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 15th March 2016

• 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
• jec

ect Finance ance – Proje ject t and sector

• r 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

INTRODUCTION AND BACKGROUND

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

Source: Xstrata

Price Devel elopmen pment t Ideal al Project ct Development elopment

USD/T Planning, financi cing and const structi ction

• n

Prod

• ducti

tion

• n, Operati

tion

• ns

and supp pply Year

Plan Fund Build ld Operat ate

Project -

RISK PROFILE OF INFRASTRUCTURE / RESOURCE PROJECTS

Expl plor

• rati

tion

• n, planning

ing, design gn, feasi sibil ility ty, bidding g and award

• Competition enhances rent
• seeking

Construc uction n / Commissioning

• Promoters has high-bargaining

power

• Local allies as investment takes

place

• Hight incentive to wait for project

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

The Perception and/or Reality

FINAN ANCIAL CIAL CLOSE

• Shareh

ehol

• lders

ders‘ /JV Agreement

• Concession

cession Agreeme ements

• Offtake Agreee

eemen ments

• Oper

eration

• ns 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

• Security contracts
• Proj
• ject

ect Risk sks s Cove vers Opera eration

• n
• Insufficient economic transformation
• Volatile government revenues
• Stagnant living standards
• Government misuse of revenues
• Stifled non-mining sector growth

Econ

• nom
• mic

ic Risks ks

• Switching to growth /profitability
• Productivity / efficiency improvement
• Capital access
• Project costs
• Fiscal crisis
• Liquidity crisis
• Commodity price shocks
• FX risks and currency volatility

Tech chnolo

• logy

gy and Environ ironmen ent

• Obsolete technology
• Climate change / extreme weather
• Ecosystems collapse
• Man made catastrophes
• Water
• Threat of substitute

Poil ilitc itcal Risks ks

• Fiscal crisis
• State /rule of law collapse
• Corruption
• Organised crime and illicit trade
• Terrorism
• Economic and resource nationalisation

Socia cial l Risks sks

• Failure of critical infra
• High Unemployment and underemployment
• Income disparities
• Mismanagement urbanisation
• Political and social instability

Polit litical ical and d Social cial Licens censes es Bu Busi siness ness Risk sks s / / Fea easibility sibility

Expertise Integration and Collaboration

GETTING TO FINANCIAL CLOSE: DE –RISKING COMPLEX PROJECTS

Project -

DE-RISKING OF INFRASTRUCTURE / RESOURCE

Unmanageable risks Manageable risks

• Strengthen stakeholder

integration

• Develop a business case for

anchoring investments

• Design a long-term risk

management strategy- regional development plan

• Accelerate economic

integration thru local content e.g. local procurement

• Adapt operating practices

to local cultures reducing the risk of social unrest and disruptions like temporary shutdowns

• Enhancing effectiveness of local investments over time
• Engagement of development agencies and specialised partners -

leverage capital and expertise from these parties

• Macroeconomic and political risk analysis
• Social to commercial assets

ECON ONOM OMIC AND SOCI CIAL INTE TEGR GRATI TION

HOW?

BANKABILITY

Various us fa factor

• rs

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

De-risking thru Economic Integration:

• 1. Local Supplier Development and Local Procurement
• 2. Supporting Agriculture Corridors along the Line of Rail
• 3. Coal waste produced reused for the generation of electricity:

supplying Vale’s operations and contributing to the local population’s energy supply. De-risking thru Economic Integration:

• 1. National Economic Development Planning
• 2. Collaboration with donor and development agencies
• 3. Local Supplier Development and Local Procurement
• 4. Supporting Agriculture Corridors along the Line of Rail

USD12 12 billion ion (2013 13 est.) USD6. 6.4 4 billion

• n (2013

13 est.) t.)

LOCAL CONTENT – RISK MITIGATION

• 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”

CONCLUSION