RMC Discussion Paper Series, Num-ber 121 Financing Jamaica's Rockfort Independent Power Project A Review ofExperience for Future Projects Basil Sutherland Project Finance and Guarantees Department Resource Mobilization and Cofinancing Vice Presidency February 1998 EI The World Bank RMC DISCUSSION PAPERS Mobilizing Private Capitalfor the Power Sector: Experience in Asia and Latin America, David Baughman, Matthew Buresch; Joint World Bank-USAID Discussion Paper, 1994. 1 10 - Exploiting New Market Opportunities in Telecommunications: Lessons for Developing Countries, Veronique Bishop, Ashoka Mody, Mark Schankerman, 1995. 113 - Advanced Infrastructure for Time Management: The Competitive Edge in EastAsia, Ashoka Mody, William Reinfeld, 1995 114 - Small Scale Privatization in Kazakhstan, Aldo Baietti, 1995. 116 - Methods ofLoan Guaranteee Valuation and Accounting, Ashoka Mody, Dilip Patro, 1995. 117 - Private Financing of Toll Roads, Gregory Fishbein, Suman Babbar, 1996. 118 - Financing Pakistan's Hub Power Project, Michael Gerrard, 1997. 119 - Power Private Finance: Experience in Developing Countries, Summan Babbar, John Schuster, 1998. 120 - Biddingfor Private Concessions: The Use of World Bank Guarantees, 1998. PROJECT FINANCE AND GUARANTEES NOTES: EXAmPLES OF RECENT WORLD BANK GUARANTEES Jamaicas Rockfort Private Power Project. 1995. Guarantees Improve Terms of Chinas Private Borrowing. The Yangzhou and Zhejiang Thermal Power Projects. 1995. World Bank Guarantee Sparks Private Power Investment in Pakistan: The Hub Power Project. 1995. World Bank Guarantees Broaden Capital MarketAccess: The National Power Corporation (Philippines) andJordan 'Telecom- munications Corporation bond issues. 1995. World Bank Guarantee Catalyzes Private Sector Investment for the Uch Power Project in Pakistan. 1996 World Bank Guarantee Electrifies Lebanons Power Sector. 1997. Moroccos JorfLasfar Power Station. 1997. PFG BROCHURES The World Bank Guarantee: Catalyst for Private Capital Flows World Bank Guarantees Handbook (Publication list continues on inside back cover) To order publications contact: RMC Information Center, phone: 202-473-7594, fax: 202-477-3045 Copyright C 1998 The World Bank 1818 H Street, NW. Washington, D.C. 20433, U.S.A. All rights reserved Manufactured and printed in the United States of America The findings, interpretations, and conclusions expressed herein are entirely those of the authors and should not be attributed in any manner to CFS, the World Bank, or to members of the Board of Executive Directors or the countries they represent. The World Bank does not guarantee the accuracy of the data included in this publication, and accepts no responsibility whatsoever for any consequence of their use. The paper and any part thereof may not be cited or quoted without the author's expressed written consent. RMC DISCUSSION PAPER SERIES 121 Financing Jamaica's, Rockfort Independe nt Power Project A Review of Experience for Fut:ure Projects Basil Sutherland Contents Foreword v Preface vi Acknowledgments vii Abbreviations viii Background 1 The Energy Sector Deregulation and Privatization Project I The Private Sector Energy Fund 2 The Rockfort Subproject 2 Selection of Project Developer 3 A Framework for Private Sector Projects 3 Least-Cost Planning and Technology Choice 3 The Competitive Bidding Process 4 Financing Arrangements 7 Project Costs 7 The Financing Package 7 The Project Sponsors 8 The Funding of Equity 9 Debt Financing and the Role of the Private Sector Energy Fund 10 The Caribbean Basin Projects Financing Authority Bonds 11 The Series A Letter of Credit Banks 11 The Role of the Commonwealth Development Corporation 12 Insurance Arrangements 12 Key Negotiation Issues 14 The Government's Perspective 14 The Jamaica Public Service Company's Perspective 14 The Energy Fund's Perspective 15 Lessons Learned 16 Bidding and Project Selection 16 Financing Arrangements 17 Negotiation Process 17 Project Implementation 18 Developmental Impact 19 011 Annexes Annex 1 The Jamaican Power System 20 Annex 2 The CARIFA 936 Bond Market 22 Annex 3 Prequalification and Bid Evaluation 24 Annex 4 Summary of Project Agreements 27 Annex 5 Risk Management Arrangements 34 Notes 36 Figure Figure 1 Project financing structure 13 Tables Table 1 Project costs at financial closing, October 14, 1994 8 Table 2 Sources of funding 9 Table 3 The Jamaica Private Power Company's equity structure at closing 10 Table 4 Performance statistics (up to end of February 1997) 18 Table 5 Finance from equity subscriptions 19 Table 6 The Jamaica Private Power Company's calculation of the average discount price 24 iv Foreword P ower generation projects have traditionally been funded by the public sector. However, as the resources available to governments have diminished, governments have begun to allow the private sector to enter such projects. The Rockfort power project in Jamaica is one of the first cases in which financing from multilateral financial institu- tions has been successfully used to mobilize private sector financing for a [imited recourse project. The Rockfort power project evolved in line with the international market for private sector infrastructure. By demon- strating the viability of private finance for a major infrastructure project in a developing country, the project has set an important precedent, particularly in the energy sector. A novel approach was required to attract private investment in the power sector in Jamaica because of the perceived country risk and the relative lack of established regulatory arrange- ments. The project was successful in mobilizing funds through the use of Caribbean Basin Projects Financing Authority (CARIFA) 936 bonds sold in the Puerto Rican market. The bonds were retired through takeout financing provided by a World Bank-Inter-American Development Bank loan facility. The government used a competitive bidding process to select the sponsors, which resulted in a very attractive tariff. Several of the project's features merit close examination for lessons that can be applied elsewhere, both with respect to government policy and to the role of multilateral agencies in supporting private sector development. These include competitive bidding for the right to develop the independent power project and risk-sharing among the government, its agencies, and private investors, as well as innovative use of multilateral funding for limited recourse financing structures. This study examines the structure of the project, identifies lessons, and suggests ways to improve future transactions based on this experience. It reviews the project development and the biddling process as it evolved and the role of vari- ous parties, including the government, its agencies, the multilateral development banks, and potential bidders. It also pro- vides an integrated discussion of the risk-sharing provisions outlined in the contractual agreements. The review also examines whether early expectations were realistic and makes recommenclations for improving the process. These find- ings have implications both for policymakers considering private power projects and for private investors seeking to finance such projects. Hiroo Fukui kN ia B. Shapiro Vice President Director Resource Mobilization and Cojinancing Vice Presidency Project Finance and Guarantees Department v Preface Po wer generation projects have traditionally been funded by the public sector. But, with the financial performance of most public sector institutions deteriorating and resources available to governments for such investments diminishing because of macroeconomic adjustment strategies, new approaches that involve the private sector in such enterprises are being explored. The financial closure of the Rockfort power project in Jamaica is the first case in which financing from mul- tilateral financial institutions has been used to successfully mobilize private financing for an independent power project. The government's strategy for reforming the power sector called for the provision of urgently required power genera- tion capacity through a public sector component; the establishment of an environment suitable for attracting private invest- ment in the power sector; and the support of government's deregulation and privatization program in the energy sector. A novel approach was required to attract private investment in the power sector in Jamaica because of the perceived coun- try risk and the relative lack of transparency in the utility regulatory arrangements. Therefore the Rockfort project established a loan facility in Jamaica that would provide a large portion of the debt capital required for project development. Further, to keep prices for power as low as possible, the government used a competitive bidding process to select the sponsors. It was originally expected that debt financing for the project, including construction financing, would be provided by the loan facility. The developer proposed, however, that the financing for the construction period, as well as for the first three operating years, be provided from the proceeds of "936" bonds sold in the Puerto Rican market, and that the bonds be retired by take-out financing provided by the loan facility. The resulting arrangements turned out to be complex, but they provided insights into how the private sector and the state could cooperate in risk sharing. In concluding them, sev- eral innovations were successfully implemented: *T he use of competitive bidding to select the project developer (as a proxy for direct competition in the procure- ment of goods and services). * The approval of expenditures during construction by the multilateral financial institutions. These "pre-approvals" were then used as the basis of a take-out commitment to disburse funding at the end of a five-year period, so as to provide the project with access to cheaper bond financing. • The use of cheaper bond financing backed by equity investors' commitments to finance equity commitments for the first two years. These innovations required the cooperation of the Jamaican government, the multilateral financial institutions, the project developers, and the commercial financial institutions. The Rockfort project was conceived in the last quarter of 1991. It took about four years from that time and 22 months from the selection of the developers to achieve financial close (in October 1994). The plant began commercial operations in the third quarter of 1996. Because of the project's complexity and the additional time taken for completion, primarily to ensure the use of cheap 936 funds, the transaction costs associated with the project were higher than originally anticipated. One of the purposes of this review is to identify the reasons for the delays and suggest mitigating measures. The review also examines whether early expectations were indeed realistic, makes recommendations for improving the process, and offers suggestions for reducing the time required to close similar private sector transactions. It maintains the incentives for the developer and many of the negotiated protections for the government and the utility that are contained in the transaction agreements. vi Acknowledgments PFlhthis report was prepared under the direction of Suman Babbar, Project Finance and Guarantees Department, with the assistance of Nina Shapiro, Thomas A. Duval m, and Pankaj Gupta. The report was written by Basil Sutherland, J an independent consultant to the World Bank. Other contributors include David Baughman, previously with the Project Finance and Guarantees Department of the World Bank, and Cl]audio Pardo and John Sachs, who contributed extensively to the collection of information and preparation of the report. The author is also grateful to Dana Smith of Jamaica Private Power Company Limited for providing information on the post start-up performance of the project and to Stephen Wedderburn of the National Investment Bank of Jamaica for his assistance in reading the manuscript. The report was edited by Ilyse Zable and laid out by Glenn McGrath, both with Communications Development Incorporated. This report is the result of a cooperative effort by several contributors within and outside the World Bank. However, the views expressed are those of the author only and should not be attributed to the World Bank, the government of Jamaica or the National Investment Bank of Jamaica Limited, or to any of the individuals previously acknowledged. vii Abbreviations CARIFA Caribbean Basin Projects Financing Authority CBI Caribbean Basin Initiative CDC Commonwealth Development Corporation CIDA Canadian International Development Agency EIB European Investment Bank ESDPP Energy Sector Development and Privatization Project ESI Energy Systems Intemational ESMAP Energy Sector Management Assessment Program ESSIPS Energy Sector Strategy and Investment Planning Study IBRD International Bank for Reconstruction and Development IDB Inter-American Development Bank IFC International Finance Corporation JPPC Jamaica Private Power Company Limited JPS Jamaica Public Service Company Limited MIGA Multilateral Investment Guarantee Agency OPIC Overseas Private Insurance Corporation NIBJ National Investment Bank of Jamaica NRCA Natural Resource Conservation Authority PSEF Private Sector Energy Fund TIEA Tax Information Exchange Agreement USAID United States Agency for International Development viii Background T he Jamaica Public Service Company Limited JPS) vided a maximum of $30 million in 1988. Moreover, no part was incorporated as a private company in 1923. In of the commercial debt had been used for investments in 1971 the government of Jamaica acquired a con- the power sector, primarily because of the non-tradable trolling interest in JPS. and by 1975 held 99 percent of the nature of the output. In view of these constraints, the gov- issued ordinary capital. JPS has the sole right to distribute ernment decided to make arrangements that would pro- and supply electricity and currently has an installed gener- vide comfort to lenders and investors, and establish a ating capacity of approximately 497 megawatts. It also has framework for soliciting, appraising, and supervising pri- about 1 16 megawatts of capacity available to it from inde- vate sector projects, particularly power projects. The gov- pendent power producers, making for a total installed capac- ernment also decided that in order to attract private ity of about 613 megawatts.1 In addition,Jamaica has captive investment:'n power projects, the barriers inhibiting private installed capacity of approximately 265 megawatts, of which capital inflows would have to be eliminated. And a clearly bauxite companies own and operate about 168 megawatts. delineated framework to ensure efficient resource alloca- About half of this capacity is connected to the JPS grid. tion and eonomic pricing of energy products would have Although JPS has purchased electricity from this source to be established. regularly over the past 10 years, the volume of purchases The rationale behind the government's policy to encour- has been insignificant. age private financing for the electricity supply system was During 1988-90 power shortages and costly disrup- to relieve itself of the burden imposed by the sector's financ- tions in supply hampered production in critical sectors of ing needs. I:t therefore began investigating the possible the Jamaican economy, constraining the country's growth participation of private sector investors, in 1990, and held prospects. Even though efforts were already underway to a seminar on "Private Sector Participation in the Energy rehabilitate the generation capacity, the transmission and and Power Sector" on September 10-12. The seminarhigh- distribution system ofJPS, as well as to implement demand- lighted specific constraints to private sector participation, side management and energy conservation programs, sig- including lack of adequate regulatory framework, lack of nificant capacity was still needed to meet future demand. long-term financing for private power sector investments, The demand for electricity was then forecast to increase by insufficient security provisions to safeguard the interests an average of 4 percent a year over the next 20 years. of private investors and lenders, and limited size and scope One of the critical components of the government's of local capital markets to mobilize financing. macroeconomic adjustment program is the reduction of the fiscal deficit, which limits its ability to borrow in order to The Energy Sector Deregulation finance investments. External financing is also constrained, and Privatization Project as Jamaica's per capita external debt burden is one of the highest in the world. The country also has very limited The government subsequently decided that private sector ability to access long-term commercial financing, as evi- participation in the energy sector should be guided by a denced by the fact that during 1988-90 commercial sources proposed Er ergy Sector Strategy and Investment Planning provided no debt without government guarantees. Study (ESSIPS). The study was undertaken by the World Disbursements of public and publicly guaranteed debt from Bank's Energy Sector Management Assistance Program commercial sources ranged from $30-130 million during (ESMAP) with financial and technical assistance from the those years.2 Of this amount, the commercial banks pro- Canadian International Developmental Agency iCIDA). I The study was completed in August 1992, and the govern- reporting and auditing requirements. NIBJ's finance depart- ment accepted its recommendations. With assistance from ment handles loan disbursement and collection. the Bank and the United States Agency for International PSEF loans to subprojects are denominated in UJ.S. dol- Development (USAID), the government subsequently estab- lars, but will be repaid in equivalent Jamaican dollars. The lished a framework for private sector participation in the Fund's on lending interest rate is variable and determined energy and power sectors and for the solicitation of investors. annually in accordance with a benchmark rate-the yield It also developed the Energy Sector Deregulation and on long-term maturity U.S. Treasury bonds. Privatization Project, which included provisions for: The arrangements give borrowers an incentive to refi- * Installation of about 120 megawatts of power-gen- nance PSEF debt by borrowing on better terms from pri- erating capacity consisting of a 60-megawatt build- vate foreign (or domestic) sources. Project companies that own-operate (BOO) low-speed diesel facility in the borrow from the Fund and subsequently refinance their private sector and 60 megawatts of combustion tur- debt by tapping cheaper commercial sources will be allowed bine plant. to retain 50 percent of the savings in debt service. It is this * The installation of associated transmission and sub- potential savings that is expected to prompt companies to station facilities. refinance. * The establishment of the Private Sector Energy Fund (PSEF) to finance approved projects. This Fund The Rockfort Subproject enables the government to use borrowings from inter- national financial institutions to provide limited- The Rockfort project is the first subproject to be financed recourse financing for project sponsors who wish to by the PSEF and is the first independent power project to develop projects in the energy sector. be financed in Jamaica. It is also the first project financed from World Bank resources to have achieved financial The Private Sector Energy Fund closure. The project involves construction of a 60-rmegawatt low-speed diesel power station, which will be owned and The National Investment Bank of Jamaica (NIBJ) is the operated by the Jamaica Private Power Company (JPPC), administrator and executing agency of the PSEF on behalf a company incorporated in Jamaica. It will sell the plant's of the government. A private power unit has been estab- output to the JPS system under a power purchase agree- lished within NIBJ to administer the PSEF under an admin- ment over a 20-year period. The power station will com- istration agreement between the government and NIBJ. prise two diesel engines and will provide the capacity to The Fund will finance projects if they are found to be tech- JPS on a dispatchable basis at an availability of approxi- nically, economically, and financially viable, as well as envi- mately 90 percent. The annual net energy delivery is ronmentally acceptable. expected to be approximately 420,000 megawatt-hours. The private power unit, supported by short-term con- Equipment of similar design and manufacture is used in sultants needed to assist with legal, technical, and financial successful commercial operations throughout the world. aspects, is responsible for loan documentation and nego- A detailed description of the technical aspects of the pro- tiation, supervision and monitoring, and the fulfillment of ject is given in Annex 1. 