tuyen project finance march 2016
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Mongolia Economic ForumUlaanb aatar, March 31, 2016
Tuyen D. Nguyen, IFC Resident Representat ive, Mongo lia
Project Finance:A Very Simplified
What & Why
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• IFC Strategy in Mongolia: (i) Sustainable Infra and world-class Mining; (ii)
Access to finance via systemic banks, focusing on SMEs; (iii) Diversification
(services, agri) for jobs.
• Excluding OT our cumulative investment in Mongolia is approx. $500m (half in
past 3 years, and increasing mobilization). Diversified portfolio includebanks, windfarm, hospital, dairy, hotels, telco, affordable housing.
• Advisory to strengthen local institutions (governance, professionalization,
sustainability): (i) Corporate Governance (banks and starting with Erdenes
Mongol, the OT SOE JV entity); (ii) Trade & Competitiveness (Inspections and
Doing Business reforms, and upcoming Agri Commercialization); and (iii)
Sustainability (water in mining, banking sector).
IFC IN MONGOLIA Diversified & Growing Investment and Advisory Portfolio
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Petronet LNG
$150,000,000Syndi cated Corporate Loan
Lender
India
June 2007
IFC PROJECT FINANCE EXAMPLES Airport, Power & Energy, Oil, Gas & Mining (well-tested globally)
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WHAT DO THESE HISTORIC GLOBAL PROJECTS HAVE IN COMMON?Completed by Project Financing Solutions
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Eurotunnel: UK France Panama Canal
North Sea Oil Fields (UK) LNG Terminal (Texas)
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WHAT DO THESE MONGOLIAN PROJECTS HAVE IN COMMON?Two World-Class Projects Done with PF… Others in Future?
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Oyu Tolgoi Salkhit Windfarm
CHP5 UB Waste & Clean Water
? ?
http://www.google.mn/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwjUp8vpreDLAhVKSiYKHWydDPIQjRwIBw&url=http://www.aseminfoboard.org/events/asem-seminar-renewable-energy&bvm=bv.117868183,d.eWE&psig=AFQjCNHJov4xfJneLgt-FPNC5uRggzJxmg&ust=1459150622231553http://www.google.mn/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwjUp8vpreDLAhVKSiYKHWydDPIQjRwIBw&url=http://www.aseminfoboard.org/events/asem-seminar-renewable-energy&bvm=bv.117868183,d.eWE&psig=AFQjCNHJov4xfJneLgt-FPNC5uRggzJxmg&ust=1459150622231553
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• Project finance offers a means for investors, creditors, and other unrelatedparties to come together to share the costs, risks, and benefits of new
investment in an economically efficient and fair manner .
• Project finance helps finance new investment by structuring the financing
around the project's own operating cash flow and assets, without
additional sponsor guarantees. Thus the technique is able to alleviate
investment risk and raise finance at a relatively low cost, to the benefit of
sponsor and investor alike.
• As the emphasis on corporate governance increases, the contractually based
approach of project finance can also help ensure greater transparency.
WHAT: DEFINITION & KEY FEATURES Share Risks and Benefits, Ring-fence Project Risks, and Assure Greater Transparency
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How Common. Project financing is a very well established financing approach,very common both in developed and emerging markets especially for
infrastructure. Project financing is IFC’s core financing product.
Advantages. Especially suited for investments with well defined scope. Also for
investments with multiple Sponsors, where clarity of obligations is important.
Especially attractive for financings in emerging markets, where Sponsors may
need some element of political risk mitigation. Leverage’s potential returns to
equity holders.
Disadvantages. Lengthy process of choosing banks and advisors, complex
multiparty negotiations and legal documentation add to cost and time.
WHAT: DEFINITION & KEY FEATURES Well-tested Globally Over Many Decades…. But Complex & Very Technical
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Oil and gas field production, •
Downstream oil and gas (incl. LNG and
refining) • Petrochemicals • Pipelines •
Power generation and transmission •
Petrochemicals • Pipelines • Power
generation and transmission • Mineralsmining • Minerals processing • Road,
bridges and tunnels • Railways and
metros • Road, bridges and tunnels •
Railways and metros • Airports and docks• Water supply and desalination • Waste
treatment • Telecommunications •
Property (incl. hotels) • Hospitals
WHAT: APPLICATION FOR INFRASTRUCTURE PROJECTS All Types, Well-tested, & Continuing to Broaden in Application
A Very Brief History:
• 19th Century – infrastructure(e.g. canals and railways)
• 1970’s – Oil, gas and mineralsindustries
• 1980’s – US IPPs andEurotunnel
• 1990’s – Privatization, “globalutilities” and PFI
• 2000’s – Utilities andInfrastructure (Broadening)
A Very Tested Solution!
