It’s All About Risk!<br />The key to project financing is the reallocation of any risk away from the lenders to the projec...
Definition of Project Completion<br />Principle Categories of Risk: Pre-Completionand Post-Completion<br />Physical Comple...
Management and Alleviation of RisksPrinciple Categories of Risk: Pre-Completionand Post-Completion<br />A:Pre-Completion R...
Management and Alleviation of Risks<br />A:Pre-Completion Risks (cont’d):<br />	Some Examples of<br />Ways to Reduce or Sh...
Regulatory Risks<br />Regulatory is the risk of not obtaining all approvals required to build (e.g. export licences)<br />...
B. Post-Completion Risks<br />		Some Examples of<br />Ways to Reduce or Shift Risk<br />Types of Risks Away from Financial...
B. Post-Completion Risks<br />		Some Examples of<br />Ways to Reduce or Shift Risk<br />Types of Risks Away from Financial...
		Some Examples of<br />Ways to Reduce or Shift Risk<br />Types of Risks Away from Financial  Institution<br />Political R...
Currency risk Currency risks include the risks that: (a) a depreciation in loan currencies may increase the costs of const...
Project Financing and Political Risk MitigationThe Singular Case of the Chad-Cameroon Pipeline<br />
Chad-Cameroon Pipelines: Project Background<br />Oil first discovered in southern Chad by Conoco early in 1970’s<br />Init...
Key to Unlocking Chad’s Reserves – Risk MitigationProject Finance one of few Available Tools<br />Project Finance can miti...
First Test:  Esso Production Malaysia(EPMI)1978<br />Concept:  Cash flow allocated for debt service could be impacted by g...
Special Risks in Chad-Cameroon led Oil Company Consortium to reconsider using PF<br />Chad’s acute revenue needs for pover...
risk management
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risk management

  1. 1.
  2. 2. It’s All About Risk!<br />The key to project financing is the reallocation of any risk away from the lenders to the project.<br />
  3. 3. Definition of Project Completion<br />Principle Categories of Risk: Pre-Completionand Post-Completion<br />Physical Completion<br />Project is physically complete according to technical design criteria.<br />Mechanical Completion<br />Project can sustain production at a specified capacity for a certain period of time.<br />Financial Completion (financial sustainability)<br />Project can produce under a certain unit cost for a certain period of time & meets certain financial ratios (current ratio, Debt/Equity, Debt Service Capacity ratios)<br />
  4. 4. Management and Alleviation of RisksPrinciple Categories of Risk: Pre-Completionand Post-Completion<br />A:Pre-Completion Risks:<br /> Some Examples of<br />Ways to Reduce or Shift Risk<br />Types of Risks Away from Financial Institution<br />Participant Risks<br />-Sponsor commitment to project- Reduce Magnitude of investment?<br />-Require Lower Debt/Equity ratio<br />-Finance investment through <br /> equity thenby debt<br />Financially weak sponsor - Attain Third party credit support for weak sponsor (e.g.,Letter of Credit)<br /> - Cross default to other sponsors<br />Construction/Design defects - Experienced Contractor<br />- Turn key construction contract<br />
  5. 5. Management and Alleviation of Risks<br />A:Pre-Completion Risks (cont’d):<br /> Some Examples of<br />Ways to Reduce or Shift Risk<br />Types of Risks Away from Financial Institution<br />Process failure - Process / Equipment warranties<br />Completion Risks<br />Cost overruns - Pre-Agreed overrun funding<br /> - Fixed (real) Price Contract<br />Project not completed - Completion Guarantee <br /> - Tests: Mechanical/Financial for completion <br />Project does not attain - Assumption of Debt by Sponsors if mechanical efficiency not completed satisfactorily<br />
  6. 6. Regulatory Risks<br />Regulatory is the risk of not obtaining all approvals required to build (e.g. export licences)<br />and operate (e.g. orbital slots assignment and frequency coordination, landing rights) the<br />system.<br />
  7. 7. B. Post-Completion Risks<br /> Some Examples of<br />Ways to Reduce or Shift Risk<br />Types of Risks Away from Financial Institution<br />Natural Resource/Raw Material<br />Availability of raw materials - Independent reserve certification<br /> - Example: Mining Projects: reserves twice planned mining volume<br /> - Firm supply contracts<br /> - Ready spot market<br />Production/Operating Risks<br />Operating difficulty leads to - Proven technology<br /> insufficient cash flow - Experienced Operator/ Management Team<br /> - Performance warranties on equipments<br /> - Insurance to guarantee minimum cash <br />
