Training on Case Studies on Public Private Partnership (PPP) by TlDmH0mc

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									                      Training on
     Case Studies on Public Private
           Partnership (PPP)

Case Study1:
360 MW Haripur Power Plant
 Commercial Considerations

                          Nazrul Islam
                  Executive Director and CEO
         Infrastructure Investment Facilitation Center


                      17 February 2010
Haripur 360 MW Combined
Cycle Power Plant




                          2
           THE OVERVIEW
 What is PPP?
 Why PPP?
 Types of PPP
 Risk Identification and Mitigation
   Contractual Structure (Security Package)
   Tariff Structure
   Tender Evaluation
   Financial Modelling
   Operational Results (last 7 years)
    – Performance on power price, Capital cost, implementation
      time
    – Comparison to BPDB Dependable capacity
    – Heat rate
    – Availability
    – Capacity factor etc.                              3
        PPP: What is it?
 Medium to long term relationship
  between the public and private sector

 Involves sharing and transferring of risks
  and rewards between public and private
  sector

 Attempts to utilise multi-sectoral and
  multi-disciplinary expertise to
   – structure, finance and deliver desired policy
     outcomes

 Clear governance structures established
  to manage the partnerships              4
  Rationale
 Access to larger capital base
 Greater access to technical and
  managerial skills
 Allows scarce government fund
  to health, education and rural
  infrastructure
 Reduced load shedding
 Allow the local development of
  entrepreneurial skills
                                    5
                   Forms of PPP
100 % non-public                                                               Enabler/ Regulator
                                                       Divestures
   ownership
                                                                     BOO
                                     Concessions



                                                  BOT                           Governments’
                                                                                    Role
                                 Leases


                   Management
                   contracts

 100 % Public                             Service
  ownership                               contracts                                Provider
                                                                    Duration
                       5        10   15   20      25     30
                   Increasing level of delegation, risk &
                   irreversibility
                                                                                              6
Risk Identification
 and Mitigation



                      7
Risk Allocation Principles


  Risk is allocated among parties
    – through Contract Document
  Impose the risk to a party who is
   naturally capable to bear it
  Government bears more risk
    – In flagship projects
    – Reduces over sector maturity




                                       8
      Project Risks
 Commercial risks:
  –   Completion risk
  –   Demand or market risk
  –   Operating/performance risk
  –   Economic risk
  –   Management risk
 Noncommercial or policy risks:
  –   Political risk
  –   Regulatory risk
  –   Legal risk
  –   Contractual risk
                                   9
Risk Management Process

  Assessing potential risks
  Risk managing strategies:
    –   Tolerate (retention)
    –   Treat (mitigation)
    –   Terminate (elimination)
    –   Transfer (buying insurance)
  Developing risk management plan
  Implementing the plan
  Review and evaluation of the plan


                                       10
   Risk Allocation Principles


 Risk should be allocated to the parties
  who are in best position to manage,
  mitigate or control such risks and bear
  such risks at the lowest cost
 Remember other factors:
   – Incentives to reduce risk
   – Transactions cost of allocating risk
   – Second-best considerations
 Risk can be allocated to:
   –   Government and executing agency
   –   Investors (through SPV)
   –   Third parties (professional agencies)
   –   Consumers

                                               11
                Risk Mitigation Instruments (1)

Type of risks    Mitigating Instruments

Delays in         Fixed price contract
construction      Turnkey contract
                  Equipment supply contract
                   including provision of Liquidated damages (LD)

Cost overruns     Contingency provision and escalation in
                   original cost estimates
                  Standby credit facilities from the sponsor
                  Project funds agreement
Project site      Land lease agreement or land purchase
                                                                12
                     Risk Mitigation Instruments (2)


Type of risks        Mitigating Instruments

Technological risk    Choose tested and proven technology
                      Guarantee from the licensee of the technology to
                       repay debt, in case of untested or new technology


Equipment               Bond or guarantee from the equipment supplier
performance risk        Equity stake in the range of 5-10%
                        LTSA with OEM for spare parts supply
                        Major maintenance contract with OEM


Input supply risk     Supply contract with input suppliers
                                                                   13
                  Risk Mitigation Instruments (3)

Type of risks       Mitigating Instruments
Management risk      Employ experienced team/ employee
                     Contract with incentive packages
Demand risk          Off-take agreement
                     Call and put options
                     Forward sale or purchase agreement

