Infrastructure: Negotiating position crucial in structuring deals, say experts

infrastructure summit sri lanka

Nov 09, 2015 (LBO) – Sri Lanka’s government must pay attention to increasing its negotiating strength when seeking commercial borrowing and entering into partnerships with the private sector, financing experts said.

This process involves announcing long-term plans, with properly structured projects in the pipeline, and building institutional capacity to structure deals, they said.

“As a country we need to take the upper hand,” Kumudu Gunasekera, an economist and director of consulting firm Stax, said.

Gunasekera was speaking at the LBR LBO Infrastructure Summit: Making Colombo a Globally Competitive City.

He gave the example of the 5.2 billion dollar Panama Canal expansion to build a third set of locks for raising and lowering ships. Gunasekera was a member of the financing team.

The project was announced several years in advance, and after feasibility studies, it was put to a referendum in Panama in 2006. They created “a lot of buzz around this” and went to private banks and secured good terms for 2.3 billion dollars in borrowings, firstly in principle.

“Then the interest rose and we managed to negotiate very good terms from development agency banks,” he said.

“The takeaway from this is the negotiating power that they established early on. They were able to take the upper hand negotiating contracts and negotiating financing terms.”

The deal included the absense of state guarantees and loans not being tied to contractors. Creditors were not allowed to intervene in canal operations, and they obtained a 20-year loan with a 10-year grace period.

Gunasekera likened private sector banks to ‘sharks’ which is why a strong negotiating position is necessary.

“We are coming from an era of no-bid contracts, or one-bid contracts,” he said. This is why a slower approach and getting the institutional capacity in place would be prudent.

Thilan Wijesinghe, a former chairman of Board of Investment from 1995-2001, said at the summit that he used two million dollar technical assistance from USAID to set up the Board of Infrastructure Investment (BII).

Professionals with financial structuring skills and legal skills, some of them from overseas, were brought in by paying market rates, he said.

“We had the funding, and we brought in the people that the government didn’t have. It is sad to say the BII is defunct,” Wijesinghe said.

The BOI may not have institutional capacity now to structure a PPP project, he added.

Last month the Central Bank raised 1.5 billion dollars at 6.85 percent through a sovereign bond with Citigroup, Deutsche Bank, HSBC and Standard Chartered Bank acting as joint lead managers.

The issue raised 3.3 billion dollars in bids, and some analysts argue that this is an indication Sri Lanka could have negotiated a lower rate if it had a better negotiating position.

Prime Minister Ranil Wickremesinghe said last week a State Holding Corporation, along the lines of Temasek of Singapore, will be set up to manage state enterprises. A Public Wealth Trust would be created through which shares in these enterprises will be passed on to the public.

Outling an economic policy statement of the new government, Wickremesinghe said shares of state ventures such as hotels and Lanka Hospitals will be sold, and a Special Purpose Vehicle will be created for the purposes of infrastructural development initiatives.