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Mitigating Risk in Infrastructure and
Development Financing in the Philippines
Susan Z. Prado Executive Vice President & Chief Finance Officer Development Bank of the Philippines
Blue: 0-26-216
Red: 224-0-25
Direct
Lending
Nation-building thru
funding of priority
sectors such as
infrastructure and
logistics, social
services,
environment, and
Micro, Small and
Medium Enterprises
(“MSMEs”)
On-lending
of Official
Development
Assistance
(“ODA”)
funds
Primary on-lender of
ODA funds from
international
development
agencies to finance
medium to long-term
projects in priority
sectors
DBP is a 100% Philippine Government–owned universal
bank that is a pillar in both platforms of developmental
and commercial banking.
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Active participant in PPP and Infrastructure projects
Arranger and/or Lender (sample projects):
DepEd PPP for School Infrastructure Project I
Tarlac-Pangasinan-La Union Expressway
Boracay Water Supply and Wastewater Project
Mactan-Cebu International Airport
El Nido (LGU) Water Supply, Sewage and Wastewater Treatment Systems
300MW Therma SouthCoal Power Plant in Davao
54MW Trans-Asia Wind Power Plant in Guimaras
3MW Hydro Plant in Benguet and 8WM Hydro Plant in Agusan del Norte
RISK ANALYSIS AND MITIGANTS
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• Typical Infrastructure Financing is through the use of Project Finance structures
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Risk Type Mitigant/s
Pre completion • Cost overruns • Schedule Delays
• Fixed price turnkey contracts • Warranties / penalties • Financially strong and technically
capable contractors • Review of schedule by
Independent engineer
Post completion • Revenue forecasts • Revenue build up • Operating Costs • Management Failure
• Supply contracts • Offtake contracts • Market analysis • Strong operator/O&M partner • Performance guarantees
Project Finance Risk Matrix
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Risk Type Mitigant/s
Technical • Performance • Environmental • Safety
• Warranties / Incentives • Proven technologies • Experienced contractor /
operator • Periodic reviews by
Independent Technical Consultant
• Equipment performance guarantees
• Public consultation and approval
Project Finance Risk Matrix
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Red: 224-0-25
Risk Type Mitigant/s
Financial • Structure: D/E ratio • Structure: risk/reward ratio • Foreign Exchange • Interest rates • Debt Service Cover • Cashflow
• Equitable ROE • Acceptable cover ratios
(DSCR) • Escrow and reserve accounts • Dividend restrictions • Loan syndication • Insurance • Financial derivatives / swaps • Standby funding
arrangements • Offtake / Supply Agreements
Project Finance Risk Matrix
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Risk Type Mitigant/s
Legal • Regulatory Framework • Concession Agreement
• Experienced legal counsel • Experienced transaction
advisors • Clear documentation
Political / Country
• Political stability • Change in law / regulations • Expropriation • Civil Unrest • War • Work Stoppages • Force Majeure • Political Intervention • Currency Controls
• Local knowledge particularly on the political environment
• Clear regulatory regime • Flexible tariff arrangements
that incorporate adjustments for these types of events
• Involvement of multilateral / bilateral agencies
• (Extended) political risk insurance
Project Finance Risk Matrix
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Risk Allocation Matrix (for PPPs) Risk Private Sector Government
Construction Liable for completion Liable for delivery of required ROW
Market/
Revenue
Volume risk; has flexibility to adjust fares/fees up to a cap
• Ensures implementation of fare/fee increases per contract;
• non-implementation of increase = payment of difference
Expense Controls efficiency and optimization of operations/ maintenance
• Contractual adjustment of fares/fees typically tied to CPI;
• Government ready to provide relief for extra-ordinary movements in major cost items (ex. power) via adjustments in fees/fares or through other forms
Material Adverse Gov’t Action
Burden of proof; subject to a materiality threshold
Provides relief/compensation due to a MAGA event
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Alternative Financing Structures:
• Corporate lending via bonds/notes:
– EDC Fixed Rate Bonds (for 87MW Burgos Wind Farm)
– Citicore-Megawide Fixed Rate Notes (for the DepEd PPP for School Infrastructure Project I)
– First Gen Corp. Fixed Rate Notes (various power projects and general corporate purposes)
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Key Issues in PPP Concessions • Clear delineation of obligations for both Government (ex.
ROW delivery) and the Concessionaire
• Reasonable timetable for delivery of obligations
• Material Adverse Government Action provision does it adequately protect the Concessionaire?
• Termination payment provisions are lenders protected? Is there a haircut?
• Provision for delayed Government payment? issue of appropriations risk (ex. 2yr payment provision subject to interest)
IN CLOSING…
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Parting Thoughts
• Financing infrastructure development
– Contributes greatly to national development
– Requires proper understanding and allocation of the risks and issues
– DBP can play key roles throughout the project lifecycle
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Infrastructure - Connecting Rural Urban Intermodal Systems Efficiently (CRUISE) Program
JICA - Logistics Infrastructure Development Project (LIDP)
• Bulk/cold chain and packaging, transport and distribution facility •Road RORO Vessels & Terminal Facilities •Toll/access/LGU Roads and maintenance equipment • Airports • Public Market
• Private corporations, LGUs, GOCCs, Cooperatives
• tenor up to 20 years/ 5 years grace
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Red: 224-0-25
Infrastructure - Financing Program for the Water Sectors
JICA – Environmental Development Program Philippine Water Revolving Fund
• Water Supply system
• Private Corporation, LGUs, Water Districts (WD), PFIs
• tenor up to 20 years/ 3 years grace
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Red: 224-0-25
Infrastructure – Financing Program for Water Sectors
JICA - Environmental Infrastructure Support Credit Program I and II
• Water supply system
• Private Corporation, LGUs, PFIs
• tenor up to 15 years/ 5 years grace
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Red: 224-0-25
JICA - Environmental Development Project (EDP) Non Water
•Power generation and distribution (renewable energy)
• Private Corporations, LGUs, GOCCs, Cooperatives
• tenor up to 20 years/ 5 years grace
Infrastructure - Financing Utilities for
Sustainable Energy Development (FUSED)
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JICA - Environmental Development Project (EDP) Non Water
•Solid/Hazardous/Health Waste Management • Industrial Pollution Control Projects
• Private Corporations, LGUs, GOCCs, Cooperatives
• tenor up to 20 years/ 5 years grace
Environment - Green Financing Program
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Environment - Green Financing Program
JICA - Environmental Infrastructure Support Credit Program I and II
• Waste water treatment and sanitation • Solid/healthcare/ hazardous waste management • Industrial Pollution control •Cleaner production waste minimization/recycling
• Private Corporation, LGUs, PFIs
• tenor up to 15 years/ 5 years grace
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Red: 224-0-25
Environment - Green Financing Program
KfW –Credit Line for Solid Waste Management
• Solid waste management
• Private Corporations, LGUs
• tenor up to 12 years/ 3 years grace
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Red: 224-0-25
Environment - Green Financing Program
KfW – Industrial Pollution Control Loan I and II
• Industrial pollution control projects
• mSMEs
• tenor up to 10 years/ 2 years grace
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Red: 224-0-25
Retail Lending Program for mSMEs
JICA - Industrial and Support Services Expansion Program II (ISSEP II)
• Manufacturing and support services • Education strongly linked to SMEs • Working capital
• <P200 M asset size before financing with loan limit of P100 M
• tenor up to 15 years/ 5 years grace (for working capital up to 7 years/ 3 years grace)
Contact Information:
Susan Z. Prado Executive Vice President & Chief Financial Officer Development Bank of the Philippines [email protected] +63.2.818.9511 (trunkline)
