Presentation to Higher School of Economics, Moscow, on the basics of limited recourse financing

1. Project Finance,
Public-Private Partnerships
and Emerging Markets
L.S.P. Prabhu, BCom MPhil CA CPA
Managing Director
Interstice Consulting Corporation
Higher School of Economics, Moscow
October, 2008

2. Session objectives
To understand the basic characteristics of project
finance as distinct from corporate finance
To understand the principles of public-private
partnerships
To understand the analytical process of assessing
viability and financeability of projects
To understand the related terminology/acronyms
such as SPV/SPC/SPE, EPC, O&M, BOT/BOOT, PRI,
ECA, IFI, DSCR, LLCR, DSRA, IDC, MRA, Monte Carlo,
cashflow waterfall, loan syndication
To understand typical banking terms and conditions
of limited recourse loans

3. Agenda
Project finance
Public-private partnerships
Investment analysis of projects
Finance raising process
Emerging markets

4. Project finance

5. Some basic definitions to frame our
discussion
“Finance” = providing funding for a business or
investment project
Two principal forms of finance
Equity: residual ownership
Debt: senior claim on assets, including cash
We will concentrate most of our discussion on the
debt aspects of project finance
“Infrastructure” = the services provided by the
physical networks associated with energy (gas,
thermal and water-based), water supply, transport,
telecommunications, sanitation and waste facilities,
and flood protection and drainage.

6. Multiplier effect of
infrastructure
Numerous research studies
point to the relationship
between income per capita and
infrastructure stocks per capita
Infrastructure is an
environmental good – benefits
cut across industries
Inadequate infrastructure limits
international competitiveness
e.g. unreliable power or
telecom infrastructure
Inefficient infrastructure
provides disincentives for
private capital investment
e.g. air conditioning in China
Raises the quality of life

7. Definition
Project finance:
“a method of funding in which the lender looks primarily to the revenues generated by a single project,
both as the source of repayment and as security for the exposure. This type of financing is usually for
large, complex and expensive installations that might include, for example, power plants, chemical
processing plants, mines, transportation infrastructure, environment, and telecommunications
infrastructure. Project finance may take the form of financing of the construction of a new capital
installation, or refinancing of an existing installation, with or without improvements. In such transactions,
the lender is usually paid solely or almost exclusively out of the money generated by the contracts for the
facility’s output, such as the electricity sold by a power plant. The borrower is usually an SPE (Special
Purpose Entity) that is not permitted to perform any function other than developing, owning, and operating
the installation. The consequence is that repayment depends primarily on the project’s cash flow and on
the collateral value of the project’s assets.”
Source: Basel Committee on Banking Supervision, International Convergence of Capital Measurement and
Capital Standards ("Basel II"), November 2005. http://www.bis.org/publ/bcbs118.pdf.
Key takeaways:
“Project finance” (in terms of debt) = limited or no recourse to the
shareholders (sponsorii), beyond their equity invested in the project
Lenders look to the cash flow generated by the project for their
repayment
Not to be confused with “financing of projects” where lenders require
guarantees from the sponsors or other forms of recourse to the
sponsors’ other assets outside of the project itself
Not to be confused with “asset finance” or “asset securitization” where
lenders advance funds against the market value of an existing asset
Not to be confused with “pre-export” financing which finances existing
production and is re-paid by customer payments to offshore accounts

8. Corporate finance vs. project finance
(cont.)
Corporate Finance Project Finance
Stage of business being Existing Greenfield (or brownfield)
financed
Use of funds General corporate purposes, Construction costs and initial
acquisition of new businesses, working capital
expansion projects
Lenders’ security Flexible, sometimes no Shares and assets +
security is required assignment of third-party
contracts
Minimum deal size Any $100 million
Typical industries Any Infrastructure, real estate
Typical tenor (final maturity) Depends on the country; in Normally, at least 10-12 years
Russia typically 3-5 years
Drawdown Lump sum, up front In stages, depending on
documented project needs
(e.g. construction contract)
Repayment Lump sum, via operating cash Installments matched to the
flow or re-financing with a new cash flow of the project, could
debt facility require cash flow sweep

9. Credit risk of project finance
Research summary (Standard & Poor’s, 2002)
Average recovery rate for project finance loans is superior to other asset
classes, including leveraged loans, senior unsecured bank loans and
bonds. Why?
Credit Process and Structure Nature of Projects Financed
Extensive due diligence by lenders Transparency of the project’s
Perfected first-priority liens on all performance (SPE)
assets, shares, material contracts, funds Projects are often of national
on account importance
Cashflow sweeps Deep-pocket sponsors
Covenant triggers – “early warning” Sponsors as contractual counterparties
Step-in rights Commercial value of the project vs.
Restrictions on facility drawdowns, use sponsors/off-takers
of funds Size of projects; need to syndicate
Mandatory pre-payments
Prohibition on additional indebtedness
Debt service reserve accounts (DSRA)

