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<title>November 2001: 911 - P3 - Power</title>
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<p align="left"><font face="Arial"><strong><small>About The Author:<br>
<br>
</small></strong><span lang="X-NONE" style="color: black"><font size="2">
ROGER FELDMAN, Co-Chair of Andrews Kurth LLP Climate Change and Carbon
Markets Group has practiced law related to the finance of environmental and
energy projects and companies for 40 years. In particular, he has analyzed
and executed a wide variety and substantial value of project financings. He
chairs the American Bar Association’s Committee on Carbon Trading and
Finance, serves on the Board of the American Council for Renewable Energy,
and has been a senior official in the Federal Energy Administration. He is
a graduate of Brown University, Yale Law School and Harvard Business School.</font></span></font></p>
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<img src="../images/feldman.gif" alt="Washington Viewpoint by Roger Feldman" border="0" width="375" height="75"><p><b><u><br>
November 2001</u><br>
</b></p>
<p><font size="6">911 - P3 - Power</font></p>
<p><strong>by Roger Feldman -- Bingham, Dana L.L.P.<br>
</strong><font face="Arial" size="2">(<em>originally published by PMA OnLine Magazine:
200</em>1/01/19)<br>
</font><span style="font-size: 10.0pt; font-family: Palatino; color: black">
</span></p>
<p class="MsoNormal"><span style="font-family: Palatino">Global energy
policy is so much at the fulcrum of our post-911 world that the ongoing
machinations associated with the remodeling of regulation of the domestic
power industry blurs into the background – high dollar and societal issue
that it is. Thrust more into the foreground are two ideas much associated
with the international power business in the recent past, which have taken
on new casts today: “risk management” and “publicprivate partnerships”
(“P3”). The U.S.’s ability to keep the world’s course on a growth rather
than a confrontation- oriented keel will depend on its facilitating
innovative approaches to risk management in the structured finance of
overseas power and other infrastructure. Just as the U.S. faces a massive
domestic conventional insurance shortfall post-911, so too does it face a
need to assure continued credit enhancement of global development investment
as well. P3 thinking will be critical in this regard.</span></p>
<p class="MsoNormal"><span style="font-family: Palatino">As a nation, we
have not been keen in recent decades on governmental solutions to problems,
particularly overseas. Notwithstanding that fact, U.S. governmental
bilateral agencies (sometimes in conjunction with multinational bodies or
other foreign bilaterals) have been a primary force in facilitating
privatization and host country P3s in power and infrastructure throughout
the world. (None dare call it “nation building.”) While the U.S.
Export-Import Bank (Ex-Im) and Overseas Private Investment Corporations (“OPIC”)
each has a statutory mandate to be sources of “last resort” capital and risk
management support to private overseas trade and investment initiatives,
their respective roles in power and other project development risk
mitigation have relentlessly moved them each forward into the front lines of
actually getting a large number of deals done.</span></p>
<p class="MsoNormal"><span style="font-family: Palatino">That is true
because however well projects are transparently procured, contracted for and
managed consistent with the design-build-operate model, and financed on
rational and firm concession bases, the reality is not obviated that the
infrastructure project marketplace is seen by those investing in it as a
series of risks for which potential reward may be insufficient, in the
absence of internal transaction arrangements or external third-party
mitigation devices that satisfactorily limit the probability of those risks.</span></p>
<p class="MsoNormal"><span style="font-family: Palatino">Historically, the
first-line approach applied by international agencies to cope with project
risks that private parties refused to absorb has been to advance or loan
funds directly or in concessionary terms, or provide support of project host
country loans with guarantees strong enough to, in effect, bolster host
credit with their own.</span></p>
<p class="MsoNormal"><span style="font-family: Palatino">This effective
bundling and transfer of risks to international credit sources has on
occasion distorted behavior on the part of private project sponsors or host
governments in projects. It has proved to be sub-optimal, particularly where
the local political environment and model of economic operations of the host
remained unreceptive or risky to projects, and the ensuing economic results
from them were not sustained at the robust levels at which they were
projected. Boom and bust interest in emerging markets, continuing defaults
and restructurings, and bailouts of untenable original risk calculations
have been the outcome on several occasions. This has slowed the flow of
capital to emerging markets. Particularly, at a time when capital markets
pride themselves on sophisticated, probability- based “scientific” modeling
of all contingencies – and have factored multilateral and host government
undertakings into them – the results have been viewed as disappointing and
ultimately not acceptable. It has led to global redlining and, in some
measure, is a consequential damage to the overall national security
situation we face today.</span></p>
<p class="MsoNormal"><span style="font-family: Palatino">Particularly in the
past few years, there has been a new focus on ways in which risk mitigation
assistance can be undertaken through alternative financial engineering and
risk transfer methods, analogous to those now being used in the private
sector. This has been not only because of the absolute constraints on
international agency resources for development but also because of
recognition of the need to stimulate improvement of host country managerial
policies toward internationally facilitated P3 projects. This new focus
derives both from increased sophistication in project and structured finance
lending and, institutionally from the private sector convergence of
insurance, reinsurance, bank and financial intermediary/ investment
activities into multi-service institutions which can offer money, credit
enhancement, risk contingency backstops, liquidity, or derivative returns
correlated to other events embedded in financings.</span></p>
<p class="MsoNormal"><span style="font-family: Palatino">Better
disaggregation of project risks and their sophisticated parceling out are
the watchwords of the present structured finance world.</span></p>
<p class="MsoNormal"><span style="font-family: Palatino">International
agency collaboration to coordinate and cooperate with this effort has become
a source of important recent P3 innovation.</span></p>
<p class="MsoNormal"><span style="font-family: Palatino">Essentially all
U.S. bilateral and even global multilateral support of
Design-Build-Operate-Transfer projects of the past decade (comprised of
private sponsors, host government public financial commitments, and some
external assumption of certain risks caused by host public policy) are P3
arrangements. In essence, all of these international institutions are now
seeking to sponsor and support use of much more sophisticated risk
allocation devices, both by the private sector and by project host
governments, to produce more efficient financing and more effective project
development.</span></p>
<p class="MsoNormal"><span style="font-family: Palatino">Specific examples
in this regard are coming more to the fore since 911 as a result of
geopolitical pressures and the emerging global shortfall in available
private insurance.</span></p>
<p class="MsoNormal"><span style="font-family: Palatino">Two initiatives
initially undertaken prior to 911 are suggestive of directions in which U.S.
