Lampung PPP Water Supply Project For discussion only

APN Workshop 2012, Seoul, Korea November 2012

2

Contracting Agency (Ministries, Regional Governments, SOEs)

Investor

PPP Agreement 2

Proposal for Guarantee

Recourse Agreement

1

3a

3b

A

Minister of Finance

MOF

Multilateral Development

Agency / Others

Equity Injection & Guarantee Policy

Coun

ter G

uara

ntee

for M

DA G

uara

ntee

Fac

ility

Credit & Guarantee Facility

B

Note:

will exist only if exist, i.e. when become part

of guarantee structure provided to investor

B A A

IIGFs Business Model

3

Eight economic infrastructure sectors: water, power, transportation (railway, ports), toll road, waste, irrigation, telecommunication, oil & gas

Awarded through a competitive bidding process

Economically, financially, technically & environmentally viable, socially desirable

Comply with related sector regulations

Prepared by credible experts/consultants

Binding arbitration provision in the Concession/PPP Agreement

Sector

PPP Contract

Project Viability

Regulations

Feasibility Study

Arbitration Clause

Project eligibility criteria for IIGF Guarantees

4

IIGF Guarantee Provision Process

4. Structuring 2. Screening 3.Appraisal 1. Consultation

CA Role

Seek info on IIGF guarantees &

process

Submit Screening

Form

Submit Guarantee Application

Package (GAP)

Finalize T&C of Guarantee &

Recourse Agreement

IIGF Role

Provide info on guarantee product &

process

Issue Confirmation to

Proceed for eligible project

Issue Letter of Intent

for guarantee provision

Issue In-Principle

Approval to be used for bidding

Screening Form: 1. Cover Letter 2. Project brief

description 3. Outline Business

Case

Guarantee Application Package: 1. Request Letter 2. Pre-feasibility study 3. PPP structure 4. Risk Matrix & Risk Mitigation Plan 5. Draft PPP Agreement 6. Description of Govt support 7. Scope of guarantee required 8. Financial model 9. Env. & social assessment report 10. Project Management Plan 11. CA related information

Overall Process Objective is to ensure Guaranteed Projects are: Feasible Fair in Risk Allocation

Robust in Risk Mitigation Plan Well Structured in terms of Financial Impacts of the Guarantee

Risk Monitoring

of Guaranteed Projects

5

IIGF guarantee process vs CAs transaction process

Sample timeline involving CA preparation and transaction execution vs corresponding IIGF guarantee provision process

Finalize Pre-FS

Pre FS review &

prepare GAP Use of

Consultant

Decision to go with PPP

1. Consultation

2. Screening

Signing of: PPP Agreement

Guarantee Agreement

Recourse Agreement

Award & Signing

Bid Submission & Evaluation

One on one meetings

Submit GAP (Usulan Penjaminan

3. Appraisal

4. Structuring

Issue Draft RFP

IIGFs Guarantee Process

EOI and PQ Process

Issue Final RFP

Issue In-Principle Approval

Financial Close

Attaching Final Draft of: PPP Agreement Guarantee Agreement

Issue Confirmation to Proceed

Issue Letter of Intent

6

Brief Profile of Bandar Lampung City

Capital city of Lampung Province located strategically as the entrance to the

island of Sumatra (45 mins flight from Jakarta) Administratively divided by 13 Districts and 98

Sub-District with a total area of 197.22 km2 One of the most Indonesias rapid growth city

with the population of 873.517 in 2009 and average growth level of 1.55 % per year.

Progress on a number of residential and commercial areas growing rapidly, as well as other public facilities, esp. in the 6 districts located in the northern part (future location of the provincial administration center)

Thus, the availability of infrastructure is critical (especially the water supply).

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BOT of Bulk Water Supply System (intake at 21km from City border, water treatment plant, transmission, and reservoir)

Capacity: 500 liters/ sec or 41 MLD. Develop selected water distribution network(s) to cover the required service area (9 districts).

Target: >300,000 existing population (+/- 30% of citys population, at greenfield with the high growth potential.