10. Industries amenable to limited
recourse financing
Infrastructure
Natural resources: oil & gas, mining
Power generation
Telecoms, transportation
Social infrastructure (hospitals, housing, schools) – on PPP basis
Real estate
Why?
Superior predictability of cash flows based on contracts
Construction costs/timeframe
Output prices/volumes
Input prices/volumes
Creditworthy counterparties
Cash generation profile fits with investors’ requirements
Significant capital requirements
Impact of market risk
More conservative leverage ratios / maximum debt
Hedging / partial hedging, if available (e.g. commodities)‫‏‬
Conditional access to funding (e.g. real estate pre-leases)
Revenue makeup provisions by concession grantor (e.g. in PPPs)‫‏‬
Additional recourse to sponsors

11. Overall size of the project finance
market (debt)
Source: Thomson Financial

12. Banks, regions and industries
Source: Thomson Financial

13. Simplified contractual structure
EPC contract Sponsors
Contractor
Capital contribution agreement
Take-or-pay contract
Offtaker
Project Company Funders
Operator
O&M contract (SPE)
Financing agreements
Supply contract
Supplier
Terminology
EPC – Engineering, Procurement, and Construction
O&M – Operations and Maintenance
Sponsors
Funders - Financial investors (debt and equity)
SPV/SPC/SPE – Special-Purpose Vehicle/Company/Entity

14. Attractiveness of project finance vs.
corporate finance
Ring fencing of investment projects
Limits risk to sponsors/corporate parents
Appropriate for joint ventures
Benefits of independent monitoring
Project can have a stronger debt capacity than the sponsors
Raising debt at project level will not have an impact on the
parent company’s credit rating (other than the
commitments it undertakes towards supporting the project)
Attractive for both borrower and lender
Project finance loans have had a superior recovery rate
(S&P study - project finance recovery rates)
Structural protection
Early monitoring
Flexibility of banks in responding to changing needs

15. Drawbacks of project finance
Much more time consuming (detailed due
diligence)
Sizable additional transaction costs,
requiring minimum deal size
Limited number of financial institutions
which specialize in this type of structure
Operational and financial restrictions placed
on the borrowing entity
Generally, higher cost of borrowing than
corporate facilities

16. Public-private partnerships

17. Definition
Public-Private Partnership:
A cooperative venture between the public and private sectors, built
on the expertise of each partner, that best meets clearly defined
public needs through the appropriate allocation of resources, risks
and rewards.
Source: Canadian Council for PPPs
Key takeaways:
PPPs are not a financing method, but rather a method of
public sector procurement which seeks to share risks with the
private sector
PPPs are generally based on a limited-life concession: private
sector finances and constructs the facilities, and receives
revenues from the project over the life of the concession
Payments can come directly from users (e.g. toll roads) or
from government sources (e.g. prisons)
Commonly has 2 components: availability and usage
The private sector's participation in most PPP projects is
funded through project finance structures

18. PPP is a alternative procurement
method
PPPs allocate risks to the party best able to bear them
Source: PricewaterhouseCoopers

19. Models of PPPs
Design-Build (DB): The private sector designs and builds infrastructure to meet public sector
performance specifications, often for a fixed price, so the risk of cost overruns is transferred to the
private sector. (Many do not consider DB's to be within the spectrum of PPP's).
Operation & Maintenance Contract (O & M): A private operator, under contract, operates a
publicly-owned asset for a specified term. Ownership of the asset remains with the public entity.
Design-Build-Finance-Operate (DBFO): The private sector designs, finances and constructs a new
facility under a long-term lease, and operates the facility during the term of the lease. The private
partner transfers the new facility to the public sector at the end of the lease term.
Build-Own-Operate (BOO): The private sector finances, builds, owns and operates a facility or
service in perpetuity. The public constraints are stated in the original agreement and through on-going
regulatory authority.
Build-Own-Operate-Transfer (BOOT): A private entity receives a franchise to finance, design, build
and operate a facility (and to charge user fees) for a specified period, after which ownership is
transferred back to the public sector.
Buy-Build-Operate (BBO): Transfer of a public asset to a private or quasi-public entity usually under
contract that the assets are to be upgraded and operated for a specified period of time. Public control is
exercised through the contract at the time of transfer.
Operation License: A private operator receives a license or rights to operate a public service, usually
for a specified term. This is often used in IT projects.
Finance Only: A private entity, usually a financial services company, funds a project directly or uses
various mechanisms such as a long-term lease or bond issue.
Other terms used in the PPP field:
RFEI: Request for Expressions of Interest
RFQ: Request for Qualifications
RFP: Request for Proposals
Source: Canadian Council for PPPs

