04/21/23Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC 1

Project Finance

ICAM Conference September 2014

In SADCs to spend US$64bn between

2013 to 2017

Source: SADC Short-term Plan 2013 – 17

04/21/23 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC

2

The

Infrastructure

Gap

04/21/23 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

Definitionby 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.

04/21/23 4Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC

Corporate Finance

Trend Analysis

04/21/23 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC 5

• Loan against exiting balance sheet

• A going concern status

• Extrapolate from past performance

• Management has full control

• Recourse to company balance sheet;

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

04/21/23 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC 6

Angel Finance

04/21/23 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC 7

• 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

Structured Finance

04/21/23 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC 8

• Existing Company borrows• Finance brown field project• Full recourse on borrower • Creditworthiness - historical &

future • Limited security perfection • Pay interest in construction

Project Finance

04/21/23 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC 9

• 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

NPV

IRR

Inflation

Interest

Demand

DSRR

ROE

Interest

NPV

Deman

d

Inflation

ROE

Fortune telling??

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.04/21/23 Presented by Audrey Mwala, Director

Project Finance & Risk Analysis, The PPPC 10

Typical Stages in Project Finance

04/21/23 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC 11

Preliminary negotiations (Business Plan, Cash flow projections

Due diligence (affordability, technical, Economic, Environmental, legal, financial, commercial)

Procurement/BiddingContract negotiationsContract Signing Financial closure (Sale and Purchase Agreement, concession, Construction, FM agreement, Conditions precedent, Architects, Contractors, Project Management team, Marketing team)

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

04/21/23 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC 12

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

04/21/23 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC 13

The Cash flow Waterfall

04/21/23 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC 14

EBITDADSCR = ----------------=>1.5

Debt Service

Operating Income or EBITDA

Revenue

O & M Expenses

Debt Payment Taxes Profit

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

04/21/23 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC 15

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

04/21/23 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC 16

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

04/21/23 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC 17

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.

04/21/23 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC 18

Special Purpose Vehicle

Operating

and

Maintenance

fees

Unitary payments

Payment

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Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC

DEBT FINANCIAR

Subordinated debt/ Mezzanine

Financing

agreement

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 companies @ risk capital• Infrastructure Bonds- based on project cash flows• Revenue Bonds- used by municipals• Securitization – receivables used to float a bond

04/21/23 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC 20

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

04/21/23 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC 21

Risk Allocation

04/21/23 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC 22

Public Sector Base Comparator

• 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.

04/21/23 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC 23

Affordability

• PV of Govt.’s future revenue :

• equals or exceeds present value of future capital & current expenditure

• Whole life cycle costs

Present Value of O & M

04/21/23 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC 24

Risk Impact Assessment

04/21/23 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC 25

Risk Probability

04/21/23 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC 26

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

04/21/23 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC 27

Develop a PSC

Develop a Shadow

bid

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

Value for Money assessment

04/21/23 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC 28

Value for Money= •NPV of PSC $149.9m less•NPV of PPP bid $121.1m = $28.8m

Summary

04/21/23 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC 29

$100

$149.9

$121.1$135

$170

$28.8m

$14.9m

Questions?

Thank you for your Attention04/21/23 Presented by Audrey Mwala, Director

Project Finance & Risk Analysis, The PPPC 30