Project Finance ICAM Conference September 2014 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC 4/13/2017

In SADCs to spend US$64bn between 2013 to 2017 The Infrastructure Gap In SADCs to spend US$64bn between 2013 to 2017 (interconnection) ( Twara Corridor) ( Songwe river Basin) Source: SADC Short-term Plan 2013 – 17 4/13/2017 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC

The Infrastructure Challenge Infrastructure demand growth rate > traditional finances Traditional finance not enough for operations Need for Project Finance 4/13/2017 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC

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. 4/13/2017 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC

Corporate Finance Trend Analysis Loan against exiting balance sheet A going concern status Extrapolate from past performance Management has full control Recourse to company balance sheet; including past total cash flows from rest of business 4/13/2017 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC

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 sovereign guarantee from taxation and general public enterprise revenues, plus any new tariff revenue from the project 4/13/2017 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC

Angel Finance 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 4/13/2017 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC

Structured Finance Existing Company borrows Finance brown field project Full recourse on borrower Creditworthiness - historical & future Limited security perfection Pay interest in construction IPO or acquisition 4/13/2017 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC

Project Finance High upfront capital intensive assets, long lives. Fortune telling?? Project Finance DSRR NPV ROE 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 IRR ROE NPV Demand Inflation Demand Interest Inflation energy, gas Interest 4/13/2017 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC

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. 4/13/2017 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC

Typical Stages in Project Finance Preliminary negotiations (Business Plan, Cash flow projections Due diligence (affordability, technical, Economic, Environmental, legal, financial, commercial) Stage 1 Stage 2 Stage 3 Construction Service delivery 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) 4/13/2017 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC

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 4/13/2017 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC

The Cash flow waterfall Construction, operating and maintenance expenditure Principal &Interest senior debt Senior debt service reserve account Interest subordinated debt Principal on subordinated debt Maintenance Reserve Account Shareholder subordinated loans Distributions to shareholders 4/13/2017 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC

The Cash flow Waterfall EBITDA DSCR = ----------------=>1.5 Debt Service Operating Income or EBITDA Revenue O & M Expenses Debt Payment Taxes Profit 4/13/2017 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC

Key Ratios (negative covenants) Debt Service Cover Ratio (“DSCR”) Loan Life Cover Ratio (“LLCR”) Project Life Cover Ratio (“PLCR”) Cash flow waterfall priority Major Maintenance reserve account >X DSCR - (cash flow available for debt service / total debt service for the period – excluding cash balances) (NPV of future cash flows for the remaining period of the loan / loan balance at beginning of period) (NPV of future cash flows for the remaining life of the project / loan balance at beginning of period) 4/13/2017 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC

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 4/13/2017 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC

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 4/13/2017 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC

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. 4/13/2017 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC

Special Purpose Vehicle Project sponsors Contracting Authority Contract Monitoring fees Unitary payments Other Equity Investors Marriage contract The Special Purpose Vehicle Payment Construction firm DEBT FINANCIAR Financing agreement Government contracted certifier Operating and Maintenance Subordinated debt/ Mezzanine Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC 4/13/2017

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 4/13/2017 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC

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 4/13/2017 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC

Risk Allocation 4/13/2017 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC

Public Sector Base Comparator Affordability Hypothetical, risk-adjusted, cost of govt. doing a project. Expressed in present value Testing private party bid for value for money. Helps to ascertain full life cycle cost of the project. PV of Govt.’s future revenue : equals or exceeds present value of future capital & current expenditure Whole life cycle costs 4/13/2017 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC

Present Value of O & M 4/13/2017 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC

Risk Impact Assessment 4/13/2017 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC

Risk Probability 4/13/2017 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC

Value for Money Present Value of PSC less Risk adjusted private bid Monitor VM during tender, construction & Service delivery Significant shift of VM might be ground for renegotiation Develop a PSC Compare with shadow price If PSC price> shadow bid, then proceed to tender Comparator bid price with PSC Monitor the value for money throughout the project life Develop a Shadow bid 4/13/2017 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC

Value for Money assessment NPV of PSC $149.9m less NPV of PPP bid $121.1m = $28.8m 4/13/2017 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC

Summary $170 $14.9m $149.9 $28.8m $135 $121.1 $100 4/13/2017 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC

Thank you for your Attention Questions? Thank you for your Attention 4/13/2017 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC