AFRICAN EXPORT-IMPORT BANK STRUCTURED FINANCE SEMINAR Introduction to Limited Recourse Project Financing PRESENTED BY: SIYANGA MALUMO Africana Finance

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AFRICAN EXPORT-IMPORT BANK STRUCTURED
FINANCE SEMINAR Introduction to Limited
Recourse Project FinancingPRESENTED BY
SIYANGA MALUMOAfricana Finance Investments
(AFI)CAIRO 1 DECEMBER 2010
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CONCEPT OF RISK DEFINITION

• Probability of a loss or other negative
  occurrence, caused by external or internal
  factors, and which could be mitigated by
  anticipatory action.

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PROJECT FINANCE
The International Project Finance Association
(IPFA) The financing of long-term
infrastructure, industrial projects and public
services based upon a non-recourse or limited
recourse financial structure where project debt
and equity used to finance the project are paid
back from the cash flow generated by the
project.
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Specific Risks

• Payment system risk
• Refinancing risk
• Reinvestment risk
• Settlement risk
• Sovereign risk
• Underwriting risk

• Capital risk
• Completion risk
• Default risk
• Delivery risk
• Exchange rate risk
• Interest rate risk
• Liquidity risk
• Operations risk

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STRUCTURED FINANCE

• Concept premised on the following
• Every transaction or project involves risk
• Every risk requires mitigation
• Risks must be allocated to parties best suited to
  bear them.
• Risk mitigation creates comfort to both lenders
  and equity investors.
• No risk can be 100 mitigated a priori.

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TYPES OF RISKS

• Key Risks
• Political
• Economic
• Commercial
• Technical
• Socio-Environmental

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ADVISORS

• Financial
• Technical
• Legal
• Marketing
• Environmental
• Social
• Insurance
• Others

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ROLE OF ADVISORS

• Expertise
• Experience
• Network
• Credibility
• Work Load Reduction
• Blame Game / Punch Bags
• Time Management
• Project Management
• Process Management

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THE PROJECT CYCLE
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Project Preparation Investment Period
Project Identification Mobilisation of Project Preparation Resources Prefeasibility/Feasibility Study Engage Team of Advisors (Transaction Advisor...Financial, Legal, Technical, etc) Information gathering (within and outside the Country) by Transaction Advisor Stakeholder meetings (Government, Client officials, Investment agencies, regulator, etc.) Due diligence (including site visits to various plants) Client due diligence on Potential Partners Client Asset Valuation Develop power systems planning strategy Develop cost and tariff strategy Develop power off-take marketing strategy Develop financing strategy Develop Operation and Maintenance strategy Develop EPC contracting strategy Signing Joint Development Agreement Project Information Memorandum Transmission line investment option Formation of a Special Purpose Vehicle (SPV) Concession Agreement (between SPV and Government) Finalisation of Security Package Agreement on Shareholding Split (Client Partner) Negotiate Sign Shareholders Agreement Equity Injection Develop Contact Launch Lender Road Show Obtain Indicative Term Sheets from Lenders Obtain Lender Commitment Develop Lender Club Lender Due Diligence Develop, Negotiate Sign PPA Contract Develop, Negotiate Sign OM Contract Develop, Negotiate Sign Connection Agreement Develop EPC Tender Documents Launch EPC Tendering Process Evaluate Bids Select Negotiate with Bidder Preferred Bidder Loan Negotiation Develop Sign Loan Agreements Sign EPC Contract Legal and Financial close EPC Contractor Mobilisation Construction Launch Staff Recruitment Technical Testing Commission Project
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STRUCTURING PACKAGING
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PROJECT STRUCTURING PACKAGING

•  Key Elements of Project Structuring
• The Challenges of Project Structuring Packaging
• Project Development by the Public Sector
• Project Development by the Private Sector
• Public-Private Partnerships

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KEY ELEMENTS OF STRUCTURING
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STRUCTURING PACKAGING

• PPP Structure

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AFRICANA PROJECT STRUCTURE
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AFRICANA Financing Structure
Payment of insurance premium
ZULU CO
MUKUNI CO
PPA 2
INDOSURE
LOAN
Insurance
LOAN
PPA 1
AlternativePPA
Assignment of receivables/ Escrow Acct
EPC (Assigned to SPV)
BANK 1
INDOHYDRO
AFRICANA SPV
LOAN
BANK 2
Intercreditor Agreement
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STRUCTURING PACKAGING

• Structuring Challenges
• Type Strength (financial, technical,
  managerial, organisational, etc.) of
  Developers/Investors Targeted
• Type of projects (infrastructure, commercial,
  agriculture, PPP, etc.)
• Econo-Political Environment
• Legal Regulatory Environment
• Social Environment
• Potential Funding Sources (targeted)
• Potential Market

