1. Project Finance ICAM Conference September 2014
Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC
4/13/2017

2. In SADCs to spend US$64bn between 2013 to 2017
The Infrastructure Gap
In SADCs to spend US$64bn between 2013 to 2017
(interconnection) ( Twara Corridor) ( Songwe river Basin)
Source: SADC Short-term Plan 2013 – 17
4/13/2017
Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC

3. The Infrastructure Challenge
Infrastructure demand growth rate > traditional finances
Traditional finance not enough for operations
Need for Project Finance
4/13/2017
Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC

4. Definition by E. R. Yescombe, 2007
Means of raising long term non-recourse debt financing for major projects based on lending against the project’s future cash flows and depends on a detailed evaluation of project’s construction, operating and revenue risks, their allocation between the investors, lenders and other parties through contractual and other arrangements.
4/13/2017
Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC

5. Corporate Finance Trend Analysis Loan against exiting balance sheet
A going concern status
Extrapolate from past performance
Management has full control
Recourse to company balance sheet;
including past total cash flows from rest of business
4/13/2017
Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC

6. Sovereign Finance Government borrows to finance public infrastructure.
Govt. may contribute its own equity
Analyze govt.’s ability to raise funds
Shows up as a liability on Government
sovereign guarantee
from taxation and general public enterprise revenues, plus any new tariff revenue from the project
4/13/2017
Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC

7. Angel Finance Rich individuals or a group
Retired entrepreneurs or executives
Seed capital
Management advice & contacts
Bear extremely high risks
A higher reward
Invest beyond monetary return
Equity or convertible debt
A defined exit strategy
4/13/2017
Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC

8. Structured Finance Existing Company borrows
Finance brown field project
Full recourse on borrower
Creditworthiness - historical & future
Limited security perfection
Pay interest in construction
IPO or acquisition
4/13/2017
Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC

9. Project Finance High upfront capital intensive assets, long lives.
Fortune telling??
Project Finance
DSRR
NPV
ROE
High upfront capital intensive assets, long lives.
Greenfield project
Used in most PPP’s
Special Purpose Vehicle borrows
Highly leveraged structure
Non or limited recourse
Bankability- NPV of future cash flows
Capitalise interest in construction
IRR
ROE
NPV
Demand
Inflation
Demand
Interest
Inflation
energy, gas
Interest
4/13/2017
Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC

10. Financing Agreement Disbursements-lender’s consent. Lenders monitoring
Step in rights
In large projects financiers appoint manager
Lien-project assets, paid from project cash flows
Debt repaid before the end of project life.
4/13/2017
Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC

11. Typical Stages in Project Finance
Preliminary negotiations (Business Plan, Cash flow projections
Due diligence (affordability, technical, Economic, Environmental, legal, financial, commercial)
Stage 1
Stage 2
Stage 3
Construction
Service delivery
Procurement/Bidding
Contract negotiations
Contract Signing
Financial closure (Sale and Purchase Agreement, concession, Construction, FM agreement, Conditions precedent, Architects, Contractors, Project Management team, Marketing team)
4/13/2017
Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC

12. Project Finance Pricing
During Construction Period: LIBOR + X%
During Project Operation: LIBOR + X% -1%
Typical Upfront Fees : X
Arrangement Fee – Once off Documentation Fees
Legal Fees
Commitment Fees –X% p.a. on un-drawn amount ™
Administration Fees
4/13/2017
Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC

13. 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
4/13/2017
Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC

14. The Cash flow Waterfall
EBITDA
DSCR = =>1.5
Debt Service
Operating Income or EBITDA
Revenue
O & M Expenses
Debt Payment
Taxes
Profit
4/13/2017
Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC

15. Key Ratios (negative covenants)
Debt Service Cover Ratio (“DSCR”)
Loan Life Cover Ratio (“LLCR”)
Project Life Cover Ratio (“PLCR”)
Cash flow waterfall priority
Major Maintenance reserve account >X
DSCR - (cash flow available for debt service / total debt service for the period – excluding cash balances)
(NPV of future cash flows for the remaining period of the loan / loan balance at beginning of period)
(NPV of future cash flows for the remaining life of the project / loan balance at beginning of period)
4/13/2017
Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC

16. Financial Modeling
Lending based on financial modeling of investment, cost & revenues.
bankability based on key assumptions
Sensitivity & scenario analysis used to draw the comfort lines
4/13/2017
Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC

17. Key Inputs of a financial model
Project duration
Initial Capital plus additional capital Demand volume
Price
Unit cost
Overheads
Inflation
Discount rate- Cost of total capital
Interest rate
Debt repayment
4/13/2017
Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC

18. Special Purpose Vehicle
A special entity created for project, shields other sponsor’s assets from project failure.
Has no assets besides the project.
Sponsors capital contribution assures lenders of the sponsors' commitment.
4/13/2017
Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC

19. Special Purpose Vehicle
Project sponsors
Contracting Authority
Contract Monitoring
fees
Unitary payments
Other Equity Investors
Marriage contract
The Special Purpose Vehicle
Payment
Construction firm
DEBT FINANCIAR
Financing agreement
Government contracted certifier
Operating and Maintenance
Subordinated debt/ Mezzanine
Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC
4/13/2017

20. Sources of Project Finance
Equity- for new or same line of business
Pure equity or Quasi equity, Preferred equity, Shareholder loans
Pension funds- matches with pension obligations
A 'syndicate' of lending institutions
Senior debt, Second lien debt, Mezzanine debt, Convertible debt
Bank loans (usually short term)
Construction risk capital
Infrastructure Bonds- based on project cash flows
Revenue Bonds- used by municipals
Securitization – receivables used to float a bond
4/13/2017
Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC

21. Project Financing Risks
Infrastructure projects are inherently risky.
A project may be subject 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.
Financiers institutions at times conclude that the risks in a project are unbankable
Riskier projects may require limited recourse financing, a surety from sponsors
4/13/2017
Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC

22. Risk Allocation
4/13/2017
Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC

23. Public Sector Base Comparator
Affordability
Hypothetical, risk-adjusted, cost of govt. doing a project.
Expressed in present value
Testing private party bid for value for money.
Helps to ascertain full life cycle cost of the project.
PV of Govt.’s future revenue :
equals or exceeds present value of future capital & current expenditure
Whole life cycle costs
4/13/2017
Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC

24. Present Value of O & M
4/13/2017
Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC

25. Risk Impact Assessment
4/13/2017
Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC

26. Risk Probability
4/13/2017
Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC

27. Value for Money Present Value of PSC less Risk adjusted private bid
Monitor VM during tender, construction & Service delivery
Significant shift of VM might be ground for renegotiation
Develop a PSC
Compare with shadow price
If PSC price> shadow bid, then proceed to tender
Comparator bid price with PSC
Monitor the value for money throughout the project life
Develop a Shadow bid
4/13/2017
Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC

28. Value for Money assessment
NPV of PSC $149.9m less
NPV of PPP bid $121.1m = $28.8m
4/13/2017
Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC

29. Summary
$170
$14.9m
$149.9
$28.8m
$135
$121.1
$100
4/13/2017
Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC

30. Thank you for your Attention
Questions?
Thank you for your Attention
4/13/2017
Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC