guinea and Angola - and these are only the most concrete prospects. Project financiers will definitely play a part in some of this development, but despite the previous NLNG-linked deals for both plant and ships proving regional LNG risks are not insurmountable, structuring new transactions going forward will remain challenging. By Daniel O'Sullivan.
Australia Report 2003
The Victorian government's Partnerships Victoria policy was announced in June 2000 and then followed up by the release of guidance material in June 2001. This article reviews Victoria's experience in procuring projects under the Partnerships Victoria policy and discusses some of the pertinent issues that have arisen during the projects completed to date. By Andrew Sutcliffe, assistant director, project development commercial & infrastructure projects, department of treasury and finance, Victoria.
Despite a renewed focus in recent years, private financing of public infrastructure in New South Wales (NSW) is not a new thing. NSW has a long and well-established record of working with the private sector to provide infrastructure to the community, and is in many respects a global leader in this field. However the provision of social services via PFI initiatives is just taking off. By Simon Palagyi, senior financial analyst, private projects branch, NSW Treasury.
Queensland has a smart state agenda - a vision of innovation in everything we do, creating new opportunities to meet our full potential to be a globally competitive regional economy. An important part of this agenda is to find smarter ways to deliver infrastructure to a rapidly expanding region. In particular, we are keen to find better ways to manage the risks of large projects, writes Shaun Drabsch, executive director, infrastructure partnerships taskforce, department of state development, Queensland.
The government of Western Australia has just recently released its policies and guidelines for public private partnerships (PPPs). Robert Mianich, director - asset financing, department of treasury and finance reviews the government's approach to private finance.
The joint lead arrangers Deutsche Bank and Westpac Banking Corporation recently closed syndication of a A$580m project facility for Cross City Motorway Consortium. The deal marks the first time a bullet structure has been adopted for a greenfield transaction in Australia; and it was well received in the market. By Jason Peasley, director - debt products, Deutsche Bank and Brad Masters, director - loans & syndications, Westpac Banking Corporation.
Cheung Kong Infrastructure has become the biggest foreign investor in Australia, replacing the American and European developers, which have been exiting from the region during the last few years. The Hong Kong-based conglomerate has been building its assets there, acquiring significant equity stake in a number of projects and winning some infrastructure projects. Indeed, it is one Asian developer that is making a wave in Australia and a player the market cannot afford to ignore. Minerva Lau writes.
The use of private finance in passenger rail infrastructure is always tricky, especially when passenger forecasts go horribly awry. However, recent failed examples have highlighted the risks involved, as well as the potential political fall-out. By Sharon Klyne.
The inroad of gas as a fuel of choice seems assured with its share of global primary energy supply predicted to continue into the coming decades. What then are the emerging trends in this market and the issues for project financiers seeking potential opportunities? Craig Lee, head - corporate and project finance, Sumitomo Mitsui Finance Australia discusses.
Americas Report 2003
At 8,000km coast to coast from St. John's to Victoria Canada is the second largest sovereign nation in the world and the twelfth largest OECD country by population. Its political fragmentation is one of the main factors in its so-called P3 and infrastructure market. Few other countries could have Ministries of Government Relations that are genuinely engaged productively in managing relationships with other Government entities. The Federal government, the 13 provincial or territorial governments and hundreds of municipal governments, together with a myriad of authorities and agencies, each have their own overlapping mandates, governance and lifecycles. This makes the sponsorship and completion of large projects challenging. Nonetheless, a significant number of infrastructure and P3 deals have been completed, and interest in this model in a number of the Provinces and at Federal level now suggests there is a substantial regional market developing. By Joe Parker, ...
Increasingly, public agencies are relying on design-build and public-private partnerships as tools to accelerate delivery of and obtain financing for needed transportation infrastructure. FHWA, through its recently published final rule on Design-Build Contracting, has succeeded in expanding the potential for use of these tools in certain respects but, unfortunately, has also placed significant limitations on the ability of state and local agencies to use them. By Nancy C Smith, partner, Nossaman Guthner Knox & Elliott.