2 Selection of Project Developer T he selection of the project and approval and final- to develop the project. To ensure commitment to sub- ization of the security package involved extensive projects, minimum equity contributions should be interministerial coordination. The government required as part of the financial plan. These contri- entrusted the responsibility for coordinating the project, butions would ensure a viable capital structure and including the preparation of the requests for proposals an acceptable debt-service-coverage ratio. (RFPs) and the approval of loans from the Energy Fund, Limited recoursefinancing. Private investors and lenders to the Ministers' Steering Committee, which the minister should not require direct sovereign guarantees. responsible for energy established to guide privatization of Institutions providing these funds should be prepared the energy sector. The committee includes representatives to assume project-specific risks. If these risks are from all of the government ministries and agencies that were recognized, the recourse of lenders should be limited concerned with the project.3 It functions through small to the provisions outlined in the project's security working groups responsible for specific areas. The Steering package. Committee has played an important role in the pushing of the various phases of the project through the government Least-Ccist Planning and Technology Choice bureaucracy and in establishing the framework for private participation in the sector. The core team for evaluating and Some have argued that central least-cost planning by the negotiating bids was derived from the Committee. utility is inappropriate if private sector participation in the sector is desired. Rather, the market should decide tech- A Framework for Private Sector Projects nology and prices. The selection of projects should then be based solely on the price at which capacity and energy are At the start of this initiative the government decided that offered for sale. proposals from private investors would need to fulfill the The government and JPS rejected these arguments,4 following criteria in order to ensure that they would be con- selecting low-speed diesels for the project for the follow- sistent with Jamaica's national priorities: ing reasons:5 * Least-cost alternative. Public and private sector invest- * A recent least-cost expansion-planning exercise car- ments should form an integral part of the least-cost ried out by the utility had indicated that low-speed development plan for the power subsector. diesels installed in three increments of 20 megawatts * Competitiveness. Competitiveness should be ensured each would satisfy the immediate expansion needs of by considering proposals that offer electricity prices the system at the lowest economic cost.6 that are lower than the unit cost of generation that * The government was primarily interested in improv- JPS would have incurred, adjusted for financing avail- ing the reliability of the overall system, and low-speed able to the private sector. diesel technology had proven to be the most reliable * Use ofproven technologies. The technologies proposed technology so far employed by the utility by private investors should have a successful track * The government was anxious to expand as quickly record in countries at a similar level of technological as possible. It felt that, given the reliability require- development and support infrastructure. ment, the complexity of evaluating bids that involved * Viability. Sponsors should be creditworthy to make differing technologies would add considerably to the needed investments and possess the capability the lead time for implementation. 3 Although, theoretically, much more flexibility can be best site suitable for locating a coal plant pre-empted allowed (than was during the preparation of the RFP) by by a developerwho, because of the absence of restric- giving developers the freedom to choose the technology, it tions on choice of technology, decided to install a may still be appropriate for the utility to limit the choice of plant burning relatively clean fuel, which could eas- technology for the following additional reasons: ily have been located elsewhere. • Given the small and isolated nature of the Jamaican Manufacturers of equipment may consider it to be power system and the consequent inability to wheel worth their while, as part of their research and devel- in power from adjacent systems, reliability is of the opment efforts, to use BOO projects as a testing utmost importance. Such reliability would not be ground for new technologies, with possible disastrous assured if the wrong technology is chosen. consequences for system reliability * Experience gained during negotiations showed that Supply-constrained countries with small isolated systems there is little possibility of imposing penalties on a and no future possibilities of connection with other systems developer that are sufficiently large to compensate must approach private sector involvement in the sector the utility for the harm caused by nonperformance. somewhat differently than do countries in which intercon- This is because the private power market, which fol- nection is possible. A pure market approach could have sig- lows U.S experience, is not accustomed to facing nificant disadvantages. It therefore must be properly assessed penalties that are enough to fully compensate for so as to balance the benefits derived from widening the the harm caused. The same is probably true of the market segment in which competitive bidding will take place expectations of project financiers. To insist on large against the potential for such an approach to lower system penalties would probably render projects unfi- reliability by allowing the introduction of untested tech- nanceable. In the absence of restricting the choice nologies or incremental additions that are too large a per- of technologies to those that have a real chance of centage of total system capacity. achieving the required reliability and capacity fac- tor, a developer is likely to chose a cheaper tech- The Competitive Bidding Process nology with a marginal capability to perform reliably because of the smaller capital outlays required. The The government initiated an international competitive bid developer would then take a chance of incurring to attract private investors to develop the 60-megawatt low- penalties, which, in any event, are lower than the speed diesel-power station on a BOO basis. Investors were incremental cost of upgrading to a more reliable advised that they would be required to put up a rninimum technology. of 30 percent of project costs in the form of an equity invest- * It is advantageous for Jamaica to purchase fuel from ment, and that the remaining 70 percent of the project costs Venezuela and Mexico under the San Jose Accord.7 could be funded from the PSEF. But because the govern- Such fuels are, however, high in vanadium content. ment agreed to accept a lower percentage of proje ct equity And if equipment used to burn this fuel is unsuitable, in such cases, the prospective developer was offered an maintenance costs will increase. Allowing a developer incentive to mobilize non-Fund debt, which required no to choose equipment that is unsuitable for use with direct government guarantees. this fuel will therefore deny the government the ben- efit of the accord. Prequalification * Fuel diversification may be important for national strategic reasons. Allowing developers to have a com - The process of selecting the developer involved an inter- pletely free choice of technology may lead them to nationally advertised prequalification, which solicited expres- gravitate to only one type of fuel, defeating any diver- sions of interest from private developers to construct, own, sification objectives. and operate the 60-megawatt low-speed diesel-power sta- * There are a very limited number of sites that are envi- tion and all support facilities. The prequalification docu- ronmentally and technically suitable for locating power mentation included the evaluation criteria, which were based stations in Jamaica. For example, it would be unde- on the developer's ability to mobilize financing ancl its expe- sirable from an environmental standpoint to have the rience with BOO projects. 4 Preliminary interest in the project was strong, as demon- the basis and arrangements for procurement, technical data strated by the large number of firms responding to the adver- on the Rockfort site, and the required performance speci- tisement. JPS did not expect this widespread interest. fications for equipment. Because of the anticipated difficulty of evaluating a large Several questions arose among the bidders during the number of bids, it was decided to limit the number of pre- preparation of their bids, necessitating a prebid meeting in qualified bidders to seven, which was considered a man- April 1992 and the preparing and issuing of several clarifi- ageable number. After ranking the prequalification cations to the RFP The bidders, in turn, sought additional submissions, the best seven firms were notified and advised time to evaluate and factor the clarifications into their prices, to await issue of the RFP. and JPS agreed to extend the due date from May 8, 1992 toJuly22, 1992. Requests for proposols Submission of proposals JPS prepared the RFPs with the assistance of consultants funded by USAID and the World Bank. The preparation JPS received proposals from two firms: FPL Group and a prefeasibility study commenced in July 1991, but the Incorporated, through its subsidiary Energy Systems final version of the RFP was not completed and issued to International (ESI), and JPPC, which is a special purpose the prequalified bidders until March 12, 1992. project company established by Hydra-Co Enterprises, Inc., The RFP gave prospective developers a general descrip- U.S. Energy Corporation, and International Energy Finance tion of the project and the prefeasibility study, as well as Ltd. The bids were opened in public. drafts of the key contracts making up the security package. Both biclders submitted base proposals that were tech- Being developed for the first time in Jamaica, these docu- nically identical. In addition, they both submitted alterna- ments were required to undergo a complex and lengthy tive proposals that included alternative financing review and approval process. The main features of the arrangements for the same equipment in one case, and in RFP were: the other, alternative equipment with similar financing. Only * A formal invitation to the prequalified applicants. the base proposals were evaluated. 3 Instructions to the applicants. In the base proposals JPPC bid an average discounted * General information for applicants, including back- price of $0.0691 per kilowatt-hour and FPL bid $0.0759 ground information on Jamaica and the project, as per kilowatt-hour. well as any special requirements and circumstances that were relevant. Evaluation criteria • A description of the proposed security package, which included the principles of the implementation agree- The prequalification process had already determined that ment, power purchase agreement, and fuel supply each of the invited bidders was qualified to undertake the agreement. It also provided information on required project. Thc main criteria used to select the best bidderwas insurance coverage; the requirements for government therefore the price offered per unit of electricity supplied. approvals; the principles of an appropriate construc- The average discounted price of the capacity and energy tion contract; the proposed arrangements for leasing offered for sale by each bidder was compared.8 In addi- the site at Rockfort; the principles of the operations tion, the responsiveness of each bid was also tested to ensure and maintenance agreement, which the developer that the specification of equipment proposed was in accor- was expected to enter into; and the arrangements that dance with the minimum functional specification and the would permit use of the PSEF. Also included were a financing arrangements were credible. pro-forma of the applicant's proposal and pro-forma No adjustment to the average discount price would be sheets for providing the supporting technical data and allowed, except to accommodate differences in costs of guaranteed performance levels. financing between assumptions made when preparing the The RFP provided the method of calculating the aver- bid and what was realizable in practice. age discounted price, pro-forma sheets for the cost data to Among the main technical characteristics of the proposal support the average discount price and tariff calculations, that were taken into account in the evaluation was the 5 requirement that the proposed equipment must have been lower cost was one of the factors that allowedJPPC to offer used in successful commercial operations for at least 8,000 a lower average discount price. Although the drafters of hours under base load conditions. Also, the equipment must the RFP did not expect that equity would be financed in have been designed to operate continuously on No. 6 heavy the manner proposed, the evaluation team felt that the fuel. The evaluation of the financial proposals considered effect of the equity financing proposal was similar to what mainly the credibility of the financing arrangements pro- was intended in the RFP. The proposal was therefore posed and the extent of the commitment that had been accepted. offered by the participants. The lesson to be learned, then, is that in drafting an RFP, it is desirable to allow some degree of flexibility with respect Bid evaluation to financing proposals: - It will often be impossible to mobilize foreign financ- To evaluate the bids, the government appointed an evalu- ing if there is no willingness to negotiate the financ- ation team, comprising representatives from the utility ing conditions with lenders, since financial markets and a number of other government agencies. It was sup- perceive risks in a country in ways that cannot be ported by technical experts drawn mainly from the utility. anticipated by the drafters of the RFP After seeking several clarifications from the bidders and * Allowing flexibility will permit bidders to be innova- legal opinions as to the responsiveness of the bids, the tive in preparing financing plans and, consequently, evaluation team determined that JPPC's bid was the win- to offer lower tariffs without misallocating project ning bid. JPPC offered to supply power for a lower aver- risks. age discount price and presented a financing plan showing stronger commitment and lower financing risk than the Procurement issues FPL. The financing plans proposed by each of the bidders Although all of the principles of the World Bank's guide- were innovative and therefore conditional on lenders' eval- lines for procurement remained intact, the procurement for uations-presenting the evaluators with a number of issues. this project departed significantly from the usual practice The most significant issue was that JPPC proposed to finance of public sector projects. The process used substituted com- its equity participation in the project for the first two years petition for the position of project developer for the nor- by issuing bonds, the repayment of which would be guar- mal competitive bidding for goods and services. anteed by letters of credit opened by the equity holders. The World Bank and the Inter-American Development During the evaluation questions arose as to whether or not Bank both accepted that this procedure would not violate JPPC's bid met the requirement that the project devel- their guidelines because it was agreed that competition oper finance at least 30 percent of the project costs with for the position of developer that was based on an aver- equity-the evaluators initial perception was that bond age discount price in which the base capital cost compo- financing would not provide the same degree of commit- nent of the project was fixed would serve as a good proxy ment to the project as would cash financing. JPPC chose for direct competition for goods and services--the fixed to use bond financing because the cupon rate on bonds is average discount price would have to be based on com- lower than the rate of return that equity holders expect. petitively procured goods and services in order to be itself Therefore, the cost of funds would be lower. And this competitive. 