Black Sea Energy Conference Public-Private Partnership in CEE

1. Black Sea Energy Conference Public-Private Partnership in CEE Bucharest, April 4, 2006

2. World Bank Group and Energy Sector Introduction to IFC’s Advisory Services

3. The World Bank Group Our Department WORLD BANK GROUP CAS «World Bank» IFC IBRD IDA MIGA ICSID

4. WBG in ECA – Selected Current Activities • US$14.6 billion World Bank active portfolio in ECA region, of which: • US$4.4bn in 95 projects in infrastructure and energy • US$4.4 billion IFC active projects in ECA region, of which: • US$350m in infrastructure • US$160m in energy • US$5.0 billion FY05 World Bank program for the region, of which: • US$600m for Romania alone • US$1.3bn for infrastructure and energy • In 2004/05 IFC invests in the region approximately: • US$600m in infrastructure projects, of which • US$500m in power and gas projects

5. Gas Power TOTAL No. of Active Projects 17 61 78 Countries 30 33 12 IFC Investment (US$ mm) 1,921 2,550 629 Syndicated Loans (US$ mm) 119 2,111 2,229 Project Cost (US$ mm) 11,729 14,982 3,253 IFC Global Portfolio - Private Energy • 78 active projects in the energy sector in 33 countries • Financed US$15.0bn total project cost • Invested US$2.5bn in debt and equity • Syndicated US$2.2bn loans

6. Constraints to Attracting Private International Capital • International power companies have more or less withdrawn from emerging markets in recent years • Issues in Developed country markets: • Enron collapse • California crisis • Trading and accounting scandals • Negative perception of international investments by stockmarkets • Stock market downturn • Access to debt and equity capital limited

7. Constraints to Attracting Private International Capital (contd) • Issues in Developing country markets: • Latin America: Argentine crisis, Brazil devaluation/power rationing/sector uncertainty, Mexican political deadlock, Chilean gas import restrictions • East Asia: Slowdown after 1997 crisis, no progress in sector reform • South Asia: Dabhol cancellation, limited sector reform • Europe: Focus on EU accession • Africa: Opportunities are smaller and riskier

8. Current Context in SEE • Investment needs too large for Governments • Slow earnings growth in EU will draw investors out • Big EU corporates will lead – will hit financial limits • Region is building record of strong economic growth • Missed the PF Boom: no legacy of large losses • Countries in this region are first place to look • Acquisition costs a fraction of what they paid elsewhere • Big progress made on tariffs, regulation etc. Strong grounds for optimism: few projects… 12

9. Key Success Factors • Sector Fundamentals • Contractual Arrangements • Government Support • Legal Framework • Regulatory Framework • Adequate tariff levels and consumer payment discipline • Balanced contractual arrangements and high standards of transparency • Government commitment to performance of the off-taker and other contractual undertakings • Legal framework enforceable and conducive to private sector activities • Independent and transparent regulatory institutions

10. New Models Needed • Where regulatory framework unproven : • World Bank’s Partial Risk Guarantee • Where regulatory framework inadequate: • Concessions with regulation through the contract • Where economic & commercial returns diverge: • PPPs: to reduce risk and/or raise returns to investor • Longer term, incentivised Management Contracts • Where uncertainty is so great required return too high Must change risk / reward balance in some sectors

11. Why are PPPs taking front stage? • Availability of public capital remains constrained due to deficits and/or prudent fiscal management • Availability of private capital also constrained: investors generally more risk-aware than previously and less willing to take risks in emerging markets • Yet huge capital needs remain in infrastructure, education and health care, for development and for competitiveness • Efficiency gains from private sector involvement are believed to be considerable.

12. Rationale for PPPs • Can make projects viable where economics and risk are more difficult • Bring private sector efficiency in sectors/project which do not achieve cost recovery • Better use of “hard earned” Public Money, i.e.: • More projects for given amount of funds • Focus on more social projects / complex risks • Value for Money

13. Partial Government Subsidy Can Be Important • PPPs in some areas will increasingly need some degree of government subsidy to: • Avoid ‘rate shocks’ for consumers • Share financial risk with investors • Kick start major projects in difficult investor environment • Success of future PPPs will depend on structuring public subsidy in a manner which: • Secures political and public support • Is fiscally feasible and sustainable • Eases transition to full cost recovery rates for public services

