Project finance presentation ppp conference- south africa 2015
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key issues of project finance, establishing value for Money
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Project finance presentation ppp conference- south africa 2015
- 1. 2/26/2016 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC, Malawi 1 Project Finance PPP Conference March 2015
- 2. 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 2
- 3. 2/26/2016 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC, Malawi 3 • Infrastructure demand growth rate > traditional finances • Traditional finance not enough for operations • Need for Project Finance
- 4. What’s not Project Finance •Corporate finance •Angel finance •Sovereign finance •Structured finance 2/26/2016 4 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC, Malawi
- 5. Corporate Finance Trend Analysis 2/26/2016 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC, Malawi 5 • Loan against exiting balance sheet • A going concern status • Often unsecured • Extrapolate from past performance • Management has full control • Recourse to company balance sheet;
- 6. 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 2/26/2016 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC, Malawi 6
- 7. Angel Finance 2/26/2016 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC, Malawi 7 • 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
- 8. Structured Finance 2/26/2016 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC, Malawi 8 • Existing Company borrows • Finance brown field project • Full recourse on borrower • Creditworthiness - historical & future • Limited security perfection • Pay interest in construction
- 9. Definition by E. R. Yescombe, 2007 Means of raising long term non-recourse debt financing for major projects based on lending against the project’s future cash flows and depends on a detailed evaluation of project’s construction, operating and revenue risks, their allocation between the investors, lenders and other parties through contractual and other arrangements. 2/26/2016 9 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC, Malawi
- 10. 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 2/26/2016 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC, Malawi 10
- 11. 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 2/26/2016 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC, Malawi 11
- 12. 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 2/26/2016 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC, Malawi 12
- 13. Disadvantages • High transaction costs • Complex structures • Slower to arrange financing • Not appropriate for small projects less than $10 million • It increases equity return 2/26/2016 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC, Malawi 13
- 14. Sources of project finance • Commercial banks- – banks – Pension funds – Insurance • Multilateral lenders • Regional development banks • Export crediot Agency 2/26/2016 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC, Malawi 14
- 15. Project Finance 2/26/2016 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC, Malawi 15 • 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
- 16. 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 2/26/2016 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC, Malawi 16
- 17. Typical Stages in Project Finance 2/26/2016 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC, Malawi 17 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/Bidding Contract negotiations Contract Signing Financial closure (Sale and Purchase Agreement, concession, Construction, FM agreement, Conditions precedent, Architects, Contractors, Project Management team, Marketing team)
- 18. 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 2/26/2016 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC, Malawi 18
- 19. 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 2/26/2016 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC, Malawi 19 Bankability
- 20. 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 Fees 2/26/2016 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC, Malawi 20
- 21. 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. 2/26/2016 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC, Malawi 21
- 22. 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 2/26/2016 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC, Malawi 22
- 23. Special Purpose Vehicle The Special Purpose Vehicle Construction firm Project sponsors Contract Monitoring Government contracted certifier Contracting Authority f e e s Marriage contract Unitary payments Payment 2/26/2016 23 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC, Malawi Other suppliers
- 24. 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 2/26/2016 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC, Malawi 24
- 25. 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. 2/26/2016 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC, Malawi 25
- 26. PPP Shadow Bid • Hypothetical, risk adjusted, cost of private party. doing a project. • Expressed in present value • Helpful to understand assumptions • Helpful for negotiation 2/26/2016 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC, Malawi 26
- 27. 2/26/2016 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC, Malawi 27 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
- 28. 2/26/2016 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC, Malawi 28 Gap funding • Viability Gap fund • Initial funding or • Operational • Output Based aid • Contract period extension • Guarantees, loan • Availability payments • Concessional loans
- 29. 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 2/26/2016 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC, Malawi 29
- 30. 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 2/26/2016 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC, Malawi 30
- 31. Present Value of O & M 2/26/2016 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC, Malawi 31
- 32. Risk Impact Assessment 2/26/2016 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC, Malawi 32
- 33. Risk Probability 2/26/2016 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC, Malawi 33
- 34. 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 most PPP projects range between 7% - 15% of the PSC estimate 2/26/2016 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC, Malawi 34 Develop a PSC Develop a Shadow bid Compare with shadow price If PSC price> shadow bid, then proceed to tender Compara tor bid price with PSC Monitor the value for money throughout the project life
- 35. Optimal Value for Money 2/26/2016 Project Finance Presentation- A. Mwala Sept. 2014 35
- 36. 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
- 37. Value for Money assessment 2/26/2016 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC, Malawi 37 Value for Money= • NPV of PSC $149.9m less • NPV of PPP bid $121.1m = $28.8m
- 38. Summary 2/26/2016 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC, Malawi 38 $100 $149.9 $121.1 $135 $170 $28.8m $14.9m
- 39. 2/26/2016 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC, Malawi 39 •Monitor VM during in all stages: •Tender •Construction & •Service delivery •Transfer • Significant shift of VM might be ground for renegotiation VFM Monitoring
- 40. 2/26/2016 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC, Malawi 40 •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
- 41. 2/26/2016 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC, Malawi 41
Hinweis der Redaktion
- (interconnection) ( Twara Corridor) ( Songwe river Basin)
- including past total cash flows from rest of business
- sovereign guarantee from taxation and general public enterprise revenues, plus any new tariff revenue from the project
- IPO or acquisition
- energy, gas