Rethinking Infrastructure Project Finance Andrew Chen.pptVIP

Rethinking Infrastructure Project Finance Andrew Chen;Motivation;Huge Volume;Poor Performance; ? Esty (2004a) states that “Project finance, as it turns out, just happens to be a particularly interesting and effective setting in which to illustrate the simple yet critical idea that ‘structure matters’.” He further states “… the growing use of project finance challenges the Modigliani and Miller’s (1958) ‘irrelevance’ proposition, …” ? I’ll argue that the current practice in forming project companies under BOT or PPP approaches creates severe agency problems that cause failures of large-scale investment projects. ? I’ll further argue that under the proposed approach, the MM propositions will apply to large-scale infrastructure project finance. ;Shortcomings of Existing Approaches;B. The BOT and PPP Approaches ? The BOT (Build-Operate-Transfer) approach and the PPP (Public-Private-Partnership) approach. The basic structure is that the project companies constructs and operates the project for 25 to 35 years before it is transferred back to the government. ? In the PPP model, the government buys services from the project companies.; b) The World Bank’s mid-1999 report – Indonesia and Philippines incurred respectively $10 billion and $5 billion in bad debt. ? Inefficient “contract finance” – The $3.6 billion financing for the BTC pipeline project signed in February 2004 – took more than ten years to negotiate and required 208 finance documents and 17,000 signatures from 78 parties. 2. Imperfect project contracts: a) The Hong Kong based Hopewell Holdings’ $4 billion BOT road and rail project in Thailand b) Enron Corporation’s $2.9 billion PPP power plan project in India c) The Supreme Court of Philippines nullified the Terminal-3 BOT project ; 3. Lack of Diversification and Liquidity: ? Project companies under BOT and PPP have concentrated equity-ownership and small number of lending banks. Thus, the benefits of risk-sharing and diversification can