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Flannery: Sovereign credit in support of financing
1. A possible sovereign guarantee framework for Iraq
Presentation by Dennis Flannery, Country Head for Iraq, Citibank
Capstone Meetings
Policies To Encourage Iraq’s Economic Development
MENA-OECD Investment Programme
Baghdad
February 2nd and 3rd 2014
2. Why would Iraq employ Sovereign Credit to finance its Power Sector Infrastructure Investment?
Satisfy Lenders’ and Investors’ Need for Solid Source of Repayment
Provide Iraq Access to International Financial Markets, Export Credit Agencies, etc.
Enhance Terms on which Iraq finances power sector Infrastructure Projects
Experience of Similarly-Situated Neighboring Countries indicates Use of Sovereign Credit leads to Expediting Development of Power Sector
3. Source of Repayment?
Creditors & Investors demand Highest Level of Certainty that Obligations will be Honored
Solid Financial Backing is Essential - indicating the ABILITY to Pay
Political Leadership must demonstrate WILLINGNESS to Pay
Established Track Record of Meeting Financial Obligations
4. Traditional Power Sector Source of Repayment
Electric Utility Company
Power Purchase Agreement Cash Flow
Debt Service / Return on Equity
Independent Power Producer
Sources of Financing
5. Traditional Power Sector Source of Repayment
Public Utility with “Investment Grade” Credit Rating from Independent Rating Agency
High Standard of Operating Performance and Enterprise Management
Long Track Record of flawless, Transparent Financial Performance
Well established Tariff Structures
Electricity Meters and Rigorous Collection Protocols
Proven Record of Project Development and Management
Conclusion: Creditworthy, Bankable Source of Repayment
6. Iraq’s Power Sector Source of Repayment
Not yet meeting Traditional Power Sector Financing Standards
Need for institutional reform in the Ministry of Electricity to develop strong operational management, financial management, collection regime and project management capabilities
Likely to take Years to reach Investment Grade Status
Needs Credit Enhancement in order to gain Access to International Financial Markets
Most Likely Credit Enhancement would be Sovereign Guarantee
7. What is Sovereign Credit?
Financial Obligation – can be Direct Loan or Guarantee
Carries “Full Faith & Credit” of the Nation
Very Substantial Obligation
Political Authorities undertakes Obligation on behalf of the Entire Nation
Obligation which the People of the Nation are committed to honoring as a matter of National Priority
8. What is the form of Sovereign Credit?
Direct Financing by the Government or authorized Government agency through a Bond Issue or Bank Loan
Sovereign Guarantee on Obligation undertaken on behalf of the Government
Government Agency or Ministry
Project Financing Sponsor – Special Purpose Vehicle
9. How is a Sovereign Credit created?
National Laws govern establishment of Sovereign Credit
Usually requires Approval of Highest Political Authority, i.e., Parliament
High Standard for Approval avoids Abuse
May be delegated to certain Government Agencies
Minister of Finance usually executes Instruments of Sovereign Credit
10. How can Sovereign Credits be created in Iraq?
No Current Legislation governing Establishment of Sovereign Credit
Iraq Financial Management Law of 2004 indicates Need for Council of Representatives Approval
Could be established through Inclusion in Annual Budget Law for specific project
May be best to present to Council of Representatives on Case-by-Case Basis
Eventually incorporated into Financial Management Law
11. Test of Sovereign Credit validity
Legal Counsel at Closing of Financing must confirm the Sovereign Credit is in Conformity with Iraqi Legal Requirements; they must confirm the Obligation is fully binding on the State
Signatory of the Sovereign, e.g., Minister of Finance, must be Legally Authorized to commit the Full Faith & Credit of the Nation; Parliamentary Resolution must Authorize the Signature which will bind the State
12. Benefits of Borrowing to Finance Iraq’s Power Sector
7 – 15 Year Repayment Terms will permit Iraq to finance many Power Sector Infrastructure Investment Projects each Year
Cost of Borrowing – Especially from Low Cost Export Credit Agencies – may often be lower than Current Payment-on-Delivery Option
Gain Technical Assistance from Certain Creditors
Establish Iraq’s Presence in International Financial Markets
13. A Path forward for Iraq to use Sovereign Credit to finance Infrastructure Investment in the Power Sector
Develop Consensus among Iraqi Government Leadership to employ Sovereign Credit on a Case-by-Case Basis to finance Power Sector Infrastructure Investment Projects
Agree on Process for Establishment of Sovereign Credit
Select a Project which could benefit from the use of Sovereign Credit
Develop a Financing Plan which demonstrates Project Viability and details of Sources of Financing for the Project, including Expected Terms and Conditions
Present Financing Plan to Council of Ministers and select Committee Chairs of the Council of Representatives for Provisional Approval of Use of Sovereign Credit
Negotiate Terms of Financing with Investors and Creditors
Present Final Terms and Conditions of the Financing to the Council of Ministers and Council of Representatives for Final Approval to permit the Minister of Finance to execute the Contemplated Sovereign Credit Instruments
14. A Path forward for Iraq to use Sovereign Credit to finance Infrastructure Investment in the Power Sector
Repeat Process for Subsequent Power Sector Infrastructure Investment Projects
Eventually adopt Legislation governing Process for the Establishment of Sovereign Credit on a Routine Basis – maybe in a revised Financial Management Law