Presented at the 4th Global Infrastructure Basel Summit 21 & 22 May 2014.
Read more about the world leading platform for Sustainable Infrastructure Finance at www.gib-foundation.org.
Next Summit: 27 & 28 May 2015 in Switzerland
4. Have Institutional Investors Officially
Entered the Game?
Institutional Investors’ AUMin OECD, Dec 2013:
Allocation to Infrastructure:
Australia and Canada:
> $70 trillion
< 3%
~ 10-15%
Source: OECDReport, 2013
4
5. Have Institutional Investors Officially
Entered the Game?
Institutional Investors’ AUMin OECD, Dec 2013:
Allocation to Infrastructure:
Australia and Canada:
> $70 trillion
< 3%
~ 10-15%
Source: OECDReport, 2013
5
Unlisted Funds, AUM
2004: $24 billion
2010: $210 billion
about 10x
6. Institutional Investors Overview
(*) Date source: Prequin
6
♦ Small and medium-sized institutions make up
the majority of all infrastructure investors
7. Institutional Investors Overview
♦ Small and medium-sized institutions make up
the majority of all infrastructure investors
(*) Date source: Prequin
7
81%
9. Identifying the Suitable Capital Match for
your Project
• Pension Funds
• Infrastructure Funds
• Insurance Companies
• Private Equity
• Endowments
• Banks
• Wealth Managers
• Family Office
• SWFs
• Multi-laterals
9
10. Risk free rate (treasuries)
+
Construction risk
+
Revenue model / sector
premium
+
Operation risk
+
Upside / Ownership
premium
+
Exit
Risk free rate
(treasuries)
+
Project risk premium
+
Swap rate
+
Country risk
[Premium]
...so how much do I pay for capital?
Equity Debt:
Expected Returns
IRR[low teens – 20s]
Margins [250 –
400bp]
Credit insurance wrap
Upfront fees
Or
Amortised
Credit Enhancement
depends
10
11. Rise of Infrastructure Debt Providers
Benefits forfixed-income investors (“Shadow Banking”):
Traditional lenders such as banks and governments are undermuch
economic pressure.
• Stable businesses
• Limited exposure to competitive forces and economic
environment
• Stable cash flows, often with inflation linkage
11
13. Key Challenges – the Institutional Investors
View
♦Greenfield projects are highly complex
♦Long construction periods
♦Upfront development costs
♦Entitlements & permits can be long and challenging
♦Require careful analysis and preparation
♦Require specialists to assess this asset class
♦Higher risk profile / who pays for the risk and how
♦Must prove profitability AND affordability
♦Highly capital intensive (maintenance)
♦Highly contested projects (unions; citizens; etc..)
♦Expensive undertakings
13
14. Other Challenges and Issues
♦ Public sector as counterparty
♦ Lack of resources trained in new implementation models
♦ Managing procurement change
♦ Easy targets to challenge / high level of scrutiny
♦ Complex design – impact to costs
♦ Necessity for sophisticated/experienced resources in Gov. teams
♦ High uncertainty and risk
...suitable team and strategy is crucial
to address these issues and achieve sustainability
14
15. Future of Financing in Emerging Markets
♦ Bonds from governments or institutions
♦ Institutional Investors look to make new infrastructure investments to move closer
to their strategic targets
♦ Collaboration between investors and World Bank/Multi-Laterals
♦ Banks managing a pool of assets based on a fee system. They have the
connections but not the capital anymore. Will invest small amounts in long-term
debt
♦ SWF huge in emerging markets and could drive growth
♦ Increased involvement of pension funds as they look for long term investments
and risk is now shared with other collaborators
♦ Example of ACTIS and RfI in Africa
♦ Oil or mineral extraction rights are exchanged for turnkey infrastructure,
complementing standard tax and royalty regimes
15
16. Public Sector Actions for Successful
Implementation
♦ Sophisticated management team (leverage private-sector practitioners’
experience)
♦ Clear priorities and objectives (public & project needs)
♦ Standardize tender process / clear guidelines
♦ Transparency throughout project development
♦ Conduct competitive tender BUT accept unsolicited offers
♦ Clear coordination between Minister’s / Mayor’s governance
♦ Investment incentives (tax deferral, tax holiday, fiscal support)
♦ Fast track permitting
♦ Stick to the timetable
16
17. Requirements for Successful Private
Participation
Category Definition
Definition Tightly-bound, ironclad definition of project with good & clean limits
Size
Large enough to attract strong international interest, but not so large as to force need for
large bidding groups, thus limiting competition
Timeframe Adequate to bring project to completion – balanced, sufficient time to organize tender
competition but short enough to maintain high level of bidder interest
Skill-sets Should not require extensive skillsets – avoid complex, extensive multi-purpose projects that
require expensive and diverse skills
Interfaces
Complex project structure and inter-organizational agreements take longer to implement than
simpler networks
“Financeability” Solid capital structure; financial equilibrium
Regulation
Required to establish project privatization with defined mechanisms on setting tariffs. Legal
framework for the Government to regulate and monitor PPP performance
Technical
Factors
Wealth of technical data available for more efficient monetization
Land &Permits Clear definition of ownership of land, right of way and permitting process
