1. SADC PPP Network PPPs in SADC
PROJECT FINANCE - AN INTRODUCTION
Kogan Pillay
Head
SADC PPP Network
7 March 2014

2. Public Private Partnerships
PROJECT FINANCE

3. Legal contracts holding structure together
Introduction to Project Finance for PPPs
Need for service delivery – infrastructure investment – private sector participation
Structure to deliver
Explain what PF is
Structure (generic)
Legal contracts holding structure together
Chioose

4. DEFINITION OF LIMITED/NON-RECOURSE PROJECT FINANCE
Although widely used/common term in business – could not find a precise definition
Clifford Chance – “Wide range of financing structures with a common feature – financing is not primarily dependent on credit support from sponsors or the value of the physical assets involved. The debt providers place a substantial degree of reliance on the performance of the Project itself.”

5. DEFINITION OF LIMITED/NON-RECOURSE PROJECT FINANCE
Peter Nevitt describes it as – “the financing of a particular unit which a lender is satisfied to look initially to the cash-flows and earnings of that economic unit as the source of funds from which a loan will be repaid and to the assets of the Project as collateral for the loan”
PPPs no assets as security/collateral (the general rule)

6. DEFINITION OF LIMITED/NON-RECOURSE PROJECT FINANCE
A PF structure allows the sponsor of the Project to avoid providing financiers with “recourse” (that is access) to its general assets/balance sheet in the case of poor project performance which in turn allows the sponsor to finance the Project off its balance sheet
Cash-flow driven
Ring-fenced structure
Special Purpose Vehicle (SPV Pty Ltd)
Off-balance sheet
Bankruptcy remote

7. DEFINITION OF LIMITED/NON-RECOURSE PROJECT FINANCE
Project Completion
Lenders are prepared to take project risk after Project Completion (after construction)
Project Completion 2 elements
Technical completion – Project performs at certain technical performance specified in Financing Docs
Financial Completion – Project performs at financial base case for certain specified period
Sponsor’s balance sheet released

8. Ways of Financing a Project
Public Finance from the budget for asset creation
Corporate Finance – balance sheet lending
Limited/non-recourse project finance
Hybrid of above

9. Public Finance for Asset creation
LENDERS / DEBT
Sovereign guarantee
Loan
Asset
TAX PAYERS/
TARIFFS
GOVERNMENT
PRIVATE
CONSTRUCTION
CONTRACTOR

10. Financing of Projects Conventional Lending

11. Forecasting the Future
PF - Different Approach to Lending (Slide borrowed from C Marais – slightly adjusted)
Conventional Lending
Project Financing
Forecasting the Future
Fortune telling?
Assessing the Past
Analyzing

12. Fundamental difference
Corporate lending –
Has no maturity
Assumption it can be refinanced
Analyses the past operational performance
Analyses the balance sheet performance
Raising financing on the basis of strength of B/S
Project lending –
Specific loan life usually with a tail as security
Ring-fenced Project
Single purpose vehicle
May be refinanced
Forecasts the future
Look at the Project viability/cash-flow

13. Financing of Projects Project Financing

14. Participants in a PF Structure
Government
Sponsors/Equity Participants
BEE participants
Borrower (SPV)
Financial Advisors
Arrangers/Underwriters/Lenders
Export Credit Agencies
Lessors

15. Participants in a PF Structure
Independent Experts
Lawyers
Construction Contractors
Operations and Maintenance operators
Insurers
Swap counterparties
Suppliers
Equipment vendors
Offtakers

16. Generic Project Structure

17. Contractual Arrangements
PPP Agreement
Shareholders Agreement
Equity Participation Agreement
Financing Agreements and Inter- creditor
Sponsor Support Agreement
Design & Construction Agreement
Operations and Maintenance Agreement

18. FINANCING OF PPP PROJECTS - Limited/non-Recourse Project Finance
Why limited/non-recourse PF for PPPs
Facilitate private sector involvement/capital in infrastructure development
Capital intensive – large scale infrastructure projects R500m+
PF structure allows and optimises private sector participation
No balance sheet impact – sponsor – off-balance sheet
Bankruptcy remote
Leverages private sector money
Allows high debt levels
Cash flow determines debt levels
Debt vs Equity risks
Cost of Debt vs Equity

19. FINANCING OF PPP PROJECTS – Limited/non-Recourse Project Finance (continue)
Why limited/non-recourse PF for PPPs
Robust due diligence by lending institutions and financial engineering
Experienced Sponsor with strong balance sheet to support Project to Project Completion
Managerial skills of private sector
Efficiencies because of profit motive
Balance Sheets only until Project Completion
Ring-fenced project cash flow with appropriate risk allocation
Complex legal structures, but very logical approach
Cash-flow driven
Ratios – DSCR / D:E / LLCR / PLCR and ALL

20. Government Perspective
Robust due diligence by PFs before financial close
Robust project structure, necessary and appropriate sponsor support
Identification, analysis and appropriate risk transfer/allocation (to party who has sufficient knowledge, expertise & experience to most appropriately manage the risk)
Risk mitigation where possible by participants
Experienced and skilled participants and strong management
Optimal gearing ratios and financial engineering
Proper and robust monitoring against base case
Control over the equity participants and watch-dog
Commitment to the project and step-in in case of service failure leading to termination

21. Lenders Perspective
Robust, ring-fenced project with appropriate risk allocation
Experienced sponsors and participants with substantial balance sheets to support projects to project completion
Project Fundamentals and economics – predictable and reliable source of cash flow
Demand for the project deliverables and enough cash flow generated to service debt (and ensure return on equity!!)
Well-balanced structure and tight legal agreements (contractual arrangements
Project assets as security – No assets as security in PPPs – therefore above NB
DFIs should be interested in socio-economic issues and local economic development

22. Lenders perspective - risk
Risks – identification, transfer/allocation and mitigation
Credit Risk
Construction Risk
Operating Risk, Performance and Termination Risk
Market Risk
Currency Risk
Cross-border Risk
Regulatory Risk
Political Risk
Force Majeure

23. Lenders Perspective - risk
Risks – identification, transfer/allocation and mitigation
Legal Risk
Technology
Completion Risk i.e. delays and cost overruns
Participant Risk
BEE participation and sustainability of funding structure Risk
Environmental and Heritage Risk
DOES PF PPPs GIVE COMFORT TO GOVERNMENT?
YES!!!!!! A lot

24. Ratios
Primary cash flow tool is ratio analysis. Ratios drive financial covenants
Important Ratios:
Debt / Equity (90:10)
Debt Service Cover Ratio (“DSCR”) (cash flow available for debt service / total debt service for the period – excluding cash balances)
Loan Life Cover Ratio (“LLCR”) (NPV of future cash flows for the remaining period of the loan / loan balance at beginning of period)
Project Life Cover Ratio (“PLCR”) (NPV of future cash flows for the remaining life of the project / loan balance at beginning of period)

25. Cash-flow Waterfall
Construction, operating and maintenance expenditure
Concession fees (if not subordinated) *
Interest and fees on senior debt
Principal on senior debt
Senior debt service reserve account
Interest and fees on subordinated debt
Principal on subordinated debt
Refurbishment / Maintenance Reserve Account *
Distributions to shareholders including payments on shareholder subordinated loans

26. WATER TREATMENT PLANT - BOT

27. FINANCING STRUCTURE

28. Thank you
Kogan Pillay
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