ANZ Pacific Infrastructure Forum October 2010

1. IFC Advisory Services in Public Private Partnerships ANZ Pacific Infrastructure Forum October 2010

2. IFC Advisory Services in PPPs • Lead advisor mostly to governments • Transparent international competitive bidding • Marketing of business opportunities to selected investors • Preparation of institutional reforms • Search for financing in coordination with rest of WBG, as needed • Undertake difficult projects; advise governments objectively • Fee based services • Modest retainer paid by Clients (according to milestones) • PRIF has provided the funding for IFC PPP transaction advisory services in the Pacific, reducing the Governments’ contribution significantly • Largest portion of remuneration to be paid as success fee at closing of transactions (by the winning bidder) • Grant funding for specialistexternal consultants (e.g. lawyers)

3. Financial Closure IFC Approach Phase 2: Implementation Phase 1: Analysis Assess PPP Options Define Transaction Structure GoV Go- Ahead Market To Investors Prepare PPP/Project Contracts Conduct Bid • Legal / Inst. Framework • Payment mechanism • Risk allocation • Investment Program • Info memo • Road show • Pre -Qualification • Data room • Technical evaluation • Financial evaluation • Select winner • Contract effectiveness • Assumption of service obligations • Service standards • Performance targets • Payment procedures • Penalties • Monitoring

4. STRATEGY Transaction Structure Transaction Process ...to marry interests ….outcomes Public Sector Goals Government's • Public service, particularly to the poor • Transfer of operational risks/ investment responsibilities • Alleviation of financial burden • Other stakeholders’ concerns Objectives Investor Goals Business Opportunity • Project returns • Legal framework Business • Country risk mitigation • Institutional framework • Long-term commitment • Technical diagnosis • Limited financial obligations • Market analysis • Upside potential • Regulatory framework • Investment needs Funding Sources • Consumers (Tariffs) • Treasury (Availability Pmts) • Treasury (Subsidies) • Commercial Lending • Equity • IFIs/DFIs

5. Samoa Case Study: Polynesian Blue Background IFC Mandate • Isolated in the Pacific, Samoa is dependent on tourism for economic development and jobs • To support tourism expansion, the GoS recognised the need to operate Polynesian Airlines as a commercially sustainable business in order to provide safe, efficient, and affordable international air transport to Samoa. • Major issue with Polynesian Airline • Inappropriate route and fleet structure • Over-staffing • Profitable regional and domestic (turbo-prop) operations but loss-making international (jet) operations • Expensive aircraft leases • Small remote islands dependent on air access, with small demand (huge peaks) and diseconomies of scale • GoS appointed IFC as lead transaction advisor to a PPP with international aviation investor • IFC mobilised a large team comprising a) a core advisory team of IFC staff; and b) external technical and legal consultants • Fees paid for IFC staff & travel costs was a combination of NPC fees plus success fee paid by winning bidders • Consultants fees paid by IFC Trust Fund, of which DevCo – DfID, UK is major partner • IFC assisted in marketing the opportunity to potential investors, structuring the joint-venture agreement, evaluating business plans, negotiating contracts, and achieving financial closure

6. Samoa Case Study: Polynesian Blue (cntd) Results/Lessons Scope of Work • Design an innovative PPP partnership model which takes advantage of the international partner’s cost structure, leverage marketing and distribution strengths to maximize profitability • The international investor manages and operates the new airline, providing the fleet capacity as well as commercial and managerial oversight • GoSprovides aspects such as traffic rights, operational support, flight operations personnel • Assist in the managing the Bid process • Competitive process involved the 3 main regional players (Air New Zealand, Qantas and Virgin Blue) • Winning bidder selected on best business plan that (a) requires least GOS subsidy, (b) guarantees access to Samoa and (c) would contribute positively to tourism development • Winning bidder selected on best lowest proposed subsidy • Fiscal impact • Subsidy in 2004 WST 19.5million (US$7.5million) 70% of Samoa’s budget deficit • Profit in 2007 WST 16.6million, WST3million dividend paid to Government • Economic growth • Tourist numbers have increased by 15% annually (historic trend 4%) • Tourism earnings 2005: WST 208million • Tourism earnings 2007: WST 283million • Multiplier effect large • Estimate that for every $10,000 of tourist, 1 job is created • Implies 2,000 new jobs (population of Samoa 180,000)

7. Vanuatu Case Study: Air Vanuatu Results/Lessons Transaction Phases • Mandate signed in August 2007 • Phase I (Strategic Options Report) presented in December 2007 • First Bid in 2008 not successful • Second Phase I ( an Independent review of Air Vanuatu's financial performance due to huge financial losses of the airline) • Second round of marketing efforts for equity partnership with the airline from June-August 2009 • The most promising candidate dropped out in September 2009 • Ended mandate formally in 2010 • Bid failed due to timing and unfavourable market -industry meltdown in 2008 as a result of high oil prices; and • Regional airlines changed strategic priorities However, • GoV, relied on technical and legal advice to reject several proposals which were not in line with GoV’sobjectives • GoV awareness and knowledge of the challenges facing the airline and the sector has significantly increased over recent years • The Bid process facilitated greater competition in the marketplace-Virgin Blue began flying between Sydney and Port Vila, reducing fares and boosting tourist arrivals

8. Competition from Pacific Blue benefits Vanuatu Tourism

9. Thank you!