Strictly Private and Confidential
May 2009
Pension Fund Infrastructure Investments in Nigeria
Alternative, Impact and Growth
2Table of contents
1. Overview of Project Financing
2. Public Private Partnerships (PPPs)
3. Case study – Shuaibah IWPP, Saudi Arabia
Appendices
A. Introduction to Stanbic IBTC Bank
4Project Financing Overview
Project Finance is the financing of long-term infrastructure and industrial projects based upon a complex financial structure where project debt and equity are used to finance the project, rather than the balance sheets of project sponsors
– providers of capital have full or limited recourse to the project’s cashflows, which are ring-fenced from its parent company
– applicable in a variety of sectors including power & infrastructure, oil & gas, manufacturing & distribution, telecoms & technology and property
Non-recourse
Maximise leverage
Off-balance sheet treatment
Maximise tax benefits
Loan repaid from project cashflows; assets are used as collateral Lenders get comfort in terms of credit supports from guarantees,
warranties and other covenants from the sponsor, its affiliates and other third parties
Highly leveraged projects with c. 60 – 85% debt used to finance the costs of development and construction of the project
Depends on the structure of the transaction Can help the borrower manage its debt portfolio to ensure it can
meet the covenants already in place with other lenders
Project can be structured to maximise tax benefits
AD
VA
NT
AG
ES
5
Multi-currency
Multi-source
High Leverage
Key features of infrastructure financing
Amount of leverage is determined by what the project’s cashflows can support
Debt tends to be c. 60 to 85% of total project cost
Local and international banks Vendor financing Export Credit Agencies Bilateral and multi-lateral DFIs
Naira / USD mix recommended Huge liquidity for Naira assets - US$1.6bn equiv. raised for MTN Liquidity constraints for US$ funding given global credit and
liquidity crunch
COMMENTS
Long Tenor
Debt term varies from project to project and also depends on the sector:
– Power: 8-25 year debt term
– Infrastructure: 20-30 year debt term Bridge funding available where required
Security
Credit supports include guarantees, warranties and other covenants from the sponsor, its affiliates and other third parties including Federal and completion guarantees
Guarantee ensures transaction achieves optimal debt pricing and tenor and demonstrates commitment from the Guarantor
6Funding Sources
DEBT
EQUITY
Local Banks
International Banks
Regional Banks
ECAs
Capital Markets
Islamic Finance
Government
Foreign Partners
Local Private Sector
Pension funds
Recent entries = Infrastructure Funds, Sovereign Wealth Funds, Private Equity…
Up to 90% for strong PPPs and 80% max for typical Project financings…
Pension funds
Local Stock Market
7
Higher raw material prices Constrained contracting capacity Constrained sub-contractor and vendor capacity Higher profit margins for contractors and suppliers
Project Finance Challenges
Capital costs
Governments keen to extract value from natural resources Higher input costs impact cash flows Higher capital costs mean that cash flows are more thinly stretched Combined with limited debt capacity….ability to leverage has fallen
Constrained economies
Larger investments mean all funding sources now more important Local commercial banks’ liquidity insufficient for many projects ECA and Regional Development Institutions critical – pace of due
diligence sometimes not aligned with sponsors timetable Substantial reliance on international debt capital
Financing costs and capacity
Maturities getting longer Demand for US$ borrowings Eroding Government support
Others
8Lessons learned
Spend time putting together robust structures before approaching bank market
Government support critical for injecting confidence i.e. to get deals off the ground
Market testing / sounding-out critical
Shareholders to demonstrate tangible commitment throughout the life of the project i.e. not only pre-completion
Tight / Bank friendly Term Sheets and Documentation - Generally relaxed terms possible via refinancing post completion where project reaches steady state
Crucial to engage and accommodate issues pertaining to all funding sources from a very early stage in the process (i) ECAs, (ii) Regional Developmental Institutions, (iii) Local
banks, (iv) Regional Banks, (v) International banks and (vi) Islamic Financial Institutions
Independent Opinions crucial (i.e. Market / Traffic, Technical, etc) – even on projects where limited and / or no demand or technical risks are apparent
9
Policy formulation Transparent bidding process Funding Operation
Role of Stakeholders
Government
Policy formulation and implementation Transparent interactions with the various stakeholders Consistent policies
Regulators
Assist in the planning, design and construction phase May take on the role of sponsors and equity investors in the
underlying project Undertake maintenance and efficient operations of the public utility Assists in maintaining the utility through long term maintenance
contracts
Operators
Advise of the feasibility and assess the financing needs of projects Assist in structuring projects to make them bankable Provide finance on a non or limited recourse lending basis Assist in management of project-related exchange rate risks DFIs helpful in stretching lending terms and tenor of financing
Financiers / Financial Advisors
11Definition and Rationale for PPPs
Contractual arrangement between public and private sector entities whereby the private sector performs a government department’s function in accordance with an output based specification for a specified, significant period of time in return for financial remuneration
– The public sector retains a significant role in the partnership project either as the main purchaser of the services provided or as the main enabler of the project
Projects may be self-sustaining (from user charges eg. ports, airports etc), or rely on a contracted state payment (so-called unitary fee eg. hospitals, prisons) or a combination of both
Benefits of PPPs
– Combine public interest / public good with private innovation, finance and implementation capacity
– Government becomes a purchaser of services and/or enabler of the project, no longer an owner and operator of assets
– Substantial transfer of all forms of project lifecycle risk to private sector
– Inefficiencies of capital rationing avoided
– Lenders’ and investors’ due diligence ensures a viable and robust project
– Profit motive over the project lifecycle drives adherence to programme, cost management, operating efficiency
– These factors can outweigh higher private sector cost of funds to enable value for money
12Generic PPP Structure
EQUITY INVESTORS (20-40%) Project Sponsors Passive EquitySubordinated debt Pension funds
DEBT INVESTORS (60-80%) Development Banks Commercial Banks Capital MarketsPension funds
SPV
DESIGN & CONSTRUCTION
OPERATION & MAINTENANCE
STATE
Direct Agreement
Concession
Agreement
13
Notion of “the private sector providing a public service” must be understood and accepted at both national and local government levels, as well as traditional leadership
Willingness to overcome vested interests for the change in delivery mode, and, in some cases, motivate a new charging regime
Committed project champions in the concession granting authority to obtain support and approvals across the range of public stakeholders
State capital contributions and/or revenue support
Success Factors
Political Support
Legal and Institutional Capacity
Need developers and contractors who respond to tenders with adequate resources and commitment – to get value for money and delivery
Too many tenders attract too few bidders – why? A global boom in power and infrastructure – supply side constraints Quality and efficiency of tender process critical
Willing and Able Developers
Legal capacity to grant concessions Necessary ownership of existing asset to confer a concession over it Financial capacity to meet any financial liabilities under the concession (or
else bind the State) Institutional capacity to negotiate and manage concession agreements
14
In some countries construction contracts often awarded on a negotiated basis
Pricing of civil works is higher than many other emerging markets - a challenge for project viability
Persuade contractors to act as sponsors and equity investors Contractors get more influence over contracting terms and have greater
certainty of payment New business opportunities in maintenance and operations
Success Factors (continued)
Competitive Contractors & Operators
Willingness and Ability to Pay
In a user-pay scheme like a toll road, the willingness and ability to pay is a key issue
Willingness can be influenced by political players - need national and local leaders to give overt support for the user pay concept (where it is the appropriate solution)
Getting to the affordable charge for a user is a delicate process, and in public transport often requires a public subsidy or capital grant
Affordability also applies to take-or-pay PPPs such as waste, water or power deals
Off-taker’s credit-worthiness is key and may need to be enhanced But understand the status quo e.g. Stand-by generation now costs
US$0.42/kWh >> don’t underestimate end-user’s willingness to pay!
15
Infrastructure needs long term finance on flexible terms, e.g. high gearing, interest and capital grace periods, sculpted repayments, etc.
Critically, non or limited recourse lending needed Ideally, exchange rate and interest rate risk need to be managed/hedged Pension Funds and Development Finance Institutions helpful in stretching
lending terms Depth and competitiveness of the banking market has improved e.g. Celtel
and Nairobi Toll Road Capital markets are the natural long-term investors But regulatory hurdles can be a problem e.g. bond listing requirements
exclude green-field projects
Success Factors (continued)
Bank and Capital Markets
16Lessons Learned – Let’s move on!
Remember the “Partnership” in PPP? Infrastructure is everybody’s business!
Understand what risks developers and funders will take
Work out how to attract the right developers (LCC – Lagos State)
Encourage innovation, don’t over-specify inputs
Aid & development finance should supplement - not substitute - commercial lenders
Keep it simple!
18Project Overview
The first IWPP (Independent Water & Power Project) development in Saudi Arabia, which laid out the framework for other IWPP transactions in the Kingdom of Saudi Arabia
– framework mirrors that in UAE, Qatar and Oman
PPP: Build, Own and Operate (“BOO”)
20 year Power & Water Purchase Agreement (“PWPA”)
36.5 months construction schedule
Desalinated Water production (880k cm per day, using 12 units of Multi Stage Flash technology)
Power generation (900 MW 3 units, light crude oil fired burners, back pressure steam turbines)
100% of water and power capacity and output sold to Government-owned entity for 20 years
Main project parties are Saudi & Malaysian sponsors (60%) and Kingdom of Saudi Arabia (40%)
Groundbreaking IWPP in Saudi Arabia laying down the framework for future IWPP projects in the country
Project summary
Project: Shuaibah IWPP Sector: Power & WaterTotal cost: US$2.45 billionDebt term: 20 years
19Finance Plan
496
233
875
418
225
400
0 100 200 300 400 500 600 700 800 900 1000
Equity
Pre-completion Revenues
Bank Debt
KEXIM
Islamic Tranche
HERMES
(US$m)
20Ownership Structure
Combination of public and private sector ownership
SHUAIBAH Water & Electricity Company(Project Company / Borrower)
PRIVATE SECTOR ENTITIES GOVERNMENT OWNED ENTITIES
Public Investment Fund
Saudi Electricity Company
Saudi Sponsors
Malaysia
Sponsors
Saudi Malaysia Water & Electricity Co Ltd (Project developer / Bidder)
60%
50%32% 8%
32%
30%
12%
12%
8%6% PIF
ACWA Power Projects
Khazanah
Malakoff
SEC
Tenega Nasional Berhad
21
Patrick Okey Mgbenwelu – Head, Project Finance – Stanbic IBTC Bank [email protected]
Nigeria:Stanbic IBTC Bank Plc,
IBTC Place, Walter Carrington Crescent, P. O. Box 71707, Victoria Island, Lagos State
Tel: 01 – 448 – 8900
Fax: 01 – 448 – 8902
Mob: 0703 – 413 – 6835
www.stanbicibtcbank.com
THANK YOU
23Stanbic IBTC Bank
Stanbic IBTC Bank, a product of the merger between IBTC Chartered Bank Plc and Stanbic Bank Nigeria Limited, is Nigeria’s premier investment bank with a wealth of experience in advisory, privatisations and capital markets
The bank also has excellent corporate and retail banking capabilities and a network of over 60 branches in all the major cities and commercials centres spread across the geo-political zones of Nigeria
Being a member of the Standard Bank Group means that Stanbic IBTC is part of a strong global banking network
Fitch recently upgraded Stanbic IBTC’s National Long and Short-term ratings to 'AAA(nga)' from 'A(nga)' and to 'F1+(nga)' from 'F1(nga)', respectively – only local bank with a Fitch AAA rating
Stanbic IBTC Bank is the parent of Stanbic IBTC Pension Managers, Nigeria’s largest PFA and Stanbic IBTC Asset management Limited, Nigeria’s largest non-pension asset managers
Stanbic IBTC is among the 15 Primary Dealers / Market Makers recently appointed by the Debt Management Office to trade in government securities and appointed along with 13 other banks to manage Nigeria’s foreign reserves
Stanbic IBTC Bank is the parent of Stanbic IBTC Pension Managers, Nigeria’s largest PFA and Stanbic IBTC Asset management Limited, Nigeria’s largest non-pension asset managers
Overview
Selected Accolades
Stanbic IBTC is the only local bank with a Fitch AAA rating
Best Debt House: Euromoney Excellence Award 2008
Best Issuing House: Thisday Awards 2008
Best Issuing House in Africa: African Banker Awards 2007
Best Fund Manager, Nigeria: ThisDay 2005
Euromoney Project Finance Magazine ‘Deal of the Year’ Awards:
– African PPP: Lekki-Epe Expressway (2008)
– African Telecoms / Mobile: MTN Nigeria US$2bn Fund raising (2007)
Local knowledge supported by a global network and expertise
24Stanbic IBTC ― Project Finance Credentials
2008US$ 300m
Toll Road, Nigeria
Joint Financial Advisor / Lender
2007US$ 2bn
Syndicated Credit Facilities, Nigeria
Global Co-ordinator / Mandated Lead Arranger
2007US$ 160m
Project Finance, Nigeria
Lead Arranger
INDORAMA
2006US$ 595m
Medium Term Syndicated Facilities,
NigeriaLead Advisor / Arranger
2004US$ 300m
Revolving base term facility, Nigeria
Senior Lead Arranger / Co-Underwriter
2007US$ 350m
NNPC Local Content Support Fund,
Nigeria Programme Manager
2007US$ 25m
Bridge Finance, Nigeria
Financial Arranger
INDORAMA
2007US$ 450m
Syndicated Credit Facilities, Nigeria
Mandated Lead Arranger
2007US$ 1.5bn
Senior Secured Reducing Revolving
Credit Facility, Nigeria & Gabon
Senior Lead Arranger
2006US$ 10m
Uncommitted Revolving Pre-offtake Finance, Amni Intl, Nigeria
Sole Arranger / Lender / Hedging Bank
2005US$ 100m
Silent Payment Guarantee Facility,
PPMC, NigeriaArranger
2008NGN 100bn
Commercial Paper Programme,
Nigeria Primary Dealers
GROUP
Stanbic IBTC has experience in a wide range of sectors across Nigeria
2007US$ 200m
Senior Secured Borrowing Base Facility,
Nigeria Mandated Lead Arranger
/ Underwriter
25Disclaimer
Confidentiality and disclaimer
This document is provided on the express understanding that the information contained herein will be regarded and treated as strictly confidential and proprietary to Stanbic IBTC Bank Plc (“Stanbic IBTC”), its holding company Standard Bank of South Africa, and the subsidiaries of its holding company (“the Standard Bank Group”). By retaining it the recipient undertakes that it is not to be delivered and nor shall its contents be disclosed to anyone other than the intended recipient, and nor shall it be reproduced or used, in whole or in part, for any purpose other than for the purpose described herein, without the prior written consent of Standard Bank.Whilst every effort has been made to ensure the accuracy and completeness of the information contained in this document, no responsibility is accepted by the Standard Bank group for the treatment by any court of law, tax, banking or other authorities in any jurisdiction of any transaction based on the information contained herein. There may be tax implications to consider in any transaction and these should be identified and understood before investing. Separate tax advice should therefore be sought when appropriate. Should anything contained herein contribute to the acquisition of a financial product the following must be noted: there are intrinsic risks involved in transacting in any products; no guarantee is provided for the investment value in a product; any forecasts based on hypothetical data are not guaranteed and are for illustrative purposes only; returns may vary as a result of their dependence on the performance of underlying assets and other variable market factors and past performances are not necessarily indicative of future performances. Any client that is not a merchant banking client as defined in the Financial Advisory and Intermediary Services Act must note that unless a financial needs analysis has been conducted to assess the appropriateness of any product, investment or structure to its circumstances, there may be limitations on the appropriateness of any information provided by a member of the Standard Bank group and careful consideration must be given to the implications of entering into any transaction, with or without the assistance of an investment professional.