Revolutionising Iran's Private Sector Part 3: 21 st Century Funding Chris Cook I.C.C.I.M, Tehran, 2 nd July 2012

Introduction 13/06/102 Wimpole Institute for International Energy Studies (IIES) Is a Network of experts with unrivalled capabilities in the architecture and implementation of market instruments and infrastructure For Research on international energy markets and energy economic issues

Session Three - Executive Summary  Conventional Funding  Debt & Equity  Hybrids  Capital Partnership  Origins  Nondominium  Partnership Types  Energy Applications  Capital Equipment  Refinancing 13/06/103

Conventional Funding of Productive Assets  Debt  Interest-bearing credit created by credit institutions ie banks  Secured by a claim over the asset – a 'mortgage' or 'charge'  Equity  Ownership shares in a Limited Liability Joint Stock Company  Shares receive a dividend 13/06/104

Conventional Funding - Conflicts  Conflict of interest between the ownership claim of the shareholders and the debt claim of the bank  Conflict of interests between the shareholders and the management – the 'Principal/Agent' problem 13/06/105

Hybrid Funding  Equity hybrids – preference shares, redeemable preference shares  Debt hybrids – convertibles, subordinated loans, 'mezzanine'  New ownership instruments – Unit Trusts, Real Estate Investment Trusts (REITs), Exchange Traded Funds ('ETFs'), Master Limited Partnerships, Income Trusts etc etc  Complex, and some conflict always remains 13/06/106

Capital Partnership Origins – Hilton Deal 2002 Capital Partnership LLP 10 UK Hotels Gross Revenues Hilton Group Capital User Consortium LLP Capital Provider Bank Property Developer Hotel Specialist % % %

UK Limited Liability Partnership (LLP)  An “Open” legal vehicle – no need even for a written agreement  Enables infinitely flexible structures  There are many 'Public/Private' LLPs  City of Glasgow now has five  These municipal LLPs are public/private organisations which borrow from banks and employ staff and managers in the conventional way  Capital Partnership can bring finance and management inside LLP 13/06/108

Generic Capital Partnership - Nondominium Users Custodian ManagersInvestors Value % Stock Units

Asset-based - Land Partnership Occupiers Custodian ManagersInvestors Rent % Stock Units

People-based - Film Partnership Viewers Custodian Me, Actors Producer Investors Revenues % %

Refinery (Held by Custodian) Investors Oil Suppliers Managers Units Domestic Refinery Partnership واحدها Oil Product Stock Services Money

How it Works  Problem: if the refinery sells products forward by issuing 'stock' it is exposed to a rise in costs eg crude oil and labour  Solution: for as long as the Manager provides services, or the Supplier provides oil, they are entitled to a % of product flow  There is no purchase and sale of crude oil  Oil supplier and manager receive product 'stock' which will be widely acceptable in exchange

Liquefaction Plant (Held by Custodian) Liquefaction Plant (Held by Custodian) Investors Gas Pool (Public Sector) Managers Services % of Units Units Gas Partnership – Flared Gas % of Units Units Money

Refinancing Existing Loans  Existing interest-bearing loans may be replaced with energy loans eg 'stock' returnable in payment for gas  Outcomes – Cost of funding reduced because no money is paid for the use of money – New asset class for investors with a return in energy 8 Nov

Example – Qatar Gas Loan  Qatar requires $2bn to repay existing loan for LNG train  Qatar issues and sells 400 million Gas Units each redeemable in payment for 1 MMbtu at $5.00 per Unit  Chinese and Japanese participants each buy 200 million Units  Outcome: a Gas Loan  Qatar – interest-free funding and a a forward 'hedged' sale of 400MMbtu of future gas production  China and Japan – an 'inflation hedge' investment in natural gas as an alternative to acquiring $ denominated 0% Treasury Bills giving negative real returns 8 Nov