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

10

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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