20. Risk transfer

21. Investment analysis of
projects

22. Analytical model for projects
Credit Enhancements
Business & Legal Institutional Risk
Sovereign Risk
Transactional Structure
Project Level Risks
Counterparty Competition Technology, Construction, Financial Contractual
Exposure Operations Risks Foundation
Source: Standard & Poor’s

23. Risk analysis of projects
Project level risks
Contractual foundation
Technology, construction and
operations
Resource availability
Competitive-market exposure
Counterparty risk
Financial performance
Financial model projections,
stress tests
Transactional structure
Bankruptcy-remote SPE
Independent trustee to manage
cash
Sovereign risk
Business & legal institutional risk
Legislation supporting security
requirements
Credit enhancements
Political risk insurance
Financial guarantees
Source: Standard & Poor’s

24. Investment analysis - qualitative
Project rationale
Does it make sense?
What problem is it solving?
Track record of sponsors
Support of government
Risk analysis and mitigation
Key risks
Construction (e.g. tunnels)‫‏‬
Technology
Resource (e.g. geothermal, mining)‫‏‬
Operating
Legal/contractual
Environmental
Reputational
Expropriation (e.g. sensitive sectors)
Seek risk mitigation from party best able to manage it
Some uncovered risks may be addressed by insurance

25. Investment analysis - quantitative
Financial model
Integrity of the financial model is of core importance
to the investing (equity) and lending (debt) decision,
since there is no existing business or historical
financial information on which to base assumptions
Highly complex
In bidding situations (equity stage), quality of
financial model and soundness of assumptions make
the difference between winning and losing a project
Can also lead to “winner’s curse” if the financial
assumptions are deemed unrealistic by the lenders
In syndicated lending situations, financial models are
distributed to potential lenders and are subject to
independent audit

26. Key differences between modeling
project finance and corporate finance
Construction vs. operating period
Long-term projection period (e.g. 30 years) emphasizes need for
consistent assumptions
Multiple tranches
Multiple currencies
Hedging requirements
Inflation has an impact on long-term project viability, if not
compensated in the legal agreements
Need to model reserve accounts - DSRA, MRA
More sophisticated tax modeling (know specific assets being
procured)
Interest and fee calculations lead to circularity (interest accrues
and other fees are payable during construction, but no cash to
pay, so must draw more from the facility, etc., etc.)
Terminal value / exit multiple may be zero, depending on
concession nature

27. Investment analysis - quantitative
(cont.)
Ratio analysis (post-completion)
DSCR = Cashflow Available for Debt Service / Debt
Service (P+I) for a specific period (e.g. 1-year)
LLCR = NPV of future Cashflow Available for Debt
Service / Debt Outstanding
Acceptable benchmarks depend on the industry, with
the most predictable sectors, such as power
generation, allowed to show the smallest DSCRs (e.g.
1.2x)
Equity analysis uses standard CF-type ratios for overall
investment attractiveness: NPV, IRR, payback

28. Investment analysis - quantitative
(cont.)
Monte Carlo simulation
Statistical technique for modeling macro
variables with a long history - e.g.
exchange rates, interest rates, weather
effects
Uses proprietary software, can provide a
95% confidence of the upper/lower limit
of the given variable
However, does not apply to more specific
project risks, e.g. traffic risk for a
specific bridge

29. Financial modelling exercise – BOT
container port in Russia
Concession period: 15 years
Construction assumptions
Construction period: 3 years
Construction costs: Y1=$50 million,
Y2=$150 million, Y3=$100 million
Total capacity: 1,000,000 TEU
Operating assumptions
Capacity build-up: 60% in Y4, 80% in Y5,
90% thereafter
Revenue and cost assumptions
Revenue per TEU = $75 per TEU
Fixed operating costs = $100mm per year
Variable operating costs = $40 per TEU
Financing and tax assumptions
Interest rate = 10% during construction,
8% post construction
Require 30 days of Y1 revenue as initial
working capital
Financing mix: 30% equity, 70% debt
Loan repayment: 1 year grace, thereafter
in 8 equal annual instalments, end of period
Tax rate: 25%
Is this an attractive project from a purely
quantitative point of view?
Equity vs. debt perspective?
Which measures would you use?

30. Risk analysis
Traffic / demand
Location / competing facilities
Construction
Foreign currency
What protective measures would you
seek as a loan provider?
From an equity perspective, how does
this project compare with a power
station? Risks? Returns?