14. Today’s Challenges for PPPs • Cautious investors, and little appetite for project finance risk • Need solutions to regulatory uncertainty • Mobilise local investors and financing • Newly emerging generation of failed attempts to introduce PPP • Overcoming public resistance • More attentive Trade Unions • Media more alert and playing a political role BUT GOING BACK TO THE PAST IS NOT AN OPTION

15. PPPs and IFC World Bank and Energy Sector Introduction to IFC’s Advisory Services

16. Advisory Services to Governments to structure and implement PPPs • Dedicated Department specialized in providing advice on the structuring and implementation of PPPs in infrastructure worldwide. • We have been at the forefront of advisory services in the transportation, water, municipal infrastructure, power, telecommunications sectors. • Our staff are transaction specialists. They are all experienced in the key elements of PPP transactions, and in planning and managing the transaction process. • We undertake pioneering transactions • First, difficult, political, reform-based, innovative • Over 100 advisory assignments in more than 67 countries • Capital mobilized post-transaction since 1995: US$4 billion

17. PEP-SE infrastructure • IFC’s Advisory Services’ structure dedicated to South East Europe with support by donors • Operating in: Albania, Bosnia Herzegovina, Bulgaria, Croatia, Macedonia, Romania and Serbia & Montenegro • Funding commitment from: • Austria, Italy, the Netherlands, Norway, Switzerland, USA and IFC • Mandate: development of infrastructure in the region via the increased participation of the private sector PPPs • Spanning all types of infrastructure • Started operations in July 2005

18. Government Civil Society & Other Stakeholders Project Company PEP SE Infrastructure Local/Intl. Legal Consultant(s) Technical/Market Consultants Social/PR Consultant(s) Accounting/Tax Consultant(s) Advisory Team

19. Competition Communication Government Financing Investors Advisor Sources / Operators Consumers Efficiency Transparency A Difficult Balancing Act Between Stakeholders

20. Phase I: Preparation Phase II: Implementation Step 1 Step 3 Step 4 Step 2 Mobilization Strategy Reforms Transaction Closing Framework Options Team A Structured Approach Institutional Building Institutional Building Institutional Building Communication-----Communication-----Communication----Communication

21. Public Funding of PPPs : Examples With Different Approaches to Public Funding • Consumers: SPUG, Philippines • IDA and donors: Pamir, Tajikistan

22. All End-Users Energy Regulatory Commission Sets Surcharge Output Based Subsidy Power Sector Asset and Liabilities Mgmt Corporation Regulates rates & services An Example: Philippines SPUG Selected on a competitive basis –True Cost Generation Rate (TCGR)= lowest bid price New Private Providers Power Supply Agreement No Deficit Subsidy = TCGR - SAGR Revenue Power Rates set at affordable level - theSocially Acceptable Generation Rate (SAGR) -and increasing in real terms Improved reliability - Supply standards contractually agreed + performance guarantees Electricity Cooperative

23. Example: Tajikistan, Pamir Private Power Project $10mil., 40 years, at 0.75% Swiss Govt. Govt. of Tajikistan IDA Output-based Financing of Lifeline Tariffs $10mil., 20 years, at 6.00% $4mil. $5mil. grant $4.5mil., 10 years, IDA Spread Account Swiss Grant Account Average subsidy of 1.85cents/kWh per month for 50 kWhs in summer and 200 kWhs in winter $3.5mil. equity Residential Consumers $8.2mil. equity IFC Agha Khan Foundation for Economic Development Pamir Energy Co. Lifeline tariff of .25cents/kWh Consumers Average tariff of 2.1cents/ kWh instead of 4.65cents/ kWh

24. What is needed to succeed • Understanding of public interests and ability to balance public/private issues • Capacity building of governments to increase their capacity in structuring and managing PPPs • Transparency and Communication • Oriented towards development objectives – e.g. social focus • Knowledge of investors’ market & confidence of investors • Integrated approach / synergies within the other players • Leverage international experience elsewhere • Public Dissemination and PR campaigns

25. PEP SE Infrastructure: Contact Details THANK YOU Contact Details: Angelo Dell’Atti, General Manager PEPSE Infrastructure International Finance Corporation World Bank Group Tel: +359 2 9697207 Fax:+359 2 9697222 E-mail: adellatti@ifc.org