  8. 8. B. Post-Completion Risks<br /> Some Examples of<br />Ways to Reduce or Shift Risk<br />Types of Risks Away from Financial Institution<br />Market Risk<br />Volume -cannot sell entire output- Long term contract with creditworthy buyers :take-or-pay; take-if- <br />delivered; take-and-pay<br />Price - cannot sell output at profit- Minimum volume/floor price provisions - Price escalation provisions<br />Force Majeure Risks<br />Strikes, floods, earthquakes, etc.- Insurance<br />- Debt service reserve fund<br />
  9. 9. Some Examples of<br />Ways to Reduce or Shift Risk<br />Types of Risks Away from Financial Institution<br />Political Risk<br />Covers range of issues from - Host govt. political risk assurances nationalization/expropriation, - Assumption of debtchanges in tax and other laws, - Official insurance: OPIC, COFACE, EXIM<br /> currency inconvertibility, etc. - Private insurance: AIG, LLOYDS<br /> - Offshore Escrow Accounts - Multilateral or Bilateral involvement <br />Abandonment Risk<br />Sponsors walk away from project - Abandonment test in agreement for<br /> banks to run project closure based on historical and projected costs and revenues <br />Other Risks: Not really project risks but may include:<br />Syndication risk - Secure strong lead financial institution <br />Currency risk - Currency swaps / hedges <br />Interest rate exposure - Interest rate swaps <br />Rigid debt service - Built-in flexibility in debt service<br /> obligations<br />Hair trigger defaults <br />
  10. 10. Currency risk Currency risks include the risks that: (a) a depreciation in loan currencies may increase the costs of construction where significant construction items are sourced offshore; or (b) a depreciation in the revenue currencies may cause a cash-flow problem in the operating phase.<br />
  11. 11. Project Financing and Political Risk MitigationThe Singular Case of the Chad-Cameroon Pipeline<br />
  12. 12. Chad-Cameroon Pipelines: Project Background<br />Oil first discovered in southern Chad by Conoco early in 1970’s<br />Initial consortium: Conoco, Exxon, Shell, Chevron<br />Additional discoveries brought reserves to ~1 billion barrels<br />Chad’s unique risk profile<br />Landlocked country: oil must be pipelined to Atlantic coast for export<br />Best route: through Cameroon – ranked 148/177 on poverty, 99/99 on corruption – potential for pipeline to be held “hostage”<br />Chad: 30 year civil war after independence; ruled by Gen. Indris Deby since 1990; unstable borders; $300 per capita income; 173/177 poverty<br />Oil companies declined to develop Chad’s reserves<br />Conoco withdrew in favor of Exxon; Chevron sold to Elf-Acquitaine<br />
  13. 13. Key to Unlocking Chad’s Reserves – Risk MitigationProject Finance one of few Available Tools<br />Project Finance can mitigate location/political risk in 3 ways:<br />Stake Reduction: limiting project sponsor’s capital at risk<br />Requires financing to be “non-recourse” to sponsor<br />Also strengthens sponsor’s ability to resist host government pressure<br />Deterrence: disrupting financing involves consequences that deter <br /> host government disruptive actions<br />Financing to include lenders which host governments don’t want to offend<br />3. Terms Clarification: project finance process forces host government<br /> to clarify/document commitments<br />Ties commitments to NY/UK law and/or offshore arbitration<br />Private firms want deterrence to avoid unilateral contract revision<br />
  14. 14. First Test: Esso Production Malaysia(EPMI)1978<br />Concept: Cash flow allocated for debt service could be impacted by government changes in tax rates<br />Bank loan repayment at risk if government raises rates<br />Consortium: Top three international PF banks in lead<br />Citibank, JP Morgan, Chase<br />Followed by top 3 Malaysian commercial banks<br />Result: Inconclusive<br />Malaysia raised rates, banks responded with mild protests<br />Exxon repaid loans; Malaysia did not raise rates again<br />Result left Exxon disinclined to use PF for upstream risk mitigation<br />
  15. 15. Special Risks in Chad-Cameroon led Oil Company Consortium to reconsider using PF<br />Chad’s acute revenue needs for poverty/security; lack of rule of law<br />Cameroon’s potential to hold pipeline hostage once built, demanding higher transit fees, equity participations<br />Nothing about EPMI suggested PF by itself would deter such events<br />Consortium’s new concept: combine PF & World Bank deterrence<br />WB’s status: “concessionary” lender, ties to IMF as ‘lender of last resort’<br />Track record where few if any countries failed to repay WB loans<br />Plan to combine WB participation with strategic ECA/MLA lenders<br />US Ex-Im, CoFACE, European Investment Bank (EIB)<br />

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