Eduardo V. Francisco, President, BDO Capital, Philippines
Eduardo Francisco, President of BDO capital recognizes that power is relatively expensive but says that he would rather have expensive power than not have power at all commenting that, « it is unfair to say that our power prices are not competitive or very expensive. We are not subsidised ; it is as simple as that. »
Despite the buzz, clean tech funds worldwide have not yet yielded the expected results, and some say that the global dash for gas will affect Renewable Energy investment. As the head of BDO capital, what is your perspective?
I believe that the impact in the Philippines should not be significant. Foreign investors continue to look at the renewable space in our country and have committed capital for it. We have been working with several foreign investors, both corporate and financial institutions, on energy projects here.
There is of course significant need for renewable energy: the Philippines is tweaking the feed-in tariff (FIT) awarding process and some other small issues. In any case, in the medium term, as the percentage of the renewable energy is quite small (five percent), there will always be enough demand. That is one of the luxuries that we enjoy in the Philippines: there will always be enough demand as the big local conglomerates are so flush with capital that they can finance projects by themselves. But of course, foreign investors have a lot of interest here, especially clean tech and renewable energy funds.
In fact, although it does not involve power, when local conglomerates are bidding for these projects, they are able to bid more aggressively and justify lower returns because they are comfortable with the country risk where they don’t have to put a premium. In those cases, everyone ends up winning and projects get awarded and built.
Nevertheless, the game will not change so much: projects will continue to be developed here because of the existingt capital. On top of that, there is local interest from the equity side. Except from the coming LNG projects, and speaking from the financing side and having considered all the requirements, I believe there will be enough local equity to finance all the projects, both in coal and renewable energy.
Considering that there is so much liquidity in the system today, which kind of renewable energy projects would BDO capital like to finance? Where do you see the biggest opportunities?
In terms of renewable energy, the total financing amount can easily be funded solely by the local banks. It is really the allocation of FIT that complicates the funding structure as it only gets awarded when the project is complete. Some sponsors have done it on a corporate finance basis where we lend based on the sponsor’s balance sheet.
To do it on a project finance basis becomes complicated, as lenders have no assurance yet on the revenues. There have to be credit enhancements or some guarantees if sponsors want us to finance their projects even without a FIT.
The key issue is not really us; rather, the issue has really been because of the change in the DOE rules about when FIT is awarded. It is the classic case of what comes first—the chicken or the egg. They want us to finance the project and then they will decide, only after, if they are giving the FIT. We continue to find ways to meet the sponsors and regulator’s needs.
There is a gap in terms of short-term loans versus understanding that renewable energy requires long-term investment. What do you have to say to those that complain about the short loan conditions offered?
Local banks are now able to provide long-term financing. The decision is not whether to give short or term finance. Our clients need term financing as these are major capital expenditures and need time to repay the debt. But what is really happening in the renewable energy space is that the companies who don’t have the sponsors with deep pockets are the ones having difficulties in getting their finance. It is difficult to give companies financing if we’re not sure that they will be awarded a FIT. Here is where we have to do structure deals: we have to have some credit enhancement in place. In other words, if you are a sponsor and you want the money today without the FIT, you have to mitigate the risk of not getting FIT and having the cashflows to repay the project debt.
Collaborating with local partners is one of the most important factors for successful operations in Asia and is the area where many foreign investors fail. Why is BDO capital the best choice in order to finance energy projects in the Philippines?
We are very fortunate to be in the space that we are today. Being focused in the Philippines, our added value is that we know all the energy players. We have lent to almost all the energy companies to date. We have close ties with the generation, transmission and distribution players. Also, our portfolio has become even more extensive. BDO has been involved in the majority of the large power projects in the country in the last decade.
BDO keeps its ears close to the ground on what is happening in the power industry. We also know what is happening in the provinces. We have branches all over the country, which give us as much exposure as possible, and helps us validate demand and supply. We deal with the electric cooperatives, utilities and large customers and the DOE. Our customers are the consumers that eventually use and pay for the electricity. We definitely have a detailed idea of where the growth is. In that sense, at least when we look at the numbers or when we look at structures where there are off-take contracts in cities or municipalities, we are able to validate if the power plant makes sense. In fact, we invest money to put up new branches nationwide. We are taking a bet on the cities and growth there. That is why we are so much involved. We are here for good and that is why when we make a commitment we are there.
Related to your comment about “when we commit we are there”, which are the next steps planned for BDO capital? Where would you like to see BDO Capital in the coming years?
Let me give credit to the government on the power side: we got it right when we de-regulated or privatized. There are no Private Public Partnerships (PPPs) for power anymore because everything was built well. Today, our Asian neighbours are copying our system because they see that things are really getting done. The government has done a lot.
Now the challenge is to anticipate where we are heading. The country’s growth has been faster that we even expected. It is a nice problem to have. Despite all these power plants that have been built, we do realize that we still need more. The challenge for us is to know how to be able to give support to all the new players that will come in and how to work with them. We do not want brownouts in the next few years. We are ready to support the sponsors. The money is there. We are just waiting for the right projects.
The Philippines needs to attract PHP 3 trillion of investments in power projects. What would you like BDO Capital’s role to be during these defining years? What will your priorities be?
BDO Capital will always be there! For instance, there are a couple of big billion-peso projects we have been working on with local and foreign sponsors. In any case, we know that power has a long gestation. Whether the developer comes from the US, Europe or Asia; they come and see us, which is fantastic. These sponsors can bring their board members also to us to confirm and see with their own eyes that the liquidity exists and we are here to help.
In terms of priorities, renewable energy is sexy but frankly speaking, the majority of our energy exposure book will still be going to coal. That is our bread and butter. That is effectively the cheapest in terms of dollars per megawatt. That is the one where we can mitigate a lot of the risk, except for the environment, although now we are promoting clean coal. Coal companies are willing to spend more and use new technology. We are definitely comfortable with that and on top of that their financing is there. If it can be done and if the local communities accept it, we want and are ready to bring the Philippines to the next stage. With that, at least our growth will not be impeded by the lack of power. I recognize that power is relatively expensive but I would rather have expensive power than not have power at all. It is unfair to say that our power prices are not competitive or are very expensive. We are not subsidised; it is as simple as that.
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