Infrastructure Financing Options - PowerPoint Presentation

1. Infrastructure Financing OptionsMarch 2021Presented by: OLOPADE Hakeem (Snr. Financial Advisor)

2. OutlineBasic Principles/Tools of Infrastructure Financing: Project/Structured Finance, Corporate Finance, Public Finance and Blended Finance Understanding Infrastructure Financing Vs Funding OptionsInfrastructure Financing OptionsCredit Enhancements and Financial InstrumentsConclusions and Take-outs2

3. Learning Objective3To understand basic principles behind Project & Structured Finance, Corporate Finance, Public Finance, and Blended Finance;To understand the concept of Financing vis-à-vis Funding in Infrastructure Provision; To understand some of the challenges facing infrastructure service providers in accessing private finance

4. Basic Principles/Tools of Infrastructure FinancingPublic/Government Finance: public sector lending, grants, subsidies or guarantees of indebtedness; may be least expensive, but may not be sustainableCorporate Finance: financing to the project company or a sponsor company against proven credit risk and on-going businessProject Finance: limited or no recourse financing to a special purpose vehicle or company (“SPV” or “SPC”) - project company relying primarily on future cash flows of the project for repayment; more expensive than government financing but “off balance” sheetPrivate Finance: may employ Corporate and Project Finance to provide equity, quasi-equity, shareholders and subordinated loans, grants, etc. to develop projects Blended Finance: Using grants and/or concessionary finance with commercial finance to reduce the cost of capital in delivering infrastructure thereby making tariffs affordable.All of the above are tools for Infrastructure Financing Options

5. Source: Project Finance Manual, National Treasury South Africa 2001A government borrows funds to finance an infrastructure project and gives a sovereign guarantee to lenders to repay all funds. Government may contribute its own equity in addition to the borrowed funds. Lenders analyse Government’s total ability to raise funds through taxation and general public enterprise revenues, including new tariff revenue from the project. The sovereign guarantee shows up as a liability on Government’s list of financial obligations. Basic Principles/Tools of Infrastructure FinancingPublic Finance Structure

6. Source: Project Finance Manual, National Treasury South Africa 2001A private company borrows funds to construct a new treatment facility and guarantees to repay lenders from its available operating income and its base of assets.The company may choose to contribute its own equity as well. In performing credit analysis, lenders look at the company’s total income from operations, its stock of assets, and its existing liabilities. The loan shows up as a liability on the company’s balance sheet (“Mining the Corporate Balance Sheet”) Basic Principles/Tools of Infrastructure FinancingCorporate Finance Structure

7. Source: Project Finance Manual, National Treasury South Africa 2001A team or consortium of private firms establish a new project company to build, own and operate a specific infrastructure project. The new project company is capitalised with equity contributions from each of the sponsors.The project company borrows funds from lenders. The lenders look to the projected future revenue stream generated by the project and the project company’s assets to repay all loans. The host country government may/may not provide a financial guarantee to lenders; sponsoring firms provide limited guarantees. “Off-Balance-Sheet” financing.* Basic Principles/Tools of Infrastructure FinancingProject and Structured Finance Structure

8. Project Sponsor(s) after entering into collaborative structures with the Government may implement infrastructure projects through corporate and project financing tolls and also by providing:Equity;Quasi-equity;Grants;Debts (in Cash and in-kind);Subordinated or Shareholders debt; andOthers.The Project Sponsor, prior to providing any and/or all of the aforementioned financing products to implement a project, would have executed relevant agreements with the Government or Entity saddled with the primary responsibility to provide that service to the public, before stepping into implement the project or to provide same service.Basic Principles/Tools of Infrastructure FinancingPrivate Finance Structure

9. 9Use of development finance and effective partnerships to attract and mobilize private capital into development deals/projectsLeverageInvestments that drive social, environmental, and economic progress in line with local context for transparency and resultsImpactFinancial returns for private investors in line with market expectations, based on real and perceived risksReturnsBlended finance is the strategic use of development finance and grants to mobilize private capital flows to emerging and frontier markets, by mitigating risk and/or ensuring commercial risk adjusted returns. It has three characteristics:Source: OECD – Blended Finance Principles, 2018Basic Principles/Tools of Infrastructure FinancingBlended Finance Structure

10. 10Source: OECD – Blended Finance Principles, 2018Grants Junior Equity Flexible Debt Market Rate Debt or Equity Guarantees Funds costs and activities that lead to investment Subordinate position absorbs highest risk Favorable terms shift risk-return profile Investment on same terms demonstrates viability and provides investor comfort Risk Reduction tools that protect investors against capital losses or provide credit enhancement Basic Principles/Tools of Infrastructure FinancingHow Blended Finance Works

