Project finance presentation ppp conference- south africa 2015

2/26/2016Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC, Malawi 1

Project Finance

PPP Conference March 2015

In SADCs to spend US$64bn between

2013 to 2017

Energy USD12.3bn

Transport USD16.8bn

Water USD13.5bn

ICT USD21.4bn

Other USD 0.5bn

Source: SADC Short-term Plan 2013 – 17

2/26/2016 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC, Malawi

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2/26/2016Presented by Audrey Mwala, Director

Project Finance & Risk Analysis, The PPPC, Malawi

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• Infrastructure demand growth rate > traditional finances

• Traditional finance not enough for operations

• Need for Project Finance

What’s not Project Finance

•Corporate finance

•Angel finance

•Sovereign finance

•Structured finance

2/26/2016 4Presented by Audrey Mwala, Director


Corporate Finance

Trend Analysis



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• Loan against exiting balance sheet

• A going concern status

• Often unsecured

• Extrapolate from past performance

• Management has full control

• Recourse to company balance sheet;

Sovereign Finance

• Government borrows to finance public infrastructure.

• Govt. may contribute its own equity

• Analyze govt.’s ability to raise funds

• Shows up as a liability on Government



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Angel Finance



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• Rich individuals or a group

• Retired entrepreneurs or executives

• Seed capital

• Management advice & contacts

• Bear extremely high risks

• A higher reward

• Invest beyond monetary return

• Equity or convertible debt

• A defined exit strategy

Structured Finance



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• Existing Company borrows• Finance brown field project• Full recourse on borrower • Creditworthiness - historical &

future • Limited security perfection • Pay interest in construction

Definitionby E. R. Yescombe, 2007

Means of raising long term non-recourse debtfinancing for major projects based on lendingagainst the project’s future cash flows and dependson a detailed evaluation of project’s construction,operating and revenue risks, their allocationbetween the investors, lenders and other partiesthrough contractual and other arrangements.

2/26/2016 9Presented by Audrey Mwala, Director


Project Finance

• Contractual structure where the lender only looks at the project cash flows & earnings

• The project finance structure affects the cost of finance

• Security is the project asset

• Multiple parties & multiple contracts

• Lenders control

• 70 % of infrastructure is financed through project finance



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Why project finance

• Its clean- project finance lenders avoid exposure to various risks of the sponsors balance sheet

• Magnitude of the project is too large normal corporate finance arrangement

• Diversification –risk spread• Off-balance sheet financing• Protection of Govt. interest in the

asset• Lenders have more control



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Why project finance

• Lower agency costs- lender monitor managers

• Extensive due diligence of by lenders

• In distress lenders can manage situation through step in rights

• Lower financing costs

• Ring fencing of project assets



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Disadvantages

• High transaction costs

• Complex structures

• Slower to arrange financing

• Not appropriate for small projects less than $10 million

• It increases equity return



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Sources of project finance

• Commercial banks-

– banks

– Pension funds

– Insurance

• Multilateral lenders

• Regional development banks

• Export crediot Agency



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Project Finance



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• High upfront capital intensive assets, long lives.

• Greenfield project• Used in most PPP’s• Special Purpose Vehicle borrows • Highly leveraged structure• Non or limited recourse• Bankability- NPV of future cash

flows• Capitalise interest in construction

Sources of Project Finance

• Equity- for new or same line of business

– Pure equity or Quasi equity, Preferred equity, Shareholder loans

• Pension funds- matches with pension obligations

• A 'syndicate' of lending institutions

– Senior debt, Second lien debt, Mezzanine debt, Convertible debt

• Bank loans (usually short term)

• Construction companies @ risk capital

• Infrastructure Bonds- based on project cash flows

• Revenue Bonds- used by municipals

• Securitization – receivables used to float a bond



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Typical Stages in Project Finance



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Stage 1

Stage 2

Stage 3

• Construction

• Service delivery

Preliminary negotiations (Business Plan, Cash flow projections

Due diligence (affordability, technical, Economic, Environmental, legal, financial,

commercial)

