Legal and Related Challenges of Funding Infrastructure Projects in Emerging Economies
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Transcript of Legal and Related Challenges of Funding Infrastructure Projects in Emerging Economies
www.lcc.com.ng
Legal and Related Challenges of Funding
Infrastructure Projects in Emerging Economies
Opuiyo OforiokumaCEO/Managing Director
Perchstone & GraeysAnnual Law Seminar
Lagos, 25th April 2008
Challenges in Meeting Public Sector Financing Needs: Financing Key PPP Projects
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About Lekki Concession Company
LCC’s mission is to provide high quality road infrastructure and related services along the Lekki Peninsular of Lagos, Nigeria, and to be recognized as the pioneer for change in the way road infrastructure is delivered throughout Nigeria
Lagos Infrastructure Project (LIP), the first PPP Toll Road Concession in Nigeria, is already in the process of execution
LCC is an initiative of the ARM Group, which has a broad-based ambition to develop major infrastructure projects throughout Nigeria and West Africa
ARM Group is a leading player in the Nigerian asset management sector, with approximately NGN147 Billion under management
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About Our Project
Scope
Public-Private Partnership with Lagos State, to design, build, finance and operate:
Phase I - Lekki Epe Expressway (49.4 km)
Phase II - Coastal Road (20km) plus option to do the Southern Bypass
Funding
Financed by the Concessionaire, LCC, on a limited-recourse basis. Estimated project cost during construction is $300 Million
Toll
Concessionaire will collect tolls and charges on the Concession Roads to recoup cost of investments
Concession Period
30 years
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Typical Emerging Market Financing Challenges Viewed as high risk; hence, difficult to attract capital to them at all, or at
reasonable cost – there is global competition for investment funds
General lack of local understanding of the various infrastructure models and what they entail – affects both public and private sectors, and civil society at large
Lack of skills and experience in key areas, eg, deal development/packaging, project structuring/financing, and major project management/execution
Under-developed financial/banking sector, lacking experience in project financing of major infrastructure transactions
Lack of enabling legislation and/or non-existent/weak regulatory institutions
Political instability and/or lack of continuity
Economic instability and/or poor track record of management
Corruption, lack of transparent procurement processes, and lack of adherence to the rule of Law
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Typical Stages in Infrastructure Development & Delivery
DEVELOPMENTDEVELOPMENT PPP PROCUREMENT NEGOTIATION & AWARD
PPP PROCUREMENT NEGOTIATION & AWARD
DEAL STRUCTURING &
FINANCING
DEAL STRUCTURING &
FINANCING
PROJECT EXECUTION
PROJECT EXECUTION
Opportunity identification
Opportunity evaluation (feasibility studies, EIA/Social Impact studies, due diligence, etc)
Review/establish regulatory framework
Determine PPP Model to use
Procurement process (can be open tender or negotiated)
Bidding and selection of PPP Partner
Agree and negotiate final PPP contractual terms
Develop capital structure
Arrange financing (equity, debt, etc)
Financial close
Construction programme
Operation & Maintenance
Service Delivery
Asset transfer at end
LEGISLATIVE / REGULATORY FRAMEWORKLEGISLATIVE / REGULATORY FRAMEWORK
The 1st two stages are sometimes combined or reversed, especially in negotiated deals
The process to financial close has been known to take years, especially in emerging economies where little or no track record exists
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General Overview of The PPP Model PPPs involve collaboration between the Public Sector and the Private Sector
- Usually for the construction and/or management of a specific asset or a group of assets
- Helps to assign risk to the partner best equipped to deal with it
- Helps to secure specialist skills and experience not readily available in the Public Sector, for public interest projects
- Enables Public Sector funds to be used for other programs, where private sector financing is part of the PPP package
Various Models of PPP exist
- Service contracts, Operations & Maintenance Contracts, etc
- Concessions – transfers the rights to develop and operate defined assets, within a defined area, over a defined term
- Other PPP models include PFI, BOT, BOOT, DBFO, DBF, etc
- They should not be confused with “privatization”, which involves a transfer of ownership of the assets (eg, through the sale of shares)
PPPs are common in asset intensive and/or Utility type industries, eg, Roads, Water, Power, Airports
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Balancing Project Risks & Returns is Key