31. Financial model output
construction period operating period
Summary Y1 Y2 Y3 Y4 Y5 Y6 Y7 Y8 Y9 Y10 Y11 Y12
Operating activities
Revenue 7 800 000 000 450 000 000 600 000 000 675 000 000 675 000 000 675 000 000 675 000 000 675 000 000 675 000 000 675 000 000
Direct expenses -4 160 000 000 -240 000 000 -320 000 000 -360 000 000 -360 000 000 -360 000 000 -360 000 000 -360 000 000 -360 000 000 -360 000 000
Fixed expenses -1 200 000 000 -100 000 000 -100 000 000 -100 000 000 -100 000 000 -100 000 000 -100 000 000 -100 000 000 -100 000 000 -100 000 000
Interest expense -137 216 410 -3 763 441 -9 730 347 -19 503 533 -18 948 925 -18 948 925 -16 580 310 -14 211 694 -11 843 078 -9 474 463 -7 105 847 -4 737 231 -2 368 616
Pre-tax income (loss) 2 302 783 590 -3 763 441 -9 730 347 -19 503 533 91 051 075 161 051 075 198 419 690 200 788 306 203 156 922 205 525 537 207 894 153 210 262 769 212 631 384
Taxes -467 156 182 0 0 0 -18 210 215 -32 210 215 -39 683 938 -40 157 661 -40 631 384 -41 105 107 -41 578 831 -42 052 554 -42 526 277
Net income 1 835 627 408 -3 763 441 -9 730 347 -19 503 533 72 840 860 128 840 860 158 735 752 160 630 645 162 525 537 164 420 430 166 315 322 168 210 215 170 105 107
Investing activities
Capital expenditure -300 000 000 -50 000 000 -150 000 000 -100 000 000
Initial working capital -37 500 000 -37 500 000
Financing activities
Equity drawdown 99 899 196 16 129 032 47 919 104 35 851 060 0
Term debt drawdown 233 098 125 37 634 409 111 811 243 83 652 473 0
Revolver drawdown (repayment) 0
Term debt repayment -236 861 565 0 0 0 0 -29 607 696 -29 607 696 -29 607 696 -29 607 696 -29 607 696 -29 607 696 -29 607 696 -29 607 696
Net financing activities 53 763 441 159 730 347 119 503 533 0 -29 607 696 -29 607 696 -29 607 696 -29 607 696 -29 607 696 -29 607 696 -29 607 696 -29 607 696
Net cashflow 1 594 263 164 0 0 0 35 340 860 99 233 164 129 128 057 131 022 949 132 917 842 134 812 734 136 707 627 138 602 519 140 497 412

32. Cashflow generating profile
$1 800 000 000
$1 600 000 000
$1 400 000 000
$1 200 000 000
$1 000 000 000
$800 000 000
Operating cash flow
$600 000 000
Cumulative
$400 000 000
$200 000 000
$0
-$200 000 000
-$400 000 000
Y1 Y3 Y5 Y7 Y9 Y11 Y13 Y15

33. Environmental impact of
infrastructure projects
Historically, environmental Sample risk considerations
considerations have been applied Assessment of the baseline social and
environmental conditions
using each bank’s own standards Consideration of feasible
“Equator Principles” (voluntary) environmentally and socially preferable
alternatives
were introduced in 2003, based on Requirements under host country laws
IFC standards and regulations, applicable international
treaties and agreements
Created global standards for Protection of human rights and
commercial banks community health, safety and security
(including risks, impacts and
Level playing field: most major management of project’s use of
international PF banks have security personnel)
subscribed to common principles for Protection of cultural property and
heritage
categorizing environmental and
social risks in project financing Protection and conservation of
biodiversity, including endangered
Applies to all projects over $10 species and sensitive
million Ecosystems in modified, natural and
critical habitats, and identification of
Projects are categorized in A/B/C legally protected areas
depending on risk assessment
Category A projects, and as
appropriate, for Category B projects,
require appointment of an
independent environmental and/or www.equator-principles.com
social expert

34. Finance raising process

35. Raising equity finance
Sponsors
Typically, sponsors would be a JV between international and
local partners
Common issues with local sponsors
Have the requisite political connections to secure the project,
but no cash
Provide “in-kind” contributions towards the equity
Leads to valuation issues and may have a negative impact on
debt capacity of the project
Equipment suppliers may also be considered more as
sponsors than as equity investors since they typically have
technical or operating experience to contribute
Financial investors
Equity - increasing number of hedge funds dedicated to
infrastructure, since the returns are more predictable for fund
investors than in private equity funds focused on the
corporate sector. Fund investors are typically pension and
insurance funds, who seek a premium over a the benchmark
fixed income rate of return

