Post on 19-Dec-2015
World Bank Port Reform Toolkit
Module 5Financial
Implications of Port Reform
Module 52World Bank Port Reform Toolkit
Part A : Public-Private Partnerships in Ports : risk analysis, sharing and management
•Risk Management•Contractual Risks•Approach of the different partners to risk and risk management•Concluding thoughts
Part B : Principles of Financial Modeling, Engineering and Analysis•Measuring economic profitability from the perspective of the
Concessioning authority•Rating risk from the perspective of the concession holder•Financial project engineering•Financial modeling of the project•Construction of the financial model
Financial Implications for Port Reform
•Characteristics of the port operator
Module 53World Bank Port Reform Toolkit
Fundamental risks carried by the terminal operator
•Cost risks : risk of exceeding initial cost estimates for the construction or operation of the project
•Revenue risks, or commercial risk : depending on traffic and revenue yields
Module 54World Bank Port Reform Toolkit
Characteristics of the port operatorand associated risks
•National environment (legal, economic, social and political aspects) : country risks
•Industrial and commercial dimension : project risks and commercial/traffic risks
•Vertical partnership with the concessioning authority : contractual risks
•Horizontal partnerships with numerous players (customers, ship-owners, shippers…) : additional commercial risk
•Long-term commitment : need for a clear and stable legal arrangement between the operator and the concessioning authority
Module 55World Bank Port Reform Toolkit
Part A : Public-Private Partnerships in Ports : risk analysis, sharing and management
•Contractual Risks•Approach of the different partners to risk and risk management•Concluding thoughts
Part B : Principles of Financial Modeling, Engineering and Analysis•Measuring economic profitability from the perspective of the
Concessioning authority•Rating risk from the perspective of the concession holder•Financial project engineering•Financial modeling of the project•Construction of the financial model
Financial Implications for Port Reform
•Characteristics of the port operator•Risk Management
Module 56World Bank Port Reform Toolkit
Risk Management : Overview
•Risk identification•Sharing of risks with public authorities•Sharing of risks with partners•Reduction of exposure to residual risk•Reduction or limitation of the consequences of residual risks•Adjustment of the expected rate of return according to the
degree of residual risk
Major steps
Important principles•Properly allocate risks•Not make the operator carry risks that the public sector
could carry at a lower cost
Module 57World Bank Port Reform Toolkit
Country Risks (1/3)
•lack of precision in the legislation
•possibility of change in the legislation
•thorough legal analysis•guarantee of legal stability •contract revision clauses•environmental study
•exchange rate fluctuations
•non-convertibility of the local currency into foreign currencies
•non-transferability
Legal risk : Mitigation :
Monetary risk : Mitigation :
•Payment of expenses in local currencies
•Hedging products•Guarantees from the
government and the Central Bank•Off-shore account
Module 58World Bank Port Reform Toolkit
Country Risks (2/3)
Economic risk : Mitigation :
•Market survey•Macro-economic factors
Mitigation :
•Expropriations•Nationalizations•Non-compliance with
the contract•Inefficiency of
administrative authorities
Political risk :
•International arbitration•Inclusion of multilateral
organizations among the shareholders/ lenders
•Recourse to export credit agencies•Insurance cover
Module 59World Bank Port Reform Toolkit
Country Risks (3/3)
Interference risk :
Direct intervention of the Public Authority in the management of the project
Mitigation :
•Contract clause limiting government authority intervention
•Contract provisions allowing renegotiations
•Natural risks•Industrial risks•Internal socio-political risks•Risks of war or armed
conflict
Force majeure :
•Contract clauses : suspension of reciprocal obligations of the parties
Mitigation :
Module 510World Bank Port Reform Toolkit
Project Risks (1/3)
Construction risksConstruction risks
•Causes : design errors, inadequate assessment of local conditions, poor management of the job site, poor coordination of the parties
•Consequences : unforeseen cost increases or delays in completion
•Mitigation measures : involvement of the operator in the design, transfer of risks to the construction company, careful selection of the construction company Hand-over risksHand-over risks
•Occur when the operator takes over the management of existing infrastructure
•Mitigation measures : clause of the contract safeguarding the concessionaire against pre-existing conditions.
