Uganda Project Finance Workshop Uganda Ministry of Local Government Kampala, August 2012

Transcription

1 Uganda Project Finance Workshop Uganda Ministry of Local Government Kampala, August 2012 Local Finance Initiative advancing Local Economic Development Global Clearinghouse for Development Finance in partnership with the UN Capital Development Fund 1

2 Workshop Agenda The Local Finance in Uganda 3 LFI Projects in Uganda 13 Case Study: Risk Analysis for the Delight Project 17 The Solu@on: Project Finance for Uganda 28 How to Iden@fy Project Sponsors? 39 How to Define and Develop Projects? 42 Next Steps: Training in the Main LFI Programme 47 Wrap- Up: Comments, Ques@ons, Sugges@ons 49 2

3 The Local Finance in Uganda 3

4 The Local Finance (LFI) Designed as a global programme that leverages UNCDF s compara@ve strength in working with local governments within its investment mandate Project development and finance (e.g., feasibility studies, finance, credit enhancement) Building capital of local stakeholders through learning by doing and training (private sector, government) Developed by the United Na@ons Capital Development Fund (UNCDF) and the Global Clearinghouse for Development Finance (GlobalDF), a non- profit organiza@on of private sector experts Currently ac@ve in Uganda and Tanzania Other countries being considered: Bangladesh, Senegal, Egypt, Cambodia, and Rwanda 4

5 The Importance of Infrastructure to Economic Development Need for infrastructure projects (energy, transport, water and sewer) is correlated with economic growth: Factories and agricultural processing require: Electric power to operate Water and wastewater treatment to be environmentally compliant to obtain market Transport to move their products to market Agricultural processing (industrial infrastructure) are to improving the value chain for crops produced in Uganda and other developing countries Studies by the World Bank have indicated that sub- Saharan Africa in underinvested in infrastructure and must significantly increase the volume of infrastructure investment to achieve the Millennium Development Goals Infrastructure projects that are small by standards can have a big impact in Uganda s economy (and those of other developing countries) 5

6 Barriers to Financing Small and Medium- Sized Infrastructure Projects Most developing- country banks have only short- term sources of funding and issue only short- term loans (3 to 5 year tenors) Many developing- country banks are less sophis@cated in credit analysis and have liele experience with project finance Project finance transac@ons, regardless of size, are labor intensive, and it is therefore difficult for banks to make enough in fees on small transac@ons to compensate for spent Aeorneys and consultants (due diligence engineers, market consultants, environmental consultants, etc.) are too expensive if paid according to interna@onal standards, to be affordable for small and medium- sized infrastructure projects Ins@tu@onal investors in developing countries (primarily pension funds) prefer equi@es and real estate rather than long- term fixed income investments Projects are expensive to develop and there needs to be extensive support in project development (e.g., iden@fying projects, designing and implemen@ng independent technical studies assessing costs and revenues, engineering studies, legal fees, etc.) 6

7 Types of Projects to Be Financed by the LFI Programme infrastructure Small electric power projects Transport- related projects Water and Industrial infrastructure Agricultural processing plants Warehouses Size: The total cost of the project should range between: US$100,000, and US$30 million Sponsors firms Local firms Local governments Community 7

8 Financing for the LFI Programme Op=on 1: Arrange financing for projects individually Difficult for very small projects; easier for projects of US$3.0 million or larger Requires credit support from donors to be arranged on a project- by- project basis Op=on 2: Create a pooled financing vehicle that finances mul@ple projects (with warehousing facility to provide interim financing for projects that are developed before other projects in the por?olio are ready for financing) Poten@ally more aerac@ve to banks because a larger amount of financing can be provided in a single transac@on More efficient to arrange credit support for a porlolio of projects LFI is currently working on mul@ple projects, with the intent of assembling a porlolio for a pooled financing facility (if of project development permits) 8