36. Raising debt finance
Financial advisor typically coordinates the process
Competitive process - information memorandum
Due diligence
Use of technical specialists
Feasibility study
Insurance
Independent review
Underwriting commitment
Syndication
Road show
Monitoring

37. Sources of debt finance
Commercial banks
Primary source of non-recourse debt
International (e.g. Citigroup, ABN-Amro, Calyon,
SocGen, HSBC, etc.)
Domestic (e.g. Vnesheconombank,
Gazprombank, Sberbank, VTB, etc.)
Capital markets
144A project bonds (SEC)
Institutional funds
TLCs

38. Sources of debt finance (cont.)
Official agencies
Critical source of financing in emerging markets
Export credit agencies (ECAs)
Support export of goods and services from a specific
country, eg. US Eximbank, ECGD, EDC, EDC, K-Exim
Can provide up to 85% of export contract value
Provide a measure of informal political risk insurance (PRI)
as they are generally government owned
International Financial Institutions (IFIs)
Seek developmental impact as well as financial returns
Are generally AAA-rated (owned by multiple governments)‫‏‬
e.g. EBRD, IFC, World Bank, Asian Development Bank
MIGA – political risk insurance

39. Terms of limited recourse debt
financing
Typical covenants
Affirmative
Financial
Debt Service Coverage Ratio
Debt-Equity
Tangible Net Worth
Non-financial
Cash flow waterfall
Debt reserve account
Cash sweep
Monitoring and reporting provisions
Negative
Additional indebtedness
Distributions
Maintain assets, existence
Conditions to release of completion guarantees
Events of default
Payment obligations
Covenant violations
Material Adverse Change (MAC) / force majeure
Step-in rights

40. Application of funds (real example)‫‏‬
$$$ All revenue $$$
$$$ All revenue $$$
Trustee general account (NYC)
Trustee general account (NYC)
Dollar operating account
Tax payment account
Debt service account
Major maintenance reserve account
Debt service reserve account
General O&M reserve account
Distribution account

41. Emerging markets

42. Emerging markets defined
No single universally accepted definition
Typically defined in terms of World Bank categories of
Middle and Low income per capita (GNI)
Morgan Stanley - as of June 2007 the MSCI Emerging
Markets Index consisted of the following 25 emerging
market country indices: Argentina, Brazil, Chile,
China, Colombia, Czech Republic, Egypt, Hungary,
India, Indonesia, Israel, Jordan, Korea, Malaysia,
Mexico, Morocco, Pakistan, Peru, Philippines, Poland,
Russia, South Africa, Taiwan, Thailand, and Turkey
Big Emerging Market (BEM) economies are Brazil,
China, Egypt, India, Indonesia, Mexico, Poland,
Philippines, Russia, South Africa, South Korea and
Turkey

43. International credit ratings
S&P Moody’s
Investment grade AAA Aaa
Sample Country Ratings
AA (+/-) Aa1, Aa2, Aa3
Brazil BBB-
India BBB-
Russia BBB+
A (+/-) A1, A2, A3
China A+
BBB (+/-) Baa1, Baa2, Baa3
South Africa BBB+
Taiwan AA-
Tunisia BBB Speculative grade BB (+/-) Ba1, Ba2, Ba3
Turkey BB-
Ukraine B+ B (+/-) B1, B2, B3
Thailand BBB+
CCC (+/-) Caa1, Caa2, Caa3
CC Ca
C C
D

44. Emerging market
characteristics
Lack of precedents,
legal framework
Weak domestic capital
markets
Weak local partners
Currency instability
Corruption
Expropriation risk
Political instability
Rule of law?

45. Project finance in the emerging
markets
Emerging markets are where the needs are greatest, but…
Country rating is generally less than investment grade - reduced pool of
lenders/investors
Cross-currency risks - project revenues are derived in local currency, but local
capital markets are not generally deep enough to fund projects, so must seek
funding in international markets
Re-patriation risk - currency restrictions imposed in future may prevent
repayment
Expropriation risk – e.g. Venezuela, Russia?
Lack of appropriate legislation, legal precedent
Questionable impartiality of court systems - “we own every judge in Mexico”
Political climate during downturns – image of exploitation by foreign investors
Implications
Importance of specialized lenders
ECAs - seeking to support export of goods and services
IFIs - concessionary lenders seeking developmental impact
Reduces political risks (indirectly)
Tighter restrictions on project companies
Increased reliance by lenders on “relationships” with key project sponsors outside
of the specific project being financed