Competition Addressing competition from other projects or sectors
17
18. What have I learned along the way?
Sound structures
Experienced advisors are worth the money
Clear guidelines and transparency
Process to resolve conflict
“Win-Win”
Multiple funding options
Delays destroy project value
... and…
Strong Partners; Leadership; Trust and Commitment
18
19. Global Relationships and Track Record
Hato Int’l
Airport, Curacao
SangsterInt’l
Airport, Jamaica
Cheddi Jagan
Airport, Guyana
South African
Airports Authority
Vienna Airport,
Austria
Luis Munoz Marin
Airport, Puerto Rico
Trans-shipment
Port Facility, LA
Ngqura Container
Port, South Africa
GreekPort System
Privatization
Ferry Passenger
Terminal, Caribbean
ContainerPort
Terminal, TX
Port Privatization,
Bahrain
Conf. Port Terminal,
Mediterranean
Bina Istra
Motorway, Croatia
Road 1604, TX
Indiana Toll Road,
IN
Ionia Odos
Motorway, Greece
Highway 2000,
Jamaica
Maliakos – Kleidi
Motorway, Greece
Sofia – Varna Road,
Bulgaria
N4/N6 Motorway,
Ireland
Funding Alternatives,
Transport Infrastructure
AsserMonetization
Program/PPP
Development, USA
Our Team has closed numerous successful transactions at a global level. Our experience
spans across all types of markets, to offer our (public or private) Clients the best possible
value proposition.
770 MWand 775 MW
PowerProjects, UK
685 MWSidi Krir
PowerStation, Egypt
500 MWPower
Project, Tunisia
770 MW, 1540 MWand
1520 MWPower
Projects, Turkey
$200 million Power
Gen. Fund, Turkey
Road Transportation
Airports & Aviation
Ports
Power Projects
Northwest
Parkway, CO
19
20. Adam Nicolopoulos
+1 415 785 4613 (office)
+1 415 246 1765 (mobile)
anicolopoulos@adncv.com
Thank you
Sustainability Successful Infrastructure
Editor's Notes
Ladies & gentlemen
Great pleasure being here and many thanks to the organizers
I run a project advisory / financial consultancy firm – A D N Capital ventures
I had the honor and pleasure of working with both different governments / sovereign nations advising them on critical needs for their countries infrastructure
At the same time I have worked extensively with the contractors and investors; the parties that commit capital, take risks and build the actual asset –
It gives me great pleasure to share my thoughts and experiences with you as well as to address some of the challenges you face in the Q & A
This slide captures the DNA of the project finance discipline / infrastructure finance discipline
What is the secret sauce in building sustainable and successful projects ?
Let me walk what is going on here and then I will address this fundamental question
This whole graph presents the cash in and out-flows (cash spent build the project / cash generated by the project annually and key project expenses)
Here is a project that has a 4 year construction period (left hand side) – where you see the cash outlayes (sp?)
After construction completion the project is an operational asset that generates revenues .
The revenues are used to cover and pay for the key cost / expense components – namely – 1) opex 2) debt service 3) taxes and 4) profit to the investor who committed cash equity …
This is where we spend a lot of our time (cash flow analysis - CAN THESE SET OF CASHFLOWS SERVICE CAPITAL? HOW MUCH DEBT / HOW MUCH EQUITY / IS THERE SUFFICIENT CUSHION IN THE PROJECT TO WITHSTAND UNFORSEEN EVENTS AND CASH SHORTAGE OR DRAIN? WHAT RISK EVENTS COULD LEAD CASH DRAINS ? HOW DO YOU DEAL WITH THOSE EVENT AVOIDING MAJOR EVENTS OF DEFAULT OR BANKRUPTCY?
