Project Finance June 1998 andProject Finance Guaranteesand Guarantees Department Resource Mobilization and Cofinancing Vice Presidency

Public Disclosure Authorized The Sea Launch Guarantees Russian Federation/Ukraine

• The Sea Launch project is an international venture PO Yuzhmash (Ukraine) (10%) for launching commercial satellites into earth orbit • KB Yuzhnoye (Ukraine) (5%) whose principal sponsor is The Boeing Company of Seattle, Washington. The venture will use rocket KB Yuzhnoye/PO Yuzhmash will produce the two- components manufactured in Ukraine and Russia, stage Zenit launch vehicle in Dnepropetrovsk, which will be transported to Long Beach, Califor- Ukraine, and will provide operations support to Zenit nia, where they will be united with commercial pay- processing and launch operations. RSC Energia will loads and loaded onto a Launch Platform. An manufacture the Block DM-SL upper stage in Mos- Assembly & Command Ship will escort the Launch cow and play a key role in Sea Launch vehicle inte- Public Disclosure Authorized Platform to a remote launch site in international wa- World Bank gration, launch operations, and range services. ters near the equator in the Pacific Ocean and will Boeing Commercial Space Company acts as inte- Guarantees control the launch from a safe distance. It will then grator of the project and will produce the payload fair- help convert escort the Launch Platform back to Long Beach to ing and interface hardware, develop the Home Port repeat the cycle. the aerospace facility, and provide spacecraft integration and overall In response to requests from the Government of mission operations. Kværner Maritime a.s is re- industry in the Russian Federation and the Government of sponsible for the design and construction of the Russia and Ukraine to provide partial risk guarantees to help Assembly & Command Ship in the United Kingdom mobilize commercial bank financing for the Sea and the modifications to the Launch Platform in Ukraine to Launch project, the World Bank executed two es- Norway; in addition, Kværner will integrate the ma- commercial use sentially identical but legally separate Guarantees rine elements of Sea Launch and perform marine on December 30, 1997. These two instruments operations. guarantee the project lenders against debt service Public Disclosure Authorized default caused by a breach of obligations (Covered The Zenit rocket is the world’s most automated Events) of the Russian Federation and Ukraine to launch vehicle, with 24 successful prior launches. the project under their respective Project Support All the rocket engines will burn liquid oxygen and Agreements with the Sea Launch venture. Thus, kerosene and the first stage will provide 1.6 million the World Bank Guarantees underwrite the com- pounds of initial thrust, sufficient to place a 5,000-kg mitments of the two Governments as regards the payload into geostationary orbit. The Block DM payment of damages arising from the occurrence upper stage has had 167 successful prior launches; of the Covered Events specified in the Project Sup- the Sea Launch version includes computer and port Agreements. guidance platform enhancements. The Zenit and Block DM-SL stages will be transported by rail to a The Project port in Ukraine on the Black Sea, for shipment by cargo ship to the Home Port in Long Beach, Cal- Sea Launch Limited Partnership, the developer and ifornia. The Home Port will provide the facilities, operator of the Sea Launch project, is an exempt equipment, supplies, personnel, and procedures limited partnership registered in the Cayman Is- necessary to receive, transport, process, test, and

Public Disclosure Authorized lands. It has five partners, each of which owns both integrate the spacecraft with the launch system, as general and limited partnership interests: well as docking facilities for the 660-foot Assembly & Command Ship and the 436-foot Launch Platform. • Boeing Commercial Space Company A payload processing facility at the Home Port will (United States) (40%) test and encapsulate the payload in a graphite com- • RSC Energia (Russia) (25%) • posite fairing. The payload will be then transferred Kværner Maritime a.s (Norway) (20%) to the Assembly & Control Ship for integration with Project Finance the rocket; the entire assembly will then be trans- both companies have sought to diversify into other and Guarantees ferred to the Launch Platform for the journey to the activities, thousands of high technology jobs are launch site. presently at risk due to the contraction of the tradi- June 1998 tional Government market for space and space-re- The Launch Platform, a converted North Sea oil rig, lated activities. As prospects for Government is self-propelled and will carry the rocket to the funding of such activities are dim, entering the com- launch