11. Understanding Infrastructure Financing Vs Funding OptionsInfrastructure Funding – refers, broadly, to revenue sources, often collected over a span of many years, which are used to pay the costs of providing infrastructure services. The most common sources of infrastructure funding are: General purpose tax revenues: Tax revenues for infrastructure can be raised from many sources;Revenues from user charges: Tariffs or User charges are typically tied directly to the cost of producing the service for which the fee is charged. This source of funding is limited, however, to those forms of infrastructure (such as toll roads) and related services that are amenable to the collection of user charges; andOther charges or fees dedicated to infrastructure: Transfers/Revenue from Government, from a variety of charges and fees can be applied to infrastructure funding, such a fuel surtaxes and vehicle registration fees. Infrastructure Financing - by contrast, turns these revenue sources into capital that can be used today to build or make improvements in infrastructure. Commons sources include:Concessional financing;Commercial financing; andGrants and others.Only if a project can demonstrate reasonable predictability in funding sources for both capital expenditures and for operations and maintenance (O&M) can issues such as financing and delivery be tackled successfully. In other words, unless infrastructure funding issue is addressed, the financing options will continue to be limited. Source: World Economic Forum – Accelerating Infrastructure Delivery, New Evidence from International Financial Institutions (2014)

12. Funding sources (“3Ts”) TaxesDomestic taxes levied by local and central governments and provided as grants or subsidies or appropriation TariffsUser fees for services provided and households’ investment for self-supplyTransfersTransfers from external sources, such as international donors (ODA grants), foundations, NGOs, remittancesRepayable financingConcessional financeProvided by development agencies with a grant element (e.g. “soft loans”) Commercial finance Provided by private sector financiers at market rate (vendor finance, microfinance, loans, bonds, equity)Pre-financePrivate fundsMixed public and private funds Public fundsKeyRepaySource: Sophie Tremolet,WBG 2017Understanding Infrastructure Financing Vs Funding Options

13. Development Financial InstitutionsLoans in more favorable terms compared to other sources. Important but insufficientConcessional loansTechnical assistanceCommercial banksDifficult to access if the utility/project is not creditworthyWorking Capital FinancingCommercial lendingShort or long term Financial marketsDifficult to access if the country does not have developed financial marketsFixed-income instrumentsSales of Shares GovernmentTransfers by government. Important but not sustainable in the long term. Other Sources Customer Advances Credit from supplierCredit from supplier may only cover financing for specific investmentsCommercial Finance FinancingProject or Infrastructure Asset has to repay its obligationsFundingProject or Infrastructure Asset does not have to repay these amountsInstruments offered Characteristics Understanding Infrastructure Financing Vs Funding Options

14. Infrastructure Financing OptionsSource: NIIMP, 2015Government Financing and Funding OptionsOn-budget FundingPrimarily from Taxes, Transfers government revenue. Includes: Budgetary Allocation, Enhanced Statutory Allocation, Ecological Funds, etcOff-budget Funding & FinancingGovt. assumes some financial commitments as is the case with Special Intervention Funds; Bonds; Low-interest concessional loans; Financing and funds from aid and donor agencies; Credit Enhancements; Minerals Resources, Tariffs, etcPrivate Sector Financing and Funding OptionsFunding and financing is sourced through means that may require minimal or no government contribution. Includes: PPPs, PFIs,, Leases, Mgt. Contract, etc with funds from Contractual Savings Sector, Long Term Commercial Bonds (Capital Markets), Multilateral Agencies, MDBs, Export Credit Finance, DFIs, Private Equity, Infrastructure Funds, DMBs, Pension Funds, etc. Repayment is usually through Tariffs, Transfers & Govt. Subsidies Required Infrastructure Spend Over the next 30yearsEnergy – US$1Trillion;Transport – US$775billion;Water, Agric, Mining – US$400billion;Housing & Regional Devpt. – US$350billion;ICT – US$325billion;Social Infrastructure – US$150billion i.e.$3 Triillion (30yrs)Funding &Financing Options

15. 15Public Owned and OperatedPublic Private Partnerships (Public Ownership eventually)Private Sector owns and operates Private Sector partially owns and operates Private Sector Involvement and Participation increases and Public Sector’s Control and involvement Decreases. Infrastructure Financing OptionsSpectrum of Public-Private Interactions

16. 16On time and on budgetSource: National Audit Office-UK Parliament- Expenditure AuditorInfrastructure Financing OptionsBenefits of PPPsSynergy1+1=3