9 LFI Programme: Phase I Finance projects either individually or through pooled approach (i.e., assemble 5 6 projects into a pool totaling at least US$10 million) Arrange credit support in the form of a par@al credit guarantee from one or more donors (e.g., SIDA, USAID or other providers of credit enhancement) Par@al credit guarantee will be in an amount equal to 40% - 50% of the amount of the loan that finances the porlolio of projects If the lenders suffer a loss, the par@al credit guarantee will cover 40% - 50% of the loss Seek financing for the individual loans and/or pool by selec@ng an arranging bank that will syndicate a loan denominated in local currency Syndicate is likely to consist of 3 5 banks Local ins@tu@onal investors may also par@cipate pari passu with commercial banks Push banks to extend the tenor of the loan to 7 10 years as a quid pro quo for the credit support provided by donors 9

10 LFI Programme: Phase II Assemble porlolios of projects and finance them as pools using credit support, as described in Phase I Ins@tu@onal investors refinance the bank loans that provide ini@al financing for each pool Ins@tu@onal investors gain experience with project financing and with the risks of these projects by par@cipa@ng in ini@al bank syndica@on Ins@tu@onal investors have longer term sources of funding in the form of pension contribu@ons and the need for long- term assets Refinancing avoids the need to con@nue to push banks for longer tenor loans and frees their capital to finance another round of projects 10

11 Why the LFI Programme Can Overcome Barriers to Financing Small and Medium- Sized Projects Credit support provided by development partners and governments Can encourage banks to lend on a longer term basis Can help banks overcome their lack of experience with project finance and percep@on of high risks UNCDF / GlobalDF can do the ini@al work required to develop and structure projects, so banks do not need to perform the most labor intensive part of project financing Local consultants who can do professional work at lower local market prices will be trained and used to assist project development and perform due diligence Banks and ins@tu@onal investors will be provided training (as will government officials) in the type of credit analysis applicable to project finance Opportuni@es for new ventures will produce debt service coverage ra@os high enough to jus@fy market risk 11

12 Why the LFI Programme is to Project Sponsors Assistance in the project development process, ensuring that project development is adequate to secure private sector financing Facilitate access to financing for local projects that would have difficulty obtaining debt financing on a standalone basis Lower the cost of financing for local projects by: Using credit support to reduce the risk faced by lenders Using local consultants to conduct the independent analyses required as part of the due diligence process required by lenders Spreading legal expenses and other closing costs over mul@ple transac@ons rather that having them borne by each individual project Financing with longer tenors than currently available for corporate financing Elimina@on of foreign exchange risk with financing that will match the revenues earned by each project 12

13 LFI Projects in Uganda 13

14 LFI Projects Currently in Development Arua IPS Olewa Hydroelectric Project Busia Private Lorry Park Isingiro/Mbarara UCCCU Milk Processing Plant Kampala/Kayunga Amfri Farms Organic Fruit Processing Facility Kitgum Olam Simsim Warehouse and Processing Facility Nwoya Delight Fresh Juice Plant 14

15 An Example: Delight Fresh Juice Plant Being developed by Delight (U) Ltd, a Ugandan firm that currently produces and sells juice under the Cheers brand The new plant is to be located in Nwoya District The new plant will process principally mangoes, oranges, and pineapples The project will include a 1,000 acre nuclear farm devoted principally to growing mangoes and that will demonstrate best prac@ces for the outgrowers who will supply the plant The major equipment at the plant will be: Extrac@on equipment to produce pulp PET line to boele juice (which can also produce boeled water and carbonated rinks) Tetra Pak line to package juice The fresh juice produced by the plant will be sold in Uganda, South Sudan, DRC, and Rwanda Es@mated capital cost: US$16 million 15

16 Approach to Financing the Delight Project Problem: Delight does not have enough financial resources to finance the plant by itself Bring in venture capitalists/private equity investors to supply equity for the project Second Problem: Outside equity investors will not want to provide all of the financing needed for the project Bring in commercial banks to provide a significant por@on of the financing for the plant Major Ques@ons: How large an ownership interest will the outside equity investors require? Will banks be willing to provide a loan? If banks are willing to provide a loan, will the terms of the loan fit the projects needs? 16