6 Financing Arrangements T he project's financial closing occurred on October financing plan showed the strongest commitment and the 14, 1994; the sponsoring JPPC consortium esti- lowest risk. mated total project costs at $138.97 million. On Projectcostswerenotallowedtovaryduringthebidvalid- October 14 contracts were signed that made $144 million- ity period. The only adjustments in costs that were allowed including standby funds-available for this limited-recourse to be reflected in the tariff during this period were those financing project. In addition to the principal contracts, related to financing. After the one-year bid validity period, nearly 350 different legal documents had to be negotiated however, changes in these costs due to inflation up to the and signed at closing to secure the required financing. date of financial closing were allowed to be passed through This complexity was largely due to the novel concepts con- to the tariff in the proportion of the currency basket that tained in the financial package. was originally bid. After this date project costs were fixed. In order to be competitive bidders had to keep interest Final sele ction of JPPC was made in December 1992. costs on the project's debt as low as possible. Also, in line It took about 20 months to close the financial package, dur- with the government's policy to try to avoid any further ing which time financial conditions in the international mar- increase in its external debt burden, PSEF resources were ket had changed significantly. Higher interest rates in the intended to be used as a last resort. Developers would United States, as well as, inter alia, the requirement of the reap financial rewards if they refinanced borrowings from government and the commercial banks that higher debt- the PSEF in the commercial debt market. service reserves be maintained also resulted in higher pro- ject costs. Thus the tariff model costs in table 1 represent Project Costs the project costs that form the basis of the tariff. The pro- ject model project costs represent costs thatJPPC budgeted The largest component in the average discount price is the and include additional contingency costs.9 capacity purchase price. Because of this, the successful bid- der had to minimize the project's total capital cost. The The Finailcing Package sponsors knew that there was very little room to gain an advantage on the technical aspects of the project because The limited-recourse financial package that JPPC put of the very detailed technical specifications established in together in July 1992 included several interesting features. the RFP and because only a few specialized producers were A principal feature was the arrangement for credit enhance- capable of supplying the equipment. The sponsor's com- ment to facilitate the use of low-cost Caribbean Basin petitive advantage would come from its ability to achieve Projects Financing Authority (CARIFA) 936 bond financ- lower financial and developmental costs. JPPC was able to ing available from profits deposited in Puerto Rican banks out-bid its competitor by offering a lower average discount by subsidiari.es of U.S. corporations operating there.", The price, made possible by a capacity purchase price of roughly bonds were issued in three series. Series A bonds, amount- 70 percent of that proposed by the FPL. ing to $81 million, are the "debt bonds" and carry a fixed For the other component of the average discount price, annual interest rate of 6.2 percent over their face value JPPC quoted a price that was higher than that of FPL. and a bullet maturity at year five (due on October 13, 1999). Construction and start-up costs represented about 75 per- Series B and C bonds are the two "equity bonds." Both cent of the $117.6 million in total project costs. In addi- have a two-year bullet maturity and are due on October tion to offering the lowest average discount price, JPPC's 13, 1997. Their fixed annual rates differ-5.57 percent for 7 TABLE, Project costs at financial closing, October 14, 1994 (millions of U.S. dollars) Cost categories Base costs Tariff model costs Project model costs Construction ond start-up Power plant construction-EPC 85.57 90.90 86.02 Security for EPC termination 0.00 0.30 (.00 EPC interest on retained payments 0.35 0.00 (.00 Taxes and duties 0.00 0.04 (.08 Operating equipment 0.32 0.34 0.34 Project management 1.68 1.77 2.07 Start-up costs 0.56 0.61 0.70 Lease payments 0.00 0.13 0.12 Subtotal 88.48 94.08 89.33 Financil costs Equity finance costs 1.56 1.78 0.68 Bond finance costs 3.37 4.94 4.38 Energy loan fund finance fees i.15 1.53 1.49 CDC financing fees 0.00 0.66 (1.86 Net construction interest 6.23 11.92 11.96 Insurance 1.39 0.64 1.97 Miscellaneous financing costs 0.06 0.26 (1.58 Subtotal 13.74 2 1.73 21.91 Development costs Professional fees I .03 1.08 41.70 Development costs 1.82 2.07 5.26 Subtotal 2.85 3.15 9.96 Reserves Working capital 2.25 2.44 2.43 Security deposits 3.00 3.00 2.00 Debt-service reserve 3.00 7.00 7.00 Base contingency 4.23 4.45 4.16 Subtotal 12.47 16.89 15.58 Bose copitrol costs 117.55 135.85 136.78 Contingent development and legal costs 0.00 0.00 2. 19 Totol project costs 117.55 135.85 138.97 Remaining standby funds 7.1 13. 15 5.03 Total available funds 124.65 139.00 144.00 Source: JPPC's Projec Model. the $20 million Series B bonds and 6.875 percent for the equity pledged by JPPC shareholders (in addition to their $21 million taxable Series C bonds. equity contribution financed by CARIFA bonds). CARIFA bond financing amounted to $122 million or 84.7 percent of the total funding secured for the project (table The Project Sponsors 2). These bonds were used to cover base capital costs, Series A bonds, financing $81 million of the project's debt and Series The original sponsors of the project were a group of U.S. B and C bonds financing $41 million of its equity. The other companies that specialize in developing independent power main source of funding came from the Commonwealth projects in the United States. The consortium they formed Development Corporation (CDC), which added flexibility to bid for the Rockfort project in Jamaica was composed of: to the financial package by providing $19.8 million in base * Hydra-Co Enterprises, Inc., at that time a wholly-owned and standby credits, in addition to contributing equity funded subsidiary of Niagara Mohawk Power Corporation, a by the CARIFA equity bonds through itsJamaican subsidiary, large utility operating in New York State, later pur- West Indies Development Corporation Ltd."1 The financial chased (October1994) byCMS Generation Company, package was completed with $2.2 million in base and standby an independent power production unit of CMS Energy 8 TABLE 2 Sources of funding (millions of U.S. dollars) Base Allocated Remaining Total funds Source funding standby standby available Debt bonos-Series A 81.00 0.00 0.00 81.00 Equity bonds-Series B 20.00 0.00 0.00 20.00 Equity bonds-Series C 21.00 0.00 0.00 21.00 CDC base debt 14.00 0.00 0.00 14.00 CDC standby debt 0.00 1.53 4.27 5.80 JPPC base equity 0.78 0.00 0.00 0.78 JPPC standby equity 0.00 0.66 0.76 1.42 Total 1 36.78 2.19 5.03 144.00 Source: JPPC's Project Model Corporation, one of the top five independent power holders or portfolio investors. Jamaican law, however, does producers in the United States. not lend itself to this legal partnership structure. Instead, * U.S. Energy Corporation, a small independent power the sponsors decided to give JPPC a corporate structure developer located in Bethesda, Maryland. with two classes of shareholders: holders of Class A shares * International Energy Finance, Ltd., a small, special- represented the general partners and holders of Class B ized investment advisory institution located in shares represented the limited partners. This feature allowed Bethesda, Maryland. JPPC shareholders to treat the future repatriation of divi- * Precursor Systems, an independent power developer dends to the United States as income derived from a part- located in Reno, Nevada. nership, which has some tax advantages for U.S. investors. This consortium created JPPC under Jamaican law as a The balance in voting rights is such that at least two share- special-purpose company to bid for and implement the project. holders are needed to gather a majority of the voting power HCE's portfolio included interests in 25 projects in the (table 3). United States, most of them hydroelectric facilities, some cogeneration and biomass plants, and two windpower facil- The Funding of Equity ities. The assets under its management added up to nearly to $1 billion. HCE was formed in 1981 as a wholly-owned, With the exception of $780,000 contributed in cash, most nonregulated subsidiary of Niagara Mohawk. By law, HCE of the equity in the project is being funded through the has to work at arm's length from its parent company, and Series B or C bonds.12 At closing, shareholders that retained it cannot receive any financial comfort from it. All parent- a small porion of the shares issued signed an equity pur- company contributions are in the form of equity chase agreement that enabled the issuing of additional Class As the industry supplying the dynamic U.S. market for A shares to HCE and a new class, Class B, shares for the independent power development matured over the years, passive investors. In the agreement all investors commit- HCE witnessed the gradual disappearance of new invest- ting additional equity (all of them except for the three small ment opportunities and the growth of more fierce, experi- sponsors) committed to back the equity bonds issued by enced competition. These changes forced all participants CARIFA with a guarantee. The investors also arranged to in the industry to seek out new opportunities abroad, par- obtain the credit enhancement from Banco Santander S.A. ticularly in the developing world, where there was a strong New York Branch. Its AA-rating satisfied the credit qual- demand for new power generation capacity and an increas- ity that CARIFA demanded. Banco Santander does not ing trend toward privatization. have any project exposure and gets its own security from The equity structure designed by the sponsors was dri- other comniercial banks, which have a client relationship ven mainly by taxation issues and voting rights considera- with the equity contributors, except for CDC, which sup- tions. For income tax reasons independent power generation ports its Jamaican subsidiary directly. projects in the United States are structured as partnerships, In addition to HCE and the Commonwealth in which the general partners are in charge of running the Development Corporation, the other Class B sharehold- business and the limited partners behave as minority share- ers are Utilco Group Inc., a subsidiary of UtiliCorp United 9 TABLE 3 The Jamaica Private Power Company's equity structure at closing Amount of Shareholder Voting equity committed interest Interest Stockholder (millions of U.S. dollars) (percent) (percent) Class A 8.835 36.8 46.5 HCE-Rockfort Diesel. Inc. 8.815 30.1 38.1 IEP Jamaica Investments 1. L.L.C. 0.013 4.5 5.6 USEC-Precursor. Inc. 0.007 2.2 2.8 Class B 33.009 63.2 53.5 HCE-Rockfort Diesel. Inc. 7.208 13.8 I .7 West inoies Development Corp. Ltd. 7.251 13.9 11.8 ElF Jamaica. L.L.C. 7.330 14.0 ;1.9 Rockfort Power Associates. Inc. I 1.221 2 .5 18.1 Total 41.844 100.0 00.0 Source. IPPCs Project. Model. Inc., a U.S. investor-owned gas and electric utility, and from which to draw lessons, several lessons we-re drawn Energy Investors Fund, a Boston-based investment fund from the World Bank's experience with a similar operation. specializing in equity participations in tne power sector. The World Bank and IDB each provided a $40.5 mil- lion, 17-year loan to the Jamaican government, which was Debt Financing and the Role of the Private earmarked to be used by PSEF for long-term debt financ- Sector Energy Fund ing of construction. The interest rate charged on funds disbursed was the 30-year United States Treasury Bond as During the project's first five years, its debt financing was a risk-free, long-term benchmark. A three percentage-point mobilized from private commercial sources. These con- premium is intended to cover: sisted mainly of interim debt guaranteed by letters of credit * Cross-currency risks faced by the Jamaican govern- issued by well-known banks-the letter of credit banks- ment on the loans from the multilateral banks. and underwritten in Puerto Rico in the 936 CARIFA bond * A guarantee fee to cover credit risk. market by First Boston Corporation, a subsidiary of Credit * The NIBJ's costs of managing and administering the Suisse and one of the leading participants in the 936 mar- PSEF. ket.'3 Some taxable bond financing was also used. Although The on-lending rate for the PSEF was initially set at 11 the plant was scheduled to be completed in year two of the percent a year, but the current rate is now 9.16 percent. The project, the loan will be disbursed by PSEF in year five at money will be on-lent to the project for the redermption of the maturity date of the 936 bonds, thereby facilitating the Series A bonds (debt bonds). access to the low-cost bonds for an additional three years The NIBJ loan made toJPPC from the Fund was denom- after completion of the plant. inated in U.S. dollars, but the debt servicing will be in This financing plan effectively provided an irrevocable Jamaican currency. This leaves the U.S. dollar-Jamaican dol- "take-out" commitment to retire the 936 bonds at the bond lar exchange rate risk with JPPC, which hedges that risk maturity date in year five. But the project agreements also through U.S. dollar indexing of the price of the energy it provided for the loan to be disbursed earlier under certain sells, as agreed in the power purchase agreement.14 The circumstances (collectively described as "take-out events"), cross-currency risk originating from parity variations within these included the failure of JPPC to maintain an amount the hard currency baskets that the multilateral banks use of about six months of interest payments on deposit in the to denominate their loans will remain with the governrment, U.S. Dollar Debt Service Reserve Account, or any accel- which has included a fee as part of the spread PSEF charges eration or redemption of the debt bonds, such as resulting JPPC to cover this eventuality from the bankruptcy or liquidation of JPPC. The take-out by the PSEF is scheduled to take place in The multilateral banks were expected to be major cat- October 1999. When the Series A bonds mature (or earlier, alysts in mobilizing private financing for the power sector at the occurrence of a take-out event), the two multilateral in Jamaica. Although there was no similar project in Jamaica banks will disburse directly to the letter of credit banks 10 amounts corresponding to the purchases of goods and ser- with an irrevocable letter of credit issued by Banco vices that have been reviewed and certified beforehand by Santander, became part of the project's equity. NIBJ and approved by the two multilateral banks for pay- The Series C bonds, which are being used to fund equity, ment out of their loan proceeds. Prior to take-out, interest have the full backing of the investors under a similar letter on the bonds will be paid in U.S. dollars, after the conver- of credit issued by Banco Santander. These proceeds, how- sion of project revenues from Jamaican dollars. To ensure ever, were aimed at covering "noneligible" project expendi- thispayment,JPPC has established anInterimPeriod Standby tures and thus their interest was taxable under U.S. federal Facility, funded by CDC, which will provide approximately tax regulations. Since these expenditures could not qualify six months of debt bond interest and letter of credit fees. for 936 funding, alternative buyers had to be found for the From the perspective of the multilateral banks, perhaps bonds to cover them. In the end, the whole Series C issue the most interesting aspect of their involvement may be was purchased by the Government Development Bank of exercising their capacity to mobilize private resources. If Puerto Rico, the state institution in charge of managing the the project is constructed as expected and no takeout events day-to-day affairs of CARIFA. The principal items in the list occur, their resources will not be disbursed until year five. of expenditures to be financed by the Series C bonds are: And if private markets still remain available for JPPC at * Interest accrued during construction. that time, there may never be a need to disburse multilat- - Legal and financial fees. eral credits. - Security deposits. * Debi: service reserve. The Caribbean Basin Projects Financing * Base contingencies. Authority Bonds Initially, the bond pricing was expected to have been set on a LIBOR basis so as to take advantage of a steep yield The final dicision to package the CARIFA bonds into three curve and low-level short-term interest rates. In the end, how- series was determined by tax considerations, the need to ever, the pricing mechanism was changed from LIBOR-based satisfy market conditions, the peculiarities of 936 funding, to a fixed rate because the government's negotiating team and the constraints of the project itself. Thus funds from perceived that there would soon be a leveling of the yield Series A and Series B bonds were targeted to cover "eligi- curve and higher short-term interest rates. The government's ble project expenditures" so that interest from these bonds concern over higherrateswas justified bythe fact thatJPPC's could be given favorable tax treatment.1" This lower tax- higher financial costs are passed on to JPS (and eventually free rate means savings of $5.47 million over the five-year to consumers) through the application of the escalation dauses life of the Series A bonds compared with the initial 11 per- in the power purchase agreement. The need to opt for fixed- cent annual rate for funds available from the PSEF. The rate bonds was reinforced when the Series A letter of credit savings, in turn, translates into a lower electricity tariff, banks, alsc concerned about rising interest rates and the The main items among the eligible expenditures are: prospects of an uncovered Jamaican risk, demanded that * The EPC contract. higher coverage be included in the debt-service reserve if * Project