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    Project Finance of Infrastructure PPPS: An Introduction

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    mahmoud Ibrahem
    1) The document discusses project finance of infrastructure public-private partnerships (PPPs), including definitions, interests, and risk allocation models. 2) It provides an overview of key project finance concepts such as special purpose vehicles, non-recourse debt, and reliance on project cash flows. 3) The successful structuring of PPPs requires an adapted legal framework, public expertise in needs identification, and financially viable projects with experienced operators.

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    Project Finance of Infrastructure PPPS: An Introduction

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    mahmoud Ibrahem
    36 views15 pages
    1) The document discusses project finance of infrastructure public-private partnerships (PPPs), including definitions, interests, and risk allocation models. 2) It provides an overview of key project finance concepts such as special purpose vehicles, non-recourse debt, and reliance on project cash flows. 3) The successful structuring of PPPs requires an adapted legal framework, public expertise in needs identification, and financially viable projects with experienced operators.

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    1) The document discusses project finance of infrastructure public-private partnerships (PPPs), including definitions, interests, and risk allocation models. 2) It provides an overview of key project finance concepts such as special purpose vehicles, non-recourse debt, and reliance on project cash flows. 3) The successful structuring of PPPs requires an adapted legal framework, public expertise in needs identification, and financially viable projects with experienced operators.

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    36 views15 pages

    Project Finance of Infrastructure PPPS: An Introduction

    Uploaded by

    mahmoud Ibrahem
    1) The document discusses project finance of infrastructure public-private partnerships (PPPs), including definitions, interests, and risk allocation models. 2) It provides an overview of key project finance concepts such as special purpose vehicles, non-recourse debt, and reliance on project cash flows. 3) The successful structuring of PPPs requires an adapted legal framework, public expertise in needs identification, and financially viable projects with experienced operators.

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    Project Finance of infrastructure PPPs : an introduction

    Infrastructure PPPs : presentation

     Definition :
    - Way of delivering public infrastructure through procuring services rather than capital assets

    - Public sector defines service requirement

    - Private sector designs, finances, builds, operates, (usually transfers) the asset

     Interest
    - Alleviate budgetary constraints

    - Expertise

    - Transfer of risk

    2
    PPP Risk Matrix

    Public Partnership
    u BOT (building Privatization
    procurement agreement (building and operation) (building and/or
    (building and/or and/or operation) operation)
    operation)

    Public financing, Private financing, Private financing, Private financing,


    public payment public payment private payment private payment
    (users)

    Risks assumed by Risks assumed by the Risks assumed Risks assumed by


    the private sector: private sector: by the private the private sector:
    construction risk construction risk, sector: construction risk,
    performance risk construction risk, performance risk,
    performance risk, commercial risk
    commercial risk

    Degree of control Degree of control by Degree of control Degree of control


    by the public the public authorities: by the public by the public
    authorities: very high authorities: low authorities: very
    high low 3
    Project finance : presentation

    . Definition :
    - A stand alone project and a Special Purpose Company

    - Non recourse MLT finance with high ration debt/equity

    - Lending based on project cash flows

    - Lenders mainly rely on project contracts as project security

    . Interest :
     Transfer of risk

     Lower the risk

     Lower the cost/increase the return on equity

    4
    An exemple of project finance structure

    Source: Esty, B., “An Overview of Project Finance – 2002 Update: Typical project structure for an independent power producer”

    5
    A favourable institutional framework

    . An adapted legal and regulatory framework:


    - complete (PPP, public domain, securities, investment and preinvestment protection)

    - clear (directly or indirectly : assistance and/or binding opinions)

    - encouraging competition (transparency and remedies) and the diffusion of


    ideas (the private sector may contribute to the definition of the needs of the public party)

    . A public expertise :
    - Prior identification of the needs (budgetary, financial, operational, expertise, risk managment) and of
    the objectives

    - Negotiating capacity (internal and external)

    6
    A bankable project

    . A cash flow positive project :