46. Case studies
BTC pipeline (Azerbaijan, Georgia,
Turkey)
Ariawest International (Indonesia)

47. BTC pipeline – project overview
Baku-Tbilisi-Ceyhan (BTC) oil pipeline
built to transfer oil reserves of the
Caspian Sea Basin to world markets,
avoiding the congested Bosphorus
Straits and also bypassing Russia
British Petroleum (BP), the consortium
manager, (30.1%), SOCAR (25%),
Unocal (8.9%), Statoil (8.7%), Turkish
TPAO (6.5%), ENI (5%), Total (5%),
ConocoPhillips (2.5%), Amerada Hess
(2.35%), Itoku (3.4%) and Inpex
(2.5%).
The opening of the pipeline had been
delayed on several occasions. Initially
expected at the end of 2004, delivery
of the first litres of crude from the
Caspian to oil tankers in Ceyhan did
not begin until May 29 2006. One of the most complex project financings ever – 11
The 1,774-kilometer pipeline has sponsors, crossing 3 countries, 2 years to conclude
capacity to hold 10 million barrels of financing package. financing package includes 208
oil, stretching across 449 kilometres of finance documents, with over 17,000 signatures from 78
Azerbaijan, 235 kilometres of Georgia different parties
and 1,059 kilometres of Turkey, before
reaching the Turkish port of Ceyhan.
Main driver: to transport crude from the $12 billion Azeri, Chirag and
Deepwater Gunashli Fields (ACG Field) without going through Russia

48. BTC pipeline - financing
US$3.65 billion project cost
Debt package (~70%):
IFC/EBRD A/B loans US$500mm
ECAs (JBIC, NEXI, US Exim, ECGD, 766mm
Hermes, Coface and SACE)
JBIC overseas investment loan 300mm
OPIC covered loans 100mm
Sponsor senior loans 923mm
TOTAL DEBT US$2,589mm
EBRD - $125 million 12-year A Loan; $125 million 10-year B Loan
12- 10-
MLAs: SocGen, Mizuho, Citi, ABN-Amro + 11 others in syndicate – BNP Paribas, Credit Agricole Indosuez, Natexis Banque
MLAs: SocGen, Citi, ABN-
Populaire, ING, Banca Intesa, Sanpaolo IMI, HypoVereinsbank, WestLB, Dexia, KBC, Royal Bank of Scotland
Populaire, Intesa, HypoVereinsbank, WestLB, Dexia,

49. BTC financing – structural features
Cayman Islands SPE (BTC Co) – receives
payments from shippers
Construction completion guarantees by
sponsors (several) + milestones related to
ACG Field development
Transportation agreement
Shippers must transport all their ACG field
crude production through BTC
Ship-and-pay (not ship-or-pay)
Main bank accounts held in New York

50. Ariawest International
PT Ariawest International
SPE owned by U S West (now AT&T) –
35%, Asian Infrastructure Fund –
12.5%, and local partner PT Artimas
Kencana Murni – 52.5%
“Joint Operations Scheme” with PT
Telkom (State monopoly provider)
5 territories
Private sector invited to bid on, and
operate, concessions for 15-year
period, under a BOT scheme
Employees seconded from PT Telkom
Financial terms:
30% revenue sharing with PT Telkom
Minimum Telkom Revenue (gross
amount)
Investor’s commitment to build a
minimum number of new land lines
(500,000 in West Java), for a
population of 25 million with 1.4%
penetration rate for fixed lines
US$614 million project financing was 1996
the largest ever in Indonesian Euromoney
telecoms sector; 40 international Deal of the
banks participated in the syndicate Year

51. Key risks and mitigants
Risk Mitigant(s)
Inflation Revenues are not directly Ability to raise tariffs
linked to inflation, thus long-
term viability of the project
could be eroded
Foreign exchange Revenues are denominated in Government commitment to raise
local currency, while funding is tariffs if IDR depreciates more than
in offshore currency 10% p.a.
Capital expenditure Additional hedging requirements in
(equipment) largely the financing agreements
denominated in foreign currency
Construction Potential for construction cost Turnkey construction contract with
overruns and delays Siemens
Demand There may not be a market for Independent market survey
the total land line commitment indicates significant unmet demand

52. Indonesian economy (1990-96)

53. Indonesian economy (1997-98)

54. Indonesian currency (IDR)
2,112 (Oct-93)
2,482 (Jul-97)
9,551 (Oct-08)
16,475 (Jun-98)

55. What went wrong?
Financing structure:
Currency hedge not available when markets are dysfunctional
Impractical to raise tariffs in response to devaluation
Acrimonious labour relations; former State employees
Political unrest
Developments:
1988: Banks declared MAC, froze credit lines after company drew
US$284 million; shareholders forwarded extra $120 million to make up
for shortfall
1990: US$284 million debt restructuring completed
1999: Ariawest files a US$1.3 billion arbitration claim against PT
Telkom with the head office of the International Chamber of Commerce
in Paris
2002: Senior executives of Ariawest (seconded AT&T reps), named as
suspects in a corruption case worth a reputed IDR 74 billion
2002: Project was re-acquired by PT Telkom for US$185 million, plus
assumption of debt of US$270 million