Payment risk         Contract with creditworthy buyers
                     Commercial security from the buyer
                     Government guarantees of buyer’s contractual
                      performance
                     Direct assignment of part of buyer’s revenue into
                      escrow account
                                                                   14
                 Risk Mitigation Instruments (4)

Type of risks    Mitigating Instruments


Currency risk     Mixing local currency and foreign currency loans
                   and equity
                  Indexing output prices to the exchange rate
                  Obtaining contingency sponsor support
                  Establishing escrow account
                  Obtaining government guarantee for foreign
                   exchange availability and convertibility



Inflation risk    Provision for indexing inflation into output price
                                                                  15
                 Risk Mitigation Instruments (5)

Type of risks         Mitigating Instruments

Interest rate risk     Loan for fixed interest rate
                       Converting floating rate to fixed rate
                       Swap interest rate
Financing/Financial      Ability to start project on equity
risk                     Interaction/comfort letters from potential lenders
                         Sequencing of loan repayments with cash flows
                         Creating reserve to avoid default in debt
                          servicing

Environmental risk     Legal compliance
                       Limit contamination within set standards
                       Pay outstanding compensation claims
                                                                       16
                Risk Mitigation Instruments (6)

Type of risks        Mitigating Instruments

Political risk        Good regulatory structure
(including change     Share with the government through contract for
in law)                compensation, extending contract term,
                       temporary payment to pay loan repayment
                      Purchase political risk insurance from multi-
                       lateral agency
                      Include local investors and lenders in financing
                      Purchase raw material from local markets


Force Majeure risk    Insurance policies for general force majeure
                       events                                         17
Contractual Structure
 (Security Package)


                    18
                       The Major Contracts of
                      Haripur Power Company
                              Government of
  Strong commercial            Bangladesh
  contracts for Private      (Power Division)
     Infrastructure
                                       Implementation
                                       Agreement
                                                               Bangladesh
                                  Haripur                        Power
Petrobangla    Complex Contract                                Development
                                  Power     Complex Contract
   (Titas)            Gas           Ltd
                                                                  Board
                                                Power




                      Contract documentation proportional
                      to allocation and transferring of Risks
                                                                             19
               Project Contractual Structure
                                Bangladesh Power
                                  Development
                                                                     Govt. of
 Petrobangla                          Board
                                                                    Bangladesh

                 Fuel Supply      Power Purchase   Implementation
                 Agreement          Agreement        Agreement

Construction     EPC Contract
 Contractor
                                                                             Senior
                                                    Loan Agreement
                O&M Agreement                                               Lenders
   O&M
  Operator
                                                    Sub-ord Loan
                  Insurance        Shareholders
                  Agreement         Agreement
                                                     Agreement             Sub-Debt
  Insurance
 Companies
                                  Shareholders
                                                                                 20
Security Package:
Terms and Conditions



                       21
                       Major Guarantees in the Haripur Power Plant

     Guarantee                 Level                          Penalty
Project Completion          30 month         US$3 per kW per month
Date                        from
                            Contract
                            signing
Construction Cost           US$180 m         Capacity charge is fixed
O&M Cost                    Part of tariff   No increase, except inflation
Financing Availability      Within 9         US$3 million
(as denoted by financial    months
closure)

Plant Output                360 MW           The plant can be rejected if commercial
                                             operation test demonstrates a shortfall in
                                             excess of 10%. During operation, penalty for
                                             capacity below 6% of Dependable Capacity
Plant Availability          90%              Capacity Payment penalty proportionately, if
                                             availability falls short of 90%
Heat Rate                   7336 kJ/kWh      The Company incurs loss over the
                                                                                   22
                                             Guaranteed Heat Rate of 7336 kJ/kWh
Implementation Agreement [1]

  Parties of IA : GOB and the Haripur Power Company
   (HPC).
  Term: 22 years
  Implementation: Describes the responsibilities of the
   HPC in implementation of the Project.
  Warranties : States that the HPC has full power to
   carry out its business and obligations
  Licenses and Consents : Defines GOB and HPC’s
   responsibilities for obtaining specific licenses and
   consents
  Construction, Operation, Maintenance: Allows HPC to
   appoint a Construction Contractor and an O&M
   Contractor.