Module 511World Bank Port Reform Toolkit
Project Risks (2/3)
Operating risks : countermeasures Operating risks : countermeasures
•Non performance risk : selection of an operator with recognized experience in port and terminal management
•Operating costs overruns risks : use of a fixed-price contract between the master concessionaire and the operator.
Procurement risksProcurement risks
• Cause : non-availability of critical goods and services and unforeseen increases in the cost of external resources necessary for the project
•Solution : the operator can produce the critical resource himself or sign a long-term purchase contract with its producer, with a “put or pay” clause.
Module 512World Bank Port Reform Toolkit
Project Risks (3/3)
Financial risks : countermeasuresFinancial risks : countermeasures
•Risks associated with raising the shareholders’ equity or obtaining loans : raise the initial trench, establish standby credit loans
•Interest rate fluctuation risk : appropriate financial instruments (rate caps, rate swaps…)
•Risk of failure from the government to make good on its subsidy payment : IFI guarantees
Social risksSocial risks
•Main challenges : special status of dockworkers, seamen, etc. under national law, port workers redundancies
•Mitigation : thorough preparation to insure that the local authorities can manage delicate social situations
Module 513World Bank Port Reform Toolkit
Commercial or Traffic Risks
•Origin : potential shortfalls in projected traffic and pricing constraints
•Usual response : through the terms of the concession agreement, sharing of the risk between the operator and the Port Authority, both in terms of responsibility and consequences
Module 514World Bank Port Reform Toolkit
Regulatory Risks : General View
User
Freedom of actionFreedom of action
Concessionaire
Protection of the user, Protection of the user, public interestpublic interest
Concessioning authority
RegulationRegulation
Costs
Tax-payer
Module 515World Bank Port Reform Toolkit
Regulatory Risks : Technical regulation
• Regulation of investmentsRegulation of investments : verification of the compliance with…Functional definition of thresholds triggering new investmentConstruction standardsSpecifications relating to security or environmental protection
• Regulation of maintenanceRegulation of maintenance :Commercial risks are borne by the operator Public service obligation is defined in the performance requirements of
the concession contractThe concessioning authority may impose maintenance standards to make
sure that it will get the assets back in good condition.
• Regulation of performance : Regulation of performance : in case of weak competitionin case of weak competitionPerformance standards can concern productivity, service and capacityAlthough sometimes necessary, they are difficult to impose
Module 516World Bank Port Reform Toolkit
Regulatory Risks : Economic and Financial Regulation
•Scope of the authorized activity •Public service obligations (continuity of service, equal
access and treatment for users) •Guarantees of non-competition can temporarily compensate
for the imposition of strict regulation.•Ultimate objectives : market regulated by competition•Pricing controls are necessary when the operator provides an
essential public service in a position of strong market dominance•Fees or subsidies are also a tool of regulation (positive or
negative concessions)
Module 517World Bank Port Reform Toolkit
Regulatory Risks : Golden Share or Blocking Minority
Advantages :Advantages :
Invalidation of risk sharing
Conflict of interest
oversight of the concessioning authority from within
“right to know” about decisions of the concessionaire.
Drawbacks :Drawbacks :
To be avoided
Module 518World Bank Port Reform Toolkit
Risk and Port Typology
• Operator handling only his own traffic : economic regulation is not necessary, but standards of maintenance can be imposed.
• Operator acting on behalf of a third party in a competitive situation : the traffic risk has is carried by the concessionaire.
• Operator acting on behalf of a third party in a monopoly situation : the public service dimension requires a close economic oversight. Traffic risk and profit can be shared.
Tariff is set freely
• Transit or transshipment traffic : economic regulation is not required, but awarding the concession to the highest bidder will allow the Port Authority to maximize its profit.