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STRUCTURING PACKAGING

• Structuring Strategy
• Financial Modelling (Sources Uses of funds,
  Price/Tariffs, Production Volume, Return,
  Sensitivity Analysis, Cost of Funds, Debt Service
  Coverage Ratio, IRR, Payback Period)
• Develop Project Structure
• Select Potential Funding Sources
• Packaging Strategy
• Security Package (Marketing , Supplier, EPC,
  Service Concession Agreements, Insurance,
  Escrow Account, Asset Pledge Land Equipment,
  Pledge of Present and/or Future Receivables)

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STRUCTURING PACKAGING

• Packaging Strategy
• Variants of Project Development
• Private Sector
• High Risk High Reward Philosophy
• Profit Driven
• Success Driven
• Efficiency
• Productivity
• Public Sector
• Public Service / Goods
• Political Benefits
• National Development
• Socio-Economic Progress
• Public-Private Partnership

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STRUCTURING PACKAGING

• PPP Definition

PPP - 1 "Public-private partnerships (PPP) refer
to contractual agreements formed between a public
agency and private sector entity that allow for
greater private sector participation in the
delivery of projects. PPP - 2 "
Public-private partnership" (PPP) is legally
constituted relationship between the state or its
agencies with private sector firm(s) in which the
latter substitutes the former in the provision of
public goods and services over a specified or
indefinite period, for mutual benefit."
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VARIANTS OF PPP

• Design-Build (DB)
• Design-Build-Maintain (DBM)
• Design-Build-Operate (DBO)
• Design-Build-Operate-Maintain (DBOM)
• Build-Own-Operate-Transfer (BOOT)
• Build-Own-Operate (BOO)
• Design-Build-Finance-Operate or Maintain (DBFO,
  DBFM, DBFO/M)
• Public Social Private Partnerships (PSPP)
• Service Contracts
• Public Private Development Partnerships (PDP)
• Management Contract
• Concession
• Divesture
• Cooperation between Private Foundations (eg.
  HIV-AIDS, Tuberculosis, Malaria, New and Rare
  drugs etc) Public Sector

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STRUCTURING PACKAGING

• PPP Outsourcing

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STRUCTURING PACKAGING

• Packaging Strategy
• Security Package
• Marketing , Supplier, EPC, Service Concession
  Agreements
• Customer Credibility Credit Worth
• Performance Bond
• Liquidated Damages
• Insurance
• Escrow Account
• Asset Pledge Land Equipment
• Pledge of Present and/or Future Receivables
• Debt Service Reserve Account
• Other Guarantees Government Support,
  Shareholders Guarantee, etc.

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PROJECT FINANCE

•  
• What is Project Finance?
• Key Elements of Project Finance
• Resource Mobilisation In project Finance

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PROJECT FINANCE
The International Project Finance Association
(IPFA) The financing of long-term
infrastructure, industrial projects and public
services based upon a non-recourse or limited
recourse financial structure where project debt
and equity used to finance the project are paid
back from the cash flow generated by the
project.
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OBJECTIVES OF PROJECT FINANCE

• Facilitation of Project Development
• Public Debt Reduction
• Reduce/Eliminate Impact on Balance Sheet (Limited
  Recourse/Non-Recourse)
• Optimisation of Risk Allocation (Structured
  Finance)
• Management of Project Costs (Fixed Time/ Fixed
  Price/Lump Sum Contract)
• Value for Money
• Optimisation of Return on Investment
• Attraction of Private Sector in Public Goods
  Services Investment

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KEY ELEMENTS OF PROJECT FINANCE

• The Project
• Project Sponsor/Promoter/Developer
• Government (Concession/PPP)
• Special Purpose Vehicle (SPV)
• Equity Provider(s)
• Lenders
• Offtake (Buyer) Contract(s)
• Supply Contract(s)
• Engineering, Procurement, Construction( EPC)
  Contract(s)
• Operation Maintenance (O M) Contract
• Insurance
• Cash Flow
• Security Package

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ANALYTICAL TOOLS 1

• Risk Analysis (Political/Financial/Commercial)
• Financial Modelling
• Discount Rate
• Discounted Cash Flow (DCF)
• Free Cash Flow
• Internal Rate of Return (IRR)

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ANALYTICAL TOOLS 2

• Project Rate of Return
• Sensitivity Analysis
• Ratio Analysis
• Debt Service Coverage Ratio (DSCR)
• Loan Life Cover Ratio
• Project Life Cover Ratio
• Weighted Average Cost of Capital (WAC)
• Pay Back Period

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THE FUNDING MIX IN PROJECT FINANCE

