Project Finance and Guarantees January 1995 CofinancingandFinancialAdvisoryServicesVicePresidency · ProjectFinanceGroup JamaicaÕs Rockfort Private Power Project The consortium formed a special-purpose Financial closing for the 60-megawatt, diesel- project company in Jamaica, Jamaica Private Power Financing Plan (US millions) powered power station project occurred on October Company (JPPC), which entered in various 14, 1994, setting several milestones for Jamaica and agreements to undertake the project. The main Equity (30%) the Bank: · agreements are a 20-year power purchase Largest private infrastructure project in agreement with the government-owned electric utility, Hydra-Co/U.S. Energy/IEF 16 Jamaica to date. Jamaica Public Service Company, which will provide UtilCo 12 · First build-own-operate project in Jamaica. the projectÕs revenue, and an implementation Energy Investors Fund 8 · First Bank-supported build-own-operate project agreement with the government, which sets the CDC 7 to reach financial closure. · framework for the investment. Payment obligations First project jointly supported by the Bank and of the utility are being guaranteed by the government. Subtotal equity 43 MIGA. · Fuel will be supplied by the Petrojam Refinery under First Bank loan to facilitate access to low-cost a 20-year fuel supply agreement. The government is construction financing provided by commercial providing no guarantees for the performance of Debt (70%) lenders. Petrojam. Project revenue will be in local currency. Under the BankÕs ÒMainstreaming of CARIFA bonds (years 1-5) 81 GuaranteesÓ initiative, future projects of similar The project, which will increase JamaicaÕs PSEF (years 6-17) structure could utilize guarantees, either through installed generating capacity by over 10%, will be CDC 20 encouraging the refinancing of medium-term debt, or constructed by consortium of European contractors through backstopping risks associated with specific led by Astilleros Espa­oles of Spain. Specific Subtotal debt 101 government obligations to the project, which lenders provisions to ensure compliance with Government of are unable to assume. Jamaica and World Bank environmental guidelines have been included in the project agreements. The Total 144 project is expected to come on line in 1996. Financing Plan The Project Total available funding for the project amounts to US$144 million. The financing plan covers the cost of The project consists of a 60-megawatt slow-speed the construction contract, development costs, interest diesel power plant to be located at Rockfort (near during construction and other finance-related costs, Kingston), and is being undertaken on a build-own- as well as standby facilities for about 20% of the base operate basis by a consortium of U.S.-based costs. Also included is a US$7 million debt service developers. As the largest private infrastructure reserve account. The project will be financed through investment ever undertaken in Jamaica, the project equity and debt mobilized under limited-recourse provides a significant boost to the governmentÕs arrangements. Construction will be financed through program to deregulate and privatize the countryÕs low-cost commercial funds available from the energy sector. earnings of U.S. subsidiaries operating in Puerto Rico The government selected the sponsors for projects in the Caribbean1. through a competitive process in December 1992. Total development time was 22 months from the date of selection to closure, which compares favorably with the experience elsewhere in the world. The sponsors include Hydra Co. Enterprises (a subsidiary of Niagara-Mohawk Electric Company, a utility in New York State) and U.S. Energy Corporation and International Energy Finance Corporation (IEF), both private power developers. Role of the Bank Group These funds will be raised through the ProjectFinance Caribbean Basin Projects Financing Authority andGuarantees (CARIFA), which is the Puerto Rican financial The Bank supported the project in several ways. It January 1995 institution set up to channel investment funds from assisted the government in formulating a competitive U.S. corporations to private sector projects in the bidding process for the selection of the sponsors of Caribbean. The Puerto Rican funds are tax- the project, and thus helped establish a precedent for advantaged funds and carry below LIBOR interest transparency and competition in the power sector. In rates. parallel to the development of the Rockfort project, CARIFA will offer two bond issues, one to the Bank is also supporting the restructuring of the fund equity and one to fund debt, both with full power sector and the establishment of a new principal repayment at maturity. Total CARIFA regulatory system, designed to foster private sector 1.These funds are sometimes funding, which will be underwritten by First Boston participation through both privatization of generation referred to as "936 funds," Corporation, amounts to US$122 million. This is the and distribution and new investment through build- which relates to a section in the largest CARIFA issue to date and could open funding own-operate programs. U.S. tax code that provides for a opportunities for private sector projects in other tax exemption on the earnings of Caribbean Basin countries. U.S. corporations in Puerto Rico. These earnings are in turn The equity portion of the issue will have a available for investments in maturity of two years and the retirement of these The Bank loan, which was included as a Puerto Rico as well as certain bonds will be secured by irrevocable letters of credit financing option in the bidding documents for the countries in the Caribbean. from Banco Santander of Spain, backed by selection of the sponsor, was essential to enable the commitments from the equity investors. The debt project to access low-cost commercial financing for portion of the issue will have a maturity of five years. the first five years. This has facilitated the provision These bonds are backed by a letter of credit from of cost-effective power by the private sector and Deutsche Bank, with BOT Financial Corporation and enable the Jamaican government to raise significant NationsBank participating. amounts of private financing for a major private investment on the island. As such, the project also The five-year letter of credit from these provides a demonstration effect for the country as banks is backed by US$81 million in take-out well as the region, and has facilitated the re-entry of commitments, US$40.5 million each from the World commercial banks in Jamaica agreed an extended Bank and the Inter-American Development Bank absence. (IDB), provided through the Private Sector Energy Fund (PSEF), a Jamaican government-owned In addition to the Bank, MIGAÕs lending facility. The PSEF loan will be repaid in the involvement was critical for the project, as investors local currency equivalent to the dollar amounts owed faced political risks that they had been unprepared to to the Bank and IDB. The five-year bonds were rated assume without some form of insurance. Given the by AAA by Standard and PoorÕs and Asaa by MoodyÕs limited political risk cover available for Jamaica in Investor Services. The two-year bonds were rated the private markets, MIGA filled a crucial gap in the AA- by S&P and Aa3 by MoodyÕs. financing. This is the first-ever jointly supported Bank-MIGA venture and demonstrates the Hydra-Co, U.S. Energy, and IEF will complementary role these institutions can play in invest approximately US$16 million in equity. The fostering private sector development. remaining equity has been committed by the other sponsors, Commonwealth Development Corporation (CDC), a U.K. government-owned statutory corporation, Utilco Group Inc., a wholly-owned For further information on the Rockfort subsidiary of UtilliCorp United Inc. (a U.S. investor- Power Project, contact Suman Babbar, PFG, TEL owned gas and electric utility), and the Energy (202) 473-2029. Investors Fund, a private power investment fund in the United States. In addition to its equity stake, CDC is providing a direct loan to the project The Multilateral Investment Guarantee Agency (MIGA) is also playing an important role in the project by providing political risk insurance for war and civil disturbance and inconvertibility risks of up to US$50 million. Project Finance and Gu arantees January 1995 World Bank Counter-guarantees Inter-American Development Bank $81 (year 5-17) Commercial $81 LC banks Private Sector Repayment guarantee Energy Fund Government of Jamaica 5-year bonds 936 market ($81) $10 Standby $122 Jamaica Private (Puerto Rico) Carifa facility 2-year bonds Power Company (CDC) ($41) $41 $2 (year 2) (standby) Equity and Underwritten by debt First Boston Project sponsors coverage MIGA Irrevocable Equity investors $50 commitment Note: Two-year bonds fund equity, secured by irrevocable commitments from the equity investors. Cash Flow Guarantee/security