                                                   23
Implementation Agreement [2]

  IA states Foreign Currency Exchange and transfer of
   Funds
  Assignment and Security : Agreement states Company's
   rights to assign or transfer its obligations to the Project.
  IA states Provisions Relating to Lenders and Investors
  Force Majeure : defines the Force Majeure events and
   remedies allowed under the IA.
  Taxation: Bangladesh Tax Laws Applicable.
  Defaults and Termination: Defines the events of default
   for both the GOB and the Co and project termination.
  Resolution of Disputes : Resolves through arbitration



                                                          24
Power Purchase Agreement [1]

  Parties of PPA: BPDB and the HPC
  Term of PPA: 22 years from COD
  The power of the Project is fully dispatchable by
   BPDB, subject to approved scheduled outages and
   maintenance outages
  The capacity of the Project is tested at regular
   intervals.
  The capacity payment covers all fixed costs including
   debt service, fixed operation and maintenance costs,
   and a return on equity.
  Energy generated by the Project is metered by BPDB
   and BPDB pays the HPC as per measured energy.
  The energy payment covers the cost of fuel and
   variable O&M costs.
                                                    25
Power Purchase Agreement [2]

    Liquidated damages assessed against the HPC’s delays in
     completion, initial shortfalls in capacity, subsequent shortfalls in
     capacity and failure to deliver energy in accordance with BPDB
     dispatch requests.
    The Sponsor to provide a performance guarantee of US$20m during
     construction period and operation guarantee ( 2 mo capacity
     )payment) during the operations period.
    Either party may terminate the PPA under certain specified
     conditions, BPDB may terminate the PPA for, among other things
      – failure of the Sponsor to achieve certain milestone dates
      – Abandonment of construction or operation, assignment of the
        PPA without consent or
      – the appointment of an operation and maintenance contractor
        without consent.
    Upon termination of the PPA, the Project will be transferred to the
     GOB/ BPDB.
                                                                      26
  Gas Supply Agreement [1]

 Parties of GSA: Titas Gas and HPC
 Delivery: Titas guarantees fuel availability. If delivery
  delays result in noncompliance in providing power,
  the gas supplier to pay penalties to cover lost
  revenues and /or the price deference of substitute fuel.
 Price: Gas price increases are passed on to the power
  purchaser in the energy component of the PPA tariff
  with indexation principle.
 Quality: Guaranteed fuel quality is enforceable by
  penalties for noncompliance of quality.




                                                       27
Tariff Structure



                   28
                  Tariff Components


                                            Tariff

                        Capacity                                 Energy



        Escalable                   Non escalable        Fuel
                                                                    Variable O&M
    (Return on equity              (Debt Servicing)   (TK/KWh)
     & Fixed O&M)




  Foreign        Local           Foreign        Local        Foreign         Local
$/KW/Month    TK/KW/Month      $/KW/Month    TK/KW/Month   $/KW/Month     TK/KW/Month




                                                                                   29
Tariff Restrictions During
Bidding
      Haripur bid had certain tariff restrictions/ boundary
      conditions of tariff setting

       Constraints           Requirements
(a) Capacity Price:
Escalable Local Component    > or = 5% of
                             Total Escalable Capacity Price
Capacity Price:
i) First Agreement Year      <or =114% of the Levelized
                             Capacity Price
ii) Remaining Agreement      <or =112% of the Levelized
Years                        Capacity Price

iii) Average Cost, 1st ten   <or =109% of the Levelized
Years                        Capacity Price
                                                              30
Tender Evaluation




                    31
                           Reference Tariff of Different Bidders
         1.8

         1.7

         1.6

         1.5

         1.4
TK/kWh




         1.3

         1.2

         1.1

          1

         0.9

         0.8
               1   2   3   4   5   6    7    8   9   10 11   12 13    14   15 16   17 18   19   20 21   22
                                                     Agreement Year

                                       AES       Marathon    Midlands       Occidental
               Levelised Tariff Components of Different Bidders

         1.8                                                            1. 6372
         1.6                                1. 4750                                                    1. 4747
         1.4
                  1.1496
         1.2
Tk/kWh




           1
         0.8
         0.6
         0.4
         0.2
           0
                   AES                     Marathon                    Midlands                      Occidental
                                                   Name of the Bidder

                Non-Escalable Foreign   Escalable Foreign   Escalable Local   Variable Fuel Charge    Variable O&M