management costs. the bonds were to be priced at a floating rate. * CARIFA fees. * Issuer placement fee. The Seriles A Letter of Credit Banks * Development costs (after August 1992). * Professional fees. Originally, the financial package was expected to have been * Success fee. closed by July 1993 based on two assumptions: * Start-up costs. * That the letter of credit banks backing the Series A * Working capital. bonds would be willing to assume the commercial It was decided that in order to keep the financing within risks associated with the construction and comple- the agreed debt-equity ratio, the Series A bonds would take tion of the project. the form of senior debt. 16 Other eligible expenditures were * That the letter of credit banks would be able to obtain targeted for financing under the Series B bonds, which, political risk insurance to cover the debt bonds against because of their full backing by the project developers such risk. 11 In similar projects in the United States banks have taken credit risk of the two multilateral banks. In addition, the the construction risk as part of their traditional project finance intercreditor agreement established the senior status of business. In the case of the Rockfort project the sponsors the letter of credit Banks' credit claim against JPPC. Both believed that because they had well-established European CDC and NIBJ accepted that their claims against JPPC companies standing behind a well-structured turn-key engi- would be subordinate to those of the letter of creclit banks neering procument and construction contract, the purely until the letter of credit banks had been taken our. Because commercial risks that arose during construction were no dif- of this agreement, the fees charged for the issuance of the ferent than those faced by commercial banks accustomed letter of credit were lowered considerably and, in fact, to project finance risks in industrial countries. The spon- were lower than those for similar U.S. projects in which sors believed that their main efforts would have to be in try- letter of credit banks did assume completion risk., ing to secure insurance coverage against noncommercial risks, such as currency transfer and expropriation risks. The Role of the Commonwealth But, as it turned out, commercial banks tended to regard Development Corporation project finance largely on a case-by-case basis, particularly for projects in smaller developing countries, where stan- CDC often provides equity and loans to private and pub- dardization is extremely difficult to achieve and commer- lic companies in selected developing countries, though it cial banks have limited long-term interests. The main prefers to act as a catalyst, bringing other investors into spe- problem that the letter of credit banks guaranteeing the cific investment projects. The rationale for CDC's involve- senior debt of the project faced was how to contractually ment in the project was therefore similar to that of the separate political risks from commercial risks for the five multilateral banks. years during which their financial commitment was CDC's loans are more expensive than 936 funds, but requested. The commercial risks they were being asked to compared with the other sources of finance, CDC has demon- take by JPPC were of two types: strated great flexibility in its lending arrangements. When * The completion risks associated with the construc- CDC was initially approached byJPPC, it had intended to tion of the plant during the first two years of the contribute only equity and standby debt. But when projec- project. tions showed that more money was needed to carry out the * The operational risks starting from the commercial project, mainly because of debt reserve requirements, CDC operations date expected to come at the end of year offered its base debt facility (table 2). At the closing of the two, and finishing at the end of year five at the bul- financial package it committed $7.25 million in equity, $14 let maturity date of the Series A bonds. million in long-term base debt, and $5.8 million in standby The more familiar the letter of credit Banks became with debt. Part of its flexibility also resided in its willingness to the deal, the more difficulty they perceived in separating finance project expenditures not eligible for financing by the out commercial risks from political risks. multilateral banks or the CARIFA bonds. Given the difficulties encountered in putting together an insurance package covering the political risks faced by Insurance Arrangements the letter of credit banks, the urgent need to begin build- ing the plant, and the need to cap the increasing transac- The Multilateral Insurance Guarantee Agency (MIGA) is tion costs associated with financial closing, the government a member of the World Bank Group and provides politi- and the World Bank and IDB agreed to amend their loan cal risk insurance cover associated with the development agreements. The amendments are the World Bank's and of investment projects in developing countries. JPPC IDB's irrevocable commitments to the letter of credit banks requested coverage against the risks of currency transfer, to disburse against eligible expenditures at any time a take- expropriation, and war and civil disturbance. The invest- out event took place, whether motivated by an accelera- ments to be covered were financed with the project's equity tion of the loan to JPPC or the scheduled redemption of and debt, except for the contributions of CDC, which they the Series A bonds."7 The amendments effectively elimi- did not wish to insure. MIGAs Board of Directors approved nated anyJamaican risks, whether commercial or political, the request in July 1993. It agreed to issue a commitment for the letter of credit banks, which thereafter faced the low letter for an aggregate liability for the three risks no t exceed- 12 ing $50 million, which is MIGAs limit for any single invest- that extends to five years. In Jamaica private insurers indi- ment project. As a rule MIGA covers only 90 percent of cated interest in participating in the cooperative under- the losses incurred. writing program under MIGA's umbrella and covering the MIGA proposed to guarantee, on its own account, up construction period. But the additional coverage of the to $50 million of the total investment during construction. last three years of operation required for the Series A bonds After completion, it offered to guarantee equity contribu- was not possible to arrange. tions and long-term debt, other than the PSEF loan used The sponsors also approached the Overseas Private to take out the CARIFA bonds. Since the project's equity Insurance Corporation (OPIC), the official U.S. agency pro- and debt, even excluding CDC's contribution, were sig- viding political risk insurance for U.S. investments abroad. nificantly higher than MIGA's limit on liabilities on its own But the project did not qualify for coverage on two accounts: account, they proposed to arrange a cooperative under- * The absence of U.S. content in the equipment and writing program with private insurers. Under the program, other investments of the project. MIGAwould act as the insurer-of-record for the total amount * The combined benefits of 936 funding and OPIC insured. The proposed scheme allowed MIGA to co-insure coverage was considered "double dipping," (although with private companies and increase the leverage of its recent changes in OPIC's policy toward 936 fund- limited insurance capacity. The proposal was an attempt to ing would allow this). insure the three CARIFAbond series againstjamaican polit- All of the foregoing reinforced the perception that polit- ical risk, leaving only the commercial risks in the hands of ical risk coverage of the Series A bonds could be effec- the equity providers and the creditors. Thereafter, MIGA tively and timely handled only by introducing the coverage would insure the equity for up to 15 years and a amendments to the loan agreements between the govern- small portion of the long-term debt for up to 10 years. ment and the World Bank and IDB. In the end, MIGA The main difficulty with the proposed arrangements was was retained only to provide long-term political insurance that the Series A bonds had a life of five years, and the pro- for the principal invested and for future earnings of the posed scheme did not offer insurance coverage between equity holders. year three and year five. Commercial practices today make A description of how the project risks are shared is shown it virtually impossible to find political insurance coverage in figure 1. FIGURE I Project financing structure World Bank and Inter-American Counter guarantee Letter of Credit $8 1 million letter of credit Development Bank Commercial repayment guarantee I Government $81 million o,f J ~am"a_i ca, (Year 5-17) I Private Sector Energy Fund I NIBJ is Fund Manager Puerto Rico 5 year bonds 936 bond ($81 mlillion) $1. milliaead market $1i22 million 2 year bonds * ofrCmpany Xsadyfcit ($41 miallion) _i K $41 million $2.2 million ' ~~~(Year 2) (Standby) Underwritten by________ x _ First Boston Project sponsors Equity and debt and othe[ equity investors coverage * Cash flows - - - - - - _ Guarantees/security 13 Key Negotiation Issues I n the initial stages of developing the financing con- inclusion of an indemnification provision in the sale agree- cept for the project, the sponsors did not anticipate ment of JPS as a counter guarantee of these obligations. that they would use bond financing. The expectation was that bringing equity to the project would have been The Jamaica Public Service Company'-s as much risk as the international financial community Perspective would have been prepared to take so early into the lib- eralization of the Jamaican economy. As it turned out, During negotiations it was difficult forJPS to focus on the however, this was an conservative estimate of what the project from a perspective other than that of a utility under- market was prepared to do. And the innovative financ- taking its own expansion. And much effort was spent dis- ing plan put forward by the winning bidder opened up cussingthetechnicalaspectsoftheprojectwiththedeveloper, new opportunities. going beyond the requirements for compatibility with the At the beginning of negotiations it was expected that the system. This was understandable, however, given JPS' pre- letter of credit banks would accept the construction risk of occupation with reliability concerns. Still, this effort was the project, since commercial lenders were accustomed to often made at the expense of a detailed consideration of accepting this risk in the United States as long as the sov- the commercial aspects of the project. Thus, for instance, ereign risks were taken care of. As the negotiations pro- very early into the negotiations the discussions often bogged ceeded, however, it became clear that the letter of credit down on the detailed specification of equipment for the banks would not assume this risk because they regarded it plant, whereas the work on the indexation provisions for the as being intimately tied to country risk. The position even- tariff started only at a very late stage. In fact, perhaps because tually adopted thus shifted virtually all of the construction of JPS' lack of familiarity with the norm in independent risks onto the PSEF and equity power developments, the discussion of indexation was largely driven by the developer, with JPS reacting to proposals made The Government's Perspective by JPPC, as opposed to the more usual scenario in which the utility takes the lead and allows the developer to react. Initially, there was some resistance to the idea of the gov- On the issue of penalties JPS opened with very unreal- ernment delegating its authority to make withdrawals form istic positions because of a lack of understanding of the inde- the World Bank and IDB loans to the letter of credit banks. pendent power producer market. It in effect looked to the The issues of whether it was proper for a sovereign state project to pay penalties for failures to supply the required to delegate authority to a private nonresident commer- capacity, at a rate that would be equivalent to the economic cial entity and whether any unwanted precedent would cost of the loss of capacity This position was clearly unten- be set by this were considered. But in the end it was agreed able for the developer because these penalties were several that this was the only practical approach to solving the orders of magnitudes larger than independent power pro- country risk problems. ducers are subject to in the U.S. independent power pro- The government had no hesitation in guaranteeingJPS ducermarket. This issue was further complicated bytthe fact payment obligations to the project company before the that the government would be putting up a large part of the privatization of JPS. But the continuance of this guarantee funding required for the project through the Fund and stood after the privatization did present an issue. It was eventu- to bear a large part of the ultimate risk of project failure ally resolved when the government agreed to negotiate the due to accumulated penalties. 14 The Energy Fund's Perspective ceed in negotiating penalties so severe that the developer could become bankrupt even for a minor failure that could The government attempted to negotiate the fund loan agree- be quickly corrected. This issue was made even more com- ment at arm's length. But the issue of penalties presented plex by the fact that the utility would soon be privatized. a conundrum. On the one hand, the government wanted The government stood in the invidious position where the to increase the developer's disincentive for nonperformance. privatization would help to place the private utility in a more On the other, it had to ensure that the utility did not suc- advantageous position than the government itself was in. 15 Lessons Learned he success of the effort in Jamaica to involve the sufficient strength to mobilize the required equity contri- T private sector in financing the energy sector has to bution and pay the engineering and other fees, and legal a large extent been facilitated by the government's costs. Using prequalification to select potential project spon- articulation of market economic policies. Embarking on sors will result in a wider selection of experienced devel- the road toward regulatory reform, whereby an independent opers entering the competition and will not discriminate in authority will regulate the energy sector, is one of such effort. favor of large companies with strong balance sheets but lit- Deregulation of the foreign exchange regime is another. But tie project development experience. the results of these policy changes are not by themselves Another lesson to be learned is that even experienced expected to yield, in the short term, the level of capital developers do not have unlimited patience in waiting for flows required. Because of the increasing system size and an RFP to be prepared. They have staff constraints and tend the consequential need for larger increments of plant to be to focus and gear up to bid on a particular project over a installed, the level of investments required for each project relatively short period of time. The RFP should therefore will rise. In the short term it is likely that private investors be completed before advertisement and the prequalifica- will perceive somewhat more risk in financing these larger tion exercise commences so that it can be issued as soon projects than those perceived in the Rockfort project. as prequalification is completed. Doing so will facilitate It will therefore be important for the World Bank and smoother progress from prequalification, to preparing a other international financial institutions to continue to sup- bid, to possible negotiations. port the government's efforts to involve the private sector. In order to give the evaluators more assurance that they However, this support should perhaps be in the form of are making the correct choice of project developer in future providing guarantees, such as those available under the solicitations, the evaluation should take account of the Bank's guarantee program, instead of loans to the govern- sensitivity of the average discount price bid to changes in ment for on-lending to project sponsors. prices of key components of the tariff. This could be achieved Because of the much larger transaction costs incurred by including, in the RFP, the formula for indexing the key in negotiating financing for private sector projects com- components such as fuel prices and the cost of capital. The pared with public sector projects, it will also be important sensitivity of the average discount price to the escalation for the multilateral financial institutions to continue their in each of these key variables would then be tested, and technical assistance support for these projects. these sensitivities would then be considered as factors in the evaluation. Bidding and Project Selection In retrospect, the RFP's technical specification for equip- ment was too detailed, going beyond what was required to The most important lesson to be learned from the Rockfort satisfy reliability concerns. This level of detail was included project is that the most important criteria in selecting a in the hope that it would simplify evaluation. But it had project sponsor are its familiarity with financial markets and the opposite effect-lengthening the time required for its ability to negotiate project finance. A healthy balance preparation and evaluation as compliance with each of the sheet is necessary but not sufficient to ensure smooth imple- technical specifications was carefully checked. It also mentation of the project's financing. Since other factors are appeared to lengthen the negotiating time, as JPS tried to more important, an analysis of the sponsor's balance sheet enforce compliance with the RFP in several areas that did could be restricted to a determination of whether it had not affect reliability directly. 