Based on the Merida III Case study, please answer the following questions: 1. Is this a PPP structure? If so, what kind of PPP structure was this? Give a reason for your answer. (5) 2. What are IFC A and B Loans? (5) 3. What role did the IFC play as a stakeholder in this project? (4)

5 4. Using a well labelled diagram, identify the main parties in the project and the contracts that bind them. (23) Note the statement below for questions 5, 6 and 7. "If the Borrower runs into financial difficulties, or if there are political and regulatory problems, the IFC is in an advantageous position to enlist the help of other multilateral agencies, such as the World Bank or the IMF, to pursue possible solutions." 5. In this statement, what are the 3 kinds of risks that are being alluded to? (6) 6. Other than the IFC using its advantageous position with the mentioned multilateral institutions, how else could each of these risks be mitigated? (3) 7. What role was played by Sanwa Bank? (4)

\f\f\f\fOne of the scenarios that the IFC considered in its due diligence and credit analysis was the privatisation of the CFE. This seemed a remote possibility in 1997, but as of 1999 the pri- vatisation of the CFE, the establishment of a deregulated electricity market and the introduc- tion of merchant power plants appeared to be strong possibilities within the next five years. In February 1999 President Emesto Zedillo introduced legislation into the Mexican Congress that would provide for an extensive restructuring of the Mexican power industry, making it more attractive Lo private invesiment. The bill would have allowed IPPs to sell power direct- ly to consumers and, in the future, energy marketers: split the CFE into generation. transmis- sion and distribution assets, to be sold off to private companies: creale a new state-owned company to oversee the electricity transmission grid; and establish a wholesale spot electric- ity markel. The objective of these reforms would have been not just to allow private partici- pation in the electricity sector. but also to attract foreign investment o build the capacity necessary to satisfy Mexico's growing electricity needs. The legislation was not passed. how- ever, and Zedillo's government later decided to pass the power industry restructuring issue on to the government of Zedillo's successor. Vicente Fox. Credit analysis The credit risk of the CFE was considered to be almost the same as that of the sovereign. The government has provided financing to the CFE from time to time when it has run into finan- cial difficulties. The commercial banks participating in the loan were concerned with the soundness of project fundamentals, such as power demand, and the relationships between the project. Pemex and the CFE. They were also concerned about the experience and reputation of the developer. and whether the pricing on the deal was sufficient to compensate for the risk. AES's strong international reputation, and the structure of the IFC's A and B loans, were both strong selling points for the commercial banks that participated in the loan. The IFC is the lender of record for both the A and the B loans, even though commercial banks are the actual lenders for the B loan. Principal and interest payments for both loans are sent to the IFC through a trustee. Although the borrower is naturally aware of the commer- cial banks' participation, it makes no payments directly to them. The commercial banks are nolt protected by any guarantees, but, in their perception, lending alongside the IFC mitigates their risk. If a US$10 million loan repayment is expected. but the borrower pays only US$5 million, the IFC splits the payment pre rata among itsell and the commercial banks. If the borrower runs into financial difficulties, or if there are political or regulatory problems, the IFC is in an advantageous position to enlist the help of other multilateral agencies. such as the World Bank or the IMF, to pursue possible solutions. Lessons learned The IFC played a pivotal role, ensuring that sound project contracts were executed so as to facilitate the future financing of independent power projects in Mexico