Tariff policy
Module 519World Bank Port Reform Toolkit
Other Concessioning Authority Guarantees
Guarantees from the Port Authority, to be included in the contract of concession :
Standards of facilities and performance of service in the port
Land transport modes
Quality of the intermodal service at the port
Module 520World Bank Port Reform Toolkit
Part A : Public-Private Partnerships in Ports : risk analysis, sharing and management
•Approach of the different partners to risk and risk management•Concluding thoughts
Part B : Principles of Financial Modeling, Engineering and Analysis•Measuring economic profitability from the perspective of the
Concessioning authority•Rating risk from the perspective of the concession holder•Financial project engineering•Financial modeling of the project•Construction of the financial model
Financial Implications for Port Reform
•Characteristics of the port operator•Risk Management
•Contractual Risks
Module 521World Bank Port Reform Toolkit
Contractual Risks (1/2)
Contract Management risk :Contract Management risk :
•Revision clauses•Contract termination or renewal clauses•Early termination clauses•Procedures for settlement of disputes
Clauses of the contract governing the possibility of changes or disputes about contract implementation usually include…
Module 522World Bank Port Reform Toolkit
Risks induced by indexation :Risks induced by indexation :
•Significant deviation of real world conditions from the indexation formula
•Divergence between the indexing conditions of different contracts signed by the Port Authority and the operator
Financial commitments are efficiently honored through the use of bank bonds.
Contractual Risks (2/2)
Credit risk :Credit risk :
Module 523World Bank Port Reform Toolkit
Part A : Public-Private Partnerships in Ports : risk analysis, sharing and management
•Concluding thoughts
Part B : Principles of Financial Modeling, Engineering and Analysis•Measuring economic profitability from the perspective of the
Concessioning authority•Rating risk from the perspective of the concession holder•Financial project engineering•Financial modeling of the project•Construction of the financial model
Financial Implications for Port Reform
•Characteristics of the port operator•Risk Management
•Contractual Risks•Approach of the different partners to risk and risk management
Module 524World Bank Port Reform Toolkit
Concessioning Authority
Major issuesMajor issues :
• Capacity of the operator to comply with the terms of the contract (financial objectives, reliability)
• Degree of commitment of the shareholders• Commercial positioning of the operator• Transfer of technology and participation of national players
International Financial InstitutionsInternational Financial Institutions can play the dual role of lenders and advisors to the concessioning authority.
Module 525World Bank Port Reform Toolkit
Project Sponsors
Shareholders :Shareholders : Objectives :Objectives :
•All shareholders
•Constructor, equipment supplier
•Operator
•Customer, shipper or ship-owner
•Financial investor
•Project internal rate of return, investment coverage ratio, return on equity
•Return on the construction phase and through the upstream services provided
•Return on the facility management services provided
•High quality of service, reasonable rates
•Life sustainability of the project
Module 526World Bank Port Reform Toolkit
Lenders
Imposable constraints :Imposable constraints :
• Debt coverage ratios
• Minimum equity investment on the part of the sponsors
• Replacement of equity participation by subordinate debt
• Earmarking of cash flow surpluses for debt repayment
• Guarantees on the part of the sponsors
• Comfort letters or commitments by the concessioning authority, domiciliation of revenue or debt, assignment of debt, technical and financial performance bonds
Module 527World Bank Port Reform Toolkit
Part A : Public-Private Partnerships in Ports : risk analysis, sharing and management
Part B : Principles of Financial Modeling, Engineering and Analysis•Measuring economic profitability from the perspective of the
Concessioning authority•Rating risk from the perspective of the concession holder•Financial project engineering•Financial modeling of the project•Construction of the financial model
Financial Implications for Port Reform
•Characteristics of the port operator•Risk Management
•Contractual Risks•Approach of the different partners to risk and risk management
•Concluding thoughts
Module 528World Bank Port Reform Toolkit
Concluding Thoughts
Port AuthorityFair competition
Proper protection of the interests of users
Oversight Authority
Commercial activity
Public service dimension
Module 529World Bank Port Reform Toolkit
Part A : Public-Private Partnerships in Ports : risk analysis, sharing and management
Part B : Principles of Financial Modeling, Engineering and Analysis
•Rating risk from the perspective of the concession holder•Financial project engineering•Financial modeling of the project•Construction of the financial model
Financial Implications for Port Reform