16 The negotiation process may also have been length- tial guarantee. The take-out commitment provided by NIBJ ened significantly because of some of the positions advanced and backed by the issue of the World Bank's comfort let- in the RFP It is difficult to estimate how the government's ter to the letter of credit banks is effectively a guarantee of and the utility's negotiating positions were furthered by the government's obligations to the letter of credit banks. some of the strong opening positions taken in the RFP The letter of credit banks did not state their position clearly But generally, because it was prepared with the expecta- enough in the early stages of the negotiations, and, in ret- tion that developers would be willing to take more coun- rospect, because of the firm positions that they eventually try risk than they were eventually prepared to, the negotiating adopted, it would have been simpler to finance the project time was lengthened sharply. by the World Bank providing a limited guarantee backed It is difficult to prescribe an all-embracing solution to by a sovereign counter-guarantee from the government. the problem of least-cost planning and technology selec- tion. Each case should be judged on its own merit after an Negotiation Process evaluation of the costs and benefits of adopting an uncon- strained market approach. If a decision is made to specify The government's approach to the negotiations-appoint- a particular technology, the RFP should allow as much ing a negotiating team with full authority to negotiate the freedom as possible in specifiying machinery and equip- agreements and the approach of negotiating all the docu- ment, and should include a performance specification only ments together provided "one stop shopping" during the where it is absolutely essential to ensure desired reliability. negotiation process."8 The alternative would have been to negotiate the power purchase agreement withJPS, the imple- Financing Arrangements mentatiorn agreement with the Ministry of Public Utilities and Transport, and the various loan documents with NIBJ. In retrospect, the financing arrangements for a project of This scheme would have required each of the above insti- this size could have been simpler and concluded with lower tutions to have its own negotiating team. These teams would transaction costs. As it turned out, the Energy Fund was have had to coordinate their efforts and even negotiate with not used in the way in which it was envisaged at the begin- each other to reach an agreement. This approach would ning of the process. Rather, the facility was used as a par- probably have added several months to the negotiating time. 17 Project Implementation Ge enerally speaking, project implementation went Project costs remain within the original budget projec- forward without major hitches, although the first tion, despite the use of some of the contingency sums. The unit attained commercial operations about three costs projected until final completion remain within bud- months behind the original schedule. The first unit was get. Total project costs to the end of December 15996 were eventually placed into commercial operations on November. $122,319,539, compared with a budgeted amount of 13, 1996, and the second unit on December 20, 1996. $131,901,208.AttheissueofCertificateNo.28,onJanuarv However, because of teething problems, the complex only 6, 1997, for work carried out in December 1996, a total of completed its final performance tests at 7:00 p.m. onjanuary $77,282,255 had been authorized for disbursement from 6, 1998. This means that the project is now in full com- the Series A bonds.'9 mercial operation and can be dispatched as a complex on AsofFebruary28,1997,theenergyproductionandcapac- the JPS system at a capacity of 61.3 M . ity utlization from the project are as indicated in table 4. TABLE 4 Performance statistics (up to end of February 1997) (megawatt hours) 1996 1997 Item October November December January February Gross generation 9,457.99 18,264.72 29,807.06 35,300.20 31,717.40 Energy sales 9,122.22 17,096.22 28,704.43 32,960.26 30,488.86 Power purchased 305.92 44.00 80.63 49.96 28.40 Station services and losses 641.69 1,212.50 1,183.27 1,389.90 1,256.94 Copacity factors (percent) Engine No. 1 0.00 3.24 53.91 61.39 65.63 Engine No. 2 43.79 81.57 83.88 96.83 96.41 Net station 21.89 42.40 68.90 79.11 8 1.02 Note: Their capac ty factors are at pr-esent lower than expected because of initial teething problems affecting both engines. Source: JPPC's mnonthly reports, 18 Developmental Impact T he successful financial closing of the Rockfort pro- qualify for negotiating the purchase of majority shares in ject has clearly been beneficial in attracting addi- JPS is further evidence of improvements in the investment tional investment capital to the power sector in climate. Requests for prequalification information were Jamaica. This is evidenced by the implementation of two received from approximately 40 interested firms, and sub- additional private sector projects, both of which are now missions were returned by 14 of the applicants. Further, a in full commercial operations: number of foreign investors continue to express interest * A 72-megawatt medium-speed diesel barge that is by submitting several unsolicited proposals for investing in operating at a site next to the Old Harbour power the power and energy sectors. JPS has received proposals station byJamaica Energy Partners Limited (JEP), a for the development of independent power projects, and locally registered company having Wartsila Power the government has received proposals to expand the Development Inc., as its principal initial shareholder. Petrojam oil refinery into a petrochemical complex involv- * A 42-megawatt combustion turbine operated by ing the co-generation of electrical power. Kenetech Energy Systems at the site of the Bogue The project also furthered institution building. The expe- power station in Montego Bay rience gained in negotiating the Rockfort project has been The 72-megawatt JEP project was constructed using bal- a significant factor in the development of the negotiating ance-sheet financing provided by the Wartsila organization capabilities of a number of key government institutions. through various associated companies. Total project costs are These institutions can now claim to have on their staff a core projected to end up at approximately $96 million, and nego- group of professionals with useful skills and experience in tiations have been concluded to refinance the project debt negotiating private power contracts. Further, as a result of byseniorloansof about $22 millionfrom IntemationalFinance the involvement of the Natural Resources Conservation Corporation, subordinated debt of $9.6 million from Authority (NRCA) and private environmental firms in the McDonnell Douglas Finance Corporation, and $45.1 million approval and permitting process leading up to the imple- from Metra Finance OY AB, a Finnish group. Further refi- mentation of the Rockfort project, these government insti- nancing of the Metra debt is proposed at a later date. About tutions have gained significant experience in the evaluation $19.3 million has come from equity subscriptions (table 5). of the environmental aspects of power projects. The Bogue project is estimated to cost approximately $30 million. It was financed by an equipment lease and TABLE 5 balance sheet financing from Kenetech. Kenetech has already Finance from equity subscriptions refinanced a large percentage of the original equity, selling Thousands of approximately 99 percent of its investment in the project Company Percent U.S. dollars to another U.S.-based investor, Quixx Corporation. Warstila Group 18.90 3,648 Illinova Group 17.55 3,387 Together with macroeconomic improvements, the suc- Continental Group 17.55 3,387 cessful negotiation of the financing for the Rockfort pro- Scudder Latin America Group 35.10 6,774 ject has clearly catalyzed the re-introduction of foreign IFC 9E90 1,911 Jamaica Energy Inc. i .00 193 capital for large-scale projects in Jamaica. The enthusiastic Total 100.00 19,300 response to the government's invitation for investors to pre- Source JEP's project documentation 19 Annex 1 The Jamaican Power System T he Jamaica Public Service Company delivers elec- est energy conservation through demand-side management tricity to the main load centers through a trans- measures, and no change in the relative prices of electric- mission network comprising two levels of ity substitutes at the household level. transmission voltages, 138 kilovolts and 69 kilovolts. The maintenance of tariffs at their real 1992 levels will Electricity is sold at medium (24 kilovolts, 13.8 kilovolts, require tariff adjustments, particularly in the early years of 12 kilovolts, and 4 kilovolts) and low (440/220/110 volt) the forecast period when inflation is expected to be higher voltage through a distribution network that includes about than in later years. Notwithstanding the revival of GDP 11,200 circuit-kilometers of distribution lines. The JPS growth during the period, these adjustments are expected transmission and distribution system covers the entire island. to moderately dampen the demand for electricity. The forecast for increased sales of electricity for Historical and Projected Demand 1995-2011 is about 4 percent a year. This forecast com- and Supply pares with increases at an average annual rate of 5 percent during 1981-94. Growth in consumption was strongest in Electricity consumption as measured by sales, has increased the residential and large industrial sectors during that: period. at an average annual rate of 4.3 percent during 1980-91. The forecast of power demand is that the system wil] require But sales fluctuated during this period, reflecting primar- about 700 megawatts of additional capacity by 2010. The ily changes in economic performance and retail tariff lev- forecast takes into account system losses, but excludes power els. During 1980-85, which was characterized by slow GDP for station service within the power plants. growth and high petroleum prices following the second oil shock and recession in industrial countries, sales Least-Cost Expansion Plan increased modestly at a rate of 2.3 percent a year. This low sales growth also reflects the impact of two adjust- The objective of the Least-Cost Expansion Plan (LCEP) ments in the electricity tariff in 1984-one that increased is to ensure that in providing new capacity, reliable and tariffs on average by 40 percent and another that increased appropriate technology is adopted, unit sizes are compat- tariffs by 54 percent. ible with the system size, and the timing of new units nei- During 1985-91 sales increased at an average annual ther creates overcapacity nor results in capacity shortages. rate of about 6 percent. The lack of a tariff adjustment from JPS has an installed generating capacity of 698 megawatts 1984 to 1990 contributed to increased sales during this with hydro-capacity totaling 23 megawatt, forming a little period and these were also buoyed by higher GDP growth. more than 3 percent of installed capacity. The ballance of This increase in consumption occurred despite the nega- 575 megawatts, forms 97 percent of installed capacity and tive impact of hurricane Gilbert during 1988-89. The hur- consists of oil-fired units. About 112 megawatts of this ricane led to a decline in sales for the fiscal year 1988/89, capacity is supplied by independent power producers. In during which electricity service was interrupted for an addition, JPS recently signed power purchase contracts extended period in many parts of the island. for the acquisition of a further 60 megawatts of generating The forecast of electricity sales for the period 1992-2011 capacity (the Rockfort plant), which came online in, August is based on an estimated GDP growth rate of about 4 per- 1996. cent a year. It is also based on the maintenance of tariffs at New base load generating capacity is needed to improve their real levels in 1992, losses at about 19 percent, mod- system reliability and reduce fuel consumption-in Jamaica, 20 for every one kilowatt-hours of electricity not supplied, JPS synchronizing meters and relays. A 691-kilovolt tie-line has estimated that about $1.50 (J$33.50) is lost in economic breaker will also be provided between the JPS system and production. the generators. This is the point where the billing meters Based on the LCEP, about 460 megawatts of new capac- will be located. The plant will be fully dispatchable because ity will be needed during the next 10 years. The invest- reliable communication channels will be provided between ment requirements for providing this new capacity is the generator operators and the JPS dispatchers. estimated at about $850 million over the period. In addi- The diesel generator power house will comprise an engine tion, JPS will require additional funds for maintenance, hall, electrical annex, and mechanical annex. The base of rehabilitation, and support programs to sustain the new the engine hall will be approximately 1,500 square meters investments. This means that during the next decade an and the height will be approximately 22 meters. The engine average of about $85 million must be invested every year hall will be equipped with an overhead traveling crane with in the power sector. While the LCEP is subject to updat- 130/20 tons hoist capacity. The floor area of the electrical ing and annual reviews, if power outages are to be avoided annex will be approximately 265 square meters and the build- in the short term, implementation of the options for the ing will comprise high voltage rooms, low voltage rooms, next four years must proceed on time. and DC rooms. In addition, there will be an electrical room, a control room, toilet facilities, and an office. The mechan- A Technical Description of the Project ical annex will be approximately 254 square meters, and it will comprise a mechanical room and ventilation facilities. The JPPC proposal includes two identical 9K80MC/S diesel The lead carrying structure for the engine hall, electri- engine generators manufactured by MAN/B&WE Each unit cal annex, and mechanical annex will be constructed as a is rated at 28,881 kilowatts. In addition, each engine will premanuf.actured steel structure. The administration build- be fitted with a turbo compound system generating a fur- ing and other ancillary structures, such as the fire pump- ther563kilowatts.Aheatrecoveryboilerwillalsobeincluded house, will be constructed of reinforced concrete and to produce steam. It will generate an additional 804 kilo- blockwork. The cooling water pumphouse will be con- watts per unit in a steam turbine, yielding additional capac- structed similarly and equipped with an overhead crane. ity of 1,608 kilowatts. This will result in a net plant output Two steel fuel oil tanks will be provided, each with a of 60,496 kilowatts at 100 percent load. The correspond- capacity of 49,000 barrels. The bottom of the tank farm will ing plant heat rate at 100 percent is 1,889 kcal/kilowatt- be constructed of concrete, andthe farmwillbe surrounded hour. The proposed speed of the units is 103.4 RPM. by an earth wall. The wall will be designed to contain all Each generator will be connected through a step-up 98,000 barrels of fuel in the event of leakage. Distillate transformer, switches, and circuit breakers to the JPS 69- fuel will be placed in a separate tank farm, approximately kilovolt system. The breakers will synchronize the genera- 10 meters x 10 meters and will be of similar construction tors to the JPS system and will also be equipped with as the fuel oil storage area. 21 Annex 2 The CARIFA 936 Bond Market S ection 936 funds are accumulated in Puerto Rico by percent (8.2 percent x 85 percent = 7 percent). The bene- U.S. corporations operating under section 936 of the fit to the borrower of receiving 936 funds instead of con- Internal Revenue Code. These funds are available ventionalfunds might therefore equal a lowering of the interest at below-market interest rates through the Caribbean Basin cost by approximately 1.2 percent (120 basis points:' a year. Projects Financing Authority (CARIFA) bond market. Effective January 1, 1987, amendments to section 936 936 Funds in the Caribbean of the U.S. Internal Revenue Code (26U.S.C. 936) provide a tax exemption for certain investments in qualified Effective January 1, 1987, the U.S. Congress expancled sec- Caribbean Basin countries. As a result of these amendments, tion 936 to allow favorable tax treatment for the investment investment funds available from qualified Puerto Rican finan- of 936 funds in eligible activities in qualified Caribbean cial institutions are a relatively low-cost source of funding Basin countries. Under section 936 (d)(4), funds that are for low-risk projects in qualified Caribbean countries.20 generated by the operation of an exempted business in Under section 936 income earned by an eligible U.S. PuertoRicocanbeinvestedinqualifiedPuertoRicamfinan- company (a 936 corporation) operating an active trade or cial institutions for investment in the Caribbean. The income business in Puerto Rico may receive a tax credit to offset generated by such investment qualifies as QPSII and is the U.S. tax otherwise attributable to the income earned exempted from U.S. tax. A similar exemption from Puerto from its Puerto Rican operations. This credit is available Rican tax applies under Puerto Rican law. irrespective of whether the active income so generated is Under section 936 (d)(4), 936 funds can be invested immediately repatriated to the United States or is retained only in qualified Caribbean Basin countries designated in Puerto Rico. undertheCaribbeanBasinEconomicRecoveryAct of 1983 (the Caribbean Basin Initiative or CBI). Twenty-three coun- The Benefits of 936 Funds tries are so designated and qualified. Congress also requires that to be eligible for such tax-exempt funds, the qualified Section 936 funds are generally available to qualified bor- countries must enter into a Tax Information Exchange rowers directly from 936 corporations or indirectly from eli- Agreement (TIEA) with the United States. gible depository institutions. The base rate of interest charged Tourism also benefites when a CBI country signs a TIEA. for such funds is generally lower than that charged for con- Under the U.S. tax code taxpayers may deduct from their ventional loans because the interest received by the lender U.S. taxes any business convention expenses they incur in of 936 funds is generally exempt from both U.S. and Puerto CBI countries. To date, Barbados, Costa Rica, Dominica, Rican tax. Thus the lender can pass a portion of the tax ben- the Dominican Republic, Grenada, Jamaica, and Irinidad efit on to the borrower in the form of a lower interest rate. and Tobago have executed fully applicable TIEAs with the The actual interest rate paid for 936 funds is determined U.S. government. by supply and demand forces in an active local capital mar- Another requirement under U.S. law for the qualified ket. Generally, 936 funds are available at a base rate of inter- investment of 936 funds in the Caribbean is that such funds est equal to approximately 85 percent of the equivalent be invested in active business assets or development projects maturity London Interbank Offering Rate (LIBOR). For in a qualified CBI country. A development project generally example, if the current three-month LIBOR stands at 8.2 refers to an infrastructure investment, such as a road or water percent, the equivalent 936 base rate would be LIBOR 7 treatment facility, that directly supports industrial develop- 22 ment. Active business assets generally mean plant, equipment, the Caribbean. Under these regulations the project must and inventory associated with a manufacturing operation. first be endorsed by the Economic Development Ad- The regulations issued by the Department of the Treasury, ministration of Puerto Rico (Fomento) . Fomento will deter- implementing the CBI amendment to Section 936, detail mine whether, on balance, the project is of benefit to Puerto what constitutes active business assets and development Rico. or whether and to what extent the project has a mate- projects. The regulations broadly permit qualified invest- rially adverse impact. ment in tangible personal property used in a trade or busi- In order for a qualified Puerto Rican financial institu- ness, including reasonable incidental expenditures (such as tion to invest 936 funds in the Caribbean it must obtain installation costs), in qualified CBI countries. Section 936 the approval of the commissioner for the specific invest- funds can be provided to qualified CBI projects only for ment. The Puerto Rican regulations further require, in order new investments. But the regulations permit the construc- to ensure proper investment, that the financial institution tion, rehabilitation, improvement, or upgrading of quali- making CBI investment comply with rigorous due diligence fied CBI assets. An investment in used tangible personal rules. If the investment is endorsed by Fomento and property employed in the same CBI country within the last approved by the commissioner, then Puerto Rican law pro- five years may not qualify. Moreover, 936 funds may not be vides beneficial tax and regulatory treatment to such used to refinance existing project facilities. However, the investment. U.S. Treasury may approve the use of 936 funds to refinance some privatization transactions on a case-by-case basis. If a Qualified Caribbean Basin Country qualified CBI government is turning over state-owned facil- Regulations ities to the private sector, sufficient positive developmental benefits may exist to allow a portion of the purchase price For projects in qualified CBI countries to access 936 funds, to be financed by 936 funds. Generally, only up to 10 per- the host government will normally require the project to cent of the qualified investment of 936 funds in a CBI pro- seek the approval of that CBI government. Most CBI coun- ject can be used to finance working capital. tries place tight restrictions on companies within their juris- Another requirement of section 936(d)(4) is that the recip- diction taking cross-border loans and investments. Approval ient of 936 funds open its books and records to the U.S. and by the central bank of the CBI country is typically required. Puerto Rican governments to ensure that the 936 funds are Additionally, several governments in the region are now beingusedin accordancewith the law. Section936(d)(4) also operating under letters of intent with the International requires that the lending of 936 funds to a qualified Caribbean Monetary Fund and are under contractual agreements with recipient be approved by the commissioner of financial insti- commercial banks that limit the amount of allowable indebt- tutions for Puerto Rico. The circumstances under which the edness. In many CBI countries these provisions therefore commissioner will approve such lending are discussed below. require C:BI governmental approval before any new 936 borrowings can occur. Most CBI countries impose with- Puerto Rican Law and the Regulations holding taxes on the interest income or dividends repatri- Governing 936 Investments ated from enterprises in their countries. For borrowers to receive the benefits of the lower 936 interest rate, CBI The commissioner of financial institutions for Puerto Rico governments must exempt 936 loans from such withhold- has issued regulations for the investment of 936 funds in ing taxes. 23 Annex 3 Prequalification and Bid Evaluation T he process of selecting the developer for the project * Ability to raise equity and administer project financing. began with the issuing of a notice of prequalification - Technical qualifications. published in the Financial Times and in the local press * Project development experience. on May 7, 1991. It requested an expression of interest from The highest weights were given to project development private developers to construct, own, and operate a 3x20 experience and the ability to raise and administer financ- megawatt, or any equivalent combination, low-speed diesel ing-each received 40 percent of the total weighting. power station and all support facilities for the government of Technical qualifications was given a weighting of 20 percent. Jamaica. The prequalification document was made available to all applicants beginning May 8, 1991, and the applicants Prequalification Issues were given until June 10, 1991 to return submissions. The prequalification document included the evaluation criteria, A review of the process noticed that some of the best: known which were based on the developer's abilityto mobilize financ- developers, particularly from the United States, did not ing and its experience in structuring BOO projects. qualify-the principal reason being that too much weight A great deal of time was spent debating which criteria was placed on net worth and hence the ability of the pro- to use to evaluate the bids, as they raised several issues for ject sponsors to raise loan capital from their own balance the World Bank and IDB concerning the adequacy of com- sheets. But in fact, no such balance sheet financing was con- petition and the procurement arrangements. templated by the companies sponsoring the project, and the lenders to the project would have recourse only to the Prequalification Criteria assets of the project itself. The foregoing coincidentally placed several large man- The prequalification criteria awarded points to the prospec- ufacturers of equipment, utilities, and contractors with very tive developers in three broad categories: limited experience in independent power project develop- TABLE 6 The Jamaica Private Power Company's calculation of the average discount price Calendar year 1995 996 1997 1998 1999 2000 2001 2002 (Operating year) (1) (2) (3) (4) (5) (6) (7) (8) Annual capacity purchase price (thousand U.S.$ per year) 12,041 16,119 15,307 22,577 24,785 24,449 23,707 22,964 Energy purchose price (US. S per kilowott) Inland fuel transportabon 0.0008 0.0008 0.0008 0.0008 0.0008 0.0008 0.0008 0.0008 Fuel 0.0192 0.0192 0.0192 0.0192 0.0192 0.0192 0.0193 0.0193 Variable O&M 0.0029 0.0032 0.0044 0.0044 0.0044 0.0044 0.0044 0.0044 Total 0.0230 0.0232 0.0244 0.0244 0.0244 0.0244 0.0244 0.0244 Cold start costs (thousand U.S.$ per year) 2 2 2 2 2 2 2 2 Energy sold (GWh) 350 420 420 420 420 420 420 420 Annual energy purchase price (thousand U.S.$ per year) 8,053 9,763 10,263 10,263 10,263 10,264 10,266 10,267 Annual cost of cold starts (thousand U.S.$ per year) 20 20 20 20 20 20 20 20 Annual estimated paymnent (thousand U.S.$ per year) 20,113 25,902 25,590 32,860 35,068 34,734 33,993 33,251 Note: average discount price ($/kibowatt hour) =present value of annual estimate payment discounted at i 2 percent to the beginning of operating year I present value of energy sold discounted at 1 2 percent to the beginning of operating year I average discount price ($/kilowatt) = $0.0691 kilowatts Source: JPPC's bidding document. 24 ment and negotiation, but with strong balance sheets, on * Competition would establish low prices. the list of prequalified developers. These types of firms also * The developer had sufficient knowledge of the pro- received high ratings for their implementation plans. ject finance market to undertake the financial engi- Although interest in the project at the stage of prequal- neering required to make the deal amenable to the ification and shortly thereafter was very great, and as many appropriate sharing of risks, attracting the necessary as seven bidders prequalified, only two bids were eventu- equity, and if possible, commercial debt. ally received. Based on conversations with the prequalified It was finally agreed that the selection of the project bidders, it seemed that they had become focused on other developer would be based on the calculation of an average activities as finalization of the RFP took more time than orig- discount price, which would take all of the price factors into inallyindicatedatthe time of prequlificationinJanuary 1992. account. Trable 6 shows the computation of the average The more experienced developers, however, perhaps because discount price for JPPC 's winning bid. they better understood the complexity of the transaction to be undertaken, were more tolerant of the delays in com- Sensitivit)y of the average discount price pleting the RFP The long time that elapsed between noti- fication of prequalified project developers and actual receipt Experience has since shown that there are some limita- of the RFP was clearly a factor limiting the number of bids. tions to the concept of the average discount price as it was In summary, it appears that if more weight hadbeen placed structured in the Rockfort RFP. The limitations arise from on the project development experience and relatively less the inability of the ADP to discriminate between the sen- weight on the financial health of the applicants, the compe- sitivity of various project proposals to different escalation tition would have been enhanced by a wider choice of expe- factors in the tariff. It was always the intention to index the rienced developers, and more bids would have been received. tariff to changes in some of the costs that make up the tar- A clear lesson to be learned is that in future solicitations iff, such as the exchange rate between the Jamaican dollar the RFP should be prepared before the prequalification and the U.S. dollar, the cost of money, the cost of fuel and exercise commences so that it can be issued as soon as pre- lubricants, the cost of spare parts, the cost of local and for- qualification is completed. With the experience gained, this eign labor involved in operating the plant, and the cost of should be feasible. idle station electricity. But the details of the proposed index- ation were not included in the RFP, and the sensitivity of Bid Evaluation Criteria the average discount price to changes in these costs could not therefore be included as a factor in the evaluation. Several different approaches were explored in an attempt This issue did not present a difficulty in the bid evalua- to ensure that: tion because the identical technology was being compared. 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 (9) (10) (I1) (12) (13) (14) (15) (16) (17) (18) (19) (20) 22,221 21,477 20,734 19,585 18,434 17,689 16,946 10,065 8,296 8,296 8,296 8,296 0.0008 0.0008 0.0008 0.0008 0.0008 0.0008 0.0008 0.0008 0.0008 0.0008 0.0008 0.0008 0.0193 0.0193 0.0193 0.0193 0.0193 0.0193 0.0193 0.0193 0.0193 0.0193 0.0193 0.0193 0.0044 0.0044 0.0046 0.0046 0.0046 0.0046 0.0046 0.0048 0.0048 0.0048 0.0048 0.0048 0.0244 0.0245 0.0247 0.0247 0.0247 0.0247 0.0247 0.0249 0.0249 0.0249 0.0249 0.0250 2 2 2 2 2 2 2 2 2 2 2 2 420 420 420 420 420 420 420 420 420 420 420 420 10,268 10,269 10,366 10,367 10.368 10,370 10,371 10,475 10,476 10,478 10,479 10,480 20 20 20 20 20 20 20 20 20 20 20 20 32,509 31,767 31,120 29,972 28,822 28,079 27,337 20,560 18,793 18794 18,795 18,796 25 But in the future, if the evaluation of bids is based on the criteria laid down in the RFP The main issue was whether simple average discount price concept and different tech- or not the proposed low-speed diesel unit had qualified nologies are to be compared, the result could be a project under the minimum 21,000 hour operating experience with a lower average discount price but greater sensitivity criterion. to future changes in the above parameters rather than one In their financial proposal, JPPC developed an innova- with a marginally higher average discount price but rela- tive financing plan that would generate a lower average tively insensitive to the future changes in the component discount price as a result of the use of 936 bonds to finance prices. Thus the selection process would not necessarily both the debt portion of the financing required and the have generated the lowest tariff in the long run.21 required equity. The issue arose as to whether 936 bonds In preparing future bids it would be useful to examine underwritten by an irrevocable letter of credit should be whether a methodology that factors the sensitivity of the aver- considered "equity" in fulfilling the RFP requirement for age discount price to the most important cost factors in the 30 percent equity contributed by the developer. But legal tariff could be developed for inclusion in the RFP It should opinion confirmed that sources other than sponsors cash provide strict guidelines on the items for which indexation could qualify as equity. In this regard the proposal byJPPC is allowed and the principles governing such indexation. was regarded as substantially responsive. The proposal sub- The bidders would then be required to provide more detailed mitted by FPL also relied on the use of 93 6 bonds for financ - base cost breakout information, including computer spread- ing, but they made no firm provision for replacing the bonds sheet models, as it relates to the indexation guidelines and at the end of the five-year retirement period. Nonspecific principles. This would allow the evaluators to carry out the proposals relating to the "possible rollover of the bonds" necessary sensitivity computations during the evaluation. were made, but these were regarded by the evaluators as being too uncertain. FPL's financing plan was also short Other evaluation issues on the equity contribution requirements because the 10 percent standby financing required as a construction con- During the technical evaluation a number of issues arose tingency was included as part of their equity. The bid from that related the responsiveness of the bids to the technical FPL was nevertheless regarded as substantially responsive. 26 Annex 4 Summary of Project Agreements Implementation Agreement: Summary of amend those agreements if the effect would be to Terms and Conditions prevent the World Bank or IDB from making the loans for the project. T 8 he implementation agreement was executed as of * For seven years from the date of the implementation October 10,1994, by the Jamaican government and agreement, JPPC will not be liable to taxation in JPPC. Pursuant to the implementation agreement, Jamaica on its income, and the nonresident lenders the government will grant to JPPC the exclusive right to will not be liable to taxation in Jamaica on their income design, build, own, and operate the Rockfort project and from interest and fees associated with loans toJPPC. a license under the Electric Lighting Act to generate elec- Subject only to the restrictions imposed by the tricity for sale toJPS. In addition, the government of Jamaica restricted list developed pursuant to the Trade Act will offer certain assistance to JPPC in order to facilitate of 1955, JPPC may import all items essential for the the construction and operation of the project. The gov- construction and operation of the project. In addi- ernment's principal obligations are as follows: tion, the Ministry of Finance promises to grantJPPC * The government of Jamaica will guarantee the pay- a general remission of duties and taxes under the ments JPS is obligated to make to JPPC under the CustomsAct, the Stamp DutiesAct, and the General power purchase agreement, even if JPS is privatized. Consumption Tax Act, for plant, machinery, and parts * The government of Jamaica will not impede JPPC's required for the project. ability to purchase foreign currency on the open mar- * JPPC will be permitted seaward access to the site for ket, transfer foreign currency abroad, or maintain for- dreclging, the delivery of fuel, and other activities eign currency bank accounts in Jamaica or abroad. associated with the construction and operation of the Moreover, if exchange controls are subsequently project. imposed, The government of Jamaica will commit to * Each party will be excused from performing its oblig- make foreign currency available to JPPC and will ations under the implementation agreement because allowJPPC to transfer abroad foreign currency funds of force majeure events, including, among other things, generated by the project. hurricanes, epidemics, wars, riots, strikes,or changes * The governrnent ofJamaica will guarantee the issuance in law after November 15, 1993. of the specific regulatory approvals listed in Schedule After an appropriate cure period, JPPC may terminate 2. If the government of Jamaica fails to grant such the implementation agreement for, among other things: approvals, JPPC will be excused from fulfilling its * The revocation, nonrenewal, or adverse modification obligations by force majeure and may ultimately ter- of the specified regulatory approvals. minate the implementation agreement. * The expropriation or nationalization by the govern- * The government of Jamaica promises to grant work ment of Jamaica of shares or assets of JPPC. permits, passes, visas, and so on to persons involved * A force majeure event that persists for more than 12 in the project, but the government of Jamaica may months (or 18 months if prior to commercial opera- deny individual applications in accordance with the tions or if a diesel engine must be replaced). laws of Jamaica. * The winding up of JPS. * The government of Jamaica will not terminate the JPPC is a special-purpose company owned primarily by World Bank or IDB loan agreements and will not subsidiaries of Hydra-Co, UtilCo, the Energy Investors 27 Fund, and CDC. For its part, JPPC undertakes the fol- * The appointment of any principal contractor with- lowing obligations: out the government of Jamaica's consent. * The initial members must contribute 35 percent of * The winding up of JPPC. the total equity in the project at financial closing, In addition to these default events, the government of and the total equity must constitute 30 percent of Jamaica may also terminate the implementation agree- the project cost. ment for the following reasons: * The government of Jamaica has the right to approve * A force majeure event that persists for more than 12 all of the major project agreements and financing doc- months (or 18 months if prior to commercial opera- uments for the project. tions or if a diesel engine must be replaced). * The government of Jamaica has the right to approve * Expiration or termination of the power purchase the appointment of JPPC's principal contractors, agreement (unless caused byJPS's default afterJPS including the construction and O&M contractors. is privatized). * The government of Jamaica has the right to approve * If JPS exercises its option to purchase the complex JPPC 's assignment of any of its rights in the project, afterJPS is privatized, JPS must payJPPC the depre- including the creation of security interests, and the ciated book value of the project (assuming :20-year assignment of any significant upstream owner's rights depreciation), but JPPC must then pay the govern- in the project. But the government of Jamaica has ment of Jamaica a portion of the payment it receives. no right to approve: All disputes arising under the implementation agreement * Distributions of JPPC's net operating income must be resolved pursuant to the Arbitration Act of Jamaica whether through payment of dividends to under Jamaican law. preferred shareholders or loans to sharehold- ers. Power Purchase Agreement: Summary of * Transfers of assets worth less than US$750,000. Terms and Conditions * Transfers of assets that are replaced by equiv- alent assets. T he power purchase agreement was executed as of October * Transfers to project lenders on foreclosure. 