Jlu Lusaka Final
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  • Typically, the highest rates of return are in countries that have defaulted on their debt, or where additional layers of risk (typically political in nature) are added to an already complicated structure, generally because of lower degrees of transparency.
  • Read Slide Over
  • True preparation work began in 2001 with GOL reenegaging with WB
  • Theun Hinboun had been recently refinanced. No real precedent for such financing in Laos. Some ECA’s were offcover. WB support was not finalized. ADB was not engaged. Who will provide direct loans was not clear? It was not clear whether dollar lenders will accept thai credit risk in the aftermath of the Asian Financial Crisis..Optimistic as EGAT had not defaulted on its existing PPAs. Tenor and Pricing were in question..important as this was a fixed tariff deal. It was clear that THB debt most likely was floating. Their availability for about 500 million was a question mark? Not clear how the documents treated the cross border risk. Where was this risk allocated. There was uncertainity regarding how the lenders would look at this allocation? Not many market precedents were around for large cross border power deals. Process to bring donors had not started. We were not sure who would provide concessional funds to Laos. Also not clear if Laos would join HIPC. It was always a question as to how much the developers would persevere?
  • Why did the Bank get involved. To put it simply, the project provided reasonable revenues to GOL and GOL was agreeable in using that money for poverty alleviation.
  • So what instruments did we use to support the project. A partial risk guarantee was always envisaged to be the key instrument to mobilize financing. An IDA grant was also provided to support GOL equity. The Bank also undertook a number of projects in Laos that were connected one way or another to NT2. In addition, MIGA also provided political risk insurance to the project.
  • As this chart shows, NT2 was a complex project financing. These are only some of the key relationships. A number of others have not been shown here.
  • So finally who all financed NT2. The slide shows the breadth of involvement of both multilaterals and likes as well as commercial lenders in the transaction. This is a true example of a public private partnership. Stefan has given an overview of the financing so I would not spend much time on this.
  • Another innovation on the PRG front was making the lenders accountable for Prohibited Activities. The Bank's legal documents hold lenders and sponsors responsible for Prohibited Activities. including corruption. It was clear that PRGs played a significant role in mobilizing debt financing. The mere presence of WB and ADB helped mitigate political and cross border risks. And lastly, and importantly, there is a lesson learnt regarding optimization of the financial package. At the end of the day, lenders and guarantors were over committed. There were over 25 project parties. There were number of institutional requirements that needed to be managed by NTPC and its advisors. Was this process difficult to manage? Where do you draw the line in finding financiers. This is something that I will leave the panel to discuss.
  • Finally what are the lessons learnt from the project.. Make sure that the concession is a fair deal. GOL and NTPC spent enormous resources to hire top quality financial and legal advisors to make sure that the deal is fair. The concession has also become a model in terms of inclusion of detailed E&S obligations. Reinforces that high quality due diligence is needed. The Bank, ADB, and commercial lenders undertook extensive due diligence to make sure that the project was technically, economically and financially sound. To ease the implementation process, NTPC requested harmonization of the E&S regime. So all parties worked closely to make sure the a common E&S regime is adopted.

Jlu Lusaka Final Jlu Lusaka Final Presentation Transcript

  • MIGA and World Bank Group Guarantee Instruments for Multi-Country Projects June 2007
  • Agenda
    • The World Bank Group and MIGA
    • MIGA Guarantees
    • MIGA in Africa
    • IDA/IBRD Guarantees
    • Case Study: Nam Theun 2
  • The World Bank Group and MIGA
  • MIGA… a member of the World Bank Group 1988 MIGA Multilateral Investment Guarantee Agency Promotes FDI with the use of guarantees and online services 1944 IBRD International Bank for Reconstruction and Development 1960 IDA International Development Agency 1956 IFC International Finance Corporation 1966 ICSID International Center for the Settlement of Investment Disputes
  • World Bank Group Instruments
    • Guarantees
    • partial risk
    • partial credit
    • IBRD Loan
    • IDA Credit
    • Tech. Assistance
    • Political Risk Insurance
    • expropriation
    • transfer restriction
    • breach of contract
    • war & civil disturbances
    IFC A-Loan IFC B-Loan IFC C-Loan IFC Guarantees (partial credit structures usually for local financing) Interest Rate and Currency Swaps IBRD/IDA MIGA IFC
  • MIGA Guarantees
  • MIGA Mission
    • To promote foreign direct investment (FDI) into developing countries to help support economic growth, reduce poverty, and improve people's lives.
