Public Private Partnerships (PPP)- The Financial Perspective October - - PowerPoint PPT Presentation

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Public Private Partnerships (PPP)- “The Financial Perspective”

October 2014

The Logo is a trademark of Canadian Imperial Bank of Commerce, used by FirstCaribbean International Bank under license

Table of Contents

I. PPP Financing Overview

• II. Typical Lender Requirements
• III. PPP Project Challenges – Lender Perspective
• IV. Final Thoughts – Building on Early Lessons

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PPP Financing Overview

Transportation

• Roads/Highways
• Airports
• Parking Authorities
• Ports, Port Terminals

Power and Utilities

• Energy Generators
• Non-Renewables/Renewables
• Distribution/Transmission
• Water/Wastewater

Economic Infrastructure Social Infrastructure Healthcare

• Hospitals
• Other Health Care Facilities

Other Accommodation Facilities

• Social Housing
• University Accommodation
• Courthouses
• Prisons
• Government Buildings

Broad Categories of Infrastructure PPPs Proposed in Region

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Different Degrees of Private Sector Involvement and Risk Transfer

Degree of Private Sector Involvement Design / Build Public Sector – Pay as You Go / Public Debt Design / Build / Finance / Operate1 – Availability Payments Design / Build / Finance Contracting Out Ops / Maintenance Degree of Private Sector Risk Design / Build / Finance / Operate – User Fees

Traditional Procurement Models PPP Procurement Models

PPP Financing Overview

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Procurement Process

 Larger P3 projects typically take 10 to 18 months to procure from issuance of the RFQ

Request for Qualifications (“RFQ”) Issued

 Equity sponsors, construction contractors and

• perators form

consortia  Financial advisors engaged  Consortia submit information on their background and experience

Request for Proposals (“RFP”) Issued

 Typically three consortia are short- listed  Short-listed consortia invited to respond to an RFP

RFP Submission

 Consortia submit technical and financial submissions  May be submitted separately or concurrently

Preferred Proponent Selection Commercial and Financial Close 2-4 months 5-8 months 1 week - 3 months 2 - 3 months

 Preferred proponent is selected based on predetermined criteria  Project Agreement and other key contracts signed  Pricing and closing of financing  If a project has unusual characteristics, a consultant may undertake a market sounding to obtain feedback on the proposed project

Optional Market Sounding Variable

PPP Financing Overview

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Typical DBFM PPP Structure

Facility & FM Services

Project Company

Construction Contractor

Public Sector Project Sponsor

Facilities Management Provider

Construction Milestone Construction Payments

Construction Agreement Facilities Mgmt Agreement

FM Services Payment mechanism based on availability and performance Periodic payments based on availability and performance

Construction and FM Agreements are “drop- down” contracts

PPP Financing Overview

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Facility & FM Services

Project Company

Construction Contractor

Public Sector Project Sponsor

Facilities Management Provider

Construction Milestone Construction Payments Dividends & Capital Repayment Equity Financing

Equity Providers

Shareholders’ Agreement Construction Agreement Facilities Mgmt Agreement

FM Services Payment mechanism based on availability and performance Periodic payments based on availability and performance Debt Financing

Lenders

Loan Agreement

Debt Service

Direct Agreement

Project Company arranges debt and equity financing

PPP Financing Overview

Typical DBFM PPP Structure

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Good Project with Strong Sponsors Financial Strength of Operator Proven Technology Legal Structure Strong Counterparties Well Drafted Project Agreement Fixed Price Construction Contract

Typical Lender Requirements

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Typical Lender Requirements

Lender Appetite For Infrastructure Financing

• Overall strong -user-pay sometimes preferred given financial condition of some governments
• If government risk is an issue seek credit enhancement from multilateral agencies
• Pricing tied to various factors
• Project risks,
• Offtaker strength (investment grade ideal)
• Tenor/term of the debt
• Repayment profile
• Overall financial market conditions

Lender Role in RFP Bids

• Best engaged at outset to work in partnership throughout project cycle, especially in due

diligence and review and negotiation of documentation

• Financial advisors can also assist with the financial modelling and determination of the

economics and valuation of the deal (mainly how much to bid, understand returns etc)

• Value of a good lender is not just pricing but also in their knowledge of how an infrastructure

project should be procured, managed and operated to protect lenders/sponsors

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Typical Lender Requirements

Types of Financing Structures

• Financing structures can be customized for a specific project – most common i) bridge loan

(temporary financing); ii) short term (“mini –perm”) loans; iii) long term loans/bonds

• Bank deals/loans can be syndicated to other banks/financial institutions
• Bank deals tend to be shorter term (“mini-perm”) with slightly longer repayment terms (15

years) and therefore a larger amount (balloon payment) to typically refinance at maturity

• Project bond deals still not as utilized in Caribbean however rated projects can access

international debt capital markets such as US Private Placement (USPP) market What Makes a Project Bankable

• Fixed price construction contract
• Experienced consortium (equity, developer and contractor partnership) with good record and

willingness to stand behind project (performance bonds, performance guarantees)

• Good alignment between public and private sector – acceptance that private sector needs to

make a reasonable return, lenders need to be repaid and appropriate risk transfer/allocation

• Transparent identification of risks and responsibilities
• Appropriate Capital Structure (Hard Equity & Debt Limits)

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Typical Lender Requirements

What Makes a Project Bankable (cont’d)

• Strong government support (Guarantees, Direct Tariffs etc)
• Strong economic profile which supports the repayment profile with adequate coverage
• Credit enhancement (export credit guarantees and multilateral support) where necessary –

presence of multilateral agencies – IFC, IADB, MIGA etc is attractive for Banks

• Termination provisions under the Project Agreement – termination compensation for

developer under the Project Agreement is a major part of the PPP risk allocation

• Strong contracts with reputable counterparties (construction firms, advisors, engineers etc)
• Project agreement(s) which at a minimum covers the repayment term (all contracts:

concession agreement, operations and maintenance agreement etc)

• Other: Proven technology; established operating history; monopoly-like characteristics;

strong legal & regulatory framework, public acceptance and strong political commitment

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PPP Project Challenges –Lender Perspective

Scarcity of Equity

• Failure to launch due to lack of equity to complete the project financing
• Mezzanine type financing returns of 15% to 30% are difficult for projects to support
• Conflicts between bank senior lender and mezzanine terms

Construction Risks

• Typical structures have Government taking over project build on successful completion
• Requires sponsor guarantees, performance bonds/performance guarantees

Governments’ Financial Condition

• Many sovereigns no longer investment grade
• Bank’s already have high exposures to many sovereigns in region
• Social infrastructure is additional heavy burden on governments

Weak Procurement & Due Diligence Processes

• Projects collapse after being very far along in the procurement process
• Inadequate planning leading to inability to meet project timetables
• Initial due diligence/requirements on private sector partners not sufficient

Term Structure of Bank Lending versus Term of Project Agreements

• Difficult for some sponsors to accept refinancing risk due to shorter bank term

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Final Thoughts – Building on Early Lessons

• Enhance technical assistance for the public sector to identify, structure and procure PPPs
• Structuring with credit enhancement to support transactions is important
• Export credit agency participation
• Multilateral (MIGA, IFC, IDB, EIB) participation
• Agencies such as OPIC participation
• Need available, patient and reasonably prices sources of equity for projects
• National Infrastructure Funds?
• Develop alternative funding/capital market options for infrastructure projects
• Pension funds and other funds need to be able to participate

Note however that not all infrastructure projects will have to be financed as PPPs