site, which is at 154ºW at the equator. This mercial space launch business is of key strategic site was chosen to reduce the amount of fuel importance for these companies. needed for orbit maneuvers, thus maximizing the potential payload weight. The benign weather at the The project provides a long-term market to Energia site allows for year-round launches. For stability, and Yuzhnoye/Yuzhmash and incentives for the ef- the Launch Platform will submerge to a draft of about ficient production of launch vehicles. The rocket 70 feet, and tilt the rocket upright for launch. The components will be sold to the Sea Launch joint Assembly & Command Ship, which has accommo- venture pursuant to the terms of long-term supply dations for up to 240 persons, will position itself contracts. By increasing the effective demand for about 5 km away from the Launch Platform and will the Block DM-SL and Zenit stages, the Sea Launch remotely fuel the rocket and control the launch. project will generate close to $2 billion of incremen- tal exports for Russia and Ukraine, thereby helping The sponsors expect the revenue earned by to preserve thousands of high skill, high wage jobs launching satellites to cover the expenses of the Sea Launch in Russia and Ukraine. partnership, including debt service, and provide a taps the best return to its investors. Barring unforeseen delay, the first rocket is scheduled for launch in the fourth technology from Financing Plan throughout the quarter of 1998, carrying a communications satel- lite for Hughes Space & Communications Interna- The financing for Sea Launch Limited Partnership’s world tional, Inc. to geostationary orbit. development phase consists of: • equity from Boeing and Kværner; • Russian and Ukrainian Sponsors export financing from Garanti-Instituttet for Eksportkredit (GIEK) of Norway, in the amount of Energia is one of Russia’s largest aerospace com- US$85 million, for the refurbishing of the Launch panies. It currently employs roughly 20,000 work- Platform; ers, down from a peak of 34,000 in 1988. Since its • export financing from Department of Trade and creation 50 years ago, Energia has played a lead- Industry (DTI) of the United Kingdom, in the ing role in the development of launch vehicles and amount of US$100 million, for the construction the former Soviet Union’s manned space flight pro- of the Assembly & Command Ship; and gram. Energia registered as a joint stock company • in July 1994 and is scheduled to be fully privatized two loans from a syndicate of banks led by The in the near future. Its stock is currently traded on Chase Manhattan Bank, in the amount of the Moscow stock exchange. US$100 million each. One loan is for develop- ment expenditures in Russia and the other is for Yuzhnoye/Yuzhmash is now the largest aerospace development expenditures in Ukraine. The enterprise in Ukraine. Yuzhnoye/Yuzhmash has loans carry floating interest rates and will be been a highly diversified conglomerate since its repaid in two equal installments in years 9 and creation in 1944. At its peak, it was staffed by 50,000 10. The repayment of principal and scheduled employees. It is currently a 100% state-owned en- interest on these loans is covered by the World terprise with approximately 34,000 employees, of Bank Guarantees. which 19,000 are employed in aerospace-related activities. Virtually all of the recent employment decline has occurred in the aerospace sector. Project Support Agreements (PSAs) Both enterprises have suffered from a sharp de- The two Governments issued separate Project Sup- crease in employment and production stemming port Agreements to Sea Launch Limited Partnership from declines in state orders for their goods and describing each Government’s agreed commit- services. For example, Yuzhnoye/Yuzhmash pro- ments to the project. As noted above, the duced only one Zenit rocket in 1995, although at goverment obligations under each PSA are sup- the height of production in the mid-1980s, it was pro- ported by the corresponding World Bank Guaran- ducing 10 two-stage Zenits and 16 first stages per tee, payments under which must be applied to repay year. The production decline of Energia’s Block the commercial bank loan used to finance Sea DM is not as severe, although still significant. While Launch development phase investment expendi- Project Finance tures related to that country. final binding arbitration award under UNCITRAL rules. and Guarantees Covered Events. The PSAs define specified forms June 1998 of Government interference with the production and World Bank Guarantees export of launch vehicles and components from the Russian Federation and Ukraine. The Covered Guarantee Agreements. The World Bank entered Events are limited to the following: into two Guarantee Agreements with the commer- • cial banks funding the Sea Launch