3Infrastructure financingAustralia has led the world in the structuring and funding of majorinfrastructureVictorian Desalination – 2009 –$A4.9bn Sydney toll roadsWe currently face a major challenge to procure and fund the infrastructure required tosustain the growth of our mining industry.
4IntroductionSubstantial capital is available for the ‘right’ projects― Resources infrastructure CAN be funded but requires:― Careful planning at early stages― An understanding of the interaction between key project decisions, fundingand investor requirements― A willingness to accept all funding sources have individual benefits but alsohooks and constraints – the funding decision requires understanding thetrade-offs and choosing those that are right for your project.
6― According to the Department of Mines and Petroleum the Iron Ore & SteelIndustry in WA has projects on the drawing board:― With a capital expenditure of in excess of $A37 billionScale of funding requirements in WA and beyond― Why is this a frightening statistic?― It does not include all projects― At the same time, the oil and gas industry is undertaking projects with acapital expenditure of $A118 billion, employing 19,000 people duringconstruction― These projects will compete― While some projects have sponsors who have access to substantial balancesheets, many project sponsors will seek third party financing― The number of greenfields iron ore projects or related infrastructure which hasobtained substantial project financing in the last two years?― Which will employ 23,000 people during construction
77Four key reasonsWhy are funding requirements different from thepast?1The sheer scale of funding requirements means diversified funding sourcesare required2 A reduced willingness of Governments to fund resources infrastructure3The open access requirement for many port and rail assets introduces newfunding and development challenges4Post GFC, investors prioritising investments with sustainable cash flows,in particular so called brownfields assets
8The key questionsAs part of the project planning and prior to getting to the BFS stage,the following questions should be asked:How do key project decisions impact on funding?BWhat funding sources are right for my project?CWhat can I do to maximise the prospect of successfullyfunding my project?DAShould the resources infrastructure critical to my project befunded separately from the mine?
9A. Should resources infrastructure be fundedseparately from the mine?There are a number of key considerations which need to be juggledSeparate financing Integrated fundingversus
10Likely to take additional time to reachfinancial close given interface and financingprocessLikely to require stronger credit supportarrangements for take or pay obligationsand/or ongoing securityCapital providers unlikely to value futuretonnes and demand for rail and port capacityPotentially reduces sources of capitalprovidersTies up capital in arguably lower returninginfrastructureIncreases funding requirementA. Should resources infrastructure be fundedseparately from the mine?Separate financing Integrated fundingversus Access to broader base of capital providers Pass down of risk/responsibilities Flexibility to enable Project Sponsors to retainoperations and maintenance role Reduces complexity, enables quickerexecution and implementation Project Sponsors have direct control overassets Operational flexibility
11Project and funding decisions are essentially one big jigsaw puzzleChoosingequitypartnersB. How do key project decisions impact onfunding?
12It is important to lay out all of the pieces upfrontB. How do key project decisions impact onfunding?ChoosingequitypartnersHow much drilling is requiredprior to seeking funding?What form of procurementstrategy should be adopted?How many packages?What is the credit profile of keycontractors?Can your equity partnersprovide additional liquidityduring the developmentphase?Do your equity partners havebanking or governmentrelationships that may providediversified funding sources?Who should be responsible forthe interface betweenpackages?Who is responsible for costoverruns?Can ECA finance be securedvia procurement?What tenor should any off-takebe?What is the credit profile anddiversity of your customerbase?Is the nature or location ofyour customer base likely toinfluence funding sources?Can prepayment of off-takerevenues fill a funding gap?When are you likely to expandthe project?Should you seek to beregulated upfront?How do you preserve yourrights as a FoundationCustomer (without increasingproject financial risk?)When is new user expansionexpected?
13Identity ofcustomersandoff-taketermsProcurementstrategyProjectExpansionProfileChoosing equitypartnersThird partyaccessExplorationtimeframesCareful planning will enable each of these pieces to fit togetherB. How do key project decisions impact onfunding?
14Funding type— Senior debt— Mezzanine— HybridFunding type— Commercial banks— Specialist funds— Bond investors— Offtaker(s)— ECAsC. What funding sources are right for my project?
15― There are increasingly diverse markets with different funding sources― Each market has its own benefits and constraintsDebt funding type Source “The good” “The bad”“The sometimesugly”Bank debtCommercialbanksHigh level ofsophisticationHigh levels of DDrequirementsConservativepricing curvesPublic capitalmarkets144A, Reg SDeep liquid markets;Limited maintenancecovenantsHard (andexpensive) toredeem, requirescredit ratingDirectors, lawyersand financialadviser responsiblefor disclosurePrivate capitalmarketsPrivate placementmarketSophisticatedinvestors; Range ofrisk appetitesBank styledocumentation,reporting, covenanttestingLimited investorset; Volumesinsufficient for largeprojectECAsOff-take,construction,procurement andequity-linkedProvide attractively-priced credit;Political riskinsuranceLengthy – can bedouble the time ofother fundingsourcesNever a full fundingsolutionC. What funding sources are right for my project?
16― China is seen as a very deep source of capital with substantial incentives tofund infrastructure which brings product to market more quickly― However, Chinese financiers should be considered in the context of a range offunding solutions.What about China?C. What funding sources are right for my project?Difficulties thatmay be created― Where Chinese banks are majority financiers it may discourage otherfinanciers from investing― Timeframes may be hampered by approval processes (Chinese andFIRB)― The quid pro quo if Chinese funding underpins the project― Lack of transparencyWhere canChinese playersadd value?― Substantial liquidity― Capacity to package with construction elements of the project― Tenor of funding― Willingness to take a robust view on commodity pricing
17 Recognise that the development of the funding strategy for a project is not anindependent process Get your story straight before you go to financiers or investors― Where possible keep it simple and neatly packaged Make contingency plans, dont put all your eggs in one basket Be aware that financiers and investors are being presented with many differentopportunities― Differentiate your project to maximise attractiveness.D. What can I do to maximise the prospect ofsuccessfully funding my project?