17 Case Study: Risk Analysis for the Delight Project 17

18 What Risks Will Worry the Banks and Equity Investors? 18

19 What Risks Will Worry the Banks and Equity Investors? How much will it cost to build the plant? 19

20 What Risks Will Worry the Banks and Equity Investors? How much will it cost to build the plant? How do we know that the budget for the project is correct? What if actual is more expensive than budgeted? Where will the funds come from to pay for the cost overrun? What if it takes longer to build the plant than Where will the funds come from to pay for the interest that will accrue? 20

21 What Risks Will Worry the Banks and Equity Investors? How much will it cost to build the plant? How do we know that the budget for the project is correct? What if actual is more expensive than budgeted? Where will the funds come from to pay for the cost overrun? What if it takes longer to build the plant than Where will the funds come from to pay for the interest that will accrue? Will the plant work properly? 21

22 What Risks Will Worry the Banks and Equity Investors? How much will it cost to build the plant? How do we know that the budget for the project is correct? What if actual is more expensive than budgeted? Where will the funds come from to pay for the cost overrun? What if it takes longer to build the plant than Where will the funds come from to pay for the interest that will accrue? Will the plant work properly? Will it produce as much fresh juice as it is expected to do? Will the quality of the juice produced be acceptable? Will the cost of the plant be as or will it be higher? Can the plant comply with all environmental laws? 22

23 What Risks Will Worry the Banks and Equity Investors? Will there be enough fruit to operate the plant? 23

24 What Risks Will Worry the Banks and Equity Investors? Will there be enough fruit to operate the plant? Mangoes currently grown in Nwoya are not suitable too fibrous; where will the suitable mangos be sourced? When will the nuclear farm produce enough mangoes to make a meaningful contribu@on to the plant s supply? Where will mangoes come from un@l sufficient quan@@es are produced by the nuclear farm and outgrowers? Where will pineapples and oranges be procured? What prices will be required to procure the fruit needed by the plant? What will the delivered cost of fruit be? 24

25 What Risks Will Worry the Banks and Equity Investors? Will there be enough fruit to operate the plant? Mangoes currently grown in Nwoya are not suitable too fibrous; where will the suitable mangos be sourced? When will the nuclear farm produce enough mangoes to make a meaningful contribu@on to the plant s supply? Where will mangoes come from un@l sufficient quan@@es are produced by the nuclear farm and outgrowers? Where will pineapples and oranges be procured? What prices will be required to procure the fruit needed by the plant? What will the delivered cost of fruit be? Will the project be able to sell as much juice as planned? 25

26 What Risks Will Worry the Banks and Equity Investors? Will there be enough fruit to operate the plant? Mangoes currently grown in Nwoya are not suitable too fibrous; where will the suitable mangos be sourced? When will the nuclear farm produce enough mangoes to make a meaningful contribu@on to the plant s supply Where will mangoes come from un@l sufficient quan@@es are produced by the nuclear farm and outgrowers? Where will pineapples and oranges be procured? What prices will be required to procure the fruit needed by the plant? What will the delivered cost of fruit be? Will the project be able to sell as much juice as planned? How large is the market for fresh juice in Uganda? In South Sudan? In the DRC? In Rwanda? Who are the project s compe@tors? How large a market share will the project be able to get? What price can the project ask for its juice? Its carbonated drinks? How will exis@ng compe@tors react to the project s entry to the market? 26

27 Likely Outcome of Approach to Financing the Delight Fresh Juice Plant Equity Investors: Likely to decide either (1) That the project is too risky and they should not invest, or (2) To ask for a very large ownership percentage of both the project and Delight (U) Ltd Lenders: Likely to decide either (1) That the project is too risky and they should not provide a loan, or (2) To ask for: A very large amount of equity in the project Large amounts of collateral, and Guarantees from Delight and the outside investors Result: The project is unlikely to be financed, either because debt and equity financing is not offered or because the terms on which it is offered are unacceptable 27

