“Project Finance & Infrustructure Development: Insurance as a Security Instrument for Japanese Investment Abroad”
Workshop for the United Nations EconomicCommission for Europe (UNECE)
15 November 2011Tokyo, Japan
James A. Maguire
Regional Managing Director, Asia
Construction, Power & Infrastructure Specialty
Agenda
� Project Finance 101
� Risk Management – The Role of Aon
� Case Studies:
– Indonesia IPP 2011
– ABC Hydro Project in Latin America 2010
� Conclusions
– Best Practices in Project Finance and Insurance
– Contacts
– Aon Corporation
Project Finance & Insurance – Do We Need Either One?
Project Finance and Infrastructure Development
� Who’s “balance sheet” is evaluated? SPV/Borrower, Contractor (Performance Security), Host Governments, Insurer or Reinsurer?
� Today’s borrowing environment is different but key lending dynamics are fundamentally the same:
– “Need for accurate and sufficient information to identify potential risks”
– “Risk of borrowing beyond repayment capacity”
� Role of Risk Management, in both contexts:
– Supports understanding the project’s risk profile
– Is relevant for lenders (providers of debt/capital) and insurers (providers of contingent capital)
� Role of Insurance: transfers some of the financial consequences to a third party balance sheet thereby minimizing loan repayment risk
What is Project Finance?
• Financing technique for capital-intensive projects– Limited or non-recourse to sponsors
– Special Purpose Vehicles
– Risk transfer vital
• Lenders see cash flow or revenue stream of a project as the source of funds from which loans repaid
• Lenders view the underlying assets of the project as collateral for the loan or to repay debt
• Creditworthiness of project parties (including insurers/reinsurers) is critical
• Lenders view the contractual framework (concession agreement, off take agreement, fuel supply agreement, EPC, O&M) as project security
• Contracts represent the framework for project construction and control the allocation of risks.
Project Finance Lenders – Who’s Taking the Risk (s) ?
• Limited or non-recourse basis of privately financed projects – highly leveraged financial structure (75%/25% debt to equity ratio)
• Projects evaluated on contractual framework and cash-flow or revenue stream (“Bank-ability”)
• Lenders are the real risk takers?
• SPV/Borrower has minimal equity contribution (usually)
• Government loan guarantees?
• Insurance can be a principal recourse to funds – contingent capital
• “Bankable” projects require Lenders’ achieving comfort with security package
• Insurance and reinsurance form a part of the security package
Project Finance – The Role of Insurance
Insurance and Bankability
• Funds delay in project completion
• Minimizes the completion risk of the project
• Insurance in a project becomes a form of collateral or an enhanced form of security for the Sponsor and the Lenders
• Enhances project credit – contingent capital
• Revenue stream secured during construction and operational phase
Typical Contractual Structure for an Infrastructure Project
GOVERNMENT CONCESSION OR
PRIVATE CUSTOMER
COMPANY 1
COMPANY 2
PROJECT COMPANY
SECURITY AGENT
Assignment/Pledge of:• assets• land rights• all project contracts• accounts• insurance policies
LENDER 1(Onshore)
INSUREREPC Contractor
• Engineering, Procurementand Construction
Contract
O&M Contractor• Operation and
Maintenance Agreement
LENDER 2 (Offshore)
LENDER 3
LENDER 4 (JBIC)
SPONSORS LENDERS
Equity Funding
Shares in ProjectCompany
Loans
Repayment of Loans
Risk Management Process – The Role of Aon
Risk Profiling - Project Risk Management Strategies
Avoid
� Avoid� Retain� Reduce� Transfer� Leverage