• Equity
• Shareholders Contribution
• Preference Shares
• Debt
• Senior Debt
• Subordinated Debt
• Hybrids
• Mezzanine
• Shareholders Loans

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SOURCES OF FUNDS

• Equity
• Shareholders (Individuals / Institutional
  Investors)
• Preference Share Investors
• Venture Capital Funds
• Debt
• Development Financing Institutions (DFIs)
  Bilaterals / Multilaterals
• Commercial / Investment Banks (Domestic /
  International)
• Underwriting (Hard vs Soft underwriting)

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USES OF FUNDS

• Project Preparation
• Advisory Services (Financial, Legal, Technical)
• Permits / Licenses (Environmental, Water Usage,
  Operational, Way leave, etc.)
• EPC Contractor
• Working Capital
• Cash Sweep
• Contingencies

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RISK MANAGEMENT
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CONCEPT OF RISK DEFINITION

• Probability of a loss or other negative
  occurrence, caused by external or internal
  factors, and which could be mitigated by
  anticipatory action.

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RISK MANAGEMENT KEY RISKS

• Financial (Including Cost over runs,
  Underwriting, etc)
• Commercial (Including Pricing, Quantity,
  Marketing)
• Partner Selection
• Economic (Macro Economic Aggregates,
  Infrastructure, etc)
• Technical
• Legal
• Environmental
• Social
• Political
• Climatic

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RISK MITIGATION - 1

• Identify Pertinent Risks
• Develop a Risk Inventory
• Develop a Risk Matrix
• Undertake Due Diligence
• Develop Risk Mitigation Strategy (Covering All
  Pertinent Risks)
• Allocate Risks to Various Parties

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RISK MITIGATION - 2

• Develop Agree a Security Package
• Key Project Agreements
• Key Commercial Agreements
• Payments Mechanism
• Recourse to Sponsors
• Limited
• Management Fees Forfeiture
• Dividends (Current and Past) Forfeiture
• Cost over runs
• More Equity Injection

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RISK MITIGATION - 3

• Management of Contractors
• Fixed Time / Fixed Price
• Performance Bonds
• Take or Pay / Put or Pay
• Cost, Insurance, Freight (CIF vs FOB)

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PPP RISK ALLOCATION

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KEY LEGAL ELEMENTS

• Project Contracts
• Shareholders Agreement
• Joint Development Agreement
• Concession/Implementation Agreement
• Environmental and Social Impact Certification
• Loans Agreement
• Common (Lenders) Agreement
• Force Majeure Issues
• Termination Clause(s)
• Conditions Precedent (CPs)

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• LIMITED RECOURSE TO SPONSORS
• CIRCUMSTANCES
• Cost over runs
• Mismanagement
• MEASURES
• More Equity Injection
• Management Fees Forfeiture
• Dividends (Current and Past) Forfeiture

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PROJECT BANKABILITY
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PROJECT BANKABILITY

• Key Elements
• Legal Framework
• Regulatory Framework
• Compensation Clauses
• Unilateral Decisions Government
• Unilateral Decisions Private Sector
• Performance Failure by Either Party
• Government Support
• Transfer of Assets (end of concession)
• Dispute Settlement
• Re-bidding Option

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PROJECT BANKABILITY

• Contentious Issues
• Tariffs
• Price Adjustments
• Termination Clauses
• Compensation
• Step-In Rights
• Direct Agreement (with Government)
• Government Support

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PROJECT BANKABILITY

• Security Package
• Key Drivers
• Concession Agreement
• Off-take Agreement (from Project)
• Supply arrangements (to Project)
• Government Support Agreement
• Escrow Account
• Tariff adjustment Mechanism
• Insurance Arrangements (Policy)
• Performance Bonds
• Step-In Rights

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PROJECT ADMINISTRATION
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ADMINISTRATIVE ASPECTS

• Site Identification
• Staff Settlement/Welfare
• Licences/Permits
• Project Monitoring Mechanism

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LESSONS FROM AFRICA
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LESSONS FROM AFRICA

• Uganda Bujagali
• Uganda UEB Privatisation
• Tanzania Tegeta
• Tanzania Ubungo
• Mozambique Cabora Bassa
• Nigeria Lagos Barge Power Station
• Nigeria Ibom Power Project
• Botswana Mamabula
• DR Congo Inga I II
• Ghana Takoradi
• Zambia Itezhi-Tezhi
• Zambia Kariba North Bank Extension

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SUCCESS FACTORS

• The Political Climate
• The Economy Economic policies
• Legal Regulatory Environment
• Socio-Environmental Aspects.

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THE END

• ASANTE SANA
• MERCI
• DANKIE
• THANK YOU
• TA TENDA
• SIYABONGA!