Dr.

Singhal MGMT 660 InterGen Quezon Project

Question 1: Why does InterGen appear to have only a handful of competitors and why is it so difficult to attract investment into infrastructure industries? This relates to what is known as the "holdup problem," which I explain below. Obsolescing bargain or time inconsistency problem where business deals payback terms are restructured to favor a host government at the expense of the investing foreign firm is one of many reasons why InterGen had fewer competitors in the energy production industry. Additionally, prior to June 1992 the country Philippine was politically unstable, and had corrupt rulers such as Ferdinand Marcos that made it undesirable for many investors other competing energy firms besides InterGen to enter the market. Several political coups dating between 1986 and 1991 ensued until Fidel Ramos became president, and subsequently passed economic reforms that included taxation, privatization, and open foreign investments. Question 2: How does InterGen create and add value in the power generation industry? Analyze the logic of independent power projects (IPP) investments: Where does the value come from? What are the issues related to risk? Why is the Philippines unable to do the project on its own? Major investment IPPs developed as a result of the electricity crisis (demand for IPP was strong) between 1991 and 1993. IPPs traditionally became in demand by the Philippines owing to electricity shortages, and the stagnant pace with which the countries chartered energy bodies PNOC and NPC were slow to electrification of the country to meet rising electricity demand, and their monopolistic approach with development and exploration. However, reforms implemented by then Philippine presidents Aquino and Fidel Ramos that shortly took over from Aquino streamlined, and allowed foreign investors and firms participation in the exploration and development of electricity that increased IPPs to about 40% in the country. The country was an ideal and diverse place to do business owing to its fuel choices available, regulatory government, and choice of offtaker Meralco. This made InterGens management believed that the Quezon project was financially attractive with good financial return 12% discount and 20% equity discount rates, project IRR NPV of 58.4 Million(IRR of 13%), and equity NPV of 22.5 Million (23% IRR). There were political risk mitigation advantages the project was backed by Eximbank for expropriation, political violence, and currency inconvertibility. In addition to Meralco offtaker payment obligations being absolute and unconditional, as well as foreign currency debt rating had been upgraded. And

InterGen stood to make 20% in returns on its invested equity, plus additional fees for its management services, and lucrative compensation for its bondholders. Several issues that prevented the Philippine government from completing the project on its own were attributed to several coups and political instability, lack of sustainable economic reforms, and corruption.

In terms of risks, they were very minimal as InterGen as a company was very adept in managing risks. However, some of the risks that it faced were unofficial opposition form small local group activists. There were concerns and risks with construction approvals, contractual and operating risks including obsolescing and time inconsistency problems owing to political instabilities a few years prior to start of the Quezon project. There no sovereign guarantees with financial risks. However, with $200 Million committed by equity partners, Eximbank guarantee for
expropriation, political violence, and currency inconvertibility, and credit worthy power purchaser offtaker Meralco that was obligated unconditionally to pay for fixed charges even in the face of interruptions mitigated risks to very minimum levels. Question 3: Given what was known in late-1994, would you have recommended that InterGen invest in the Quezon project? What would have been your main concerns? Yes, the demand for IPP was great. InterGen was a company that was specialized in operating in countries such as the Philippines. Additionally, funding of the project was not a problem (PIL) offering InterGen unsolicited to purchase 50% InterGens stake a total equity of $85 Million in addition to a locking in of $30 Million profit on equity stake sold. InterGen also stood to make over 20% return on its investment in the project, which was one of the largest standalone projects for an IPP. Question 4: Given the situation in late-1997, what should Greg Daul recommend to Carlos Riva at the upcoming board meeting? Based on lower cost projects than Quezon that were scheduled to begin in 2000, possibility of Meralco renegotiating better contract terms, country risks with the Asian financial crisis that dropped the Philippine Peso 21%, grim growth in 1998 on-wards due to the Asian financial crisis, which were all financial obstacles to the Quezon project and would have negatively impacted InterGens financial outlook with the project. Thus, if I was Daul, I would have recommended to Riva to accept PILs offer to purchase InterGens remaining 22.9% of project equity for $85 Million despite Dauls future forecast of the project imputed equity value at nearly $180 Million, which was very attractive. But developing issues with environmental, financial, and political factors seemed to have cast a grim outlook with the anticipated valuation of the project that made sense to sell to PIL rather than taking the chance to risk loosing return on investment and equity.