•Characteristics of the port operator•Risk Management
•Contractual Risks•Approach of the different partners to risk and risk management
•Concluding thoughts
•Measuring economic profitability from the perspective of the Concessioning authority
Module 530World Bank Port Reform Toolkit
Differential Cost/Benefit Analysis
•Principle : comparison of a solution with a proposed project with a reference solution
•Methodology :
Assessment of economic benefits and costs
The various costs and benefits must be considered net of all taxes
Module 531World Bank Port Reform Toolkit
Commonly Used Economic Profitability Indicators
• Socio-economic discounted profit or Net Present Value (NPV) : must be positive
•Internal Rate of Return or Economic IRR : must be higher than the discount rate of the national economy, and the highest possible
•Sensitivity studies
Module 532World Bank Port Reform Toolkit
Assessing the “economic costs” of the project
•Assessment of “market” economic costs Investment costs Maintenance and operation equipment Induced infrastructure costs
•Assessment of “non-market” economic costsCosts related to transferring traffic from one transport route to anotherPossible effects of the project on town planningEnvironmental and safety impacts
• Assessment of “positive externalities” of the projectIncrease in national added value (job creation, increase in company
profits)Increase in real income for consumers and in profits for companies (price
reduction)
Module 533World Bank Port Reform Toolkit
Part A : Public-Private Partnerships in Ports : risk analysis, sharing and management
Part B : Principles of Financial Modeling, Engineering and Analysis
•Financial project engineering•Financial modeling of the project•Construction of the financial model
Financial Implications for Port Reform
•Characteristics of the port operator•Risk Management
•Contractual Risks•Approach of the different partners to risk and risk management
•Concluding thoughts
•Measuring economic profitability from the perspective of the Concessioning authority
•Rating risk from the perspective of the concession holder
Module 534World Bank Port Reform Toolkit
Financial Profitability and Bankability of the Project
• Country and project rating : assessment of the residual risk to be borne by the private concessionaire
• Setting of a minimum financial profitability threshold : assessment of the bankability of the project (forecasting of the cash flows generated by the project)
Module 535World Bank Port Reform Toolkit
Assessing the Project Risks by Producing a Rating
• General principles : Listing and distributing the risks to the parties best able to assume them Reducing the exposure of the SPC to a residual risk Quantifying the residual risk to be borne by the SPC : country and projects ratings
• Assessing the background risk : country rating
• Assessing the project intrinsic risks : project rating (project checklist)
Module 536World Bank Port Reform Toolkit
Commonly used Financial Profitability Indicators
• Payback
• Internal Rate of Return
• Net Present Value
• Investment Cover Ratio
Need to calculate the Project Discount Rate – Cost of Capital
Module 537World Bank Port Reform Toolkit
Financial Debt Remuneration Requirement
• Definition of the yield to maturity of debt financing
• Taking inflation into account : real and nominal interest rates
• Risk rating
• Conclusion on Debt Remuneration Requirement : new trends in financial markets (assets/liabilities management) lead to differentiated decision-making processes
Module 538World Bank Port Reform Toolkit
Equity Remuneration Requirement
• Capital Asset Pricing Model (CAPM)
• “Differentiated” remuneration requirements depend on the type of shareholding
• Sharing of public/private financial commitments : arbitration between financial profitability and socio-economic profitability
Module 539World Bank Port Reform Toolkit
Part A : Public-Private Partnerships in Ports : risk analysis, sharing and management
Part B : Principles of Financial Modeling, Engineering and Analysis
•Financial modeling of the project•Construction of the financial model
Financial Implications for Port Reform
•Characteristics of the port operator•Risk Management
•Contractual Risks•Approach of the different partners to risk and risk management
•Concluding thoughts
•Measuring economic profitability from the perspective of the Concessioning authority
•Rating risk from the perspective of the concession holder•Financial project engineering
Module 540World Bank Port Reform Toolkit
Definition of Financial Project Engineering
The financial engineering of a project consists in seeking out the optimal terms and conditions of finance and cover for the project, based on analysis of the financial constraints of the market.
Module 541World Bank Port Reform Toolkit
Financial Structuring Within the Framework of a Project Finance Set-up
• Capital Structure Ratio (CSR)
• Annual Debt Service Cover Ratio (ADSCR)
• Net Present Value Debt Cover Ratio (NPV DCR)
•What are the minimum requirements for these ratios in the case of a port project ?