The Santiago-Valparaíso-Viña del Mar toll road concession was awarded in 1998 to Sociedad Concesionaria Rutas del Pacífico SA, a Chilean special-purpose company owned in equal parts by the sponsors, the Spanish construction companies ACS and Sacyr. Like several of the other Chilean toll road concessions awarded as part of the US$4.9bn infrastructure privatisation program initiated by the government of Chile in 1993, the Rutas del Pacífico concession includes both improvements and new construction to important parts of the national highway network and urban roadways.
"There is nothing more difficult to carry out, nor more doubtful in success, nor more dangerous to handle, than to initiate a new order of things." Machiavelli, The Prince. As the merchant energy business struggles to survive, many have already pronounced the death of its model. It is not a difficult case to make. Billions of dollars of investment into unregulated generation and energy trading have fared badly and credit quality has plummeted (see Chart 1). Depressed power prices, trading losses, surplus generation, and excess leverage have pushed companies to the brink of bankruptcy. By Peter Rigby, Standard & Poor's.
With the abrupt downturn in the value of merchant generation and energy trading operations in the US, many investors are understandably concerned about the risks in participating in the US electric energy sector in the near term. One area of relatively novel inquiry has been in the acquisition and development of electric transmission facilities. By David Schwartz, partner, Latham & Watkins and Julie Greenisen, of counsel, Latham & Watkins.
Over the past decade, wind power has been the fastest growing energy technology in the world. In 2002, a record 6,868MW was installed globally, of which approximately 410MW was installed in the United States. While this amount represents nearly 10% of the total amount of installed wind energy capacity in the United States, it was a sharp decrease from 2001 when a record 1696MW of wind generating capacity was installed. The outlook for 2003 is cautiously optimistic. While many sizable wind energy projects are currently in development, an uncertain regulatory environment, among other factors, is causing some concern for the future of wind energy development in the United States. By Edwin F Feo and Wayne Song, Milbank Tweed, contributions from Simon Friedman and Keven McSpadden, Milbank Tweed.
Debt negotiations seem to have been going on forever. But now things have reached a truly critical point with a series of developments over the last few weeks. Alison Healey takes a look at the status of project finance's formerly active sponsors in terms of debt burden and the likelihood of survival.
A massive shakeout is underway in the US power and gas industry. The industry is seriously distressed, with a growing number of companies on life support. Contrary to popular opinion, the power industry's financial state is not the fault of the Enron debacle, the regulators, or the weather. By Karl W Miller, a senior partner at McConville Christen Hutchison & Waffel (MMC) and David Haaymeyer, an economic consultant in Boston.
Many companies have the impression that like-kind exchanges of power plants and other infrastructure assets are either irrelevant or too complex to arrange. In today's energy market, companies are looking to sell assets and use the sale proceeds to pay down debt and maintain liquidity, not to acquire new assets. In the rush to do these, tax-saving strategies involving like-kind exchanges are often overlooked. By Daniel L Feehan, JP Morgan in Boston.
Italian Law no 388/2000 (the so-called Legge Finanziaria 2001), for the financing and the realisation of new prisons in Italy, has introduced the possibility to resort to innovative formulas of financing, with the contribution of private resources. It has conferred to the public authorities the faculty to use legal, innovative instruments such as project finance techniques, real estate leasing, and exchange of goods and/or services. By Angelo de Angelis, legal manager, KLegal, PPP Advisory Services.
The 2001-2002 rationing was a sign that something was wrong. There may be several explanations for the rationing, but they really boil down to two: One of the worst droughts in history, and the inability of the government to manage the implementation of the then-new model for the power sector. Martim Machado of Machado Associados in Sao Paulo, Brazil, takes a look at the prospects of the evolving regulatory framework.
There have been dozens of announcements by US companies this year about their desire become active in LNG and their intent to explore the possibility of building terminals in the US or near the US. PFI looks at what has been announced and the likelihood of each project proceeding to financing stage. By Alison Healey.
