Financing of Energy Infrastructure Development and Institutional Prerequisites

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Financing of Energy Infrastructure Development
and Institutional Prerequisites
October, 2002
Dr. Woonki Sung President, CEO Korea
Infrastructure Fund Management Co.
2
Recent Market Developments

• Low interest and low inflation environment
• Severe downturn of public equity markets
• Flee to safety and preference for bonds and
  utility type stocks
• Widespread hesitation on emerging markets let
  alone new frontiers of the markets
• Most of multi-national energy companies are
  financially weak and withdrawing to their home
  country operations.
• Traditional means of infrastructure development
  financing are limited.
• Lack of suitable investment opportunities.
  Financial investors have resources to invest.

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Private Sector Participation in Infrastructure
(PPI)

• It provides benefits to consumers and
  governments. It makes possible, or lowers the
  cost of, public services and frees governments
  from heavy fiscal burdens.
• It shifts risks to private investors and
  operators, who are better equipped to handle the
  risks
• Models for PPI include management contracts,
  leasing, build-operate-transfer or
  build-own-operate, and divestitures.
• World-wide growth of PPI transactions since the
  1980s in power, telecom, transportation, and
  water sectors.

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Infrastructure Assets - Life Cycle
Risk
Risk characteristics of infrastructure assets
transform over their life cycle. Risk tends to
drop rapidly and be mis-priced during transition
phase at end of construction.
3-4 years
1-2 years
20years
A
B
C
Time
Development
Construction
Operation
Transition
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Infrastructure Assets - Investors/Lenders
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Infrastructure Financing Alternatives

• Joint Ventures vs. Foreign-controlled Operations
• Build-Operate-Transfer schemes and Project
  Finance
• Development Fund Approach
• Capital Market Transactions
• A Regional Development Bank

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Measures to Attract Private Investors and
Financiers

• Political, Social and Institutional Issues
• Special Economic Zones
• Public and Private Sectors Partnerships
• ? Public Sector Support
• ? Clear and Stable Regulatory Framework
• ? Transparency, Access and Accurate Information
  Flows
• Political Risk Cover
• Securitization and Credit Enhancement

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A Regional Development Bank

• For infrastructure development in the Northern
  Parts of Northeast Asia, an IFC/MIGA-type would
  be an effective operational model for a regional
  development bank.
• The proposed model should have special focus on
• ? Development and monitoring of infrastructure
  projects
• ? Making equity and long-term loan investments
  in connection with private sector participation
  in infrastructure
• ? Mobilization of funds (public and private
  loans and equity)
• ? Provision of credit enhancement facilities,
  partial guarantees
• ? Provision of political risk insurance
• ? Close relationships with private developers,
  technical partners, financiers
• and investors and
• ? Private sector development in host countries.

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