presentation public private partnerships (ppps) tladi josias ramushu vice president loita capital...

Presentation

Public Private Partnerships (PPPs)

Tladi Josias Ramushu

Vice President Loita Capital Partners International & Executive Director Loita SA

Presentation Outline

Introduction

PPPs – Concept and Rationale

Key Financial Issues in PPPs

Financial Structures in PPPs

About the Loita Group

Pan-Africa Investment Banking and Information Technology Group

Majority management owned and controlled

Strategic investment from the Southern African Development Fund in 1999

SAEDF is a US based multi million dollar fund

About the Loita Group 300 employees in Africa

Focus on US-style investment banking products:

Structured finance (trade, project and asset backed)

Corporate finance (debt and equity advisory)

Capital markets (bond issues)

Correspondent banking/asset management

IT and IT Financial infrastructure solutions for Banks (card and switching systems)

Strategic Consultancy

Key components of Loita’s trade and project finance activities include provision of advisory services to regional and domestic banks including PTA bank

• Strategic relationship forged with Barclays Bank Offshore (Mauritius), East African Development Bank (EADB) and Development Bank of Southern Africa; joint venture alliances (Lloyds TSB), Finance Bank Zambia, Versus Bank Cote d’Ivoire and Animal Resources Bank (Sudan)

• Leading provider of trade and project finance services Loita Investment Bank a 100% owned subsidiary in Malawi

– ICC Zambia – largest asset backed financing company in Zambia

– ICC South Africa – JSE listed

– Regional offices in Kenya, Mauritius and South Africa

– Finance Bank Zambia

About the Loita Group (Cont’d)


Introduction





Public Private Partnerships (PPP) essentially transfer of management of Public assets to Private Sector to enhance and expand service delivery mechanisms through their financing, operating and maintaining public infrastructure and services as part of Government economic reform programme/ strategy

Old model to economic reform was Privatization involving sale of State assets

However, this fell out of favour as perceived to be: “selling family silver ware”; and

“new wine in old bottles”.

Simply put, PPPs are partnership between Government and appropriately qualified private sector entities

PPPs considered more palatable approach to economic reform as they: Reduce burden of State coffers and allow for redeployment to social

programmes Stimulate new/ expansion of infrastructure rather than sale of what is already

existing Can pass on efficiency gains to consumers through introduction of new

technology Promotes regulation to yield benefits for consumers

PPPs – Concept and Rationale (cont’d) Different forms of PPPs

Service contracts - Simplest form & involves performing services at fixed fee

Management contracts – Simple service for fee & incentive fee for efficiency gains

Asset Leases – Hire out of State assets with operational risk and returns transfer

Joint ventures/Partnerships – Agreed contributions to venture and share of returns

Concessions – Take different forms such as;

Build operate transfer (BOT)

Rehabilitate operate transfer (ROT)

Concessions represent highest level of risk to include design, construct, finance and market in regulated environment

Main difference between varying types of Concessions is level of exposure to market risk

PPPs – Concept and Rationale (cont’d)

There are 3 critical elements:-

Contractual agreement

Substantial risk transfer to the private sector

Outcome based financial reward


Benefits

Acceleration of infrastructure provision via private sector

Faster implementation as Government does not have to wait until it can address the matter

Private sector efficiencies tend to reduce costs

Better incentives to perform due to payment incentives

Enhanced public sector management due to reduced loads

Stimulates capital market development

Constraints to growth in PPPs on continent

Affordability – peoples willingness to pay

Low population densities - limits market potential

Undeveloped legal and business environments – doing business difficult

Country risks – continent perceived as politically unstable, limiting foreign investment


In South Africa PPPs have been used for the following:-

Fleet Management

Hospital machinery and equipment

Eco-tourism

Information systems

District hospitals

Water services

Electricity generation

Toll roads

Air traffic control

Prisons


Most important rationale is that Government might not be the best provider of services in terms of cost, quality, ability to absorb commercial risk and quite often securing financing

Objective is to achieve value for money (benefits should out way costs)


Introduction





PPPs especially those of an infrastructure nature invariably require financing

Normally involves funding the initial investment costs that are repaid from future revenue streams of the project

Financing could be from either public or private sector

Due to long term nature of PPPs, the approach utilized from the financing side would normally involve project financing techniques - In essence this is project financing

Project financing: there are 3 possible approaches

Debt Equity Combination of both

Key Financial Issues in PPPs (cont’d)

Equity route primarily involves groups of investors (sponsors) who will draw on their equity

Debt is normally provided by banks and specialized institutions such as Infrastructure Funds

There is normally an argument against using private sector debt funding ostensibly because of cost.

