SECURING FINANCING FOR PPP PROJECTS 1...PPP projects are financed/ funded by Public & Private...
Transcript of SECURING FINANCING FOR PPP PROJECTS 1...PPP projects are financed/ funded by Public & Private...
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SECURING FINANCING FOR PPP
PROJECTS UNESCAP POLICY DIALOGUE ON PPP
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September 23, 2015
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PPP projects are financed/ funded by Public & Private sources
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• Typically 20 – 40%
• Contribute Equity
• Take manageable
risk for higher
returns
• Typically 60 – 80%
• Contribute Debt (Loans,
Bonds)
• Very risk averse
Shareholders
Private Funding
Lenders
Public Funding Support
PROJECT
Govt. pays
for services
Users pay for
services
Projects that generate ready cash flows attract most private investment:
Water ~ 33%; Energy & Transport ~ 70%; Telecom ~ 90%
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A variety of participants contribute to financing of PPPs
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Multilaterals (IFC, ADB, MIGA)
Government
Subsidy/ Grants
Project Sponsor
Commercial Lenders Public Financial Intermediaries
Project
SPV
Export Credit Agencies
Guarantees
Concessional Loans
Equity/ Sub Debt
Debt: Bank Loans, Bonds
Guarantees/ Credit Enhancements Guarantees/ Credit Enhancements
Debt
Multilaterals (WB, ADB)
Take Out Financing
Debt
Equity
PCG
Risk Insurance
Loans PRG
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Project Finance structure is the most common (~70%) with Commercial
Banks being the primary sources of debt
• Separate Legal Entity from sponsors
• Ring-fencing Project
• Limited or No recourse to sponsors
• Predominant dependence on project cash flow
Lenders
• Adequacy, certainty & timeliness of cash flow
• All risks to cash flow have to be addressed upfront
Bankability
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Securing Financing for PPPs is therefore mostly about setting the
conditions right for Project Finance
• Legal & Regulatory framework: commercial structure in the sector; level of user charges
• Simulate a financial model: Capex, Opex, Volume of demand, Debt repayment profile and Coverage; Equity IRR
• Need for public financial support to enhance debt service coverage and Equity IRRs?
Adequacy of cash flow
• Critically assess risks that could affect cash flows
• Allocate risks to the party best able to deal with it
• Mitigate risks so as to reduce overall costs and not just direct costs to Government
Certainty and
timeliness of cash flow
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Examples of some risks that are important to address
• Legal & Regulatory framework & Institutions
• Level of user charges
Sector Specific Issues
• Upfront technical due diligence and investigations
• Delays and cost overrun risk offloaded to reputed construction companies and backstopped by sponsors
Construction risks
• Demand risks (Availability payments or Take or Pay contracts), Tariff risk (Long term contracts), Payment risk (backstopping of offtake commitments) Market risk
• Tariff adjustments to be predictable. To be backstopped by Government. Regulatory risk
• Hedging in private swap markets may not be possible. Government may need to mitigate forex risks trough tariff adjustments if foreign funding is involved.
Foreign Exchange Risk
• Equator Principles: IFC Performance Standards
• E&S Impact Assessments, Mitigation Plans
Environmental & Social Risks
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Different forms of public support to PPPs can be used to secure financing
• Cash or Kind to defray construction costs, procure land, provide assets, support major maintenance
• Viability Gap Funding Funded Support
• Guarantees of debt, exchange rates, offtaker obligations, the level of tariffs permitted, the demand for services, termination compensation, etc;
• Indemnities against non-payment by state entities, for revenue shortfall
• Contingent debt: take-out financing if project can only get short tenor debt)
Contingent Support
• Borrows from private debt market based on its higher credit worthiness
• Onlends to projects
Financial Intermediaries
• e.g. Global Infrastructure Facility managed by the World Bank
Project Development
Funds
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Issues related to design of public financial support to PPPs
•Right amount and right structure? •Credible sharing of risks, costs and benefits •Avoids rate shocks
Political Support
• Public support should be sustainable
• Finding the money upfront is important
Fiscal Feasibility
•Kick starts major projects in a difficult investor environment •Transition to full cost recovery rates for public services in the long run
Is a transition
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• Info memo
•Road show
•Data room
•Contract
effectiveness &
assumption of
service
obligations
•Conditions
Precedent
• Financial
Closure
achieved by
private party
•Document has to
be seen as
bankable by
financiers and
investors:
Consultation is
key
•Viable
structure
• Identify
sources of
public
financing
support
• Identify risk
mitigation
necessary to
secure project
finance
Contractual
Closing
Conduct
Tender
Prepare
PPP
Contract
Market
To
Investors
Define
Transaction
Structure
Assess
PPP
Options
• Technical
definition
• Legal Due
Diligence
• Financial
Model
•Risk allocation
•Payment
mechanism
• Transparency
• Adequate time
for due
diligence by
lenders to
avoid post
tender
uncertainties
and
negotiations
IFC’s Role as Transaction Advisors A structured project preparation process is critical
Lenders (and investors) play a critical role in due diligence
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Contract Design • Service obligations/standards
• Sustainable risk mitigation
• Monitoring and dispute resolution
Tender Process • Fair/equal treatment of investors
• Global investment promotion
• Transparent public tender &
evaluation criteria
Project financing • Service affordability
• Creditworthy government
purchaser
• Optional IFC financing
IFC’s Approach to PPPs Expert transaction advisors are needed to put several pieces together
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In the end, a complex web of contracts reflecting a bankable risk allocation
and mitigation enables financing
Power SPV
Sponsors
State
Electricity
Board
(Purchaser)
Escrow Bank
State Government Lenders
PPAs
Private
Operator
LN
G S
up
ply
Ag
reem
en
ts LNG Supplier
Tra
nsp
orta
tion
Ag
reem
en
ts
Shipping Co.
EPC Contractor
Sp
on
sor
Co
mm
itmen
ts
Central Govt
Escrow
Agreement
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Some WBG Entities that play a role
• Equity, Debt and Guarantees to Private Sponsors after Contractual Closure
• Indicative Term Sheet at time of bidding if requested by Govt.
• InfraVentures: development capital and debt syndication to sponsors
IFC Investment
• Advises Government clients on structuring bankable transactions
• Only multilateral with global footprint which advises directly
• Global leader in PPP transactions since 1985
IFC PPP Transaction Advisory Services
• PPP Best practices & Capacity Building; Sector Reforms
• Financing of public obligations in PPPs
• Risk Mitigation products
WB
• Development funding to public entities
• Structure PPP to attract institutional investors
Global Infrastructure Facility
• Risk mitigation MIGA Footer
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THANKS
September 23, 2015
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