IFC Advisory Services in Public Private Partnerships

ANZ Pacific Infrastructure Forum October 2010

IFC Advisory Services in PPPs

Lead advisor mostly to governments
 Transparent international competitive bidding  Marketing of business opportunities to selected investors  Preparation of institutional reforms  Search for financing in coordination with rest of WBG, as needed  Undertake difficult projects; advise governments objectively

Fee based services

 Modest retainer paid by Clients (according to milestones)
PRIF has provided the funding for IFC PPP transaction advisory services in the Pacific, reducing the Governments contribution significantly

 Largest portion of remuneration to be paid as success fee at closing of transactions (by the winning bidder)  Grant funding for specialist external consultants (e.g. lawyers)
2

IFC Approach
Phase 1: Analysis Phase 2: Implementation

Assess PPP Options

Define Transaction Structure

GoV GoAhead

Market To Investors

Prepare

PPP/Project

Conduct Bid

Contracts

Financial Closure

Legal / Inst. Framework Payment mechanism

Risk allocation Investment Program

Info memo Road show Pre Qualificati on Data room

Service standards Performance targets Payment procedures Penalties Monitoring

Technical evaluation Financial evaluation Select winner

Contract effectiveness Assumption of service obligations

.outcomes ...to marry interests

Government's

Public Sector Goals

Public service, particularly to the poor Transfer of operational risks/ investment responsibilities Alleviation of financial burden Other stakeholders concerns Objectives

Business Opportunity
Legal framework Business Institutional framework Technical diagnosis Market analysis Regulatory framework Investment needs

Investor Goals

STRATEGY
Transaction Structure Transaction Process

Project returns Country risk mitigation Long-term commitment Limited financial obligations Upside potential

Funding Sources
Consumers (Tariffs) Treasury (Availability Pmts) Treasury (Subsidies) Commercial Lending Equity IFIs/DFIs

Samoa Case Study: Polynesian Blue

Background
Isolated in the Pacific, Samoa is dependent on tourism for economic development and jobs To support tourism expansion, the GoS recognised the need to operate Polynesian Airlines as a commercially sustainable business in order to provide safe, efficient, and affordable international air transport to Samoa. Major issue with Polynesian Airline  Inappropriate route and fleet structure  Over-staffing  Profitable regional and domestic (turbo-prop) operations but lossmaking international (jet) operations  Expensive aircraft leases  Small remote islands dependent on air access, with small demand (huge peaks) and diseconomies of scale

IFC Mandate
GoS appointed IFC as lead transaction advisor to a PPP with international aviation investor IFC mobilised a large team comprising a) a core advisory team of IFC staff; and b) external technical and legal consultants Fees paid for IFC staff & travel costs was a combination of NPC fees plus success fee paid by winning bidders Consultants fees paid by IFC Trust Fund, of which DevCo DfID, UK is major partner IFC assisted in marketing the opportunity to potential investors, structuring the joint-venture agreement, evaluating business plans, negotiating contracts, and achieving financial closure

Samoa Case Study: Polynesian Blue (cntd)

Scope of Work
Design an innovative PPP partnership model which takes advantage of the international partner s cost structure, leverage marketing and distribution strengths to maximize profitability  The international investor manages and operates the new airline, providing the fleet capacity as well as commercial and managerial oversight GoS provides aspects such as traffic rights, operational support, flight operations personnel

Results/Lessons
Fiscal impact  Subsidy in 2004 WST 19.5million (US$7.5million) 70% of Samoa s budget deficit  Profit in 2007 WST 16.6million, WST3million dividend paid to Government Economic growth  Tourist numbers have increased by 15% annually (historic trend 4%) Tourism earnings 2005: WST 208million Tourism earnings 2007: WST 283million

Assist in the managing the Bid process  Competitive process involved the 3 main regional players (Air New Zealand, Qantas and Virgin Blue) Winning bidder selected on best business plan that (a) requires least GOS subsidy, (b) guarantees access to Samoa and (c) would contribute positively to tourism development Winning bidder selected on best lowest proposed subsidy
6

Multiplier effect large Estimate that for every $10,000 of tourist, 1 job is created Implies 2,000 new jobs (population of Samoa 180,000)

Vanuatu Case Study: Air Vanuatu

ransaction Phases
 Mandate signed in August 2007  Phase I (Strategic Options Report) presented in December 2007  First Bid in 2008 not successful  Second Phase I ( an Independent review of Air Vanuatu's financial performance due to huge financial losses of the airline)  Second round of marketing efforts for equity partnership with the airline from June-August 2009  The most promising candidate dropped out in September 2009  Ended mandate formally in 2010
 

Results/Lessons
Bid failed due to timing and unfavourable market industry meltdown in 2008 as a result of high oil prices; and Regional airlines changed strategic priorities

However,  GoV, relied on technical and legal advice to reject several proposals which were not in line with GoV s objectives GoV awareness and knowledge of the challenges facing the airline and the sector has significantly increased over recent years The Bid process facilitated greater competition in the marketplace- Virgin Blue began flying between Sydney and Port Vila, reducing fares and boosting tourist arrivals

Competition from Pacific Blue benefits Vanuatu Tourism

Impact of Competition on Tourism
50,000 45,000 40,000 Passenger arrival 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Sydney Route without Competition Sydney Route with Competition

Thank you!