Access to Finance for Complex Projects: Innovations, Adequacy and - PowerPoint PPT Presentation

Access to Finance for Complex Projects: Innovations, Adequacy and Impacts of Low Commodity Prices By Thilasoni Chikwanda at Governing for Infrastructure Delivery in Sub-Sahara Africa; Overcoming Challenges to create an enabling environment. CHATHAM HOUSE, The Royal Institute of International Affairs 15 th March 2016

INTRODUCTION AND BACKGROUND • A2F is largely about mitigating and controlling risks or creating sufficient comfort to mobilise capital flows • Best way to de-risk is to run away!!!……yes, this can be true and is evident by the Infrastructure Gap in Africa • How are Infra projects being financed ? Proj ojec ect Finance ance – Proje ject t and sector or specif ific ic • • Bonds / similar debt instruments – Sovereign ratings / government guarantees • Fiscus and local infra taxes / tolls - Share and size of GDP • Resources for Infra Development - China • Participated in several transformational resource and infra deals underway including Simandou and Moatize • leading teams and mobilise resources to develop sustainability frameworks and de- risks resource projects which underpinned major infra projects i.e. Designing Risk Mitigation Architecture • Delivering mega projects in varying country contexts and risks profiles • Top reformer to conflict afflicted and post conflict states • Untested to mature mining laws and governance environments • Infrastructure gradually transitioning from social to commercial assets • Centrally commanded to democratic states

AFRIC RICA A EMERGI GING G RESOU OURCES CES AND INFRAS RASTR TRUC UCTURE TURE CLUSTER STERS / GRO GROWTH TH POINT NTS Cluster ters bring g Economies nomies of Scale e and Diver ersity ty www.stratfor.com www.newsecuritybeat.org

COMMODITY CYCLES Price Devel elopmen pment t Ideal al Project ct Development elopment Fund Build ld USD/T Plan Year Operat ate Prod oducti tion on, Operati tion ons Planning, financi cing and supp pply and const structi ction on Source: Xstrata

RISK PROFILE OF INFRASTRUCTURE / RESOURCE PROJECTS The Perception and/or Reality FINAN ANCIAL CIAL CLOSE Shareh ehol olders ders ‘ /JV Agreement • • Concession cession Agreeme ements • Offtake Agreee eemen ments • Oper eration ons and Maint inten enance ce Agreeme ementes • Desig sign and EPC C agreem reements • Suppl ply Agree eemen ments • Insurance ce Contract cts • Loan agree eeemnts Project - • Security contracts Proj oject ect Risk sks s Cove vers • Opera eration on Construc uction n / Commissioning Expl plor orati tion on, planning ing, design gn, • Insufficient economic transformation • Promoters has high-bargaining feasi sibil ility ty, bidding g and award • Volatile government revenues power • Competition enhances rent • Stagnant living standards • Local allies as investment takes -seeking • Government misuse of revenues place • Hight incentive to wait for project • Stifled non -mining sector growth completion • Only enhanced threat at local level Ramp Up • Risk of unmet expectations • Long wait for tax revenues • Economic conditions remain stagnant • Period of highest payoff to expropriation

GETTING TO FINANCIAL CLOSE: DE – RISKING COMPLEX PROJECTS Econ onom omic ic Risks ks Expertise Switching to growth /profitability • • Productivity / efficiency improvement • Capital access • Project costs • Fiscal crisis Liquidity crisis • Bu Busi siness ness Risk sks s / / • Commodity price shocks • FX risks and currency volatility Fea easibility sibility Tech chnolo ology gy and Environ ironmen ent Obsolete technology • • Climate change / extreme weather • Ecosystems collapse • Man made catastrophes Integration • Water Threat of substitute • and Collaboration Poil ilitc itcal Risks ks • Fiscal crisis • State /rule of law collapse Corruption • Polit litical ical and d Social cial • Organised crime and illicit trade • Terrorism • Economic and resource nationalisation Licens censes es Socia cial l Risks sks • Failure of critical infra • High Unemployment and underemployment • Income disparities • Mismanagement urbanisation Political and social instability •

DE-RISKING OF INFRASTRUCTURE / RESOURCE Unmanageable risks Project - Manageable risks • Accelerate economic • Enhancing effectiveness of local investments over time • Strengthen stakeholder integration thru local integration • Engagement of development agencies and specialised partners - content e.g. local • Develop a business case for leverage capital and expertise from these parties HOW? procurement anchoring investments • Macroeconomic and political risk analysis • Adapt operating practices • Social to commercial assets • Design a long-term risk to local cultures reducing management strategy- the risk of social unrest regional development plan and disruptions like temporary shutdowns ECON ONOM OMIC AND SOCI CIAL INTE TEGR GRATI TION

BANKABILITY Various us fa factor ors s including uding: Analysis and risk control at an early state is key  An appropriate allocation and control of risks such as:   Inherent risk that the project may not generate the expected revenue  Political risk  Cost of finance and currency risk Clear and robust management of risks in the contracts, consistent with risk mitigation  strategy Ground rules for risk sharing   Lenders recourse limited to assets and cashflow of project company  Lenders will seek to transfer risks – generally risk averse  If more risks are assumed by the lender the price will go up  Use of risk mitigation Cashflow certainty and continuity 

LOCAL CONTENT – RISK MITIGATION USD12 12 billion ion (2013 13 est.) USD6. 6.4 4 billion on (2013 13 est.) t.) De-risking thru Economic Integration: De-risking thru Economic Integration: 1. National Economic Development Planning 1. Local Supplier Development and Local Procurement 2. Collaboration with donor and development agencies 2. Supporting Agriculture Corridors along the Line of Rail 3. Local Supplier Development and Local Procurement 3. Coal waste produced reused for the generation of electricity: supplying Vale’s operations and contributing to the local 4. Supporting Agriculture Corridors along the Line of Rail population’s energy supply.

CONCLUSION • Resources and Infra projects are long-term and economic integration and developing local content needs leadership, funding, systems and time. • Things can go wrong before the integration bonds and begins to impact / dampen the risks • Issues and trends e.g. Zambia: • Local subcontractors scheme – Obligation by main contract to sub-contract a minimum of 20% to local contractor. • Under utilised and contractors aren’t getting meaningful interaction due to: • Lack of equipment • Lack of financing for equipment and W/C • Lack of skills / start ups • In the short- to medium-term, the costs of developing infrastructure in Zambia remains high because the country relies on international contractors. Further, as Zambia has committed to a sizable infrastructure programme, using foreign contractors has put the Kwacha under significant pressure as international contractor need to externalise their earning in hard currency. “too many foreign contractors means less money remains in the • economy, however if we can increase local contractors more money will remain in country ”