Main measures used to define the structure of the SPC’s liabilities :
> 15%
> 1.3
> 1.7
Module 542World Bank Port Reform Toolkit
Debt Structuring
Four Main Intrinsic Characteristics of Debt financing :
Length or maturity of the loan : date of the last repayment
Availability period : closing date of the validity of the
loan
Loan repayment terms
Average length and loan duration
Module 543World Bank Port Reform Toolkit
Long-term Commercial Debt
• The alternative to corporate financing : project finance Corporate financing : Public budget finance Pre-financing by the project sponsors Project financing : cash flows generated by the project itself
• Foreign currency loans
Module 544World Bank Port Reform Toolkit
Guaranteed Commercial Debt :
•Export Credits : supplier credits and buyer credits (administered, pure cover or financial credits)
•Financial Credits with a multilateral “umbrella” : A-loan and B-loan
Module 545World Bank Port Reform Toolkit
Bonded Debt :
•Advantage : enables financial terms (margins and fees) and favorable maturities to be obtained
•Drawback : creation of problems for inter-creditor relations
Module 546World Bank Port Reform Toolkit
Structuring Equity and Quasi Equity
• Equity provided by the public sector : contribution of assets, cash contribution or guarantee contributions, using the financing vehicles of … the budget of the concessioning authority
export credits bilateral financingmultilateral financing
• Equity invested by the project’s sponsors• Equity invested by multilateral institutions• Equity invested by bilateral institutions• Specialist investment funds
Module 547World Bank Port Reform Toolkit
Financial Engineering of the Project
• The interbank market or over-the-counter market (forward) : contracts are negotiated by private agreement, the bank acts as an intermediary
• The organized markets (futures) : standard contracts, future contracts and option contracts are available on the international stock exchanges, which means…
-imperfection of the cover-no actual delivery of the underlying securities
Module 548World Bank Port Reform Toolkit
Interest Rate Risk Management
• Interest rate risk results from an increase in inflation or in real interest rates
• Interest rate swaps or IRSs
• Firm financial instruments in the over-the-counter market : forward-forward rate and forward rate agreement (FRA)
• Firm financial instruments in the organized markets
• Conditional financial instruments - interest rate options : the cap and the collar.
Module 549World Bank Port Reform Toolkit
Foreign Exchange Risk Management
• Foreign exchange risk within the framework of a port privatization project : consolidation exchange risk or asset risk, transaction exchange risk
• Foreign exchange market : transactions between banks, standard and non-standard contract markets
• The principal existing cover products : forward currency sales, currency futures, foreign exchange options
Module 550World Bank Port Reform Toolkit
Counterpart Risk Management
• Counterpart risk : disappearance of a counterpart previously bearing part of a risk
• Project sponsors’ credit risk cover : the use of performance bonds
• Project financial counterpart credit risk cover : the use of credit derivatives
Module 551World Bank Port Reform Toolkit
Financial Engineering and Political Risk Management
• Political risks : use of investment guarantees
• Guarantees offered by multilateral agencies : MIGA, World Bank
• Guarantees offered by Export Credit agencies
• Use of Private Insurers
Module 552World Bank Port Reform Toolkit
Part A : Public-Private Partnerships in Ports : risk analysis, sharing and management
Part B : Principles of Financial Modeling, Engineering and Analysis
•Construction of the financial model
Financial Implications for Port Reform
•Characteristics of the port operator•Risk Management
•Contractual Risks•Approach of the different partners to risk and risk management
•Concluding thoughts
•Measuring economic profitability from the perspective of the Concessioning authority
•Rating risk from the perspective of the concession holder•Financial project engineering•Financial modeling of the project
Module 553World Bank Port Reform Toolkit
Construction of the economic model
• Capital expenditure : Investment breakdown
Investment phasing Investment currencies Economic depreciation and tax allowances statements Residual value of the investment at the end of the concession
• Operating revenues and expenses : Operating revenue / Charges in terminal management operations Operating finance requirement Operating account balance : GOS and OCS
• Tax Flows
Module 554World Bank Port Reform Toolkit
Part A : Public-Private Partnerships in Ports : risk analysis, sharing and management
Part B : Principles of Financial Modeling, Engineering and Analysis
Financial Implications for Port Reform
•Characteristics of the port operator•Risk Management
•Contractual Risks•Approach of the different partners to risk and risk management
•Concluding thoughts
•Measuring economic profitability from the perspective of the Concessioning authority
•Rating risk from the perspective of the concession holder•Financial project engineering•Financial modeling of the project
•Construction of the financial model
Module 555World Bank Port Reform Toolkit
Construction of the financial model
• Cash flow statement
• Profit and Loss Account (Income Statement)
• Balance sheet