Project returns must be commensurate with the risks involved otherwise knowledgeable investors will be unwilling to participate in the project
Note: Risks shown are not an exhaustive list
Economic Risks eg, unstable FX rates,
high inflation
Political Risks eg, political instability,
lack of continuity Legal Risks eg, lack of respect for contract, ineffective judiciary, absence of
key legislation, litigation culture
Financial Risks eg, loan tenors too
short, loan rates too high, onerous loan conditions, lack of insurance cover
Revenue Risks eg, rigid price controls,
uncertainty over volumes
Technical & Operating Risks
eg, unfamiliar environment, lack of experience & skills, technology failure
Regulatory Risks eg, lack of transparency,
weak institutions, rigidity/overzealousness,
highly politicized
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Effective Regulation Requires Balance
CONCESSIONAIRE
POLITICAL/REGULATORY DRIVERS
eg, provision of essential infrastructure, standards,
government policy
CUSTOMER DRIVERS
eg, affordability, value for money, quality and consistency of service
COMMERCIAL / INVESTMENT
DRIVERSeg, return on
investment, risk management
Regulation typically covers economic (eg, price-setting, ROI), and technical/operational matters (eg, performance standards, investment programmes)
The drivers, however, do not always pull in the same direction, at the same time, in the same way, and with the same amount of force
Regulation should be transparent, fair, balanced and apolitical
Interests of the key stakeholders should be balanced over the long-term
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D e v C o n s t r O & M
P r o j e c t R i s k P r o f i l e
F in /C om
C o llec tio n
T ra ff ic
E n g
T ra n s fe r
Understanding Project Risk is Critical
TYPICAL BOT PROJECT
Risk is an indication/measure of uncertainty and unpredictability
Identifying, managing and/or eliminating risk is critical in any project – this is a skilled exercise, supported by thorough due diligence
A fundamental element of structuring and executing infrastructure projects is the allocation of risk to the parties best able to deal with them – normally done through contract
Various instruments, eg, insurance, interest rate/currency hedges, etc, can be purchased to help lay-off risk to 3rd parties willing to underwrite them
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Conceptual Project Financing Structure
Concessionaire
Equity Investors
LendersInsurance
Revenues from Operations
Investors & other Providers of
Capital
Risk Management & Protection
Project support, eg, Bonds & Guarantees
Key consideration is how risk is distributed across the financing structure (“recourse”)
Financing agreements will document the roles and relationships across the structure
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Contractual Framework: Lekki Toll Road Concession
Sponsors
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Project Credibility & Bankability
Experienced Concession
& Project Manager Turnkey D&C Contractor + Maintenance
Financial StructureTechnical and Engineering
Govt. Support & Commitment +
Enabling Legislation (2004 Lagos Roads
Law)
Legal & Regulatory Expertise
Committed Sponsors
Financial Advisors& Arrangers
(robust financial model)
* Debt/Equity Mix* Tenor* Currency
* Feasibility* EIA/SIA Studies* Tolling Strategy* Surveys* Design
In developed economy environments, well researched and structured projects, backed by credible, experienced players, are usually easier to finance
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Key Project Financing Considerations Efficient project financing utilizes a mix of financing sources to achieve the optimum
balance between equity investors, lenders and other providers of capital – Share Capital, Loans, Mezzanine Finance, Grants, etc
Long loan tenors (15 years or more ideally) are key to the financing of major infrastructure
The cost of long term financing must be reasonable and commensurate with the risk of the relevant project – providers of finance need to understand how to properly price risk so as not to overburden the project
Concessionary financing from governments, multi-lateral agencies, and other similar institutions can help to significantly bring down the cost of financing and improve project economics and bankability
There should be adequate security for both lenders and investors, however, this does not mean “asking for everything plus the kitchen sink”
Where the market exists, and it is cost effective to do so, it is advisable to hedge against some risks, eg, currency fluctuation (where foreign currency financing is used) and interest rates (where they are floating)
Flexibility to repay loans early at zero or minimal exit cost, will facilitate refinancing later on (eg, through a bond issue) when the project risk profile has diminished and returns are stable
Take out appropriate insurance cover if you can get it – “a stitch in time saves nine”
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