                  Financial Evaluation carried out on the basis of
                    Levelised Cost of Electricity @ 12% discount
               Levelised Capacity & Energy Price of Bidders
         1.8                                            1. 6372
                                 1. 4750                               1. 4747
         1.5
               1.1496
         1.2                                            0.8657
TK/kWh




                                     0.7745                            0.7514
         0.9   0.7919
         0.6
                                     0.7005             0.77143        0.7233
         0.3   0.3577
           0
               AES              Marathon              Midlands       Occidental
                                        Name of the Bidders


                    Capacity Price                    Energy Price
Financial Modelling




                      35
Why Financial Modeling

  Tariff quoted by the first ranked bidder (AES)
   was one of the lowest tariffs in the world
  Bid evaluation report recommended financial
   viability of the project to be assessed
   immediately after issuance of LOI.
  The continuation of security package
   negotiation was subject to satisfaction of
   GOB with regard to financial viability of the
   project
  Financial viability was reviewed to mitigate
   the concern.
                                              36
Results of the Financial Model

  In the base case scenario of capital cost US$ 175
   million, heat rate 7336 kJ/kWh, plant factor 85%,
   Debt Equity ratio 76:24, US$ interest rate 9.25% to
   10.75%, tax holiday for 15 years, the results of the
   model were as follows:

    – Equity IRR               : 18.16%
    – DSCR
           Minimum            : 1.26
           Maximum            : 6.63
           Average            : 2.56




                                                     37
Haripur 360 MW Power Plant:
       Project Details
   Developer         :        AES Haripur (Pvt) Ltd.
    Transferred to    :        Commonwealth Development Corp.
    Transferred to    :        Pendekar Energy
   Location          :        Haripur, Narayanganj
   Project Cost      :        US$ 176.5 million
   Power plant       :        one GT + One ST + one HRSG
   Net Capacity      :        360 MW at reference site conditions
   Contract signed   :        PPA, IA, GSA, and LLA
                               signed on 17 September 1998
   Commercial Operations
     – Simple cycle            : June 3, 2001
     – Combines Cycle          :December 1,
     – 2001
   Terms                      : 22 yrs after COD
   Proposal Security          : US$ 3 million
   Performance Security : 20 million ( eq. 2 mo capacity payment)
   Manufacturer               : MHI (GT), Fuji (ST), HHI (HRSG)
   Fuel                       : Natural Gas
                                                                     38
Operational
Results of Project
(last 7 years)




                     39
                                      Comparison of Actual Heat Rate
             20000
                                                                         17822
             18000

             16000                                                                                15391                    15069
Heat Rate (kJ/kWh)




             14000
                              11988
             12000                               11257                                                                               10896        10932

             10000                                                                                                                                             8955

                     8000                                                                                                                                                 7222

                     6000

                     4000

                     2000

                        0
                            A s huganj       A s huganj                A s huganj          A s huganj C C G horas hal              G horas hal G horas hal   F enc huganj Haripur
                            2 * 64 MW       3 * 150 MW                  56 MW                  90 MW      2 * 55 MW                2 * 210 MW 2 * 210 MW     96 MW C C 360 MW C C
                                 ST              ST                        G T1             G T2 and S T       ST                       ST         ST




                                                  Haripur CC Power Plant has the lowest Heat Rate, i.e. it
                                                  is the Most Efficient one
                                         Data Source: Public Power Plants – Annual Report 2007-2008 , BPDB
                                         Haripur Power Plant – Annual Report for Financial Year 2009, Haripur Power Ltd.
                                        Comparison of Annual Plant
                                        Factor
               100%

                         90%
                                                                                                                                                           88.18%

                         80%
Annual Plant Factor(%)




                               68.74%                                                                                                           67.84%
                         70%

                         60%                 57.19%                                                                 56.00%
                                                                                                                                      51.59%
                         50%
                                                              42.85%
                         40%                                                                      33.90%
                                                                                30.77%
                         30%

                         20%

                         10%

                         0%
                               A s huganj    A s huganj       A s huganj     A s huganj C C G horas hal           G horas hal G horas hal      F enc huganj Haripur
                               2 * 64 MW    3 * 150 MW         56 MW             90 MW      2 * 55 MW             2 * 210 MW 2 * 210 MW        96 MW C C 360 MW C C
                                    ST           ST               G T1        G T2 and S T       ST                    ST         ST




                                             Haripur CC Power Plant has the Highest Annual Plant
                                              Factor, i.e. it is the Most Consistent and Reliable
                                              Data Source: Public Power Plants – Annual Report 2007-2008 , BPDB
                                                           Haripur Power Plant – Annual Report for Financial Year 2009, Haripur Power Ltd.
                           Comparison of per unit
                           Generation Cost
  3.5

                                                                                                                                        3.14
         3
                                                                                                   2.72
                                                                                  2.56
  2.5
Tk/kWh




         2      1.9           1.86
                                                                 1.76                                        1.76          1.74

  1.5                                          1.35                                                                                                  1.29

         1



  0.5



         0
             B aghabari   S hiddirganj      G horas hal     C hittagong       S hik albaha        Haripur     Tongi     F enc huganj B arapuk uria Haripur C C
               P ower        P ower           P ower           P ower           P ower            P ower     P ower        P ower       P ower      P ower
               S tation     S tation          S tation         S tation         S tation          S tation   S tation      S tation     S tation     P lant


                                 Haripur CC Power Plant has the lowest per unit
                                 Generation Cost, i.e. it’s the Most Cost Effective
                          Data Source: Public Power Plants – Annual Report 2007-2008 , BPDB
                          Haripur Power Plant – Annual Report for Financial Year 2009, Haripur Power Ltd.
                              Haripur Plant Performance
                              2008 (monthly basis)
                  Heat Rate for Year 2008                                                           Capacity Factor                          Heat Rate
                  100%                                                                                                                               7300
                                                           91.84%               91.16% 91.35% 90.68%
                                      89.07% 91.04% 91.07%        87.06% 89.10%                      87.75%
                                                                                                            91.04%
                  90%
                                                                                                                                                     7200
                  80%
Capacity Factor




                                                                                                                                                            Net Heat Rate
                  70%                                                                                                                                7100




                                                                                                                                                             (BTU/KWH)
                         63.02%
                  60%                                                                                                                     7,028
                                                                                                                                                     7000
                  50%                                                                                                             6,947
                                                                                                                          6,918
                                  6,897                                                                                                              6900
                  40%                                                                               6,870
                                                                                                                                                  6,846
                                              6,829                                                            6,818
                  30%                                  6,791                                                                                         6800
                                                                                         6,772
                  20%
                                                                  6,682      6,687                                                                   6700
                  10%
                   0%                                                                                                                                6600




                                                                                                8
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                                                                 Months of Year 2008

                                         Capacity Factor (aver.) 87%.
                                         Average Heat Rate is 6840 BTU/kWh (7213 kJ/kWh)
                                  Data Source: Haripur Power Plant – Annual Report for Financial Year 2009, Haripur Power Ltd.
                                 Yearly Performance Trend
HPL Yearly Performance Trend                                                   Capacity Factor                 Availability             Heat Rate


                           100                                                                                                              7300




                                                                                                                                                    Heat Rate (BTU/KWH)
       Availability/Capacity




                                80                                                                                                          7200
            Factor (%)




                                                                                                                                            7100
                                60
                                                                                                                                            7000
                                40
                                                                                                                                            6900
                                20                                                                                                          6800

                                 0                                                                                                          6700
                                        Dec-           Dec-           Dec-           Dec-           Dec-           Dec-         Dec-
                                      2001~Nov-      2002~Nov-      2003~Nov-      2004~Nov-      2005~Nov-      2006~Nov-    2007~Nov-
                                        2002           2003           2004           2005           2006           2007         2008

    Capacity Factor                       78.8           76.5           77.3           78.4            85             79        87.8
    Availability                          92.2            93            92.1           92.9           96.8            88        96.52
    Heat Rate                             7223           7136           7175          7046           6982           6995        6891
                                                                               Commercial Year


                                Heat Rate is Decreasing with time as the Availability
                                 and Capacity Factor is Increasing
                               Data Source: Haripur Power Plant – Annual Report for Financial Year 2009, Haripur Power Ltd.
            SUMMARY


Plant Output         Guaranteed output of 360
                     MW achieved and
                     maintained for last 7 years
Plant Availability   Guaranteed availability of
                     90% achieved
Heat Rate            Performed better than the
                     Guaranteed Heat Rate of
                     7336 kJ/kWh
Power price          Lowest power price
                     amongst all BPDB power
                     plants

								
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