2. LIMITED/NON RECOURSE PROJECT FINANCE INTRODUCTION Introduction to Project Finance Presenter:

3. Introduction to Project Financing –Project Financing Public Finance Corporate Finance (B/S or Secured Assets or Preferential Claims outside the ring-fenced project structure) Limited/non recourse Hybrid –Ring-fenced or not –Limited recourse (limited recourse to sponsor B/S or Assets) and –Non-recourse Project Finance (Cash flushed projects ”from a bank’s perspective”) PROJECT FINANCE

4. Raising and contributing funds from the public either through : –Taxes and tariffs –Public Borrowing (Sovereign guarantees/bonds/notes) –Both To finance asset creation (infrastructure) Service provision FINANCING OF PPP PROJECTS - Public Finance

5. GOVERNMENT LENDERS / DEBT Sovereign guarantee Loan PRIVATE CONSTRUCTION CONTRACTOR TAX PAYERS/ TARIFFS Public Finance

6. FINANCING OF PPP PROJECTS –Project Finance Project Finance (B/S) Project Finance (Secured assets/pref claim) Project Finance (Limited recourse/non-recourse) –Ring-fenced –Security in Project except for Limited Liability i.e. Standby Fac/ Performance Bonds/Completion Guarantees –Stand Alone after Construction Period except for incidents identified up-front i.e. Maintenance or Refurbishment Spikes etc. –Hybrid

7. FINANCING OF PPP PROJECTS - Corporate Finance Financing of PPP projects –Corporate Finance (B/S) Security Recourse to the Balance Sheet of a Participant Assets outside of the Project Preferential Claims

8. Corporate Finance Raising finance on the basis of a Company’s existing financial strength, also termed as ‘direct lending’ or ‘balance sheet financing’ – could be rolled over into PF

9. FINANCING OF PPP PROJECTS - Limited Recourse Project Finance PPPs –Capital intensive –Leverages private sector money (debt and equity) –PF structure optimises private sector participation –Allows high debt levels - Cash Flow driven Cash flow determines debt levels Debt vs Equity risks –Robust due diligence by Financing Institutions –Project Cash flow/Cession of Rights/Legal Documentation = Security –Recourse to B/S of Participants for Limited Period –Managerial skills and other Efficiencies

10. FINANCING OF PPP PROJECTS – Limited Recourse Project Finance (continue) Logical and simple approach –KIS Efficient way of mobilising private sector investment for large infrastructure projects – no wants B/S hooked-up Efficient way of mobilising the debt financing from Financing Institutions –Banks –Institutional financiers –DFIs

11. FINANCING OF PPP PROJECTS – Limited Recourse Project Finance (continue) Project Finance (Limited recourse/non-recourse) –Off-Balance Sheet –Limited / non-recourse project finance –Balance Sheets only until Project Completion –Ring-fenced project cash flow –Complex legal structures, but very logical approach –Cash-flow driven –Ratios – D:E / DSCR / LLCR / PLCR and ALL

12. Generic Project Structure SPV GOVERNMENT Concession Contract Licence Agreement EQUITY INVESTORS Project Sponsors Passive Equity Subordinated debt 10 - 50 % DEBT DFIs ECAs Commercial Banks Capital Markets 90 - 50 % CONSTRUCTION DESIGNOPERATIONS MAINTENANCE Performance based delivery and supported by Sponsors BEE/HDIs

13. GENERIC PROJECT STRUCTURE GOVERNMENT EQUIT Y PROJECT SPONSORS SPONSORS SPV PASSIVE EQUITY SHAREHOLDERS LOAN SUB/DEBT DEBT SENIOR DEBT SUBORDINATED DEBT MEZZANINE DEBT DESIGNCONSTRUCTION OPERATIONSMAINTENANCE

14. GENERIC PROJECT STRUCTURE RISK ALLOCATION - EQUITY PARTICIPANTS PROJECT SPONSORS SPONSORS PASSIVE EQUITY SHAREHOLDERS LOAN SUB/DEBT COMPLETIO N RISK TECHNOLOGY AND TECHNICAL ASSISTANCE BIDDING AND DEVELOPMENT COST RETURN on INVESTMENT PARTICIPANT RISK i.e. OPERATOR FAILURE / BEE FINANCING COST i.e. CHANGES TO INTEREST RATES/HEDGING ALLOCATION AND MITIGATION OF RISKS

15. GENERIC PROJECT STRUCTURE RISK ALLOCATION - LENDERS SENIOR DEBT SUBORDINATED DEBT MEZZANINE DEBT Participant s Risk Political Risk Syndication Risk Foreign Exchange Interest Rate/Hedging Contract Risk

16. GENERIC PROJECT STRUCTURE RISK ALLOCATION - D&C PARTICIPANTS Site Environmental i.e. pollution Completion- time /cost Management Technology Engineering DESIGN CONSTRUCTION

17. GENERIC PROJECT STRUCTURE RISK ALLOCATION - O&M/FM PARTICIPANTS Cost Labour Relations Management Technical Technology BEE/ HDI OPERATIONS MAINTENANCE

18. GENERIC PROJECT STRUCTURE RISK ALLOCATION - GOVERNMENT Supporting Infrastructure Public Sector Inefficiencies Force Majeure Political Risk Changes in Law/Enabling Environment Foreign Exchange GOVERNMENT

19. GENERIC PROJECT STRUCTURE RISK ALLOCATION - SPV ? ? ? ? ? ? SPV SPV is left with Risks not allocated or mitigated

20. WATER TREATMENT PLANT - BOT

21. FINANCING STRUCTURE

22. LIMITED RECOURSE PF4PPPs Are you confused? It is difficult …..but Logical – 25% financial, 25% legal, 25% technical, and 25% common senese Keep it Simple “Stupid” (KISS) – vanilla structure, no complicated other structuring Questions???

23. Presenters Details