56. Project finance in Russia
Source: Thomson Financial

57. Specific issues in Russia
Capacity of Rouble capital markets
Tenor
Up to 15 years, but thin market
Currency hedging
Cross-currency swaps are available for up to 10 years, up to $1 billion transaction
size
But… at what cost? Impact on project economics?
Quantum of funding available
Infrastructure spending plans vs. capitalization of Russian banking system
Goes back to the lack of development of the Russian banking system
Legal risks
Contractual enforcement
Predictability of courts
“Ability, incentive, and obligation” to perform under contracts (e.g. Stockmann)
Expropriation risks
Insurance limits
Construction risks (permits)
Impact of graft on project economics
Ability to obtain political risk insurance?
Corporate concentration/lack of alternative service providers in case of
disputes (e.g. road construction)

58. PPPs in the Russian Federation
Institutional framework
Federal Law “On Concessions” adopted in
2005 (amended in July 2008)
Investment Fund
Vnesheconombank

59. Does Russia Need PPPs?
Record budget surplus, Risk transfer
foreign exchange reserves Capital cost overruns
Operating cost overruns
Government has a lower
cost of capital than the Cost savings / value for money
Private sector skills, innovation,
private sector management
Trend towards increasing Concentrate on service outcomes
rather than assets
state involvement in key
Evidence from UK research studies –
economic sectors cost savings of 15-17%
Mobilize private capital
Public funds can be invested in other
areas of priority, such as pensions,
healthcare, debt repayment

60. Typical PPP participants
Land
owners
Private investors
Grantor’s Grantor Expropriation (concessionaire
Agent / partners)
Services
Department Company
Land lease Government shareholder
agreement financing Dividends
Concession Concession
Concession agreement transfer
monitoring Private funds
State control Concession
agencies monitoring Concessionaire – Loans
Construction Special Purpose Company Private/ multilaterals Bank or
• Environmental Payments funds (invest. contracts)
• Taxes Financiers
• Customs (imports)
• Land plan Company activities
• Etc. Debt
Roles of the SPC repayment
Turnkey
contract Commercial /
Maintenance
Construction Public Works
works
Administration Other
sub-contractors business Income (Toll)
Management
Management Ex-post operation Users
Ex-ante operation
Management
payments Management
contract
Relation
Road
building Participation in creation
Contractual relation
Outsourcing Services & Financial flows
contracts Management
Activity lines

61. Investment Fund of the Russian
Federation
Established in 2006 with funds
primarily from Stabilization Fund
Managed Vnesheconombank Annual capacity of the
US$14.25 billion up to 2009 Investment Fund
Potential private investment
mobilization 2-8x (US$28.5 -
US$114 billion) 5
Applications for funding must be
supported by an investment 4
advisor, and involve a private
investor
US$ 3
Has approved 12 projects to date
(approximately 1 out of 10 bn 2
applications)
Investment Fund endorsement 1
plays critical role, especially in
transport sector
May invest equity of up to 75% of 0
project’s cost, or provide a 2006 2007 2008 2009
guarantee for 60% of financing
obtained from private sector

62. Road PPPs approved by the
Investment Fund
Expected Investment Fund
Projected Total
Project Sector Investment Fund Contribution (% of
Cost
Contribution Total Cost)
Construction of the Western High-Speed Diameter Transport RUR 82.2 bn RUR 26.5 bn 32.2%
(WHSD) motorway (USD 2.9 bn) (USD 1.0 bn)
Construction of the Moscow – St. Petersburg high- Transport RUR 53.0 bn RUR 25.2 bn 47.5%
speed motorway (from 15km to 58km mark) (USD 2.0 bn) (USD 0.95 bn)
Construction of “Orlovsky” tunnel under the Neva Transport RUR 25.7b RUR 8.0b 31.1%
river in St. Petersburg (USD 0.97 bn) (USD 0.37 bn)
Construction of a new exit to the Moscow Outer Transport RUR 17.0b RUR 9.8 bn 57.6%
Ring Road (“MKAD”) from the motorway M1 (USD 0.65 bn) (USD 0.37 bn)
“Byelorussia” Moscow-Minsk
Expressions of interest from EBRD, EIB, NIB, IFC, VEB

63. Kupol Mine
Chukotka Mining and
Geologic Corporation
("CMGC")
BEMA Gold (Canada)
75%; Government of
Chukotka (25%)
Considered the best
gold discovery in the
world in the last two
decades
Robust economics