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WHAT: BREAKDOWN BY REGION & SECTORS Asia, Power, Oil & Gas, Transport are top PF Recipients
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Source: Thomson Reuters
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WHY: FDI CRITICAL TO MONGOLIA GROWTH (PF IS A SOLUTION) No Country Can Be An “Island”: Partners & Stable Investment Climate Vital
FDI has dropped sharply…
Source: Bank of Mongolia (BoM)
FDI is not just capital… but also expertise,technology, management
…Causing growth to fall
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WHY: MONGOLIA GOVERNMENT DEBT AT “CEILING” Project Financing (via PPPs) to Raise Needed Capital (and Expertise) from Private Sector
Strong LT outlook but near-termvulnerabilities in debt service
FX reserves & new financingcritical to service debt in 2017-18
Government alone will not have the capital (or expertise)to develop, fund, implement & operate efficient projects
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WHY: GLOBAL & MONGOLIA INFRASTRUCTURE GAP IS IMMENSEWithout Infrastructure, Growth Is Limited (Companies, Govt, Households)
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Mongolia will need $20-30 billion investments in newinfrastructure (next 5-10 years) for LT sustained growth
http://www.google.mn/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0ahUKEwi7i5KXuuDLAhXEOyYKHQFdAgoQjRwIBw&url=http://www.odi.org/events/4257-infrastructure-development-public-finance-management-pfm&bvm=bv.117868183,d.eWE&psig=AFQjCNGSCZGZ_Bg25A2Nhg1fsG9evuwlzg&ust=1459153925966752
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WHY: A FOOTBALL (SOCCER) TEAM NEEDS MANY POSITIONSEach Player Contributes Different Skills For The Team’s Shared Goal
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WHY: A PROJECT “TEAM” ALSO NEEDS DIFFERENT PARTNERS Each Partner Shares Different Risks & Benefits And Project Is Aligned and Completed
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Borrower (SPV)
Freedom. To borrow more, for as long as
possible, to spend more, to report less, to invest,
to grow, to manage the Project independently
and to distribute to shareholders
Cost. Pay lower spread, fees, expenses
Risk. To share risks with lenders, to give as little
security or support for the loans as can be
negotiated, to be able to walk away with the least
damage if everything goes wrong.
Lender(s)
• Control. Limit other borrowings, limit non projectspending, limit distributions, report more, give
lenders more rights
• Cost. Pay higher spread, higher fees, more
expenses !
• Risk. To share risks with the Shareholders, get all
possible security, as much Sponsor support for as
long as possible, make it as hard as possible to
walk away.
The Shareholder(s)
The Shareholders want the same as the Borrower. Shareholder interests and goals in negotiating the PF
are fully aligned with the Borrowers interests and goals.
Government (In PPP): To get best value for money for (Infra) services invested & delivered (to Society)
WHY: WHAT DO THE PARTIES WANTEach Partner Shares Different Risks & Benefits And Project Is Aligned and Completed
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WHY: WELL-TESTED & OBJECTIVE DISCIPLINEProfessional, Legal and Market Discipline
Tried and Tested. While PF is complex and while there are project specific features in all deals, PF is built
upon firmly established market and legal practice.
Independence and Rigor. PF is a multi party financing process which relies on independent objective advice
and rigorous due diligence which all parties can take comfort from. The PF documentation creates legally
binding, consequential obligations on all parties to disclose material information and make representations
other parties can rely on. The advisors in the process have both legal obligations and business and moral
interests to act with integrity and professionalism to protect their reputation and standing.
Market Pricing. Price setting is by a sealed bid market process involving multiple lenders with full access to
all relevant information who are legally obligated to act independently. This auction process establishes a
full and fair clearing price reflecting the true market adjusted risk/reward of the financing.
Alignment of Interests. Lenders share common interests which they, with the assistance of their legal
counsel, will negotiate hard to protect. The borrower, with the assistance of the Sponsor and their team of
legal advisors will negotiate just as hard to protect their competing interests. What’s good for the borrower in
a PF is also good for ALL Shareholders.
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(A LITTLE OF “HOW”): THE PROCESS Project Phases & Risks Assessment (Due Diligence)
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Lender Due DiligenceRisk identification, assessment,
allocation and sharing
• Environment • Technical • Commercial • Markets
• Financial • Insurance • Legal
Project Phases1. Development > Financial Close
2. Construction > Project Completion3. Operation > Termination (Transfer)
Project Assets1. Cash2. People
3. Site (Land)4. Plant, Building, Inventory5. Agreements (Concessions, Licenses)
OT historic PF closing (Dec2015) result of many years
of detailed working togetherwith many partners
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Thank You