project’s devel- deprivation by the Government of property, opment phase expenditures — one for up to resources, or services required by a local en- US$100 million of expenditures funded for the terprise for the performance of its contractu- Russian Federation and another one for up to tual obligations to Sea Launch. US$100 million of expenditures funded for Ukraine. • the introduction of limitations on transfers of Pursuant to the Guarantee Agreements, the com- foreign exchange into or out of the country; mercial banks may claim on the World Bank Guar- • the imposition of unusual or discriminatory antees only if (i) Sea Launch has obtained a final binding settlement or arbitral award upholding its new or increased taxes, duties, or fees; claim to payment pursuant to the PSA against the • revocation or suspension of, or failure to re- Government and (ii) the Government failed to pay new, licenses or permits; • the specified and ascertained damages awarded World Bank prevention of shipping and embargo; and by arbritration or agreed by binding settlement. • war and civil disturbance. covers political Indemnity Agreements. In compliance with its Ar- risk to support ticles of Agreement, the World Bank entered into The commercial and technical performance of Sea separate Indemnity Agreements with the Russian export of space Launch is not covered. Federation and Ukraine, under which each Gov- launch vehicles Government Liability. The respective Govern- ernment agrees to reimburse the Bank for any ments would be required to pay damages to Sea claims made against the Bank under its World Bank Launch if (i) a Covered Event occurs in its territory Guarantee or otherwise arising from the Bank’s in- and (ii) as a direct result of the occurrence of that volvement in the project. Each Government also Covered Event, Sea Launch is unable to pay the covenants not to permit or require any Sea Launch scheduled debt service payments on the applicable assets to be used for military purposes and to ap- commercial bank loan. Thus, the fact that a Cov- ply its environmental laws and regulations to project ered Event occurred and damaged Sea Launch fi- activities in its territory. nancially is, by itself, not sufficient to trigger any Project Agreement. Sea Launch Limited Partner- Government liability. Liability will be triggered only ship entered into a Project Agreement with the if the Covered Event is severe enough that it impairs World Bank, in which the partnership covenants, Sea Launch’s ability to service the commercial bank among other things, to use the proceeds of the loan that funded eligible development phase expen- commercial loans only for authorized purposes in ditures in that country. Each Government’s maxi- the Russian Federation and Ukraine, as the case mum liability for damages pursuant to its PSA would may be, not to permit any military usage of assets equal the actual debt service on the loan disbursed or facilities owned, controlled, or developed by the in that country and used to meet project expendi- Sea Launch venture for the project, and to comply tures. with all applicable environmental and safety regu- Dispute Resolution. Before any payment is required lations. Noncompliance with these covenants en- to be made under a PSA, the Government that is titles the World Bank to terminate coverage under alleged to have caused the Covered Event would its Guarantees. have an opportunity to correct the problem and avoid any liability. If the problem is not cured to Sea Benefits of the World Bank Guarantees Launch’s satisfaction, Sea Launch may take its The World Bank Guarantees are part of a series claim to arbitration to establish that (i) a Covered of operations being developed to encourage pri- Event occurred and (ii) “but for” the occurrence of vate capital flows to help existing enterprises in the the Covered Event, Sea Launch would have been Russian Federation and Ukraine to increase pro- able to service the commercial bank loan disbursed duction and employment. The Guarantees were in- and used to meet project expenditures in the country strumental in attracting long-term private capital to that caused the covered risk. Sea Launch must sub- these countries without “investment grade” sover- stantiate its claim through a dispute resolution pro- eign debt ratings, mitigating risks that commercial cess leading to a legally binding settlement or, if that lenders were not able to bear or adequately evalu- procedure fails to yield a satisfactory resolution, ate. Project Finance and Guarantees June 1998

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To obtain a copy of the brochure, The World Bank Guarantee: Catalyst for Private Capital Flows, please call (202) 473-3045. Please direct editorial comments to Andres Londono, tel: (202) 473-2326; fax: (202) 477-0218.