28 The Project Finance for Uganda 28

29 A Project Finance Approach to Financing the Delight Fresh Juice Plant Risk for the four major risks: Cost Overruns: a that places the risk or cost overruns and delays on the contractor Performance Risk: contracts with the contractor and major equipment suppliers that provide performance guarantees Input Supply Risk: Obtain contracts for the supply of major inputs or commission an independent study by a reputable consultant demonstra@ng the availability of inputs at appropriate prices Market Sales Risk: Obtain off- take contracts for the sale of the project s output or commission an independent study by a reputable consultant demonstra@ng that the project is likely to be able to sell a sufficient volume of its output at prices that will enable it to cover its produc@on costs, pay its debt service, and earn a reasonable equity return 29

30 Cost and Performance Risk In large project financings, these risks are by a turnkey construc@on contract: Fixed price for construc@ng the project Guarantees with respect to: Output Availability Efficiency Quality of output Environmental compliance Guaranteed in- service date Liquidated damages for failure to meet guarantees: Sliding scale damages for failure to meet output, availability, and efficiency Damages calculated so that if damage payments are used to pay down project debt, the project s debt service coverage ra@os will remain the same as originally projected Daily damage amounts payable for each day of delay Damages calculated to compensate for addi@onal interest expense, plus addi@onal expenses incurred by the sponsor as a result of the delay 30

31 Problems with Obtaining Turnkey Contracts for Projects in Uganda contractors unlikely to be interested in small infrastructure projects contractors are unlikely to be price- on an EPC contract for a small project Are there local contractors that are willing to assume the risk of being a turnkey contractor? Financial strength of construc@on contractors? 31

32 An Structure for Project in Uganda The building to house the project and all civil work will be performed by an experienced local contractor The major equipment suppliers will be engaged by the project sponsor, not the contractor The contractor will supply piping and electrical equipment to meet the requirements of each major equipment supplier Prior to installing their machinery and equipment, each major equipment supplier will accept the work done by the contractor, which means that the equipment supplier will not be able to blame the contractor for any shorlalls in equipment performance The contractor and each major equipment supplier will assume responsibility for the maximum possible amount of the costs associated with their work so that the costs remaining to be borne by the project sponsor are small and easily 32

33 Input Supply Risk: Input Studies (1) For each geographical area in which the project is expected to source its major inputs, the following issues should be addressed: Size of the market (in both units and monetary values) for each separate input required by the project (DefiniAon of the market must be based upon an analysis of the suitability of the available inputs for use by the project; for example, oranges may be required by the project but the oranges grown in a certain area may not be suitable.) Current size Historical changes in size of the market (@me series will depend upon available data) Projec@on of future changes in the size of the market Structure of the market Producers of inputs (e.g., numbers of farmer, organiza@on, availability of extension services, impediments to produc@on, etc.) Compe@tors that will also purchase the inputs required by the project Channels of distribu@on of each input (i.e., how the input proceeds from the ini@al producer to final processors (middlemen, intermediate storage and processing facili@es, etc.) 33

34 Input Supply Risk: Input Studies (2) Prices (both that received by the input producer and that paid by the project, if they are different) Current prices Historical changes in market prices series will depend upon available data) of future changes in market prices analysis Success factors in the market (approaches to insure that the required of inputs are acquired) Purchasing strategies of to the project Likely response of to a new entrant compe@ng for the same inputs 34

35 Market Sales Risk: Output Studies For each geographical area in which the project is expected to sell its output, the following issues should be addressed: Size of the market (in both units and monetary values) for each separate product to be produced by the project Current size Historical changes in size of the market series will depend upon available data) of future changes in the size of the market Structure of the market Channels of Prices (both wholesale i.e., received by the project and retail) Current prices Historical changes in market prices series will depend upon available data) of future changes in market prices analysis Success factors in the market Strategies of Likely response of to a new entrant 35

