SECURING FINANCING FOR PPP
PROJECTS UNESCAP POLICY DIALOGUE ON PPP
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September 23, 2015
PPP projects are financed/ funded by Public & Private sources
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• Typically 20 – 40%
• Contribute Equity
• Take manageable
risk for higher
returns
• Typically 60 – 80%
• Contribute Debt (Loans,
Bonds)
• Very risk averse
Shareholders
Private Funding
Lenders
Public Funding Support
PROJECT
Govt. pays
for services
Users pay for
services
Projects that generate ready cash flows attract most private investment:
Water ~ 33%; Energy & Transport ~ 70%; Telecom ~ 90%
A variety of participants contribute to financing of PPPs
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Multilaterals (IFC, ADB, MIGA)
Government
Subsidy/ Grants
Project Sponsor
Commercial Lenders Public Financial Intermediaries
Project
SPV
Export Credit Agencies
Guarantees
Concessional Loans
Equity/ Sub Debt
Debt: Bank Loans, Bonds
Guarantees/ Credit Enhancements Guarantees/ Credit Enhancements
Debt
Multilaterals (WB, ADB)
Take Out Financing
Debt
Equity
PCG
Risk Insurance
Loans PRG
Project Finance structure is the most common (~70%) with Commercial
Banks being the primary sources of debt
• Separate Legal Entity from sponsors
• Ring-fencing Project
• Limited or No recourse to sponsors
• Predominant dependence on project cash flow
Lenders
• Adequacy, certainty & timeliness of cash flow
• All risks to cash flow have to be addressed upfront
Bankability
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Securing Financing for PPPs is therefore mostly about setting the
conditions right for Project Finance
• Legal & Regulatory framework: commercial structure in the sector; level of user charges
• Simulate a financial model: Capex, Opex, Volume of demand, Debt repayment profile and Coverage; Equity IRR
• Need for public financial support to enhance debt service coverage and Equity IRRs?
Adequacy of cash flow
• Critically assess risks that could affect cash flows
• Allocate risks to the party best able to deal with it
• Mitigate risks so as to reduce overall costs and not just direct costs to Government
Certainty and
timeliness of cash flow
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Examples of some risks that are important to address
• Legal & Regulatory framework & Institutions
• Level of user charges
Sector Specific Issues
• Upfront technical due diligence and investigations
• Delays and cost overrun risk offloaded to reputed construction companies and backstopped by sponsors
Construction risks
• Demand risks (Availability payments or Take or Pay contracts), Tariff risk (Long term contracts), Payment risk (backstopping of offtake commitments) Market risk
• Tariff adjustments to be predictable. To be backstopped by Government. Regulatory risk
• Hedging in private swap markets may not be possible. Government may need to mitigate forex risks trough tariff adjustments if foreign funding is involved.
Foreign Exchange Risk
• Equator Principles: IFC Performance Standards
• E&S Impact Assessments, Mitigation Plans
Environmental & Social Risks
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Different forms of public support to PPPs can be used to secure financing
• Cash or Kind to defray construction costs, procure land, provide assets, support major maintenance
• Viability Gap Funding Funded Support
• Guarantees of debt, exchange rates, offtaker obligations, the level of tariffs permitted, the demand for services, termination compensation, etc;
• Indemnities against non-payment by state entities, for revenue shortfall
• Contingent debt: take-out financing if project can only get short tenor debt)
Contingent Support
• Borrows from private debt market based on its higher credit worthiness
• Onlends to projects
Financial Intermediaries
• e.g. Global Infrastructure Facility managed by the World Bank
Project Development
Funds
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Issues related to design of public financial support to PPPs
•Right amount and right structure? •Credible sharing of risks, costs and benefits •Avoids rate shocks
Political Support
• Public support should be sustainable
• Finding the money upfront is important
Fiscal Feasibility
•Kick starts major projects in a difficult investor environment •Transition to full cost recovery rates for public services in the long run
Is a transition
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9
• Info memo
•Road show
•Data room
•Contract
effectiveness &
assumption of
service
obligations
•Conditions
Precedent
• Financial
Closure
achieved by
private party
•Document has to
be seen as
bankable by
financiers and
investors:
Consultation is
key
•Viable
structure
• Identify
sources of
public
financing
support
• Identify risk
mitigation
necessary to
secure project
finance
Contractual
Closing
Conduct
Tender
Prepare
PPP
Contract
Market
To
Investors
Define
Transaction
Structure
Assess
PPP
Options
• Technical
definition
• Legal Due
Diligence
• Financial
Model
•Risk allocation
•Payment
mechanism
• Transparency
• Adequate time
for due
diligence by
lenders to
avoid post
tender
uncertainties
and
negotiations
IFC’s Role as Transaction Advisors A structured project preparation process is critical
Lenders (and investors) play a critical role in due diligence
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Contract Design • Service obligations/standards
• Sustainable risk mitigation
• Monitoring and dispute resolution
Tender Process • Fair/equal treatment of investors
• Global investment promotion
• Transparent public tender &
evaluation criteria
Project financing • Service affordability
• Creditworthy government
purchaser
• Optional IFC financing
IFC’s Approach to PPPs Expert transaction advisors are needed to put several pieces together
In the end, a complex web of contracts reflecting a bankable risk allocation
and mitigation enables financing
Power SPV
Sponsors
State
Electricity
Board
(Purchaser)
Escrow Bank
State Government Lenders
PPAs
Private
Operator
LN
G S
up
ply
Ag
reem
en
ts LNG Supplier
Tra
nsp
orta
tion
Ag
reem
en
ts
Shipping Co.
EPC Contractor
Sp
on
sor
Co
mm
itmen
ts
Central Govt
Escrow
Agreement
Some WBG Entities that play a role
• Equity, Debt and Guarantees to Private Sponsors after Contractual Closure
• Indicative Term Sheet at time of bidding if requested by Govt.
• InfraVentures: development capital and debt syndication to sponsors
IFC Investment
• Advises Government clients on structuring bankable transactions
• Only multilateral with global footprint which advises directly
• Global leader in PPP transactions since 1985
IFC PPP Transaction Advisory Services
• PPP Best practices & Capacity Building; Sector Reforms
• Financing of public obligations in PPPs
• Risk Mitigation products
WB
• Development funding to public entities
• Structure PPP to attract institutional investors
Global Infrastructure Facility
• Risk mitigation MIGA Footer
THANKS
September 23, 2015
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