Question 1: Why does InterGen appear to have only a handful of competitors and why is it so

difficult to attract investment into infrastructure industries? This relates to what is known as
the "holdup problem," which I explain below.

“Obsolescing bargain," or "time inconsistency" problem, though entices the investment firms at
the beginning when both the investment and the payback are in the future, but it gives the
vantage point to the “Host government” to restructure the terms after the investment have
been made, this is one of the reason InterGen had fewer competitors in the energy production
industry.

Also, the economic and political condition of the Philippine made it undesirable for many
competing energy firms to invest in the country before 1992. In addition the revolt led by Fidel
Ramos and the six coup attempts by then president Corazon Aquino slowed economic progress
and scared off the potential foreign investors.

Question 2: How does InterGen create and add value in the power generation industry?
Analyze the logic of independent power projects (IPP) investments:

a. Where does the value come from?

b. What are the issues related to risk?
c. Why is the Philippines unable to do the project on its own?

Electricity crisis (demand for IPP was strong) between 1991 and 1993. Philippine’s energy
bodies PNOC and NPC were slow to electrification of the country to meet rising electricity
demand, and their monopolistic approach with development and exploration. However,
reforms implemented by then Philippine presidents Aquino and Fidel Ramos that shortly took
over from Aquino streamlined, and allowed foreign investors and firms participation in the
exploration and development of electricity that increased IPP’s in the country.

Based on the Daul financial analysis, InterGen’s management believed that the Quezon project
was financially attractive with good financial return – 12% discount and 20% equity discount
rates, project IRR NPV of 58.4 Million(IRR of 13%), and equity NPV of 22.5 Million (23% IRR).
There were political risk mitigation advantages – the project was backed by Eximbank for
expropriation, political violence, and currency inconvertibility. In addition to Meralco payment
obligations being absolute and unconditional, as well as foreign currency debt rating had been
upgraded. And InterGen stood to make 20% in returns on its invested equity, plus additional
fees for its management services, and lucrative compensation for its bondholders.

Several issues that prevented the Philippine government from completing the project on its
own were attributed to several coups and political instability, lack of sustainable economic
reforms, and corruption.

Question 3: Given what was known in late-1994, would you have recommended that InterGen
invest in the Quezon project? What would have been your main concerns?
Due to the great demand for IPP, I certainly recommend it. InterGen was a company that was
specialized in operating in countries such as the Philippines. Additionally, adequate funding of
the project – (PIL) offering InterGen unsolicited to purchase 50% InterGen’s stake – a total
equity of $85 Million in addition to a locking in of $30 Million profit on equity stake sold.

InterGen’s projection of over 20% return on its investment in the project, makes it one of the
beneficial projects in an IPP.

Question 4: Given the situation in late-1997, what should Greg Daul recommend to Carlos Riva
at the upcoming board meeting?

Given the low cost projects and the Asian financial crisis, Dual should recommend to Riva to
accept PIL’s offer to purchase InterGen’s remaining 22.9% of project equity for $85 Million
despite Daul’s future forecast of the project imputed equity value at nearly $180 Million, which
was very attractive. But developing issues with environmental, financial, and political factors
seemed to have a profound impact on the anticipated valuation of the project, hence it made
sense to sell to PIL rather than taking the chance to risk losing return on investment and equity.