A project must have or must prove sustainable cash flows
A lot of financial analysis goes in these projects to ensure that a project can carry the right level of debt
We talked about the theory of project finance and infrastructure finance
Am sure by now you are wondering you are the key players in this field? Or “Key Project Stakeholders”?
What we see here is a highly diverse and fragmented universe of players -
We have grouped those in 4 categories although there could be more …
I would like to challenge the audience and show them that in certain cases it is possible to have the agencies participate in these categories depending upon their key drivers and objectives
I would like to address the correlation between pricing risk in the context of raising and committing capital.
Pricing capital – value of capital depends on the risk entailed – the more the risk the higher the cost of capital –
RISK-REWARD PROFILE –
2 forms of capital equity – the return on capital or yield is measured by the IRR (different types – pre-tax / post tax) (nominal / real)
And debt the measure is spread over the gov benchmark
US TREASURIES – 1 YR: 0.5% / 5YR 2.6% / 30 YR 4.3%
Message – project capital needs to be priced properly to attract commitments
We start with the definition – not a common term in Webster’s dictionary …
You may challenge the definition as being a confusing one –
We start saying that it is a financing product – arrangement of financing but then we speak about risk transfer / which is NO LONGER a financing project but a way / a method or even a culture for delivering infrastructure
So what is the true definition ? … all of the above - …
It is mobilization of capital towards the implementation of a project and the engagement of multiple parties with a single common mission for all – to see a successful and economically sustainable project…
It starts with a singe purpose company –
Interestingly the lenders and providers of capital take recourse on the project assets. The project investors’ financial commitments extend only to the amount of capital they have committed
The most challenging financing event is that of funding a greenfield project (i.e. its construction – facing maximum risk ) – in essence you are financing a set of complex contracts.
Hence it is very important to be surrounded by the right parties (credible, with track record, strong balance sheet and strong experience)
So before I continue I want to challenge you and make you think about the merits of project finance? Is it all good and positive? Are there any challenges?
Of course there are issues with Project Finance… it may not always be the best or right model for government to deliver infrastructure…
Key points –
Lot of careful preparation – 1 – 2 years study / consultations before coming to the market
Large projects (200 million + up to multi billions) - Does the market have appetite and capacity to fund projects in sub-investment grade environments (non-EOCD) – this requires careful analysis and thinking how to draw in other forms of capital / more concessional (tied to equipment or to services)
The key message here
Project finance offers a DIFFERENT PROJECT DELIVERY & procurement culture –
At the same time it is a long term commitment – similar to a marriage –
Therefore the question is are both parties ready to step to plate and commit them selves
The other point we have seen is that lots of governments start excited with the desire to procure their assets but then FALL SHORT on their ability to deliver what the market expects and needs – and here are some of the things that could go wrong…
One point to remember is that the HOW A GOVERNMENT SEES A CONTRACTOR / DEVELOPER is NOT how the DEVELOPER SEES THE GOVERNMENT’S PROJECT – i.e. different expectations
E.g. a developer is chasing a dozen projects, therefore this is one of the many. For the government, sometimes they believe that theirs projects are the most important assets
WE ARE NOW SHIFTING AWAY FROM THE PROJECT ANALYTICS INTO A DIFFENT SUBJECT
What makes a project suitable for private sector participation? That is attractive for capital and or for innovation ?
Here is a list of key investment drivers we apply when we consult our government clients
--- go through a few ---
The bottom line here is that the Agency or the public sector would have to think like investors…
Each and every one should be judging your projects against those criteria
If you see an issue / or falling short you should be flagging it and working with a solution – ahead of time
Too much debt is dangerous – debt in moderation
ALWAYS AIM FOR Win –win GAINS – THIS IS A LONG TERM INVESTMENT / PRETTY CLOSE TO MARRIAGE
Clear thinking – I do not believe in make it up as you go – in complex processes this will guarantee you get in on the wrong track – clear thinking is a plus
Time is the most precious commodity we have – use it well
Ladies & gentlemen
Great pleasure being here and many thanks to the organizers
I run a project advisory / financial consultancy firm – A D N Capital ventures
I had the honor and pleasure of working with both different governments / sovereign nations advising them on critical needs for their countries infrastructure
At the same time I have worked extensively with the contractors and investors; the parties that commit capital, take risks and build the actual asset –
It gives me great pleasure to share my thoughts and experiences with you as well as to address some of the challenges you face in the Q & A