Procurement/BiddingContract negotiationsContract Signing Financial closure (Sale and Purchase Agreement, concession,

Construction, FM agreement, Conditions precedent, Architects, Contractors, Project Management team, Marketing team)

Bankability

• A projects attractiveness to raise private finance

• Attractiveness to both attract equity & debt

• Project cash flows can service debt

• For cash flow variation- a margin to still service debt

• Risks allocated to private sector not excessive

• Enough returns to give the equity holders a return



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Bankability- Not an isolated component

• Need for balance that private party risks not to undermine:

• lenders interests

• Sponsors interest or

• burden users or

• Govt. with excessive fees

• Govt. looks at projects technical and financial viability



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Bankability

https://www.google.com/url?q=http://www.workingknowledge.com/blog/&sa=U&ei=pNr9VNXyNcbd7Qa-4oHAAg&ved=0CDgQ9QEwEQ&usg=AFQjCNHN2uNRLa5ExClIlSuMBJjHdR32Cg

https://www.google.com/url?q=http://www.workingknowledge.com/blog/&sa=U&ei=pNr9VNXyNcbd7Qa-4oHAAg&ved=0CDgQ9QEwEQ&usg=AFQjCNHN2uNRLa5ExClIlSuMBJjHdR32Cg

Project Finance Pricing

• During Construction Period: LIBOR + X%

• During Project Operation: LIBOR + X% -1%

• Typical Upfront Fees : X

• Arrangement Fee – Once off Documentation Fees

• Legal Fees

• Commitment Fees –X% p.a. on un-drawn amount ™

• Administration Fees2/26/2016

Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC,

Malawi20

Financing Agreement

• Disbursements-lender’s consent.

• Lenders monitoring

• Step in rights

• In large projects financiers appoint manager

• Lien-project assets, paid from project cash flows

• Debt repaid before the end of project life.



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Special Purpose Vehicle

• A special entity created for project, shields other sponsor’s assets from project failure.

• Has no assets besides the project. • Sponsors capital contribution assures lenders of the sponsors'

commitment.• Limited recourse- Limits the borrowers loans to the project

assets• Assignment of all contracts (insurance, off take & supply

contracts)• Pledge of SPV shares• Assignment & pledge of revenue to collateral accounts



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https://www.google.com/url?q=http://www.conrad.com/ce/en/product/517246/Kyosho-------Brushed----112----Special-purpose-vehicle----Electric&sa=U&ei=Tdr9VJiXPOHR7Qbl74HABQ&ved=0CC4Q9QEwDDiMAQ&usg=AFQjCNFua7Bemf25Mu0l4d7b7in_UUGoJw

https://www.google.com/url?q=http://www.conrad.com/ce/en/product/517246/Kyosho-------Brushed----112----Special-purpose-vehicle----Electric&sa=U&ei=Tdr9VJiXPOHR7Qbl74HABQ&ved=0CC4Q9QEwDDiMAQ&usg=AFQjCNFua7Bemf25Mu0l4d7b7in_UUGoJw

Special Purpose Vehicle

The Special Purpose Vehicle Construction

firm

Project sponsors Contract

Monitoring

Government contracted certifier

Contracting Authority

fees

Marriagecontract

Unitary payments

Payment

2/26/201623

Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC, Malawi

Other suppliers

Project Financing Risks

• Infrastructure projects are inherently risky.

• A project may be subject technical, environmental, economic and political risks.

• Risk identification and allocation is a key.

• Project financing is distributed among multiple parties, so as to distribute the project risk.

• Financiers institutions at times conclude that the risks in a project are unbankable

• Riskier projects may require limited recourse financing, a surety from sponsors



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Public Sector Base Comparator

• Hypothetical, risk adjusted, cost of govt. doing a project.

• Expressed in present value

• Testing private party bid for value for money.

• Helpful for negotiation

• Helps to ascertain full life cycle cost of the project.



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PPP Shadow Bid

• Hypothetical, risk adjusted, cost of private party. doing a project.