    - Capacity to generate the cash flow necessary to repay the debt and consitute the necessary
    guarantees (even in a bad case scenario without jeopardising the continuity of operations)

    - Capacity for the sponsor to fund the equity needs of the project

    . An experienced operator

    . A mature technology

    . A limited or covered political risk

    7
    The PPP agreement (1)

    • . Objectives, royalties and performance targets

    . The public party's undertakings:


    - exclusivity,

    - occupation of the public domain,

    - permits and authorizations,

    - provision of essential utilities,

    -tax and customs regime,

    - payment obligation/offtake agreements/public subsidies,

    - right to distribute the proceeds ad to free convertibility, guarantee


    against expropriation,

    - reserving the rights of the lenders

    8
    The PPP agreement (2)

    u
    . Limitations to the private party's freedom of management :
    - approval of change of ownership,

    - maintenance,

    - insurance,

    - approval of tariffs and possible IRR caps

    . Delimitation of the public party's rights :


    - right of approval of the works,

    - statuts of the transfer of the assets at the end of the PPP,

    - powers of control and of sanction

    9
    The PPP agreement (3)

    . Unforseeable events : Hardship, force majeure : (allocation of risks, consequences, compensation)

    . Public party caused changes : change orders, change of law (conditions, consequences)

    . Change of operator/change of operator/step in right

    . Refinancing (conditions, consequences)

    . Early termination (General interest and breach of contract : compensation mechanisms)

    . Applicable law (impact on the PPP) and settlement of disputes


    (mediation/arbitration/investment protection)

    ;
    10
    Other major contracts : The main Financing documentation

    . Loan agreement
    - cash waterfall and use of Insurance proceeds

    - financial and other covenants

    - step in right

    - acceleration

    . Security documents : pledge/mortgage/assignment of


    proceeds/escrow accounts/completion guarantees

    . Direct agreement with the government


    . Political insurance (as the case may be) :
    scope/duration/possible State counter guarantee

    11
    Other major contracts (may vary depending on each project):

    . Construction Contract (EPC):

    - acceptance process
    - delays and penalties
    - performance guarantees
    - liability caps
    - insurance
    - force majeure

    . Operation and Maintenance Contracts:

    - scope and conditions of intervention


    - performance guarantee
    - liability and insurance
    - duration and termination

    12
    Other major contracts (may vary depending on each project) :

    . Offtake Contract:

    - tariffs
    - take or pay obligation
    - delivery conditions
    - force majeure
    - duration
    - guarantees (state guarantees/political insurance)

    . Input Supply Contract:

    - tariffs
    - take or pay obligation
    - delivery conditions
    - force majeure
    - duration

    13
    Case study: a port BOT in West Africa

    . Presentation :

    - Local and regional demand


    - Solid sponsors
    - Existing local competition
    - Land belonging to various public entities
    - Exploitation of the sand by local population
    - Dredging necessary
    - Energy limitations
    - Perceived political risk
    - Applicable legislation does not allow for step in rights
    - Project to have significant employment and financial impact on the State's budget

    14
    Case study: a port BOT in West Africa

    . Project structuring :
    - Local SPV set up
    - IFC led consortium of commercial Banks
    - sponsor's corporate gurantee for the construction period
    - tenders for subcontracting
    - Throughput agreement with a financially solid shipping company
    - Changes in the legal regime to allow for (i) the independent
    production of electricity by the port operator and (ii) the
    lender's step in right
    - dredging undertakings and agency agreement for the port operator to contract the
    dredging company on behalf of the public authorities
    - environmental report carried out and compensation regime set up for the local
    populations prevented from expliting the sand on the new port's site
    - Public land owned by several public entities contributed to the port
    operations by the sole Grantor
    - Determination of the tariffs by the Port operator but on the basis of
    principles preserving the competititvity of the port within the region
    - Ruling by the tax authorities to ensure that specific tax and customs advantages open
    to the SPV may as well benefit the subcontractors

    15

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