  • MIGA helps investors by providing:
    • Non-commercial risk insurance (guarantees) for investors and lenders
    • Dispute mediation services, to remove possible obstacles to future investment
    • Online information on investment opportunities and operating conditions in developing countries
    • Attracts private sector funding into the country
    • Ensures best practice environmental and social safeguards for projects
    • Guarantee does not create additional liability to government than it would otherwise have
      • Host Country Approval does not contradict this
      • Subrogation to MIGA in the event of a claim
    • Honest mediator in the event of dispute
    MIGA Value Added to Government MIGA attracts and retains private sector investments
  • MIGA Value Added to Private Sector Investors
    • Credit enhancements
      • Improved access to financing
      • Extended tenors of capital; and
      • Often reduced capital and financing costs
    • Greater Confidence. The World Bank Group “umbrella” has a deterrent effect against government actions that could disrupt investments. MIGA can influence the resolution of potential disputes between investors and host governments, thereby preventing claims
    • Extensive Knowledge
      • Unparalleled knowledge of emerging economies through extensive resources of the World Bank Group
      • Ensure environmental and social safeguard standards are met
  • MIGA Guarantees: Four Coverages
    • Currency transfer and inconvertibility
      • Protects against losses arising from:
        • Inability to convert local currency into foreign exchange
        • Inability to transfer
    • Expropriation : government action(s) which deprives the guarantee holder of ownership or control of the guaranteed investment or deprives the guarantee holder of a substantial benefit of the investment
      • Protects against losses arising from:
        • Nationalization and confiscation
        • Creeping expropriation
        • Partial expropriation (expropriation of funds)
  • MIGA Guarantees: Four Coverages (cont.)
    • War and civil disturbance
      • Protects against losses arising from:
        • Damage/disappearance of tangible assets (including revolution, insurrection, coups d'état, sabotage, and terrorism)
        • Prolonged business interruption
    • Breach of contract : failure of the host government to honor an arbitral award following a breach of contract
      • Protects against losses arising from:
        • Breach or repudiation of a contract between the investor and the Host Country authorities (Non-enforcement of an arbitration award is a prerequisite)
      • Applied to breach of supply/take-off contract, a license agreement, etc., and breach of a sub-sovereign guarantee obligation
  • MIGA Outstanding Portfolio Distribution $5.4 billion by Sector Infrastructure Financial Oil, Gas and Mining Agribusiness & Manufacturing Tourism and Services 41 33 14 7 6 % Gross Exposure, as of June 30, 2006 by Host Region Europe & Central Asia Latin American & Caribbean Sub-Saharan Africa Asia & the Pacific Middle East & North Africa 47 20 16 14 5 %
  • MIGA Outstanding Portfolio Distribution Top Investor and Host Countries, as at June 30, 2006 Gross Investor Country Exposure (%) Austria 19.1 France 17.7 United States 8.4 Czech Republic 5.9 Cayman Islands 5.2 Netherlands 4.2 Spain 4.1 South Africa 3.9 Japan 3.6 Egypt, Arab Rep. of 2.9 Total 75 % Gross Host Country Exposure (%) $M Russian Federation 10.0 536 Bulgaria 7.4 396 Serbia and Montenegro 7.3 393 Mozambique 4.9 264 Romania 4.9 262 Bosnia and Herzegovina 4.3 231 Brazil 4.2 227 Ghana 3.4 184 Ukraine 3.3 176 Croatia 3.1 164 Total 52.8 % $ 2, 833
  • MIGA In Africa
  • MIGA’s strategy in Africa
    • Provide access to investors in countries perceived to be high risk, particularly in infrastructure
      • Support to frontier markets and conflict-affected countries through guarantees
      • Focus on strategic collaboration with existing facilities and trade agreements such as NEPAD, BOAD, AGOA
      • Help attract investments through implementation of outreach programs and technical assistance
      • Increase knowledge of investment opportunities through sector/country benchmarking, online information services
  • MIGA’s Africa portfolio FY04 Coverage Issued, $1.1 B Africa 12% LAC 5% Asia 9% MENA 7% ECA 67% Africa 14% LAC 19% Asia 12% MENA 10% ECA 46% FY06 Coverage Issued, $1.3 B FY06 Africa Exposure, % Infrastructure 40% Financial 2% Oil, Gas & Mining 23% Tourism & Services 12% Agribusiness & Mfg. 23% Last fiscal year, Africa was MIGA’s top destination for projects in terms of guarantees issued (21 contracts supporting 13 projects)
  • MIGA’s Africa portfolio Guarantees Issued in Africa by Country, Since Inception 50 100 150 200 250 300 350 400 450 Cameroon Burundi Cape Verde DRC Togo Benin Sierra Leone Madagascar Cote d'Ivoire Senegal Lesotho Eq . Guinea Angola Zambia South Africa Burkina Faso Mauritania Guinea Swaziland Mali Uganda Kenya Tanzania Ghana Nigeria Mozambique Gross Amount Issued, $m 50 100 150 200 250 300 350 400 450 Cameroon Burundi Cape Verde DRC Togo Benin Sierra Leone Madagascar Cote d'Ivoire Senegal Lesotho Eq . Guinea Angola Zambia South Africa Burkina Faso Mauritania Guinea Swaziland Mali Uganda Kenya Tanzania Ghana Nigeria Mozambique Gross Amount Issued, $m
  • MIGA’s Selected Projects in the Africa region Note: Full descriptions available on miga.org and MIGA annual reports. Nigeria Kenya Zambia Sierra Leone Burkina Faso Angola Ghana Host County Loan to Barclays Ghana to support manufacturing enterprise (Polytank Ghana) Ltd. France Barclays Bank of Ghana, Ltd. Proparco Cotton ginning France Société Cotonnière du Gourma DAGRIS Equipment supply for GSM mobile telephone network Sweden Vee Networks Ltd. Ericsson Sugar factory UK, S. Africa Kibos Sugar and Allied Industries Limited Mr. Chatthe, IDC Agriculture company South Africa Agriflora Ltd. IDC of South Africa Scanning equipment for port United Kingdom SL Intertek Intertek Earthmoving equipment dealership United Kingdom Barloworld Equipamentos Angola Limitada Barloworld Equipment (UK) Description* Investor Country Project Name Guarantee Holder
  • IDA/IBRD Guarantees
  • World Bank Guarantees: Key features
    • IBRD/IDA balance sheet
    • available to all countries eligible for borrowing from IBRD or IDA
    • Bank Guarantees back government obligations
    • Bank Guarantees cover private debt against a government’s (or government entity’s) failure to meet specific obligations to a private or public project
    • mobilize private sector participation and help catalyze debt with extended maturities and lower financing costs
    • flexibility – structured to meet borrower and project requirement
    • an integral part of Country Assistance Strategy
    • counter guarantee from Member Country
      • Bank Articles requirement
      • indicates project priority for Government and Bank
    • benefits from the ongoing sector and country engagement of the Bank
  • World Bank Guarantees: Benefits
    • to governments…
    • catalyzes private financing for key sectors such as infrastructure
    • provides access to capital markets as well as commercial banks
    • reduces cost of private financing to affordable levels
    • facilitates privatizations and public private partnerships
    • reduces government risk exposure by passing commercial risk to the private sector
    • encourages cofinancing
    •   
    • to private sector…
    • reduces risk of private transactions in emerging countries
    • mitigates risks that the private sector does not control
    • opens new markets
    • improves project sustainability
  • Types of IDA or IBRD Guarantees
    • Partial Risk Guarantees (PRGs) –in support of private projects:
    • – Cover debt amounts against specific risks
    • Partial Credit Guarantees (PCGs)- in support of public projects:
    • – Cover part of bond/loan repayments against all risks
    • Policy Based Guarantees (PBGs) – in support of development policy operations:
    • – Cover part of bond/loan repayments against all risks
  • Partial Risk Guarantees (PRGs):
    • Cover private lenders against the risk of a public entity failing to perform its obligations with respect to a private project.
    • PRG reinforces obligations of the Government – does not add to them.
    • Structured to provide minimum coverage necessary to mobilize private financing
    • The World Bank also offers enclave guarantees which are PRGs structured for export oriented foreign exchange generating commercial projects in IDA-only countries.