Determine Risk
Strategies
� Avoid� Retain� Reduce� Transfer� Leverage
Retain
Reduce
Transfer
Leverage
� Divest� Prohibit � Stop� Target� Screen� Eliminate • Accept
• Re-price• Self insure• Offset • Plan
• Disperse• Control• Re-organize• Re-engineer
• Insure• Reinsure• Hedge• Securitize• Share• Outsource • Indemnify
• Allocate• Diversify• Expand• Create • Redesign• Arbitrage• Renegotiate• Influence
Specimen Risk Map
>$2
0M
LikelihoodUnlikely
Impact
[$5
00
K/$5
M]
[$5M
/$
10
M]
[$10
M/$
20M
]<
$5
00K
Rare Likely Very likelyPossible
2
25
11
16
1
9
8
Gross risk
Mitigation
Net risk
38
2
77
11
9
8
1
25
2626
16
1714
14
6
28
24
32
31
31
1024
32
>$2
0M
LikelihoodUnlikely
Impact
[$5
00
K/$5
M]
[$5M
/$
10
M]
[$10
M/$
20M
]<
$5
00K
Rare Likely Very likelyPossible
2
25
11
16
1
9
8
Gross risk
Mitigation
Net risk
38
2
77
11
9
8
1
25
2626
16
1714
14
6
28
24
32
31
31
1024
32
Q: So how do we assure the effectiveness of insurance as a risk controlA: Establish an ‘insurable’ risk profile and design an optimal transfer program
Risk Profiling – Insurance as a form of risk control
Case Study: Indonesia IPP Post Fukushima – Due Diligence
� The Red Pin shows the plant site.
� The Power Station is located in Central Java and is about 0.3 km from the coast. Topography of the plant site can be defined as low lying flat land.
11
Case Study: Indonesia IPP Post Fukushima – Due Diligence
12
Case Study: Indonesia IPP - Typhoon Risk Assessment
13
� No recorded storms which passed within a 50 km radius buffer zone of the plant site during the period from 1945 to 2009
Case Study: Indonesia IPP - Volcanic Risk Assessment
14
The Plant site is approximately 90Km North-East (from Google Earth) of Mt Merapi.
Lender Concern: Host Country/O&M Contractor ability to service debt ?
� Potential Perils Insurable Comments
– No Water ☺ Detailed data/cost
– Earthquake/Volcano ☺ Nat Cat
– Turbine Defect ☺ Design Wordings
– Rotor Machinery Breakdown ☺ T&C and operational
– Power tunnel collapse ☺ Design or Nat cat?
– SRCC/Political Violence ☺ Thailand precedents
– Terrorism ☺ Established market
– PPA Cancelled ☺ MOF Guarantee? Sovereign?
– Powerhouse Expropriated ☺ Established market
– O&M Contractor default ☺ Established market
– Power Bureau default ☺ Sovereign v sub-sovereign/cost
– O&M Contractor Performance � Performance = commercial risk?
� Insurance is a financial risk management instrument to mitigate the potential failure to service debt repayment !
Case Study: Project ABC Hydro in Latin America
Do Project Sponsors and Lenders Really Need Insurance?
Infrastructure Projects, Project Finance & Risk Assessment
• Assessing and Management of Risk is fundamental to Financing Projects
• Risk issues are at every stage of project development
• Sponsors, Lenders and Contractors need Risk Management frameworks
• Reinsurance Syndication = Debt Syndication:
• the better the risks are assessed the better the pricing of risk
• Insurance is an instrument in the project security package
• Think of insurance as:
– Contingent prepaid line of credit
– Security instrument in the lending package
• Insurance market volatility prevails – Christchurch, Fukushima…
“Risk is a choice, rather than a fate.” Peter Bernstein
Aon Contact List
James A. Maguire Bharat Kannan
Regional Managing Director, Asia Director, Chief Strategy Officer
Construction, Power & Infrastructure Specialty Aon Japan Limited
+852.2862.4293 +81.3.3237.6353
[email protected] [email protected]
Tomohiro Katayama
Manager
Construction, Power & Infrastructure Aon Specialty
Aon Japan Ltd.
+81.3.3237.5579
Bharat Kannan
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