10, 1994, by JPS and JPPC. Pursuant to the power pur- * Transfers ordered by a bankruptcy court. chase agreement, JPPC will build, own, and operate the * Transfers to the estate or any beneficiary of a Rockfort project and will sell all of the capacity and energy deceased individual. from the project to JPS. The terms and conditions gov- - Transfers to or from the Energy Investors Fund. erning the sale are as follows: After an appropriate cure period, the government of The term of the power purchase agreement will be 20 Jamaica may terminate the implementation agreement for, years from the date of the completion of the proj ect and among others, the following default events: may be extended for an additional period. * Failure of JPPC to achieve the milestone dates for The capacity of the project will be tested at regular inter- financial closing, commencement of construction, vals, andJPS will payJPPC a fixed amount for the first 60,000 commissioned dates for individual units, or the com- kilowatts of tested capacity and 65 percent of that amount mercial operations date for the project. foreach additionalkilowatt up to 5,000 kilowatts. The energy * Failure of JPPC to post the required security deposits payment will be the product of a fixed amount per Icilowatt or make payments to the government of Jamaica in hours ($0.0230) times the net energy output of the pro- excess of $2,000,000. ject.22 Finally, JPS will pay JPPC a supplemental payment * Abandonment of construction or operation of the consisting of a fee ($2,000) for each unit start and a num- project without JPS's consent. ber of pass-through items. These payments will be subject * Continuous poor performance after completion of to the following indexation principles, among others: the project. * All base capital costs ($85,573,000) will be adjusted * Assignment of the implementation agreement or any for inflation beginning from September 26,1L993, at of the project assets without the government of the rate of 0.35 percent per month until financial Jamaica's consent. closing. 28 * The debt service portion of the capacity payment can resume normal operation. Duringany such period will be adjusted for interest rate variations. JPS must pay JPPC only the debt service and fixed * The fuel portion of the energy payment will be adjusted operation and maintenance components of the capac- by the actual cost of fuel if purchased from Petrojam ity purchase price and must pay for or replace any or by market indices if purchased from others. fuel and lubricating oil used by JPS that JPPC has * The portions of the capacity and energy payments already paid for. that correspond to debt service on foreign currency Liquidated damages will be assessed against JPPC for loans, return on investment of U.S. dollar investors, the following reasons: and foreign currency expenses will be adjusted for * Delays in financial closing. foreign exchange fluctuations. * Delays in completion of the project. * The pass through of lease payments, increased taxes, - Shortfalls in capacity at completion of the project. increased insurance costs, increased compliance costs - Subsequent shortfalls in capacity of the project. due to changes in regulation, and additionalJamaican - Failure to deliver energy in accordance with JPS's dollars required by the broker bank to obtain U. S. despatch instructions (which effectively requiresJPPC dollars. to maintain 88 percent availability of the project). * If JPPC refinances the project on more favorable JPPC must post security deposits to ensure the pay- terms than those in the original loan agreements,JPPC ment of these liquidated damages and other damages, but must payJPS 50 percent of the value of the improved JPPC may use the security deposit posted during the oper- terms through a reduction in the payments to JPPC ations period to serve as a source of United States dollars over the remaining term of the power purchase if JPPC cannot obtain U.S. dollars through a broker bank agreement. for 45 days. * To ensure the timelypayment of amounts due toJPPC, A bonus will effectively be paid to JPPC for additional JPS will establish a revolving letter of credit in an capacity. Although the capacity payment is based on 60 amount sufficient to cover two months' average pro- megawatts, 65 percent of the capacity purchase price will jected capacity and energy payments. be paid for additional megawatts between 60 and 65 • If JPS fails to complete the interconnection facilities megawatts of tested capacity. within 10 days after the scheduled date for any rea- JPPC must maintain a 21-day supply of fuel at the site, son (other than force majeure, an emergency, or except whem the fuel supplier defaults in its fuel supply JPPC's action), JPS must pay to JPPC liquidated obligations. JPPC must also obtain JPS's approval for the damages of $20,000 for each day that commission- primary fuel supply plan and an alternative fuel supply plan, ing of the each unit is delayed, up to a maximum of whichJPPC must implement if the primary fuel supplyplan $3,000,000. If the interconnection facilities are not fails at any time. completed by the time the cumulative amount of JPPC or its construction contractor must obtain speci- liquidated damages equals $2,500,000, JPPC may fied insurance throughout the term and apply the pro- construct alternative facilities. ceeds of such insurance to the repair of the project. * The project will be fully dispatchable byJPS, andJPS JPS has the right to approve the following, among other will only compensate JPPC for efficient operation. things: * JPPC may schedule maintenance outages only with * JPPC's plans for construction, operation and main- the approval of JPS, and JPPC may not schedule tenance, and fuel supply and the agreements relat- maintenance outages during peak months or for more ing thereto. than 10 percent of the available hours without suf- * The appointment of JPPC's principal contractors, fering liquidated damages. including its construction and O&M contractors. * If JPPC ceases to operate the project for at least 48 * The assignment provisions are identical to those in the hours without the consent ofJPS for anyreason (other implementation agreement, exceptJPS may assign the than force majeure, a forced outage, approved main- power purchase agreement to another entity (perhaps tenance, or JPS's actions), JPS may take over oper- through privatization) if that entity can perform JPS' ation of the project until JPPC demonstrates that it obligations under the power purchase agreement. 29 * JPS has a right of first refusal over transfers of inter- ply agreement, Petrojam will supply a high grade of est in the project (other than for financing purposes) No. 6 fuel oil with a 2.2 percent maximurn sulphur and over transfers by upstream owners of interests content, which will allowJPPC to meet low emission in JPPC (other than transfers to or from the energy standards for the project. investors fund). e Fuel will be delivered to the project by barge unless * The force majeure provisions are identical to those delivery by barge is impracticable, in which case in the implementation agreement, except JPS must Petrojam may deliver by tank trucks. continue to pay JPPC the capacity payment for three . The price for fuel supply shall be the ex refinery price months after the occurrence of certain political force or ex industry loading rack price for No. 6 fuel oil based majeure events, including wars, riots, strikes, or on the petroleum pricing formula established by changes in law after November 15, 1993. Petrojam and approvedby the government ofJamaica. The termination provisions for default events are iden- However, the price charged JPPC for fuel may not tical to the implementation agreement, and JPS may also exceed the price of fuel sold contemporaneously to terminate the power purchase agreement for the following JPS by Petrojam, giving due regard to any difference additional reasons: in the grade of fuel supplied. The price for fuel trans- * A force majeure event that persists for more than 12 portation by barge shall be the Jamaican dollar equiv- months (or 18 months if prior to commercial opera- alent of $0.65 per barrel and by tank truck shall be the tions or if a diesel engine must be replaced). Jamaican dollar equivalent of $0.51 per barrel as of * Expiration or termination of the implementation January 1, 1994. The transportation prices shall be agreement. adjusted in accordance with changes in the rate set by Furthermore, JPS will have the option to purchase the the Petroleum Haulage Contractors Association for project at a price equal to its depreciated book value minus tank truck movements within the corporate area from any damages owed to JPS if it terminates the power pur- a January 1, 1994 rate of $0.41 per barrel. chase agreement because of JPPC 's default. The purchase * JPPC will be responsible for all taxes and du'ties asso- price is higher after JPS is privatized, but JPPC must pay ciated with the fuel purchased. over part of the higher price to the government of Jamaica. * JPPC will be required to provide a letter of credit to Disputes arising under the power purchase agreement ensure timely payment for deliveries of fuel oil. are to be resolved pursuant to a three-level procedure con- 0 During shortages Petrojam will be required to allocate sisting of mutual discussion of the parties, referral to an available fuel and transportation services betweenJPS expert, and arbitration pursuant to the Arbitration Act of and JPPC on an equitable basis and on similar terms. Jamaica under Jamaican law. * JPPC will be required to order fuel with seven days' notice, for periods of seven days, and in volumes of Fuel Supply Agreement: Summary of approximately 15,000 barrels. JPPC must use its best Terms and Conditions efforts to ensure that fuel deliveries are distributed substantially evenly over a two-month perio(d. These The fuel supply agreement was executed as of October 10, ordering provisions facilitate economic barge deliv- 1994, by Petrojam and JPPC. Pursuant to the fuel supply ery. agreement, Petrojam will sell to JPPC all fuel oil necessary * If Petrojam fails to supply fuel ordered byJPPC, JPPC for the operation of the Rockfort project. The terms and may enter into spot contracts for the purchase of conditions governing the sale of fuel oil under the fuel fuel from other suppliers. supply agreement are as follows: Liquidated damages will be assessed against JP'PC for * The term of the fuel supply agreement will be 20 years the following reasons: from the date of the completion of the project. * Delays in the completion of the project. * JPPC will be required to purchase all of its fuel for * Modification or cancellation of orders byJP'C with- the project from Petroj am, and Petrojam will be oblig- out sufficient notice. ated to provide all such fuel to JPPC whether or not - JPPC 's purchase of fuel from another supplier when the refinery is operational. Pursuant to the fuel sup- Petrojam is able to supply such fuel. 30 * Each party must indemnify the other for claims tage of favorable provisions of U.S tax law, which enable brought against the other as a result of the indemni- the holders of such bonds to accept a lower rate of inter- fying party's negligence or damage it causes to the est on their investment. Repayment of the debt bonds will environment. be backed up by a letter of credit issued by Deutsche Bank * The force majeure provisions are identical to the IA. AG, New York Branch, which certain other commercial Petrojam may terminate the fuel supply agreement for, banks (collectively, the "debt banks") will help to under- among other things: write. Repayment of the equity bonds will be backed up by * Termination of the IA or PPA due to a default by two letters of credit issued by Banco Santander, New York JPPC Branch (the "equity letter of credit bank"), which in turn * Abandonment of operation of the project without will be backed up by letters of credit and guarantees pro- JPS's consent. vided by the equity investors in the project. * A force majeure event that persists for more than 12 The loan agreement between the NIBJ, acting as the agent months (or 18 months if prior to commercial opera- of the government and administrator of the PSEF ofJamaica, tions or if a diesel engine must be replaced). and JPPC will also be executed at financial closing and will * Assignment of the fuel supply agreement without become effective as of financial closing. Pursuant to the Petrojam's consent. loan agreement, NIBJ will irrevocably commit to lend up to * Assignment of the power purchase agreement,imple- $81,000,000 toJPPC, so that JPPC may refinance the prin- mentation agreement, or any of the project assets cipal amount of the loans made to the project, using pro- without the government of Jamaica's consent. ceeds ofthedebtbondson approximatelythe fifth anniversary * The winding up of JPPC. of financial closing, or such earlier date as the debt bonds JPPC may terminate the fuel supply agreement for, are redeemed. The government of Jamaica will borrow the among other things: $81,000,000 from the World Bank and IDB and make those * The revocation, nonrenewal, or adverse modification funds available to NIBJ as part of the PSEF of Jamaica. of the specified regulatory approvals accompanied by The prir[cipal terms and conditions of the loan agree- termination of the implementation agreement or ment are as follows: power purchase agreement. * The amount of the loan is the lesser of $81,000,000 * The expropriation or nationalization by the govern- and the amount of eligible expenses (as defined below) ment of Jamaica of shares or assets of JPPC accom- incurred by JPPC in connection with the project. panied by termination of the implementation * JPPC will repay the principal amount of the loan to agreement or power purchase agreement. NIBJ inJamaican dollars in 144 equal monthly install- * A force majeure event that persists for more than 12 ments starting after funding occurs, when the gov- months (or 18 months if prior to commercial opera- ernment of Jamaica is required to begin repayments tions or if a diesel engine must be replaced). to the World Bank and IDB under its loan agree- * The winding up of Petrojam. ments with them. The interest rate on the loan will vary from year to Private Sector Energy Fund Loan year alnd will be equal to the average of the yield for Agreement: Summary of Terms the previous year of 30-year United States Treasury and Conditions bonds plus 3 percentage points. * JPPC will provide security (including, without limi- At financial closing the Rockfort Diesel Project will be tatiori, a legal mortgage over JPPC's real property financed initially with the proceeds of certain Series A bonds and floating charges over JPPC's personal property) to be issued by the Caribbean Basin Projects Financing toNIBJtosecureJPPC'sperformanceundertheloan Authority (the "debt bonds"), certain Series B and C bonds agreement. In addition, JPPC will provide substan- to be issued by CARIFA (the "equity bonds"), and approx- tially similar security to the debt banks and CDC to imately $14,000,000 from CDC. The debt and equity bonds, secure JPPC's obligations under its reimbursement the proceeds of which CARIFA will lend to JPPC for use and loan agreement with the debt banks and the in constructing the project, will be issued to take advan- loan from CDC. NIBJ would have the right to exer- 31 cise its rights as to this security only after the debt loans to the government of Jamaica to finance those banks and CDC's loans are paid off. expenses. Accordingly, the parties anticipate that NIBJ's The loan agreement will not become effective (and NIBJ obligation to make disbursements of the loan will become will not become committed to make the loan toJPPC) until irrevocable, for all practical purposes, as constructicn funds the following conditions precedent (the "initial conditions"), are disbursed from the debt bond proceeds account. NIBJ among others, are fulfilled: has the right to disapprove any such disbursement if cer- * NIBJ is satisfied that all necessary project agreements tain conditions are not met. A technical expert hired by and financing documents are in satisfactory form and NIBJ (the "technical agent") will review the relevant doc- are binding upon each party thereto. umentation and assist NIBJ, the World Bank, and IDB in * The World Bank and IDB are similarly satisfied as to overseeing all such disbursements. certain project agreements and financing documents. Actual funding by NIBJ will not occur until the earlier * JPPC has an adequate management and staffing plan of approximately five years after financial closing or the and has