    • A flexible instrument – various structures available
  • PRG Covered Risks:
    • tariff
    • regulatory risk
    • collection risk
    • arbitration
    • change in law
    • convertibility
    • transferability
    • subsidy payments (e.g. Output-Based Aid)
    • Cover private lenders against all risks during a specific period of the financing term of debt for a public investment
    • Specially designed to extend maturity and improve market terms
    • Lengthen the maturity of the private debt financing beyond that available in private markets by covering a part of the scheduled repayments of private loans or bonds against all risks
    • PCGs are flexible, allowing different structures for meeting different client needs, such as:
      • – Bullet guarantee
      • – Latter maturities
      • – Rolling non-reinstatable
      • – Amortizing syndicated loan
    • At present, partial credit guarantees are available only for countries eligible for loans from IBRD.
    • No overlap with MIGA or IFC instruments
    Partial Credit Guarantees (PCGs):
    • Guarantees cover lenders in the event that the Government does not meet its commitments
    • Counter-guarantee of the member country is normally in the form of an Indemnity Agreement.
    Commercial Lenders Project Company Government Guarantee Agreement Indemnity Agreement Project Agreement (Government Undertakings) Loans World Bank Guarantee Structure Requires Counter-Guarantee
    • If a guarantee is called under the Guarantee Agreement, IBRD/ IDA has the possibility to demand immediate reimbursement of amounts paid under the Guarantee Agreement including interest; and
    • In the event of a default to reimburse, IBRD/IDA may trigger a cross default affecting the country’s entire portfolio (risking a suspension on current loans and credits).
    Call on a Guarantee
    • The host government’s indemnity of the World Bank does not increase the government’s liabilities when the government is already directly obligated to the private sector on the same liabilities.
    WB Guarantees Do Not Increase the Government’s Contingent Liabilities
  • Comparison of World Bank Group Risk Mitigation Instruments
    • Government contractual
    • Obligations including:
    • Currency convertibility and transferability
    • Expropriation
    • Political Violence
    • Breach of Contract
    • Regulatory
    • Subsidy payment (e.g. OBA)
    • Currency convertibility and transferability
    • Expropriation
    • War and Civil Disturbance (incl. terrorism and sabotage)
    • Breach of Contract
    Full and timely payment of principal and/or interest up to a specified amount - IFC covers all risks that may result in non-payment of a client’s obligations. Coverage (Risk) No Yes Yes Equity (Quasi-Equity) Yes Yes Yes Loans PRG – IBRD & IDA PCG & PBG – IBRD Only Non-commercial risk insurance Partial Credit Guarantees Hedges for clients (interest rate, currency and commodity swaps) Products IBRD/IDA MIGA IFC
    • Infrastructure
    • IDA eligible countries
    • Africa
    • IDA eligible countries
    • South-South investments
    • SMEs
    All IFC recipient member countries. Providing long-term local currency financing and development of domestic capital markets. Priority Areas of Focus Yes No No Government Counter Guarantee Yes No No Public Sector Projects Up to 100% of a tranche Debt: up to 95% Equity: up to 90% Determined on a case by case basis. Guaranteed Percentage Must be a member country Must be a member country Must be a member country Eligibility Market based Up to 15 years (20 years in some cases) Market based but IFC’s involvement can lengthen tenors Tenors Based on project and country needs and CAS allocation. Project: up to $190mm (net) Country: up to $600mm (net) Based on client’s needs Limits Joint project preparation, environmental analysis, Board processing, etc. Collaboration IBRD/IDA MIGA IFC
    • PRGs can be considered in the following situations:
      • – Sectors in early stages of reform
      • – Larger size/riskier operations
      • – Operations highly dependent on support/undertakings of governments
      • – Clout of the Bank needed
    • Joint transactions
    • Coordination
    Guiding Principles on Deployment of WBG Risk Mitigation Instruments
  • Case Study Nam Theun 2 Hydroelectric Dam (Laos and Thailand )
  • Nam Theun 2: Overview
    • US$ 1.45 billion,1070 MW project in Lao PDR, the largest ever foreign investment in the country.
    • The project is being implemented by Nam Theun 2 Power Company limited (NTPC), which was established as a limited liability company.
    • As part of the Concession Agreement (CA), NTPC will develop, finance, construct and operate the plant system.
    • After a period of 25 years, the plant will revert back to the Government of Laos (GOL).
