The Dahbol Power Project was a failed power project in India financed through project finance. The special purpose vehicle (SPV) structure isolated project-related risks and cash flows. Key relationships included power purchase agreements with state utilities and fuel supply contracts. Major risks included unreliable fuel supply and lower than expected power demand. The project was majority debt financed but struggled due to contractual issues affecting cash flows. This case demonstrates some of the risks in relying on contractual agreements in project finance structures.

1. Project Finance Session 5 – Financing the Deal (Part 1)

2. Agenda Project Finance Model Financing the Deal (Part I) Advising & Arranging Activities Fee Structure International Financial Institutions & Multilateral Banks Bilateral Agencies (ECA's) Case: Dahbol Power Project

3. Review – Project Finance Model Alternative Model (see MS Excel file) Wind Energy Financing Model

4. Financing the Deal Advising, Arranging & Lending Services & Fee Structures

5. Advising & Arranging Activities Advisory Services Modelling & Structuring the Deal Primarily the domain of … Investment Banks, Consulting Firms & Engineering Firms Arranging & Lending Commercial Banks Multilateral Institutions Bilateral Institutions Export Credit Agencies

6. Advisory Services The Advisors tasks include: Identify Alternative Solutions Evaluate Risks – Mitigate, Manage & Allocate Prepare & Negotiate Contracts Process Permits & Licenses Assist / Prepare the Business Plan

7. Advisory Services Information Memorandum The document with which the advisor contracts potential lenders and begins to negotiate the credit agreement and loan documentation.

8. Arranging Services Is covered by Commercial Banks International Coverage Large amount of Equity Mandate from the SPV to structure & manage the financing contract Mandated Lead Arranger (MLA) Syndication Underwriting Guarantee

9. Integration of Roles As the SPV (borrower) there are 3 alternatives for the structure of the Advisory & Arranging roles: Separation Reduces conflict of interest Advisor doesn’t invest any money (the Sales Man) Duplication of Efforts Combined Competition

10. League Tables Source: Thomson Reuters, Global Project Finance Review, Q3 2009

11. Fee Structure Fees for Advisory Services Retainer Fee: Covers the advisor’s costs during the study and preparation phase of the deal. Success Fee: initiated at financial close; from 0.5% - 1% of the debt value. Incentivises the highest possible debt-to-equity ratio

12. Fee Structure Fee for Arranging Services Est. as a % of debt Range from 0.7 – 1% of the syndicated debt. Pure Arranging Fee Underwriting & Arranging Services Co-arrangers Range from 0.5 – 0.8%

13. Fee Structure Participating Banks Lead Managers, Managers and Co-managers Up-front Management Fee 20 – 40 Basis points on Loan Commitment Fee Difference between maximum & disbursement to date Required to set aside capital for committed loans Agent Bank Fee based on scope of administrative tasks CF = (CL – Et) * cf * t/360

14. Fee Structure (… a simplified) Example

15. Fee Structure Which role has the best return? The Advisor! No commitment of capital

16. Financing the Deal Multilateral Organisations & the World Bank

17. Multilateral Organisations Leading role in project finance deals in developing countries Trends Less Government / More Private Projects Tendency not to lend directly Support Private Sector through Guarantees World Bank Group Five Institutional Agencies IBRD, IDA, IFC, MIGA & ICSID

18. World Bank (Group) Formed at Bretton Wood Conference, 1944 Headquartered in Washington D.C. Owned by 186 Member Countries Millennium Development Goals Goal 7. Ensure environmental sustainability Goal 8. Develop a Global Partnership for Development Last year, the World Bank provided $46.9 billion for 303 projects in developing countries worldwide

19. World Bank - IBRD Aims to reduce poverty in middle-income and creditworthy poorer countries Involvement in Project Finance Direct Loans Partial Risk Guarantees Partial Credit Guarantees Enclave Guarantees Mostly Government Related Projects No private financing available * Enclave = Revenues flow between entities outside the host country

20. World Bank - IDA Provides financial support the poorest countries (that fail to meet criteria for access to IBRD financing). Indirect Loans & Guarantees Very Long Loan, 35 – 40 years Grace Periods up to 10 years (service 0.75%) Same operations as IBRD (different financing) Funds from Governments of Developed Countries

21. World Bank - IFC Doesn’t require intervention of host government Private Projects in all sectorsin Developing Countries Loans & Equity Assists private companies obtain financing Provides consultancy services Hedging Policies / Guarantees Limits $100 Million per individual project (25% total costs) Term of loans up to 20 years Equity stakes up to 35% (8 – 15 yrs)

