Mr William Pegues, Director of Structured Finance & Insurance, Overseas Private Investment Corp.

Mr. William Pegues, Director of Structured Finance & Insurance, Overseas Private Investment Corporation, USA deliver a Keynote Address at the “World Water Summit” on 22nd March 2018 at New Delhi, India

Thank you very much i’m william fugees from the overseas private investment corporation which is the development finance institution of the us government and i’m here to talk to you today about some financing consideration particularly in large project water projects that we see around the world opec has a mission to mobilize private us capital in urging markets we

Do this in a variety of ways across sectors everything from health care and education and sme finance all the way through to very large energy and other sorts of infrastructure projects we have in india presently a portfolio of approximately 1.6 billion dollars and that is spread liberally across sectors from microfinance and smes to solar and wind projects that we

Finance particularly in the past five years enter the prime minister’s national solar initiative we deploy capital through three main ways through loan finance loans and loan guarantees through political risk insurance in which we can ensure projects located in countries with high political risk against things like currency in convertibility government expropriation

Of assets and political violence and we also make loans short tenner bullet maturity loans that look very much like equity investments and exits to private equity funds investing in particularly in sme sectors in these markets via competitive bidding process we currently work in almost 100 countries around the world and we have a portfolio of approximately 23

Million t—three billion dollars the next slide shows just some representative water projects that we have financed over the past 10 years or so we announced this week in india a 12 and a half million dollar loan to water health india which is a company that is setting up approximately 900 purification facilities and plants around the country these are basically

Vending machines where consumers can purchase potable drinking water for up to three to four times cheaper than they can get bottled water these are located in railway stations bus stations shopping areas any place with a high degree of foot traffic to give people better access to to drinking water in india at the bottom of the slide you’ll see a couple large-scale

Infrastructure projects that we’ve done the dc water project in jordan we financed a decade ago it became operational in 2014 and this was a 325 kilometer pipeline bringing water from an aquifer in southern jordan up to the capital city of amman and also we financed the desalination plan in algeria in 2005 which became operational in 2008 and that provides 200,000

Cubic meters of drinking water per day to algiers most large water infrastructure projects are done through the public-private partnership structure that has been set up and has worked fairly well over the past 20 to 30 years in this model which works for goods that are produced for public purposes such as roads water power plants and such the public sector entity

Actually owns the asset the private sector entity contracts to design build finance and generally operate and maintain the asset over a defined period of time on behalf of the government entity in return for a tariff or concession agreement the assets commonly managed under the structure tend to be motorized toll roads ports airports power plants irrigation systems

And water supply infrastructure and a key component of what i’ll talk about on the next few slides is in financing these projects allocating the risks between the lenders who are providing debt to the projects such as opec the private investors who are designing and building and operating the asset and providing their own equity risk capital and the public sector

Entity that wants the asset to be operated on behalf of the public to provide a public good an allocation of risk among these parties is a crucial part of negotiating these agreements so i’ll talk on the next three slides about several elements of bankable concession agreements for these sorts of projects the first requirement is that the debt has generally long

Tenner 10 15 maybe 20 years that gives the asset sufficient time to repay the debt and give the equity a proper return and also provides a sufficient period that whereas if there are problems in the operation of the asset those can be rectified and the the project won’t be put into distress because of a pressure from the cash flow to service debt prematurely the

Second component is a well structured tariff for the payment of the service provided this generally takes two forms a take and pay or a take or pay agreement and a take or pay agreement the government entity pays for the product regardless of whether it has the ability or the desire to take it in at a can pay agreement the government entity essentially has the

Right to refuse delivery and if it does so it doesn’t have to pay and the tariff structure needs to be such that it covers repayment of the operating costs the debt service and also provides the equity capital which is at risk in the project inappropriate return it’s also important that the tariff is indexed for inflation and for an exchange risk over over time

So that that doesn’t impair the performance of the project the next requirement is a credit worthy counterparty so generally there’s a government entity a ministry or operating entity that is purchasing the product in the case of water it might be the water ministry it’s very important that this entity has a reliable history of paying for a product if it doesn’t

Generally the lenders and the equity will require some sort of credit support so that in case the government is unable to pay for the asset liquidity instruments such as a letter of credit from a credit worthy bank can be drawn upon allowing the asset to continue to operate to pay for its operating expenses and to service the the debt in the meantime the gold

Standard of credit support in these cases is generally a sovereign guarantee from the national government so that if there is a condition under which the the ministry or entity responsible for paying for the commodity can’t do so the national government will step in and satisfy that payment obligation the next provision we look for in these project agreements to

Make them commercially acceptable is a provision that allows for change in law or change in tax over time so as i said these assets are generally financed over maybe a 15 or 20 year period the repayment of the debt and the cash flow that enables the asset to pay its operating expenses then is contingent on a projection made at the beginning of the project over a

Very long period if regulations and taxes change in the interim such that it impairs the cash flow of the project then generally the tariff needs to be indexed such that it would increase if taxes increase again so that the asset can continue to operate the project continues to produce the project for a product for the public and the data and equity can can get

The their their capital returned the next element that we look for or how we define elements of force measures so these are what are commonly called acts of god events that take place that are outside the control of the project company again it’s very important out provisions that allow the project company to be excused from performing its obligations if something

Outside of its control happens in a country such as india this is usually not consideration because it’s a very stable country many of the countries we operate in do you have a substantial amount of political risk and if there are public insurrection civil war or something like that that’s a mitigating circumstance that would allow the project company to get out

Of its its performance obligations and the next provision is for dispute resolution and here it’s just important in case of conflicts among the public sector entity the operator and blender that there’s some offshore arbitration at arm’s length among the parties so that there’s a disinterested arbiter operating in a neutral location under internationally accepted

Rules and the final two elements i’ll talk about have to do with termination and assignment of the project agreements in the case of termination it’s important that the agreements have some sort of termination payment or provision for the debt to repay in case the government decides to terminate the the project agreement for some reason if the government happens to

Default on its obligation these agreements generally contemplate that they’re not only expected to repay the debt in full but also give the equity its return obviously if the project company fails to fulfill its obligations it has no right to to get a return on its investment and the final provision has to do with what we call assignments of project agreements to

The lenders these projects operate over long periods of time it’s very important if the project company that’s operating the asset on behalf of the government runs into trouble it can’t fulfill its obligations that the lenders are able to be assigned all of the project agreements so that they can step in to the role of the operator continue to operate the asset

Continue to produce the product for the public while the project is restructured and a third party can be brought in to operate it that concludes my presentation and thank you very much for your attention

Transcribed from video
Mr William Pegues, Director of Structured Finance & Insurance, Overseas Private Investment Corp. By Anil Garg