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The New Realities of Infrastructure Financing for African Markets

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Title: The New Realities of Infrastructure Financing for African Markets


1
The New Realities of Infrastructure Financing for
African Markets
The Corporate Council on Africa The US
Africa Business SummitFinancing Infrastructure
ProjectsBaltimore, MarylandJune 22,
2005   Claudette M. Christian,
Partner Hogan Hartson LLP
2
What Is A Project Financing?
  • The term project finance is generally used to
    refer to a non-recourse or limited recourse
    financing structure in which debt, equity and
    credit enhancement are combined for the
    construction and operation of a particular
    facility.
  • Lenders base credit appraisals on the projected
    revenues from the operation of the facility
    rather than the assets or the credit of the
    sponsor of the facility, and rely on the assets
    of the facility, including any revenue producing
    contracts and other cash flow generated by the
    facility, as collateral for the debt.

2
3
Non-recourse or Limited Recourse Project
Financing Is The Preferred Way For Governments,
Developers And Lenders To Finance Projects
  • Project participants have clearly defined roles
  • Equity and debt providers can limit their legal
    exposure and liability
  • Project risks can be allocated to the appropriate
    parties
  • Cross-border, off balance sheet financing is more
    attractive for investors

3
4
What Types Of Projects Are Best Suited For
Project Financing?
  • Energy generation
  • Oil and gas pipelines
  • Development of mining operations
  • Toll roads
  • Telecommunications
  • Airports
  • Sports stadiums

Why? These types of projects generate enough
revenue from willing customers to pay financial
costs.
4
5
Conditions In Many African Markets Present
Hurdles That Traditional Project Financing
Techniques Have Not Yet Overcome
  • Limited economic sector opportunities
  • Lack of necessary infrastructure market to
    consumer delivery network
  • Difficulties in allocating and quantifying risks
  • Political Risks
  • Legal Risks
  • Better risk-reward markets Asia, Middle East,
    Europe, the United States

5
6
Host Government Issues -- Perceived And Real
  • Political or economic instability which leads to
    currency depreciation, economic decline, capital
    flight
  • High level of government involvement in the
    economy with respect to regulatory and tax
    stability and control of input and output prices
  • Unexpected changes in political regimes
  • Policies and attitudes toward project or
    international financing may change suddenly

6
7
Host Government Issues -- Perceived And Real
(Continued)
  • Expropriation
  • Nationalization
  • Creeping expropriation (more common)
  • War, revolution, civil strife
  • Currency inconvertibility

Many projects are exposed to domestic risks that
can reduce or even halt the flow of funds to the
project.
7
8
Capitalize On The Strengths Of Perceived
Weaknesses The Case For Greater Involvement
Of The Private Sector
  • Public-Private Partnerships
  • Privatizations

What is most important is to find a way to
mitigate the most unpredictable risks and to
adapt financing structures to specific industries
and countries.
8
9
Evolution Of Project Financing Techniques Into
Successful Public-Private Partnership Structures
  • Incorporates principles of traditional project
    financing while recognizing the importance of the
    public sector
  • Relieves the pressure on project sponsors and
    equity participants
  • Capitalizes on the same source of financings used
    in traditional project financings
  • Allocates risk to the parties best able to manage
    and mitigate them
  • Engages those participants with an appetite for
    risk in cross-border transactions

PPPs provide an additional assurance on cash
flows due to government involvement.
9
10
Underlying Elements of Public-Private
Partnerships
  • The public sector contracts with the private
    sector to deliver services on its behalf
  • A single stand-alone business (SPE) is created,
    financed and operated by the private sector
  • The SPE builds, operates, maintains and finances
    the asset
  • The service obligations are long-term (25 to 30
    years)
  • As the relationship is contractual, the
    underlying contracts allocate risks to the
    private and public sectors in a rational manner

The public contribution is aimed at providing
additional funds for a public good which is not a
pure market commodity.
10
11
Underlying Elements Of Public-private
Partnerships, Continued
  • The public sector enters into concession
    agreements with the private sector, whereby
    payments are made to the SPE upon completion of
    the operation and commencement of the service
  • Services are paid for as they are consumed,
    thereby ensuring the private sector is held to
    high standards in exchange for compensation
  • Ownership of the asset and the resulting service
    obligations transfer to the public sector at the
    end of the concession period

If correctly conceived and implemented, these
steps lead to training of state employees who are
then able to perform the requisite services.
11
12
Why Are Public Private Partnerships Especially
Attractive For African Markets?
  • Ability to correct the underlying reasons most
    often cited for lack of investment appetite by
    foreign investors
  • Basic infrastructure quality
  • Educational skills
  • Health Care
  • Technical Skills
  • Transfer of skill sets from private sector to the
    public sector
  • Emphasis on providing value for money and
    promoting efficiency

PPPs provide a framework for competitive
acquisition of vital services of a
semi-commercial or public nature.
12
13
How Do Public-Private Partnerships Differ From
Privatizations?
13
14
Typical PPP Project Structure
Public Sector Authority
Project Agreement (concession construction)
Direct Agreement
Public Sector
Private
Special Purpose Vehicle
Investors (Shareholders Insurers)
Banks (Loan)
Equity
Project
Finance
Construction Company
Operating Company
Source PricewaterhouseCoopers
14
15
Major Funding Sources
15
16
Major Funding Sources (Continued)
16
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