22. World Bank - IFC

23. World Bank - IFC

24. World Bank - IFC * MSME = Micro, Small & Medium Enterprises

25. World Bank - MIGA Provides Political Risk Coverage to lenders & Investors All 163 World Bank Members Only WB agency that offers Political Risk Coverage Up to 95% of debt service Max. $200 Million Premiums range from 0.5 – 1.75% 15 years duration

26. World Bank – ICSID Established in 1966 under the Convention on the Settlement of Investment Disputes. Arbitration on international investment disputes between foreign investors and host states 143 Member Countries Total Cases Registered 292 Cases Registered in (fiscal) 2009, 24 E.g. Cambodia Power Company vs. Kingdom of Cambodia and Electricité du Cambodge

27. Financing the Deal Other Development Banks, Bilateral Agencies & ECA’s

28. EIB – European Investment Bank Owned by EU member countries EIB loans funded from capital markets (AAA) Within EU Up to 50% of project costs 12 - 20 years No arranging fees Outside EU EIB takes on political risk (restricted)

29. AfDB – African Development Bank 53 African nations, 24 non-African Promotes infrastructure projects, particularly PPP Assistance Loans, Guarantees < 1/3 Total Project Cost Equity < 25% of the SPV’s capital stock Total Project Costs < $9 Million

30. IDB – Islamic Development Bank Adheres to Islamic Law Prohibits the charging of interest on loans Assistance Loans < 7 Million Islamic Dinars Maturity ranging 15 – 25 years (grace 3 – 7 yrs) Leasing (ijara) Instalment Sales (murabaha) Equity, max 1/3 capital

31. Development Banks Handout Examples … EIB – (Poland) A1 Debt Structure Emerging IDB – (Brazil) IDB Approves Rodoanel Loan Source: Project Finance Magazine, Oct 2009 (ProQuest LLC)

32. Development Agencies Bilateral … pursue aims lined toforeign economic policy or commercial promotion of home country Examples Commonwealth Development Corp. (CDC), UK invests in private equity funds focused on the emerging markets of Asia, Africa and Latin America E.g. US$35 Million, to Private Equity for Microfinance Projects Deutsche EntwicklungsGesellschaft (DEG), Germany E.g. financing of Olkaria III, a geothermal power station in Kenya

33. ECA’s – Export Credit Agencies Political Risk Coverage, total coverage & direct loans to exporting companies operating in their home country Enable exporters to be competitive, in otherwise high-risk endeavours. Funding Direct Lending, for purchase from country of origin Indirect Lending, financial intermediary (commercial) Interest Rate Equalization, lower than market rates Activities of ECA’s is regulated by OECD Consensus 85% of contract value Duration 8.5 – 10yrs (max.) Constant Repayments, 6 months (max.)

34. ECA’s – Export Credit Agencies Examples Export-Import Bank, United States Export Credits Guarantee Department (ECGD), UK AuslandsGeschäftsAbsicherung (AGA), Germany CompañíaEspañola de Seguros de Crédito a la Exportación (CESCE), Spain Export Finance &Insurance Corporation (EFIC), Australia

35. ECA Activities MTS secures USD1 billion Credit Line Ex-Im Bank Increases Export Credit Support for Renewables MTS secures USD1 billion credit line according to Russian news agency Prime-Tass, the country’s largest cellco by subscribers, Mobile Tele Systems (MTS), has secured a credit line of USD1.07 billion to finance the purchase of network infrastructure equipment from Ericsson. The facility, backed by Sweden’s Export Credit Agency, has two tranches: the first, valued at USD429 million, has a maturity of June 2019, while the second tranche, worth USD646 million, is due to be repaid in October 2020. Mikhail Shamolin, President and CEO of MTS, said, ‘The terms and size of the loan that we were able to secure provide us with the necessary flexibility in our CAPEX plans going forward as we build out our networks to provide quality services to our subscribers.’… The Export-Import Bank of the United States has established a $250 million credit facility aimed at helping to promote and finance renewable energy exports, including solar, wind and geothermal energy products and projects. The move this week makes Ex-Im the world’s first Export Credit Agency to fashion that kind of credit assistance and also the first to adopt an actual “carbon policy” to guide the financial support of U.S. exports “in light of climate change concerns,” the agency says. In fiscal year 2009, which ended September 30, the Bank authorized more than $21 billion in support of U.S. exports and associated jobs, the highest financing level since it was established in 1934. The Bank, which is the official, independent export credit agency of the U.S., also set a record for financing of U.S. small business exports at $4.36 billion.

36. Case Review: Dahbol Power Project (India)

37. Case: Dahbol Power Project Project Description Describe the structure of the Project Company (SPV) What were the key external relationships related to the deal? What we the main risks (problems) of the project? How was the project financed? Describe the main contracts that were associated with the project? How did these contracts impact the viability of the project? Conclusions?