Risk Management of a PPP

Presented by:Audrey Mwala

Director Project Finance & Risk AnalysisThe Public Private Partnership Commission, Malawi.

05/03/2023 Risk management, Presented by Audrey Mwala, The PPPC, Malawi, Phone +265888832393, email:amwala@pppc.mw

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Project Financing Risks• Infrastructure projects are inherently risky.• A project may be to subjected 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.

• Financing institutions at times conclude that the risks in a project are unbankable

• Riskier projects may require limited recourse financing, a surety from sponsors

05/03/2023 Risk management, Presented by Audrey Mwala, The PPPC, Malawi, Phone +265888832393, email:amwala@pppc.mw

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Determinants of risk allocation

• Choice the PPP model• Project type• Green field Vs brown field• Prevailing economic

environment• Payment mechanism• Performance measurement

mechanism

05/03/2023 Risk management, Presented by Audrey Mwala, The PPPC, Malawi, Phone +265888832393, email:amwala@pppc.mw

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Risk Identification• Construction (cost, delays, quality)• Operating risks • Demand risk • Force majeure and change in law • Political and regulatory risk and expropriation and

nationalization risk • Environmental risk • Social risk • Tenor and Refinancing Risk• Currency exchange risk • Interest rate risk

05/03/2023 Risk management, Presented by Audrey Mwala, The PPPC, Malawi, Phone +265888832393, email:amwala@pppc.mw

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Risk Impact Assessment

05/03/2023 Risk management, Presented by Audrey Mwala, The PPPC, Malawi, Phone +265888832393, email:amwala@pppc.mw

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Risk Probability

Risk has pushed cost by $201 i.e.40.2%

05/03/2023 Risk management, Presented by Audrey Mwala, The PPPC, Malawi, Phone +265888832393, email:amwala@pppc.mw

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Risk Allocation Factors

• Allocate risks to the party that is best placed to manage them. Best able to:– control chance of occurrence– Control the impact– Absorb it at lowest cost

• With maximum risk to private sector:.– Increases risk premium/ high equity return– Hard to raise debt

05/03/2023 Risk management, Presented by Audrey Mwala, The PPPC, Malawi, Phone +265888832393, email:amwala@pppc.mw

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Risk AllocationRisk Event Impact Private party Shared Risk Government MitigationConstruction risk high InsuranceOperational- loss of revenue Medium pay for the whole yearCommercial risks low marketing & good serviceDamage of fixtures Medium security camerarent default Low advance payment

Lack of security MediumRound the clock security , & police presence

Land encroachment by staff membersMedium Warn teachers in advanceFire Catastrophic Anti-fire formPower fai lure Severe T rainingWater availabil ity severe boreholeFinancing servere Low gearing ratioExchange rate Medium stablisation fundInterest rate Low fixed interestConcession fees default Medium Close monitoringRegulatory Risk Medium Stabillisation fundResidual Value risk severe Compulsory maint.

05/03/2023 Risk management, Presented by Audrey Mwala, The PPPC, Malawi, Phone +265888832393, email:amwala@pppc.mw

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Limitation of risk allocation

• Level of detail of risk allocation ( cost /benefit)• Risk that can’t be transferred (e.g. political,

economic risk)• Extent of risk transfer- limited to equity and not full

value of debt, the Brisbane tunnel the lenders and private investors took a haircut

• Force majeure- CEAR wash away of Rivirivi bridge

05/03/2023 Risk management, Presented by Audrey Mwala, The PPPC, Malawi, Phone +265888832393, email:amwala@pppc.mw

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Mitigating project risks, Lender’s perspective (negative covenants)

• Gearing restrictions• Debts service coverage ratios– Debt Service Cover Ratio (“DSCR”) – Loan Life Cover Ratio (“LLCR”) – Project Life Cover Ratio (“PLCR”)

• Cash flow waterfall priority• Reserve accounts– Major Maintenance reserve account– Debt service reserve account

• Insurance• Mezzanine finance

05/03/2023 Risk management, Presented by Audrey Mwala, The PPPC, Malawi, Phone +265888832393, email:amwala@pppc.mw

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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

05/03/2023 Risk management, Presented by Audrey Mwala, The PPPC, Malawi, Phone +265888832393, email:amwala@pppc.mw

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The Cash flow WaterfallEBITDA

DSCR = ----------------=>1.5Debt Service

Operating Income or EBITDA

Revenue

O & M Expenses

Debt Payment Taxes Profit

05/03/2023 Risk management, Presented by Audrey Mwala, The PPPC, Malawi, Phone +265888832393, email:amwala@pppc.mw

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Lenders Risk Mitigation through host Govt.

• Gap funding– Capital or operational costs (University student accommodation)

• Step in rights• Availability payment ( CEAR concession passenger service)• Compensation for project termination or force majeure event• Government Guarantees (Direct Agreements) CEAR OPIC loan• Collateral e.g. over project site (Vale green field PPP)• Challenge- increase Govt.’s contingent liabilities & reduces VFM

05/03/2023 Risk management, Presented by Audrey Mwala, The PPPC, Malawi, Phone +265888832393, email:amwala@pppc.mw

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Mitigation by Govt. - Construction & Operation phase

•Liquidated Damages – payment for construction delay e.g. $3b Airport link tunnel PPP Queensland, Brisbane, 2013 •Performance Bond – against constructions challenges e.g. Gautrain, Fiber optic cable PPP •Parent Company Guarantees – to take on some of the obligations of the sub-contractor•Environmental assessment- Equator principles•Key performance indicators •Performance based payments- Fiber optic connection PPP, The Canada Line

05/03/2023 Risk management, Presented by Audrey Mwala, The PPPC, Malawi, Phone +265888832393, email:amwala@pppc.mw

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Risk Management by Government• Gap funding- reduces risk premium• Reduce cost of finance –Govt. pass on concessional loans• Risk allocation• Contract performance monitoring

– Construction– Operation – key performance indicators, penalties

• Reporting obligations• Insurance• Key personnel• Certified Auditors• Renegotiation

05/03/2023 Risk management, Presented by Audrey Mwala, The PPPC, Malawi, Phone +265888832393, email:amwala@pppc.mw

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Risk Management by Project Sponsors• Leveraged capital structure • Establish Special purpose vehicle• Lenders monitoring• Subordinated loans• Contractors @ risk capital• Experienced O&M firm– Key performance indicators

05/03/2023 Risk management, Presented by Audrey Mwala, The PPPC, Malawi, Phone +265888832393, email:amwala@pppc.mw

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•Communication risk- shared between Govt & private party. Liwonde Game Reserve, MSC concessions•Financing risks- By private sector, some times Govt. provides a guarantee, step in rights CEAR concession•Demand risk- private sector but for upcoming power IPPs Govt. will be the offtaker to take demand risk•Contingent liabilities risk- approval of feasibility study by Ministry of finance•Political risks- cabinet approval of specific PPP projects•Social risks- Govt. better placed MSC hotel project•Construction risk- Private sector Vale Rail PPP•Maintenance- shared initial cost e.g. CEAR, NoCMA

Project Specific Risks

05/03/2023 Risk management, Presented by Audrey Mwala, The PPPC, Malawi, Phone +265888832393, email:amwala@pppc.mw

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•Need for risk reporting framework•Monitor risk during:• Project preparation• Procurement• Implementation • Contract end•Significant shift on risk framework can be ground for renegotiation

Risk Monitoring