(and foreign) bilaterals may go farther in the future, perhaps in
conjunction with multilaterals. Each of these initiatives is essentially
innovative risk sharing through the use of P3.</span></p>
<p class="MsoNormal"><span style="font-family: Palatino">Ex-Im has procured
and is now negotiating a cost efficient structure whereby private risk
capital will participate in a share of Ex-Im’s exposure fees on a predefined
portfolio of future medium- and long-term Ex- Im insured and guaranteed
loans.</span></p>
<p class="MsoNormal"><span style="font-family: Palatino">Under the proposal
currently being negotiated with a private financial institution with respect
to the securitization of a future Ex-Im transactions portfolio having
certain defined credit characteristics, while Ex- Im would take first loss
position, the private institution would take second loss position (and then
deal with its resulting risk exposure in the private capital markets by
using some combination of reinsurance or other credit derivatives). Ex-Im
would assume the final third loss tranche. The resulting securitized loan
portfolio would be sold in the private capital markets. Loans ineligible for
these arrangements because they did not meet portfolio criteria simply would
be held by Ex-Im as in the past. The benefit of this type of arrangement
would be an expansion of Ex-Im credit risk capacity – a development that, in
turn, increasingly has meant enlarged support for US overseas project
development in complex structured transactions. In addition, the involvement
of the private sector institutions in Ex-Im Bank credit operations for
purpose of securitized portfolio development should serve to enhance Ex-Im’s
other operations as well.</span></p>
<p class="MsoNormal"><span style="font-family: Palatino">OPIC has also been
engaging in several creative initiatives for overseas projects also. One
approach has involved provision of currency convertibility insurance, which
addresses a critical problem not previously the target of its political risk
coverage focus. Another initiative has involved, in effect, the private
leveraging of its limited per project statutory authority to credit enhance
or directly support individual projects through collaboration with
multilaterals, and allocation of its limited per project credit authority
between the support of private lenders to a project and to the investment by
private project sponsors in it. The result is the facilitation of higher
total private investment in its project, because risk has been more broadly
and suitably allocated among participating and supporting parties.</span></p>
<p class="MsoNormal"><span style="font-family: Palatino">Again, risk
management in P3 settings is enlarging the otherwise available pool of
global capital.</span></p>
<p class="MsoNormal"><span style="font-family: Palatino">Two of the
important ancillary consequences of 911 have been to highlight the fragility
of the sophisticated global insurance and credit structure and the
limitations of the U.S. ability to project the social and economic benefits
of the American System (itself a mixture of private and public rights and
responsibilities) around the world. The more sophisticated U.S. private
infrastructure structured finance mechanisms become, the more threatening
these problems become to the future of global power and other infrastructure
development.</span></p>
<p class="MsoNormal"><span style="font-family: Palatino">The looming
domestic shortage of domestic risk sharing capital only serves to exacerbate
what would be a problem in any case. One important collateral result of 911
therefore should be reemphasis on how U.S. bilateral agencies, themselves
publicprivate partnerships, can be fostering P3 arrangements in the diverse
societies outside our borders in need of power and other infrastructure
development enhancements – and producing results. The message, then,
internationally as well as domestically: 911-P3-Power.</span></p>
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text-align:left"><font face="Arial" size="2">
<span lang="X-NONE" style="color: black">ROGER FELDMAN, Co-Chair of Andrews
Kurth LLP Climate Change and Carbon Markets Group has practiced law related
to the finance of environmental and energy projects and companies for 40
years. In particular, he has analyzed and executed a wide variety and
substantial value of project financings. He chairs the American Bar
Association’s Committee on Carbon Trading and Finance, serves on the Board
of the American Council for Renewable Energy, and has been a senior official
in the Federal Energy Administration. He is a graduate of Brown University,
Yale Law School and Harvard Business School.</span></font></p>
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