• Expressed in present value

• Helpful to understand assumptions

• Helpful for negotiation



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Affordability

• PV of Govt.’s future revenue versus:

• present value of future capital &

• current expenditure

• Affordable to:

• Government

• Users

• Whole life cycle costs but may vary:• Brazil – 10 years fiscal analysis

• UK- procuring authority

• France- ministerial programme

• Colombia- cash transfer to contingent fund

• State of Victoria- PSC



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Gap funding

• Viability Gap fund

• Initial funding or

• Operational

• Output Based aid

• Contract period extension

• Guarantees, loan

• Availability payments

• Concessional loans

https://www.google.com/url?q=http://www.usnews.com/news/articles/2014/02/11/study-income-gap-between-young-college-and-high-school-grads-widens&sa=U&ei=15sFVajPDYz1au_FgLAE&ved=0CDwQ9QEwEzgU&usg=AFQjCNHMxVH799zvVSMY_QDRTbTup2P54g

https://www.google.com/url?q=http://www.usnews.com/news/articles/2014/02/11/study-income-gap-between-young-college-and-high-school-grads-widens&sa=U&ei=15sFVajPDYz1au_FgLAE&ved=0CDwQ9QEwEzgU&usg=AFQjCNHMxVH799zvVSMY_QDRTbTup2P54g

Financial Modeling

• Lending based on financial modeling of investment, cost & revenues.

• bankability based on key assumptions

• Sensitivity & scenario analysis used to draw the comfort lines



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Key Inputs of a financial model• Project duration

• Initial Capital plus additional capital Demand volume

• Price

• Unit cost

• Overheads

• Inflation

• Discount rate- Cost of total capital

• Interest rate

• Debt repayment



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Audrey-Financial Model v3 Prefeasibility.xlsx

Present Value of O & M



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Risk Impact Assessment



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Risk Probability



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Value for Money

• Key objective –optimal VFM• Programme, UK or project level• Qualitative & non qualitative• economic cost benefit basis (net benefits over PSC)• Present Value of PSC less Risk adjusted private bid

• Europe, Australia & North America shows VFM for mostPPP projects range between 7% - 15% of the PSC estimate



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Develop a PSC

Develop a Shadow

bid

Compare with

shadow price

If PSC price>

shadow bid, then proceed

to tender

Comparator bid price

with PSC

Monitor the value for money

throughout the project

life

Optimal Value for Money

2/26/2016Project Finance Presentation- A. Mwala

Sept. 201435

Key components of VFM

•Not an isolated element

•Projects affordability•Project to transfer significant risks but be affordable

•Bankability•balance risk transfer & affordability

•Risk Transfer•Balance affordability & Bankability

Affordability

Bankability

Risk Transfer

VFM

Value for Money assessment

2/26/2016Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC,

Malawi37

Value for Money= • NPV of PSC $149.9m less• NPV of PPP bid $121.1m = $28.8m

Summary

2/26/2016Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC,

Malawi38

$100

$149.9

$121.1

$135

$170

$28.8m

$14.9m



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•Monitor VM during in all stages:•Tender •Construction & •Service delivery•Transfer

• Significant shift of VM might be ground for renegotiation

VFM Monitoring

https://www.google.com/url?q=http://www.wisesupport.net/services/server-and-application-monitoring/&sa=U&ei=hZwFVbKGKMyxaYi_gXg&ved=0CBoQ9QEwAg&usg=AFQjCNF0pOxTgTyHtxPvsZx-7iGndxmx8A

https://www.google.com/url?q=http://www.wisesupport.net/services/server-and-application-monitoring/&sa=U&ei=hZwFVbKGKMyxaYi_gXg&ved=0CBoQ9QEwAg&usg=AFQjCNF0pOxTgTyHtxPvsZx-7iGndxmx8A



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•Direct financial VFM can be negative•Subsequent economic impact might be enormous e.g. Airlines, high speed trains•can be both quantifiable and non quantifiable

•Taxes•Employment, •New business

Economic Impact



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Project finance presentation ppp conference- south africa 2015

Presentations & Public Speaking

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