The Project Features (1)

Singapore

Malaysia

Sumatra Bandar Lampung city

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Est. project cost: US$ 60-100 mio Concession Period: 25 Years (start operation in 2014/2015) Land is already acquired at the intake location: 3.5 Ha, and at reservoir 2 Ha Will be the 1st case of:

IIGF guarantee supported project in water sector Viability Gap Fund (VGF) for PPP project

The Project Features (2)

Bandar Lampung city

Location of intake facility

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Why need this project?

The city seeks to achieve MDG target of 80% coverage for clean water supply by 2015 intense requests from its citizens for such service due to availability constraints in case of

other sources of water supply (i.e. groundwater). Currently, only 26% of the population in Bandar Lampung is served by the clean water

network, which is developed and managed by the local water utility (PDAM).

The current service is however supply-constrained, as a result, existing customers are receiving non-continuous water supply, and expansion of network to new customers become even more difficult

In order to expand the coverage of clean water supply, the municipality has launched the Way Sekampung Clean Water Supply Project involves the sourcing of raw water from the Way Sekampung river, the treating of water to drinking water standard as well as transmitting and distributing to the

population in the northeastern part of the city (where most of them currently are located outside the existing network)

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Parties involved in the Project

BPPSPAM

Financial Legal Technical

11

Project Scoping

12

Proposed Project Structure*

It is recommended to have: - PPP1: as bulk water provider - PPP2: O&M distribution network

Bandar Lampung

City

PPP1 (Build, operate bulk water facilities, build distribution network)

Bulk Water Purchase Agreement (25 years)

PPP2 (Marketing, operate, meter reading and

training) Availability & Output Payments

O&M Agreement ( 5- 10 years)

Management Fee & Incentives

IIGF

Recourse Agreements

* As discussed and proposed to the CA & MoF

Risk mitigation measure

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Aspects to be appraised Project-basis vs CA-basis

Guarantee Application Package

Appraisal Process

Viability

Economic, Financial & Technical Viability Pre-FS, Project Cash Flow

Environmental & Social Viability

Environmental & Social Impact Assessment

Government Support Description of Government Support

Risk

Risk Management PPP Structure, PPP Agreement, Risk Allocation

Guarantee Coverage Guarantee Coverage

Competitiveness Procurement Process Project Management (Procurement) Plan

CA Capacity CA-related Information

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IIGF Assessment on Project Feasibility, Risks and Guarantee Eligibility

The city seeks to achieve MDG target of 80% coverage for clean water supply by 2015 intense requests from its citizens for such service due to availability constraints in case of

other sources of water supply (i.e. groundwater). The municipality has submitted a Guarantee Application Package (GAP)

as part of its intention to receive guarantee from IIGF. The guarantee is needed in order to enhance creditworthiness of the municipality as the CA,

as well as the sole off-taker of the project. The absence of such guarantee is believed to compromise the bankability of the project.

IIGF appraisal criteria, includes, among others: technical, economic, and legal feasibility as well as social and environmental desirability; certainty of government support (if needed); proper risk allocation and mitigation plans; capacity of Contracting Agency; and robust project management plan, including procurement plan (ensuring competition and

value for money)

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IIGF Appraisal Process Guarantee Application Package (GAP)

Is prepared with the assistance of advisors, which includes: technical feasibility report, social cost benefit analysis (including economic assessment), legal review, initial environmental examination, financial model, project PPP structure, CA fiscal capacity assessment, and project management plan.

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Risk Appraisal & Structuring Risk Allocation and Risk Coverage

Evaluation of other aspects

Evaluation of Guarantee Impact

GUARANTEE PROVISION PROCESS BY IIGF

Evaluation of other aspects

1. Consultation and Guidance 2. Screening 3. Appraisal 4. Structuring

Evaluation of Risk AspectGuarantee Application

Package (GAP)

Risk Matrix and Risk Mitigation Plan

PPP and Infrastructure Guarantee Regulatory FrameworkPerpres 67/2005 j.o. 13/2010 j.o

56/2011 (PPP Infrastructure)

Perpres 78/2010 (Infrastructure

Guarantee)