The counter is that in international capital markets, the project can use the credit rating of the sponsor under the PPP to access credit it would not otherwise access.

Key Financial Issues in PPPs (cont’d)

In the context of PPPs and especially in developing market, the use of project financing approaches and structures allows the lenders to obtain:-

political risk insurance (thereby reducing borrowing costs)

export credit financing (where there is equipment export)

As in all forms of debt and equity relationships the higher the risk, the higher the expected return

On a scale of risk basis, bankers generally agree as follows:-

Public finance – low Senior debt/bonds – low Subordinated debt – medium Pseudo equity (e.g. mezzanine finance) – medium to high Equity – high

Key Financial Issues in PPPs (cont’d) Project financing imposes a very thorough investment appraisal process because of:-

sole reliance on the cash flows;

Lenders and other parties will undertake their own independent due diligence exercises to get comfort (could take time), focusing on following key risk areas:

Country/political risk business enabling environment Sponsor risk to stand by commitments & ability to perform Technical & operational risks to deliver agreed outputs Market risks in terms of quantifying potential revenue streams Financial risks in terms of managing interest / price risks through

hedging Environmental & social risks to ensure project sustainability

In summary project financing is the basis of the development of PPPs

Assumptions used to forecast cash flow must be able to being independently verified; and

Risk analysis can demonstrate acceptable commercial returns


Introduction





Mirror the financial requirements to cash flows of a project

Structures and approaches will to a large extent reflect the 3 possible funding routes:-

Debt

Equity

Combination of Debt/Equity

Financial Structures in PPPs (Cont’d)

Debt Route or Structure

Relies on project finance principles

Highly quantitative with risk analysis at its core and against a structured exit

Primarily provided by the international commercial and multilateral development banks

Infrastructure and other specialized debt funds increasing source of debt finance

For Africa, a principal concern by debt providers relates to country and political risk given the long term nature of PPPs

Structured approaches include political risk cover from institutions such as MIGA, African Export and Import Bank and export credit agencies (ECAs)


Debt Route or Structure (cont’d)

Once this fundamental risk coverage structure is in place, there are many innovative approaches that can be adopted as part of the financing plan or approach based on principle of tailoring finance to project’s cash flow patterns

Debt approach in project finance is particularly useful in those areas of the economy where there are no traded or limited markets such as infrastructure, utilities and government long term demands such as hospitals, schools, prisons.

Imperative when going the debt route that the project sponsor has one selected investment banker or advisor, who can then co-ordinate the approach to the banks and other debt providers


Debt Route or Structure (cont’d)

It is critical that any debt approach:

considers a large number of alternative sources of funds (senior, junior, mezzanine)

has a good grasp of the choice between domestic and external funds; long term or short term, hedging mechanisms for external sources etc;

keeps pace with developments in the financial markets.

the domestic financial and capital markets are also a good source of debt funding through the issue of capital market instruments

the instruments issued could be structured to mirror the tenor and risk of the underlying projects;

currency linked instruments could obviate the need for offshore borrowing.


Equity Route or Structure

Primarily relies on a “sponsor of substance” or a combination of “sponsors of substance”

Equity could come from the sponsors own cash flows or through structured underlying debt

Development Finance institutions (DFIs) & increasing number of Infrastructure focused Equity Funds are a good source of equity finance


Equity Route or Structure (Cont’d)

Sectorially focused equity funds could also be a good source of “come along equity”

A prospectus on the project is critical, most likely prepared by the investment banker or advisor

The primary objective of any equity fund structures are to maximize capital gains as often the nature of PPPs means dividends are distant (7 -10 years). This means clear exits or use of a projects cash flows are important in unlocking value.

The capital markets both domestic and international could also be critical for the provision of equity finance to raise expansion capital via IPOs or as a means of exit.

Conclusion

PPPs offer exciting alternative to Privatization

They involve expansion rather than ‘selling family silver ware’

Create stimulant for new economic activity & investment

Reduce capital expenditure burden on State allowing redeployment of constrained resources into social programmes that financiers otherwise find unattractive to fund

Facilitates introduction of up-to-date technologies and cost cutting measures to benefit consumers through more competitively priced services

Facilitates risk sharing to those best able to manage and offset risks

Encourages inflows of foreign and domestic investment as well as lead in time to deepening of capital markets

presentation public private partnerships (ppps) tladi josias ramushu vice president loita capital...

Documents

structured finance trade

project finance activities

bank cote divoire

public infrastructure

loita group300 employees

pppsppps concept

consumersppps concept

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