The Camisea gas and liquids reserves, locked beneath the rainforests of Peru, contain about 11tr cf untapped natural gas and 600m barrels of associated gas liquids - a bonanza to be exploited over a 40-year period by a team of companies that won the royalty-based concession from Peru's government nearly three years ago. But to get to the gas, the sponsors must navigate a host of difficulties, including significant reputational and litigational risk due to environmental considerations and a complicated financing package that won't be completed until the project is nearly up and running. By Nicole Gelinas.
Since the late fall of 2001, Mexico's state-run oil company, Petróleos Mexicanos (Pemex), has been performing a delicate balancing act between developing enthusiasm in the international oil and gas community for its proposed Multiple Services Contract (MSC) and overcoming political opponents who argue that the MSC is unconstitutional. The MSC embodies a simple, seemingly non-controversial idea: a long-term, fee-based contract that permits private companies to contract with Pemex for the exploration, development and production of certain natural gas fields in Northeastern Mexico. By John L Keffer, King & Spalding LLP, London; and Carlos A Solé and Randall Lindsey, King & Spalding LLP, Houston.
When Venezuela's four international heavy crude oil projects were financed between 1997 and 2001, investors were more worried about contagion from other political crises than about Venezuela's proprietary politics. Sure - everyone knew that then-new president Hugo Chavez was a friend of Fidel Castro, but state oil company PDVSA boasted a long uninterrupted operating history and a committed professional management structure. By Nicole Gelinas.
Russia & FSU Report 2003
Over the past year or so bankers in the international market for Russian oil financings have grown used to seeing new precedents being set on a near-monthly basis. Volume is increasing rapidly and it seems each deal is for a larger amount, longer tenor or tighter margin than its predecessors. Is this confidence justifiable or will lenders get their fingers burnt? And how long can the current receivables boom last? By Daniel O'Sullivan.
The oil is now starting to flow from the Caspian to the outside world. The hype about the potential of the region has settled down - it is now in the bracket of a new North Sea. Financiers are starting to get serious about some world-scale project financings, plus a bunch of smaller developments and corporate-style deals. Gas could follow. By Rod Morrison.
The US$200m oilfield project financing put together by EBRD and HypoVereinsbank in 2002 for SeverTEK, a joint venture between Fortum and LUKoil, received substantial attention. A project financing of this moderate size, for sponsors of this quality, put together by lenders with well-known appetites for Russian financings, would not ordinarily attract much attention. What made SeverTEK interesting, however, was that its oil exploration and production rights are not based on a production sharing agreement, but on subsoil licences issued under the Russian subsoil law. This is relatively new territory for a project financing of this size, although there have been some smaller financings done on this basis. So what's so interesting about financing a subsoil licence? By Doug Peel and Irina Nesvetova, White & Case.
Russia, the world's second-largest gas producer after the United States, produced 582bn m cu of natural gas in 2001, or roughly 22% of the world's total. Russia has the largest gas reserves in the world, at an estimated 47.6tr m cu as of December 2001 (see graph). Global gas production continues to rise, with a 1.7% increase in 2001, while Russian production has stagnated over recent years, mainly due to the advanced stage of depletion of the largest producing fields. By Paul Collison, senior Russian oil & gas analyst, and Maxim Moshkov, Russian oil & gas analyst, Brunswick UBS Warburg.
Yukos is the leading light of the Russian oil sector right now, overtaking LUKoil as number one producer and recently having its implied senior credit rating placed above the sovereign ceiling by Moody's. Much of the company's success derives from its commitment to exporting as much production as possible, and on this front it is a key player in two major new export projects. While the company normally eschews debt of any kind, on these ventures it is planning to use project finance if possible - but first it must win a major political battle. By Daniel O'Sullivan.
It will include the world's largest Liquefied Natural Gas (LNG) plant and the biggest foreign investment by a single energy concern in Russia to date. But will Sakhalin 2 ever be completed and if so, when? By Michael Dunning.