Not covered

IIGF Risk GuidelinePPP Risk Category & PPP Risk Matrix

Based on Risk

Allocation Principles

Yes

No

Risk Allocation Principles

Risk coverage considered to be

guaranteed by IIGF

PMK 260/2010 (Manual of Perpres

78/2010)

Draft PPP Agreement

Evaluation on proposed risk coverage

Guarantee Viability Analysis

Not viable

Risk coverage for guarantee structure

evaluationViable

Guarantee Capacity Analysis

IIGF Risk Coverage

Co-guarantor Risk Coverage

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Transport

Waste Water

Toll Roads

Water Supply

Electircity

Sect

ors:

As

per P

resi

dent

ial R

egul

atio

n No

. 67/

2005

**

Selected Oil & Gas

Irrigation

Selected Telecom

IIGF Guarantee Coverage CAs Obligations which have been allocated to CA under PPP Agreement

**) as has been ammended by Presidential Regulatian No. 13/2010 and No. 56/2011

Allocation of Risks in a PPP Agreement an Illustration

Examples : CA Payment

Obligations 9 Inability to Pay 9 Unwillingness to Pay

Early Termination /

Other Payment Obligations due to Government Actions / Inactions, such as:

9 Change in Law 9 Expropriation 9 Currency

Inconvertibility / Non Transfer

9 Force Majeure Affecting CA

PC Shared CA A

B* C

D

E * F

G * H *

Possible IIGF

Guarantee Coverage

PC : Project Company CA : Contracting Agency

*) Risk that leads to certain financial obligation of the bearer

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IIGF Appraisal Process Highlighted Project Risks

Quality Risk Risk that the quality of raw water will deteriorate resulting in inability or required intensification

of water treatment process Quantity Risk:

Risk that stemming from insufficient flow of raw water in the intake during the project life, resulting in insufficient or no water output that can be produced

Distribution risk (non revenue water) The risk of leakages in the network due to physical and non-physical reasons By evaluating existing utilitys performance and benchmarking with other water utilities

Demand Risk Insufficient water consumption will be experienced resulting in revenue shortfall

Land Acquisition risk Permits and licenses risk Other political risks (change of law risk, expropriation risk)

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IIGF Appraisal Process Conclusion

In overall, the project is concluded to be: 1. technically feasible given the availability of water source and workability of technical scope; 2. financially feasible assuming there is government support; 3. economically feasible given the social benefits; 4. legally feasible given the conformance to prevailing laws and regulations; 5. environmentally desirable given no significant environmental risks identified; 6. socially desirable given the minimum adverse impact to the people and the benefit in terms

of improved health and productivity; 7. available government support inline with VGF mechanism from MoF; 8. risks allocated to the municipality are those better borne by the public sector (i.e. offtake,

raw water risk); 9. fiscal space in the municipality is sufficient to cover its payment obligations; 10. project timeline is realistic and the procurement process is sufficiently competitive and

robust.

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Implementing PPP Transaction

The project was exposed at 2011 Indonesia International Infrastructure Conference and Exhibition received overwhelming response from major international developers The result of pre-qualification are four international consortiums (shortlisted bidders)

The RfP has been released and subsequent consultation sessions have been held to obtain input concerning: project technical specification, commercial structure, transaction

process/tender process, and the viability gap fund mechanism The input from RfP process will also form the basis for the MoF for VGF mechanism

Possible bid parameter: the bulk water price or the amount of VGF required. Spread of end user tariff and bulk water price to be conform with the projected O&M cost of

distribution network

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Main Priority

IIGF Guarantee MDA/Other

Financial / Gtee Institutions

IIGF Guarantee

Or

+

Last Priority

IIGF Guarantee MDA/Other

Financial / Gtee Institutions

+ Government Guarantee +

Can be due to reasons of capital inadequacy from IIGF or other strategic reasons from IIGF

Due to capital inadequacy from IIGF and if:

There is no cooperation with third party; or

There is cooperation but it remains insufficient

Possible Guarantee Structures for IIGF

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Thanks Kamsamnida

Q&A

Andre Permana a.permana@iigf.co.id