17. 17Infrastructure Financing OptionsProject Financing Allocation Guide

18. 18Limited risk transfer to private sector Government controlSubstantial risk transfer Government controlFull risk transferNo government controlTechnical AssistanceService Contract1-3 yrsManagementContract3-10 yrsLease Contract5-15 yrsMost commonPPP modelConcession ContractBOT20-25-30 yrsFull DivestitureContract DurationAs the contract duration increases, more risk can be allocated to private sector Most common PPP modalityRisk transferred contractually to private sectorDelegation of managementPFISource: adapted from IFC (2018)Infrastructure Financing OptionsSummary of Options for Private Sector Participation

19. 19Appropriation Acts and Annual budgetary subventions or allocations backed by Taxes and Natural Resources earnings; Statutory Allocations & Recoveries; Transfers and other Government charges; Sukuk Bond for Roads; EPC Contract + Financing; Ways and Means; Funds from Donor Agencies; and so on.Tariffs – Government operated and managed projects to collect tolls, surcharges, etc.On Budget FundingSpecial Intervention Funds such as CBN Power & Aviation Fund, Real Sector Support Fund, National Gas Expansion Programme, etc; NSIA managed Presidential Infrastructure Development Fund and Infrastructure Fund; Presidential Intervention funds, etcAlternative Financing Mechanisms such as Road Infrastructure Development and Refurbishment Investment Tax Credit Scheme:Minerals for Infrastructure; and so on.Sovereign and Concessional Loans ranging from G2G Loans from Policy Financial Institutions and Development Banks, Development Finance Institutions, Export Credit Agencies and Banks, Multilateral Development Banks; other syndicated loans from International Financial Institutions; Local Development Bonds; Promissory Notes for Roads development; and so on.Credit Enhancement Instruments issued in alliance with MDBs such as Partial Credit Guarantees or PCI, Partial Risk Guarantees or PRI; Other Credit Enhancements such as Minimum Revenue Guarantees; Viability Gap Funding; Sovereign Debt Notes; Comfort Letters; Standby Letters of Credit; Project Preparation Funds; and so on.Need to e Off-Budget Funding and FinancingInfrastructure Financing OptionsGovernment Funding and Financing Options

20. 20Bilateral and Multilateral Agencies provides Aids, Grants and Technical Assistance to projects, sectors, private practitioners and other privately-led government agencies, to provide infrastructure across the project development and implementation value chain.Grants from Government to catalyze follow-on financing from private sector.Grant FundingService Contracts, O&M Contracts – Funds from Corporate and Private Finance through Deposit Money Banks, Private Capital, Mutual Funds, Equity, Commercial finance, etcFranchise Arrangements – Funds through Project Finance, Corporate Finance & Private CapitalLicense Arrangements – Funds accessed through Project and Corporate Finance from DMBs, MDBs, Contractual Savings Sector, Corporate Bonds, etcAffermage and Lease Arrangement – Funds through Corporate and Private Financing structures from DMBs, Private Equity, MDBs, Infrastructure Funds, and so on.Concessions – all funds through Project Finance, Corporate Finance, Private Capital, and so on, accessed through MDBs, DFIs, Contractual Savings Sector, Donor Agencies, Private Equity, DMBsJoint Ventures – utilise Project and Corporate Finance structures through DMBs, MDBs, Private Equity, Microfinance, Infrastructure Funds, Commercial finance,etcPrivatization and Full Divesture – Corporate and Project Finance, accessed through MDBs, DMBs, International Financial Institutions, DFIs, Contractual Savings Sector, Private Equity, and so on Public-Private Interactions or PartnershipsInfrastructure Financing OptionsPrivate Sector Funding and Financing Options

21. 21Infrastructure Financing OptionsUses of Commercial Finance by Borrower size & Financing NeedMicrofinanceVendor/ Supplier FinanceBondsMDBsOthersCommercial Bank LoansLargeMediumSmallHouseholdsSmall scaleprovidersCommunitiesMedium sized entrepreneursUtilities/Govt. MunicipalitiesSize of borrowersSource: Sophie Tremolet,WBG /UNICEF 2017

22. 18All necessary parties of the Government supportive and aligned.The Government providing sufficient bankable financial support.Ability of the government to support projects due to fiscal constraints.EnsuringGovernmentCommitmentAll risks are allocated to the party best placed to manage them.Need to develop a balanced risk allocation matrix.The Government should bear the risks that private sector is not capable of.Technical and financial capacities and capabilities with verifiable track recordThe sponsor will be able to collect payment for services.Need to evaluate ability of government vs. users to pay.Good regulatory framework.Regulatory framework can be implemented quickly and efficiently.Private investors can recover their investment in worst case scenario.Legal/RegulatoryFrameworkAppropriate Risk AllocationSponsor QualitySource: IFC (2018)Infrastructure Financing OptionsSuccess Factors for attracting Private Sector