36 a Project Financing: The Transac@on Structure Controls the Opera@ons of the Project The project will be owned a separate legal en@ty A special purpose vehicle (SPV) The SPV will be prohibited from engaging in any other business The project s loan is non- recourse to the project sponsor: The sponsor is not responsible for repayment of the debts of the SPV Repayment of the project s loan comes from solely from the cash flows generated by the project The project lender is protected from any deteriora@on in the balance sheet of the project sponsor The project lender has collateral in the form of A mortgage on the land and building of the project A lien on all the machinery and equipment of the project A security interest in all contracts, insurance policies, accounts, and other intangible assets of the project Cash flows can be ring- fenced The project s revenues are deposited in accounts maintained by the project lender A cash flow waterfall directs the project s revenues to be used, first, to pay opera@ng expenses, then maintenance expenses, then debt service, and, lastly, distribu@ons to the project sponsor 36

37 A Final Element: Risk for Project Loans The LFI Programme will arrange risk as needed from agencies or development partners that will make the project loans more to lenders. This risk can take many forms: Halo effect by official sector A Loan / B Loan debt financing Pari passu ECA and bilateral agency financing Equity investment by official sector agency Contractual commitments by official agencies: Poli@cal risk insurance: Three basic forms of coverage: Transfer and conver@bility of currency (also known as inconver@bility risk ) Expropria@on (host government seizes investor s property) Poli@cal violence (investor s property is destroyed by poli@cally- mo@vated violence) Op@onal coverage: Breach of contract coverage Par@al risk guarantees provided coverage for a narrowly defined poli@cal risk, e.g., regulatory risk Par@al credit guarantees (also provides halo effect ) Output- based aid to deal with demand risk by supplemen@ng revenues received by the project when its customers to not have the capacity to pay market prices Contractual commitments by private- sector ins@tu@ons: Poli@cal risk insurance similar to that provided by official agencies 37

38 Structure of a Project Financing: An Example In this example, there are two forms of risk mi@ga@on: (1) Credit support in the form of a guarantee of payment by the Output Purchaser (2) A par@al guarantee of the project s debt Construc@on Contract Construc@on Contractor Payment (using loan proceeds) Output Purchaser Product or service Project Company (SPV) Construc@on Loan Lenders Payment Debt Service Payments Credit Support Payment Payment Inputs Payment Par@al Guarantee Risk Mi@ga@on Provider 1 Input Suppliers Risk Mi@ga@on Provider 2 38

39 How to Project Sponsors? 39

40 of Project Sponsors of the Project Sponsor First step: The Project Sponsor serves as champion, the driving force of the project, and the source of market, financial, and possibly technical on the project Responsible for: (1) managing the project development process, (2) providing some or all of the equity for the project, and (3) the project Your role is to validate the Project Sponsor's capabili=es and commitment to project implementa=on and ability to implement the project, validaang that they know what they are doing and what they are gehng into Criteria for of a credible Project Sponsor: Demonstrated exper@se in the sector (for example, prior successful projects, access to needed exper@se, knowledge of market, etc) Can be private sector company, public sector agency, individuals with demonstrated capacity, associa@on (NGO) 40

41 Project Sponsor Challenges and Challenges: Lack of experienced Project Sponsors in both private sector and government, need for training and expert support, lack of financial resources, etc. Engage local stakeholders to Project Sponsors in the private sector (including business individuals), government agencies, NGOs, etc. experienced Project Sponsors in district, or if not available, in other parts of the country (for example, research other companies and projects in the sector that might be interested in expanding to your district) Create a new legal iden@ty for the project, managed by Individuals with demonstrated capacity and commitment with donor/ngo support DDP III could also support the process of iden@fica@on and prepara@on of a project sponsor, but the scope of such support would have to be carefully defined 41