64. Key risks
Resource risk: mine life (12 years)
Remote location (above the Arctic Circle):
Transportation
Construction
Country risk
Ambiguous mining laws
Legal system untested
Commodity price risk
Environmental and social risk

65. Financing structure
US$470 million estimated project cost
Sponsors’ equity: $70 million, excluding sub debt
Debt package: $400 million project loan + $25 million corporate loan to CMGC
Completion guarantee by BEMA + cost overrun facility
Political risk insurance by MIGA (expropriation, political violence, transfer and
inconvertibility)
Offshore account structure, linked to gold exports
Debt service reserve account
Automatic cash sweep
Reporting and monitoring: monthly, with annual mine life update; semi-annual financial
projections with forward-looking tests
Tranche 1 senior (MLAs: HVB, SocGen) – 6.5 US$250mm
year term
Tranche 2 senior (Caterpillar Finance, EDC, 150mm 2005 Mining
IFC, Mitsubishi) – 7.5 year term Deal of the
Non-recourse subordinated loan (IFC) – 8.5 25mm Year
year term back by warrants to purchase
common stock of BEMA
TOTAL DEBT US$425mm

66. Current state of the market
Project finance market expected to be
driven by needs for financing PPPs
Prominent PPPs in Russia
Western High-Speed Diameter Toll Road
Pulkovo Airport BOOT concession
Moscow-St. Petersburg Toll Road
Orlovski Tunnel
Nadzemny Light Rail

67. Western High-Speed Diameter
46.6 km high-speed city highway with multi-
level exits, mostly eight lane, with a planned
average speed of 120 km per hour and a
maximum capacity of 94,000 vehicles per day
Project timeline
Nov 2006: Concession tender announced
Jun 2008: Preferred bidder selected;
negotiations in progress
Project cost estimated at $6.5 billion (double
initial estimates)‫‏‬
According to the president of Strabag, “This is
not only the largest project of this type in the
world, but probably the most complicated in
terms of execution. Tunnels and bridges make
up about half of the Diameter‘s length, and
the highway passes through established city
infrastructure.”
Opposed by environmental groups
Current status: final selection of preferred
consortium occurred on 6 June 2008 (BasEl,
Strabag, Hochtief, Bouygues, Egis,
Mostootryad 19) (big surprise!)‫‏‬
Financing plan
Russian investment fund direct subsidy
St Petersburg city direct subsidy
IFIs - letters of interest
EBRD
EIB
NIB
IFC
Equity

68. Western High-Speed Diameter
motorway in St. Petersburg
Grantor: Russian Federal Government and
City of St. Petersburg
Initial project analysis:
Project: To build a new high-speed, 46 Project rationale?
km long toll motorway along the Gulf of
Finland coast, connecting the northern, Project economics?
central and southern parts of St. Sponsors?
Petersburg
Concession: DBFO, 30-year period Experience?
Funding: Country risk?
1. Public: 33% - Investment Fund; 17% -
St. Petersburg municipality
2. Private: 50% of project costs paid by
investor funds
Letters of Interest from EBRD, IFC, and
EIB
Structure:
“Real toll”, not shadow
Toll collection risk to be borne by
concessionaire
Traffic risk mitigation by City of St.
Petersburg
Certain land risks to be borne by grantor
Early termination compensation by grantor
Some form of foreign exchange protection
by grantor
Detailed risk allocation to be set out in
draft concession agreements; subject to
negotiation

69. Careers in project finance
Commercial banks Core skills
Financial advisory Financial modelling (Excel)
Credit analysis Credit analysis
Loan syndications Legal
IFIs Writing
Concessional lenders Negotiating
ECAs Presenting
MLAs
Business development
Big 4
Feasibility studies
Financial advisory
Law firms
Drafting of contracts
Advising on legislation
Rating agencies
Project developers
Equity investors
Pension funds
Specialist infrastructure funds

70. For further references
Periodicals
Project Finance
International
Infrastructure Journal
The Journal of
Structured and Project
Finance
Harvard Business School
portal
(www.people.hbs.edu/b
esty/projfinportal/) -
links to research, data
and information services

71. Session objectives
To understand the basic characteristics of project
finance as distinct from corporate finance
To understand the principles of public-private
partnerships
To understand the analytical process of assessing
viability and financeability of projects
To understand the related terminology/acronyms
such as SPV/SPC/SPE, EPC, O&M, BOT/BOOT, PRI,
ECA, IFI, DSCR, LLCR, DSRA, IDC, MRA, Monte Carlo,
cashflow waterfall, loan syndication
To understand typical banking terms and conditions
of limited recourse loans

72. Contact details
L.S.P. Prabhu
lsp.prabhu@mail.ru