23. 23Adding resources to enable financial sustainabilityReducing risks to financiersSubsidy or VGFXEquity Grant or Blended FinanceXProject Preparation FundsXMicrofinanceXGuaranteeXPolitical Risk Insurance + Partial Risk GuaranteesXTenor ExtensionsXPooled FinanceXHedging InstrumentsXInterceptsXCredit ratingsXBenchmarkingXThere are a wide range of tools available to facilitate commercial finance….Credit Enhancements & Financial InstrumentsMaking Markets Work

24. 24Project Categorization & Attendant InstrumentsProject Preparation & Development Funds*Viability Gap Funding (VGF)Minimum Revenue Guarantee Revolving FacilityPolitical Risk Insurance/ Guarantee (PRG/PRI)Others - Cash Backing, ISPO, SBLC, SGs, etcSocio-Political Infrastructure Projects✓✓✓✓✓✓Conditionally Viable Infrastructure Projects✓✓✓✓✓✓✓✓✓✓✓✓✓✓✓✓✓Viable Infrastructure Projects✓✓✓✓✓✓✓✓✓✓Project categorization will be further evaluated based on Objectively Verifiable Indicators and attendant Credit Enhancement Instruments issued, based on project commercial, financial and economic viability metrics*Whilst PPDF may not be classified as a direct Credit enhancement instrument, it unlocks private capital into Infrastructure ProjectsCredit Enhancements & Financial InstrumentsGovt. Catalysing Private Capital into Infrastructure Provision

25. 25NeedsBankable PPP ProjectsContractual Savings Sector, MDBs, DFIs, etc(US$100b)StrategicPartnerships with Developers and FGN procurement and Regulatory AgenciesHaveAgreementsFGN & MDAs FinanceCredit Enhancement InstrumentsIssuesCredit Enhancements & Financial InstrumentsUnlocking Contractual Savings Sector Funds for InfrastructureProjects of Critical National Importance can be made bankable by the FGN through incentives and Credit Enhancements issued by the FMFBNP, to meet the funding and financing metrics of Contractual Savings Sector, DFIs and other Financiers.

26. 26Credit Enhancements & Financial InstrumentsUnlocking Private Funds for Infrastructure

27. Conclusions and Take OutsAccessing Contractual Savings and DFI Funds - Contractual Savings (Pension Funds) – South-Africa, Singapore and Chile have been able to work out a commensurate risk-return structure that's been used to access pension funds for infrastructure development An effective approach that Nigeria may use to channel pension fund contributions into large scale infrastructure projects without compromising the current widely praised system would be for PFAs to be mandated to invest into specific bankable projects, already pre-approved by an FGN appointed independent Infrastructure Development Firm or independently resourced and managed PPP CentreTaking a cue from Singapore’s mandatory savings model and Chile Infrastructure Bond approach, the FGN could credit enhance Infrastructure bonds – directly linked to bankable infrastructure assets - that PFAs will subscribe to, in line with the PENCOM Act.The scheme has to be completely transparent and robustly regulated to prevent high-level abuses and reduce the likelihood of fraud.MDBs, DFIs, ECAs, etc – Government to work with these local and international financial institutions to credit enhance projects to attain Investment Grade status thereby unlocking funds for infrastructure developmentFGN to institutionalise the National Credit Enhancement Framework to include VGF Scheme, Minimum Revenue Guarantees, Termination Guarantees, and other incentives; capitalise the Project Preparation Facility with Seed Funds; MDBs, DFIs and other local and International Financial Institutions will be a part of the Project Preparation Facility to generate critical mass of investors and financiers; andWork with MDBs, DFIs, ECAs to issue PRGs or PRIs, PCGs or PCIs, and other credit enhancement instruments Government to improve on funding (3Ts) sources structures - Public Investment and Finance Management - to be able to attract Infrastructure Financing from Private sector practitioners

28. Discussion Point28

29. 29and Finally…… Useful resources

30. 30

31. 31Project Finance - Introductory Manual on Project Finance for Managers of PPP Projects - Version 1 – National Treasury/PPP Manual; World Economic Forum - Accelerating Infrastructure Delivery New Evidence from International Financial Institutions, 2014; Easing the Transition to Commercial Finance for Sustainable Water and Sanitation -August 2017 - Amanda Goksu, Sophie Trémolet, Joel Kolker, and Bill Kingdom; and International Institute for Sustainable Development – Credit Enhancements for Green Projects - Promoting credit-enhanced financing from multilateral development banks for green infrastructure financing, Madhu Aravamuthan, with Marina Ruete and Carlos Dominguez – May 2015.Useful resources

32. Thank You