appointed certain key officers approved by occurrence of a take-out event. Take-out events include the NIBJ. failure by the JPPC to maintain approximately $3,000,000 * JPPC has received the funds from the issuance of on deposit in the U.S. Debt Service Reserve Accotnt, any the debt and equity bonds and CDC's loan agree- accelerationorredemption of the debt bonds, and the bank- ment has become effective. ruptcy or liquidation of the JPPC. The delay in funding by After the loan agreement becomes effective, NIBJ's oblig- NIBJ is designed to allowJPPC (and thus Jamaican ratepay- ation to make the initial disbursement of the loan will become ers) to benefit from the lower interest rate on the debt bonds irrevocable upon the fulfillment of the following conditions (as compared with the interest rate to be paid to NIBJ by precedent: JPPC) for as long as such bonds are outstanding and the - The conditions precedent to the effectiveness of the position of the debt banks, which are underwriting a letter loan agreement are met, which is anticipated to occur of credit to enable the issuance of the debt bonds at such at financial closing. an interest rate, is secure. * NIBJ receives notification from the World Bank and If the debt bonds are redeemed during construction of IDB that the World Bank and IDB have available the project due to the occurrence of a take-out event, for disbursement the funds necessary for NIBJ to NIBJ and CDC will continue to fund loans to complete make the loan. construction of the project unless certain events occur. Such Tlhe World Bank and IDB each have three conditions events include, among others: precedent to the funding of their loans: * Failure of JPPC to pay interest (other than default * They will advance funds only to reimburse or pay interest) on the CDC loan and fees payable to CDC JPPC for expenses (collectively, "eligible expenses") under the CDC loan agreement, unless JPPC shall that are eligible for reimbursement or payment by the have cured such default within 30 days after its occur - World Bank and IDB (for example, those expenses rence. will have to have been incurred in member countries * The occurrence of a bankruptcy event of def ault by of the World Bank or IDB. JPPC (unless it is caused by CDC). * JPPC must demonstrate that the quality of the goods * In the reasonable judgment of NIBJ, available con- purchased is in conformity with the technical require- struction funds are then less than the aggregate unpaid ments of the project. amount required to complete construction of the pro- * JPPC must provide the World Bank and IDB with ject in accordance with all applicable requirements information about the procurement procedures to be of law and the applicable project agreements. applied and the results of that procurement as NIBJ, As part of the loan agreement, JPPC makes certain rep- the World Bank, and IDB may require. resentations and warranties, as well as affirmative and neg- The World Bank, IDB, NIBJ, and JPPC have agreed to ative covenants, to NIBJ. The major representations, disbursement procedures designed to ensure that proceeds warranties, and covenants, include, among others: of debt bonds are spent only on eligible expenses and that * That JPPC has no other significant indebtedness or the World Bank and IDB will commit in advance to fund investments (other than certain permitted investments 32 of amounts on deposit in the various project accounts The primary obligations of NIBJ under the loan agree- in cash equivalents and similar securities and con- ment include the following: tracts) and will not incur any such indebtedness or * To review and, if appropriate, approve all project, undertake any such investments. financing, and equity documents relating to the pro- * That JPPC shall construct, operate, and maintain ject, and to deliver a certificate at financial closing the project according to the approved project agree- evidencing the satisfaction of the initial conditions. ments. * To review requests for disbursements of debt bond * That JPPC will not dispose of any project assets or proceeds on a monthly basis and work with JPPC, materially amend the project agreements without theWorldBank, IDB, andthetechnical agenttoeval- NIBJ's consent. uate such requests. * That JPPC will fund the U.S. Debt Service Reserve * To use diligent efforts to cause the World Bank and Account at financial closing, and will replenish that IDB to fund loans to the government of Jamaica, and account from revenues to maintain it, in an amount to on-]end such funds when received, on the terms equal to $7,000,000 while the debt bonds are out- and conditions set forth in the loan agreement. standing, which amount represents approximately * To maintain a control account showing the amount one year of debt service on the debt bonds, and there- of the outstanding loan under the loan agreement, after, in an amount sufficient to pay approximately the applicable interest rate, other obligations owed six months of debt service on the CDC loan and the by JPI'C under the loan agreement, and payments loan under the loan agreement. byJPPC on the same. * That JPPC will not distribute any dividends prior to * To review and, if appropriate, approve amendments the completion of the project, if it is in default or if to project, financing, and equity documents relating the debt service coverage ratio falls below 1.3 to 1. to the project and changes in certain key project per- * That the debt service coverage ratio will not fall below sonnel and parties. 1.0 to 1 at any time. * To give notice to JPPC if NIBJ receives any pro- * As is typical in project financings, the loan agreement ceeds of insurance relating to the project and to hold contains nonrecourse provisions. These provisions and dispose of such proceeds in accordance with the effectively mean that NIBJ can look only to the pro- terms of the loan agreement. ject and the money and certain other assets of JPPC * To permit JPPC to withdraw funds from the Debt relatedtotheprojectforrepaymentoftheloan.IfJPPC Service Reserve Account to be used to pay certain has insufficient money or other such assets to repay project costs, and to cause the escrow agent main- the loan, NIBJ would have no right (barring fraud, mis- taining the Account to pay excess amounts on deposits representation, gross negligence, orwillful misconduct) tojamaica Public Service Company andJPPC under to look to any other person for repayment. certain circumstances. 33 Annex 5 Risk Management Arrangements Construction Phase Risk Management Nature of risk Responsible party Risk mitigants Contractor's financial strength JPPC; NIB] Diligence: contractor parent guarantees; letter of credit; standby facilities: NIBJ take-out Technology and efficacy JPPC; NIBJ Diligence: contractor parent guarantees; letter of credit; standby facilities; NIBJ take-out Deicy Natural force majeure Insurers; Insurance; standby facilities; NIBJ take-out JPPC; NIBJ; JPS Political force majeure Insurers; MIGA; Political rsk insurance; MIGA; standby facilities; NIBJ take-out JPPC; NIBJ; JPS JPPC change orders JPPC; NIBJ JPPC liquidated damages; standby facilities; NIBJ take-out J PS variations JPS; JPPC; NIBJ JPS payments; standby facilites; NIBJ take-out Noncompletion of JPS; JPPC; NIBJ JPS liquidated damages; standby facilities; NIB] take-out PPA provides JPPC can interconnection facilities complete facility Contractors fault Contractor Contractor's liquidated damages; letters of credit; parent guarantees. Cost overrun Site conditions JPPC; NIBJ Standby facilities; NIBJ take-out; EPC guaranteed scope Natural force majeure Insurers: JPPC; NIBJ Insurance: standby facilities; NIBJ take-out Political force majeure Insurers: M GA; MIGA political risk insurance; standby facilities; NIBJ take-out JPPC; NIBJ; JPS JPPC change orders JPPC; NIBJ; JPS JPPC liquidated damages; standby facilities; NIB] take-out JPS variations JPS; JPPC; NIBJ JPS payments; standby facilities; NIBJ take-out Contractor's fault Contractor Letters of credit; parent guarantees Funding Interest rate movements JPS Indexation of tariff payments Exchange rate movements )PS Indexation of tariff payments Equity JPPC Sponsor letters of credit or parent guarantee (CDC) Performance Contractor Contractor's retainage; contractor's liquidated damages; letters of credit; parent guarantees 34 Operating Phase Risk Management Nature of risk Responsible party Risk mitigants Performance and operating costs Plant performance Contractor: Operator; Contractor's warranties: operator's liquidated damages; equity; NIB] take-out JPPC: NIB] Operator performance Operator. JPPC: NIB] Operators liquidated damages: equity: NIBJ take-out Increased costs caused by operator Operator; JPPC: NIBJ Operator's flood budget; equity; NIBJ take-out increased costs caused by natural Insurers: JPPC; Insurance; equity; NIBJ take-out: power purchase agreement relief force maieure NIBJ; JPS increased costs caused by political Insurers: MIGA; JPS; MIGA: political risk insurance; indexation of tariff payments; equity; NIBJ take-out; force majeure JPPC: NIB) power purcahse agreement relief; the government of Jamaica guarantee Operating Permits JPPC; NIBJ; Jamaica Equity: NIBJ take-out: implementabon agreement covenants Fuel Unavailability IPPC: NIBJ Change suppliers; equity; NiBJ take-out Pnce increase JPS indexation of tariff payments Petrojam default Petrojam Change suppliers: Petrojam indemnity Natural force majeure Insurers: JPPC Insurance: equity: NIBJ take-out: power purchase agreement relief NIBJ; JPS Political force majeure Insurers: MIGA; JPPC; MIGA: political rsk insurance; equity: NIB] take-out: power purchase agreement relief NIBJ; ]PS Excessive heat rate JPS: JPPC; Operator Indication of tariff payments for deregulation equity; operator's LDs Power purchase Low demand and low dispatch JPS Contnued capacity payments JPS force majeure JPS Continued capacity payments Nonpayment by JPS JPS; Jamaica; JPPC; IPS letter of credit; the government of Jamaica guarantee; reserves; equity; NIBJ NIBJ take-out Abandonment by JPPC IPPC; NIBJ Terminaton of power purchase agreement; NIBJ take-out Finonciol Interest rate movements JPS Integrabon of tariff payments Exchange rate movements JPS Interaction of tariff payments 35 Notes I The capacity that is available from the independent power stipulate credit levels that vary with the price of oil. Below $21 per producers is made up of a 42-megawatt combustion turbine instal- barrel the credit is 20 percent of the cost of the crude oil. The credit lation at Bogue in Montego Bay and 74 megawatts provided level increases with the price of oil up to a maximum of 25 per- from a bage-mounted medium-speed diesel facility at Old Harbour. cent if the price of oil rises above S40 per barrel. The Thirteenth Both of these installations have resulted from agreements signed Accord was renewed in August 1992. Under this Accord Jamaica after the financial close of the Rockfort project. They came online can lift up to 13 MBCD each from Venezuela and Mexico. It stip- in December 1994 and October 1995, respectively ulates that 20-25 percent of the cost of each shipment, on a cargo- 2. Dollars ($) refer to U.S. dollars throughout the review, by-cargo basis, may be converted into a credit bearing 8 percent unless otherwise stated. interest, to be paid in 10 equal semi-annual installments. The five- 3. The Steering Committee comprises representatives from year credit can be converted into a 12-year loan with interest at 6 the following ministries and agencies: Office of the Prime Minister, percent, if the money is used for energy or development projects Ministry of Finance and Planning, Ministry of Public Utilities (subject to approval from Mexico and Venezuela). and Transport, Energy Sector Policy Implementation Unit, the 8. The average discount price, which is a levelized price, includes Attorney General's Department, Planning Institute of Jamaica, debt service, equity returns, and operating costs, and represents JPS, Petroleum Corporation of Jamaica, NIBJ, and the Natural the average of the discounted price of capacity and energy over Resources Conservation Authority the 20-year life of the project. The base energy price will vary each 4. Vindicating its position on this matter, the government year, mainly in accordance with the debt-service profile chosen by had earlier interrupted development of the Energy Sector the developer. The actual capacity and energy prices will vary in Development and Privatization Project to consider an unso- accordance with the indexation provisions of the tariff. licited bid for expanding the system. It received a base bid for a 9. The lower power plant construction costs in the PMPC considerably higher price than was eventually accepted for the are the result of a favorable movement in the basket of European low-speed diesel-based project, even though that offer was for a currencies producing savings thatJPPC was allowed to keep under larger increment of capacity and used a cheaper but, given the the rules of the bid. But during negotiationsJPPC offered to share available fuel, inappropriate technology for baseload duty. some of the savings with the Jamaican government by passing a 5. The RFP, however, did not impose any restrictions on bid- portion through to the tariff. ders offering alternative technologies that need residual fuel as 10. Section936oftheU.S.InternalRevenueCode(26U.S.C. long as they could establish that the equipment met the criterion 936) provides a tax exemption for certain investments; in quali- of having been in commercial operation using residual fuel for fied Caribbean Basin countries. 8,000 hours on the date of the submission of the bid. 11. CDCisanofficialdevelopmentfinancialinstitut:ionofthe 6. This exercise was carried out by the staff of JPS's Planning United Kingdom. Division using the ENPEP Wein Automated System Planning 12. The fact that most of the project's equity is being funded (WASP), which is a widely used dynamic programming optimization with the issuance of bonds should not distract attention from the model. central point that investors do remain liable and are the first line 7. Under the Accord Venezuela and Mexico make a portion of defense against any downside risk associated with the project. of oil payments as a credit to finance the commercial exchange of 13. At financial close the LC Banks were a consortium of AAA goods and services, or short-term and long-term economic devel- and AA rated banks; Deutsche Bank AG, New York Branch, BOT opment projects. The First Accord was signed on August 3, 1980, Financial Corporation, and NationsBank. Subsequently, the com- and it is renewable on an annual basis. The terms now in effect mercialbanks'exposureontheprojectwassyndicated and theresult- 36 ing participations in the letter of credit is now: Deutsche Bank, A.G., 19. These commitments comprise $38,651,629 from the World New York Branch, $20 million (24.1 percent), ABN-AMRO Bank Bank sources and $38,630,626 from the IDB sources. N.V, $21.8 million (26 percent); BOT Financial Corporation, $20 Disbursements will be made when the take-out of the bonds by million (24. 1 percent); NationsBank of Florida, N.A., $15 million the Energy Fund takes place. (18 percent); and Fuji Bank, Los Angeles, $6 million (7.2 percent). 20. The fuiture of CARIFA and its access to concessionary 14. TheindexationprovisionallowsJPPCtopassanyincrease funding is in some doubt, as moves in the U.S. Congress appear in costs associated with, inter alia, movements in the U.S. dollar- to be leading toward the eventual elimination of the tax benefits Jamaican dollar parity to JPS by increasing the sale price of its provided to companies for investments in Puerto Rico. generated power. The government's agreement to permit the price 21. With tlhe exception of the financing cost components, cap- of JPPC's generated energy to change in accordance with chang- ital costs would be excluded from indexation. The costs to be ing market conditions was a crucial factor in reducing overall indexed mainly affect the variable cost component of the tariff project risks, and thus facilitating its financing. and, in the long run, these costs will have the greatest effect in 15. Eligibility in this context refers to eligibility for funding determining how the price of electricity to the consumer will by CARIFA tax-free bonds under CARIFA rules. increase. Thus, for example, projects with relatively low capital 16. Expenditures to be covered by the Series A bonds also costs but relatively higher heat rates could turn out better in a had to include eligible items under the loan agreements with the comparison of average discount prices with those with higher cap- two multilateral banks financing the PSEF that would take out ital costs but lnetter heat rates if the average discount prices are these bonds in five years. computed assuming zero escalation in fuel prices over a 20-year 17. As explained earlier, these expenditures were reviewed period. If, however, the comparison is done assuming an escala- and certified by NIBJ and the multilateral banks during the course tion in fuel prices, the ADP rankings could change because fuel of construction. cost is such a large component of the average discount price. 18. The Fuel Supply Agreement was negotiated separately 22. Energy payments are also adjusted to compensate for between JPPC and Petrojam, the state-owned oil refinery. low load dispatch in accordance with an agreed heat rate curve. 37 OTHER RMC PUBLICATIONS IDA10: The First Two Years - Review of the FY94-95 IDA Program, December 1995. IDA in Action 1993-1996. The Pursuit of Sustained Poverty Reduction (Report - Summary). The Trust Fund Handbook. Co-Financing Opportunities with the World Bank. Mobilizing Resources for Development: A guidefor donors and official institutions on opportunities for financial cooperation with the World Bank Group. Resource Mobilization and Co-Financing: A Guide to Activities. Co-Financing with the World Bank: 25 Years of Cooperation, 1971-1995. To order publications contact: RMC Information Center, phone: 202-473-7594, fax: 202-477-3045 The World Bank Headquarters 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. Telephone: (202) 477-1234 Fax: (202) 477-6391 Telex: MCI 64145 WORLDBANK MCI 248423 WORLDBANK Cable Address: INTBAFRAD WASHINGTONDC European Office 66, avenue d'1ena 75116 Paris, France Telephone: (1) 40.69.30.00 Facsimile: (1) 40.69.30.66 Telex: 640651 Tokyo Office 10th Floor Fukoku Seimei Bldg. 2-2-2 Uchisaiwai-cho Chiyoda-ku, Tokyo 100-0011, Japan Telephone: 813-3597-6650 Facsimile: 813-3597-6695