42 How to Define and Develop Projects? 42

43 Criteria for Project Credible Project Sponsor (legal with established financial basis and needed Project that can charge for its services (or obtain output- based aid which provides subsidies for those who cannot afford services) Project economics that enable the project to Pay its debt service with a comfortable margin for error Earn an adequate equity return Contribu@on to local economic development Employment crea@on (direct and indirect) Value chain improvement Facilitates the development of other businesses Increased tax receipts Gender equality Improves quality of life for community No adverse environmental or social impacts that cannot be mi@gated at a reasonable cost Your role: See worksheet Financing Local Infrastructure: Methodology for Developing Project Profiles (handout) 43

44 Elements of Project Development A financial model that projects revenues, start- up costs, and ongoing expenses over the course of the projected financing (i.e., if a 8 year loan, model is for 8 years) Suppor@ng independent technical studies For an electric power genera@on project, the required studies are: A feasibility study, demonstra@ng that the project s economic returns are sa@sfactory A study demonstra@ng the availability of required inputs (e.g., water flow, wind, etc.) For an agricultural processing facility, the required studies are: A market study es@ma@ng the project s sales volume and revenues A study demonstra@ng that sufficient inputs will be available at prices that enable the project to be economically successful A construc@on contract for construc@on of the building that will house the project Equipment supply contracts 44

45 Sequence of Project Development (1) of a financial model based on the Project Sponsor s knowledge of the market and the technology required for the project Conceptual design of the project by the Sponsor s engineering firm Ini@al discussions with poten@al equipment suppliers and preliminary price quotes Execu@on of the technical studies required for the project Prepara@on of Terms of Reference for the studies Selec@on of consultants to conduct the studies Conduct of the studies Selec@on of a construc@on contractor to construct the building to house the project Obtaining final price quotes from equipment suppliers Nego@a@on and harmoniza@on of construc@on contract and equipment supply contracts 45

46 Sequence of Project Development (2) of an environmental and social assessment Obtaining risk from development partners or other risk providers, if needed of an memorandum for equity investors if equity in to that supplied by the Project Sponsor is required of equity, if required of an memorandum for lenders of an agent bank to lead the financing of the project s debt financing, if required Nego@a@on of the documenta@on for the project s financing 46

47 Next Steps: Training in the Main LFI Programme 47

48 Next Steps for Training Main LFI Programme to be launched in January 2013 A major component will be training to the wide array of LFI stakeholders: Uganda LFI Team Local Technical Service Providers (consultants who can support sponsors in implemen@ng the needed independent studies) Government officials interested in suppor@ng the development of projects Banks interested in developing their marke@ng and credit func@ons for project finance lending Ins@tu@onal investors (pension funds, etc) and fund manager interested in inves@ng in projects Training to include technical aspects of: Project development (financial models, approaches to technical studies) Project finance (deal structuring, prepara@on of financial packages for investors) 48

49 Wrap- Up: Comments, 49

50 Wrap- Up Comments on LFI Approach? on concepts and technical terms? How to improve our of LFI? How to improve the LFI approach? How to improve our of LFI and training? Thoughts on ways LFI can be applied successfully for advancing local economic development? 50

51 LFI- U Team Contact Info MoLG Eng. Paul Kasule- Mukasa Programme Coordinator Ministry of Local Government Paul.kasule- mukasa@yahoo.co.uk Abubaker Luwaga LED Support Officer Ministry of Local Government a.luwaga@gmail.com +(256) Nelson Tasenga nelsontasenga@yahoo.co.uk UNCDF Dr. Jenifer Bukokhe Wakhungu Na@onal Programme Officer UNCDF Jenifer.bukokhe@uncdf.org (+256) Dr. Dmitry Pozhidaev Regional Programme Advisor UNCDF dmitry.pozhdaev@uncdf.org (+27) GlobalDF Dr. Barbara Samuels Execu@ve Director GlobalDF barbara@globaldf.org (+1) Robert Sheppard Senior Finance Advisor GlobalDF bob@globalclearinghouse.org (+1) Rehana Nathoo Assistant Director GlobalDF rehana@globaldf.org (+1)