Chad-Cameroon Pipeline: Summary Did the project finance create value for the sponsors? –Value creation is expected, or it would have used other types of finance. –Gross Value: at least $15 million + value of time structuring the deal. (It must have been worth it to spend the time and pay the $15 million in fees.) –Value net of PF transaction costs should be positive. –The fact that the sponsors used corporate finance for the field system suggests that transaction costs of PF are high. The incremental benefit of arranging a PF for the field system is exceeded by the incremental transaction cost. Important sources of the value –World Bank/ECAs participation mitigated political risk. The RMP constrains the party (Chad gov’t) who controls the risks. –Non-recourse debt shielded sponsors credit exposure. –PF structure allowed the use of higher leverage (higher value of tax shields, and reduced equity exposure). Compared to the Busang/Bre-X deal in Indonesia, Chad and Cameroon all got a pretty good deal. But the cash flows that Chad receives is “back-loaded”—it gets more of the cash flows later, rather than earlier. In other words, it ends up bearing more of the reserve risk than the sponsors.

Murphy’s Law Applied to Project Finance Project risks end up on those least able to resist them.

Poland’s A2 Motorway Infrastructure projects Sponsors announced 279 toll road projects in 26 countries worth US$61 billion from 1990 and 1999 (World Bank Private Participation in Infrastructure (PPI) database). Moody’s now rates $29 billion of toll road debt from 32 issuers. A2 is one of the larger road projects, certainly a milestone in the development of Eastern and Central European infrastructure.

(No Market Exists) Demand = f(GDP) Inflation Exchange Rates Interest Rates (Market Exists) Force Majeure (political Expropriation (taxes, regulation, enforcement) Currency Convertibility Currency Devaluation Force Majeure (Acts of God) Operator Performance Land Acquisition/Permits Cost Over-run/Delay Competing Roads/Railroads Support Roads (Infrastructure) Expropriation Environmental Risks Market Risks (e.g., country) Project Specific Risks Ability to Control LowHigh Macroeconomic and some Sovereign Risks Construction, Operating, and some Sovereign Risks Classification of Project Risks

(No Market Exists) BEAR INSURE (with political risk insurance) ALLOCATE (with contract and profit sharing) or DETER with MLA/BLA participation INSURE OR DIVERSIFY ALLOCATE (with contracts) Market Risks (e.g., country) Project Specific Risks Ability to Control LowHigh Generic Risk Management Strategies HEDGE (Market Exists) Influence

Principles of Risk Management  Allocate risk to the party that controls the risk or had the greatest impact on its outcome (effectiveness).  When possible and cost effective to do so, write a detailed contract specifying actions, quality, and performance. Contracts work best when the risks are identifiable, outcomes are verifiable, and contracts are enforceable. Predictable: note the difference between risk (known distributions) and uncertainty (unknown distributions) Verifiable: note the role of asymmetric information. Enforceable: note the importance of legal systems, property rights, and enforcement mechanisms.  Allocate risks to the party that can bear them at least cost (efficiency).  When negotiation, contracting, and other transaction costs make complete contracting unfeasible, allocate residual risk and return to align incentives and induce optimal behavior.  If possible, allocate asymmetric, downside risks to debt holders; allocate symmetric and upside risks to equity holders.

Murphy’s Law Applied to Project Finance Nature always sides with the hidden flaw. Anything you try to construct will take longer and cost more than you thought. If everything seems to be going well, you don’t know what is going on. The unexpected will always happen. Source: Fortin, R. Jay, Defining force majeure, Project and Trade Finance, Jan

Infrastructure Deal of the Year (Project Finance International). “A number of significant legal and financial structuring issues needed to be overcome to bring the project to financial close and we are delighted this has been achieved. The Polish Prime Minister, Jerzy Buzek, described the project as the most complicated financing ever carried out in Poland, and everyone involved should take that as a compliment.” (Mike Webster, Baker & McKenzie) “The deal marks the first public/private partnership in Poland and is a considerable turning point for project finance transactions for Central and Eastern Europe, given the absence of any such road infrastructure project in the region since Hungary’s 1996 M5 project.” “The deal is notable for being the first time the EIB has provided subordinated debt…(and) the first time the EIB has directly extended a 17-year facility to a project.” “(Many)…factors apparently contributed to a pricing [and structure] with no premium attached for being the first such project in Poland or for being dependent on uncovered revenues.”