    • NT2 will primarily export electricity to EGAT of Thailand. About 5% would be for domestic use.
    • Project identified in the 1980s.
    • Concession awarded in 1993.
    • Project subject to a long anti-dam campaign.
    • Project preparation discontinued following Asian financial crisis (1997).
    • Preparation resumed successfully in 2001 when the parties agreed on a mutually binding set of actions to reach financial close.
    • Since 2001, extensive due diligence has been undertaken by project participants.
    • Took about 4 years of preparation (2001-2005)
    • Financial Close - June 15, 2005.
    Nam Theun 2: Background
    • Largest private financing in the region at the time.
    • Non-availability of US$ debt (about 500m) w/out cover.
      • Export Credits
      • Political Risk Guarantees
      • Direct US$ loans
      • EGAT credit risk
      • Tenors and pricing
    • Availability of THB debt (about US$ 500m equivalent).
      • Non availability of long-term fixed-rate debt
      • Project location outside Thailand
    • Cross Border Risk
    • Funding for GOL Equity (about US$ 90m); HIPC
    Nam Theun 2: Financing Challenges
    • The project generates revenues (US$ 80 million on average), through socially and environmentally sustainable development of NT2’s hydropower potential.
    • NT2 revenues finance Lao PDR's poverty reduction and development strategy, key elements of Lao PDR's NGPES and the GOL’s MDG targets in 2015 (about 3% to 5% of gross revenues).
    • The use of NT2 revenues for these purposes was envisioned in the Decision Framework agreed between the GOL and the Bank in 2001 and reiterated in the Government's Letter of Implementation Policy (GLIP) in 2005.
    Nam Theun 2: Rationale for Bank involvement
    • IDA Grant
      • To finance E&S expenditures (as GOL Equity in NTPC)
    • IDA Guarantee
      • To mobilize private capital by mitigating Lao PDR political risks
      • Covered GOL obligations under project documents
    • IDA Credit to GOL for associated impacts – LeNs
    • MIGA guarantee
      • Covered key Thai & Lao political risks
    Nam Theun 2: Bank Group Support
    • Nam Theun 2 project has a standard emerging market power project finance structure …
      • A SPC (NTPC) to implement the project on a BOOT basis under a limited recourse finance scheme
      • A turnkey construction contract
      • A Concession Agreement with the Government of Laos
      • A main PPA with EGAT as offtaker and a PPA with EdL
    Nam Theun 2: Classic Project Finance Structure
    • Nam Theun 2 Power Company Limited (“NTPC”) is a Lao company established in Aug. 2002 by :
      • 35% EDF International (EDFI)
      • 25% Electricity Generating Public Company Limited (EGCO)
      • 25% Government of the Lao PDR (GOL)
      • 15% Italian-Thai Development Public Company Limited (ITD)
    • EDF is acting as Head Contractor, managing three Civil Work subcontracts and two Electromechanical Works subcontracts.
    • EDF & EGCO are also providing personnel & technical assistance
    Experienced sponsors brought development expertise
    • Meeting Lenders’ requirements under an acceptable project framework, risk allocation and timeframe
    • 2004-05 prevailing financial market conditions were attractive
        • high liquidity in bank market, relatively low interest rate environment & few good power projects in the region to attract investments
        • but Lao risk assessment led to full political risk cover requirement from Lenders & standard emerging market contractual risk allocation
    • Sponsors require effective financing phase management and timely completion of financing plan
        • the project financing plan was clear and adequately structured from the outset, project agreements were detailed and based on international standards
        • these conditions, under proper management, contributed to a smooth and relatively brief financing phase (15 months)
    Timely project development is possible with appropriate expertise
    • The finance plan is built on a limited recourse project finance scheme
    • Substantial financing amount required: raising USD 1,581 million eq. in a country without access to commercial funding
    • The Project finance plan revolves primarily around MLAs, BLAs and ECAs to allow the Project bankability given
        • the quantum of financing required
        • the perceived sovereign risks
        • Laos unproven track record re. private investments
      • Strong involvement of Thai commercial banks to allow local currency funding and mitigate forex risk
    A suitable response to allow a smooth financing phase
    • Early market sounding has shown expectations from ECAs and commercial banks for a strong IFI / World Bank involvement in the Project
      • to ensure compliance with highest E&S standards
      • to share or cover political risk
    • Involvement of the World Group from 1995
      • substitution of MIGA for IFC due to lack of attractiveness of “B” loans post Asian crisis
    • Involvement of the ADB from 2002
    ADB and MIGA provide pioneering dual-country PRI to accommodate the cross-border nature of the deal A requirement for MLA support
  • Diverse ECA, MLA and BLA & Thai commercial banks participation
    • World Bank Group and ADB were joined by ECAs upon selection of the electro-mechanical equipment suppliers
        • Coface (France)  EKN (Sweden)  GIEK (Norway)
        • Nordic Investment Bank (a MLA)
    • and by other institutions to complete the finance plan
        • AFD (French Agency for Development)
        • Proparco (subsidiary of AFD)
        • Thai Exim
    • All acted as either PRI providers (PRI and commercial risk cover from ECAs) or direct lenders.
    • Commercial facilities were allocated to 7 Thai banks and 9 international banks on a club-deal basis.
        • 7 Thai commercial banks provide in THB half of the long term loan facilities, and together with Thai Exim, all of the US$131 m. long term L/Cs
    • The finance plan comprises 27 financial institutions:
    • 5 MLAs;
    • 4 ECAs;
    • 2 BLAs;
    • 16 Thai & international commercial banks.
    • d. to d. tenor: USD 16.5 yrs
    • THB 15 yrs i.e. up to 12 year repayment
    Resulting Financing Structure … complex but detailed preparation enabled timely financial close
  • Contractual Structure
  • Global Financial Stake in NT2
    • WB (US$ 62 million); MIGA (US$ 42 million); ADB (US$ 110 million)
    • EIB and NIB (about US$ 85 million)
    • European ECA’s (US$ 200 million)
    • French Development Agencies (US$ 60 million)
    • Nine International Dollar Banks (US$ 500 million)
    • Seven Thai Commercial Banks (US$ 500 million equivalent)
    • Thai Exim (US$ 30 million)
  • Summary: Issues and Solutions Lao Government budget limitations Limited Environmental and technical capabilities of Laos USD1.5 B cost Commercial Lenders would not assume Political risks in Laos or Thailand Public Private Partnership WB advisory and technical assistance + experienced international power developer: EDF Project Finance scheme Political Risk Guarantees ISSUES SOLUTIONS
  • Summary: Risk Allocation
    • Risks associated with relationship between Laos and Thailand leveraged through contractual obligations of both governments
    • Additional leverage created through equity ownership by state-owned power companies of both countries
    • Social and environmental problems resolved through the involvement of the World Bank
    • Laos state-owned company enabled to make its equity contribution by using IDA funds
    • Project developed with 80% debt-to-equity ratio. Debt arranged by 9 leading commercial banks along with guarantees from MIGA, PRG, ADB and ECAs
    • Some funds provided by Thai banks
  • Summary: MIGA Value Added
    • Assisted in: syndication of larger amount of funds by Fortis bank and extension of finance period
    • Provided customized solution to multi-country risks: MIGA covered not only political risks in Laos but risks in Thailand (breach of the purchase agreement between the project and Thai state-owned company, EGAT)
    • Collaborated with sister agencies MIGA worked side by side with ADB and PRG to provide equal playing field for other arrangers
  • Key Lessons Learnt...for Large Hydros
    • MIGA and PRG Lenders were made accountable for Prohibited Activities undertaken by Company and/or Head Contractor
    • MIGA and PRG provide appropriate risk mitigation for large private hydropower schemes.
      • Political risks
      • Cross border risks
    • Optimization of the Financing Package is essential.
      • Over-commitment by lenders/guarantors
      • Over 25 project participants
      • Number of overlapping institutional requirements
      • Inter-guarantor and lender coordination
  • Key Lessons Learnt...for Large Hydros
    • Long arduous negotiations on the Concession Concession deemed “fair” by all parties.
      • Inclusion of detailed E&S obligations in concessions could be replicated in future large infrastructure projects
    • Due Diligence should be of high quality
      • Fine balance between requirements and cost implications
    • Common E&S regime acceptance by all lenders and guarantors facilitates project implementation
      • Harmonization of IFI safeguards requirements is a replicable innovation
    • For more information
    • Jason Lu Senior Underwriter [email_address]
    • www.miga.org