Chad-Cameroon Pipeline: Summary

Did the project finance create value for the sponsors?

Value creation is expected, or it would have used other types of finance.
Gross Value: at least $15 million + value of time structuring the deal. (It must have
been worth it to spend the time and pay the $15 million in fees.)
Value net of PF transaction costs should be positive.
The fact that the sponsors used corporate finance for the field system suggests that
transaction costs of PF are high. The incremental benefit of arranging a PF for the
field system is exceeded by the incremental transaction cost.

Important sources of the value

World Bank/ECAs participation mitigated political risk. The RMP constrains the
party (Chad govt) who controls the risks.
Non-recourse debt shielded sponsors credit exposure.
PF structure allowed the use of higher leverage (higher value of tax shields, and
reduced equity exposure).

Compared to the Busang/Bre-X deal in Indonesia, Chad and Cameroon all got
a pretty good deal.
But the cash flows that Chad receives is back-loadedit gets more of the
cash flows later, rather than earlier. In other words, it ends up bearing more of
the reserve risk than the sponsors.

Murphys Law Applied to Project Finance

Project risks end up on those least able to resist them.

Polands A2 Motorway
Infrastructure projects
Sponsors announced 279 toll road projects in 26 countries
worth US$61 billion from 1990 and 1999 (World Bank
Private Participation in Infrastructure (PPI) database).
Moodys now rates $29 billion of toll road debt from 32
issuers.
A2 is one of the larger road projects, certainly a milestone
in the development of Eastern and Central European
infrastructure.

Classification of Project Risks

(No Market Exists)

Market
Risks
(e.g., country)

Demand = f(GDP)
Inflation
Exchange Rates
Interest Rates

Force Majeure (political

Expropriation
(taxes, regulation, enforcement)
Currency Convertibility
Currency Devaluation

Macroeconomic
and
some Sovereign
Risks

(Market Exists)

Project
Specific
Risks

Force Majeure
(Acts of God)

Low

Operator Performance
Land Acquisition/Permits
Cost Over-run/Delay
Competing Roads/Railroads
Support Roads (Infrastructure)
Expropriation
Environmental Risks

Ability to Control

High

Construction,
Operating,
and
some Sovereign
Risks

Generic Risk Management Strategies

(No Market Exists)

Market
Risks
(e.g., country)

INSURE
(with political risk insurance)
ALLOCATE
(with contract and profit sharing)
or
DETER
with MLA/BLA participation

BEAR

HEDGE
(Market Exists)

INSURE
Project
Specific
Risks

OR

Influence

ALLOCATE
(with contracts)

DIVERSIFY

Low

Ability to Control

High

Principles of Risk Management

Allocate risk to the party that controls the risk or had the greatest impact on its outcome
(effectiveness).

When possible and cost effective to do so, write a detailed contract specifying actions,
quality, and performance. Contracts work best when the risks are identifiable, outcomes
are verifiable, and contracts are enforceable.
Predictable: note the difference between risk (known distributions) and uncertainty
(unknown distributions)
Verifiable: note the role of asymmetric information.
Enforceable: note the importance of legal systems, property rights, and enforcement
mechanisms.

Allocate risks to the party that can bear them at least cost (efficiency).

When negotiation, contracting, and other transaction costs make complete contracting
unfeasible, allocate residual risk and return to align incentives and induce optimal
behavior.

If possible, allocate asymmetric, downside risks to debt holders; allocate symmetric and
upside risks to equity holders.

Murphys Law Applied to Project Finance

Nature always sides with the hidden flaw.

Anything you try to construct will take longer and cost more than you
thought.
If everything seems to be going well, you dont know what is going
on.
The unexpected will always happen.

Source: Fortin, R. Jay, Defining force majeure, Project and Trade Finance, Jan. 1995.

Infrastructure Deal of the Year (Project Finance International).

A number of significant legal and financial structuring issues needed to be overcome

to bring the project to financial close and we are delighted this has been achieved. The
Polish Prime Minister, Jerzy Buzek, described the project as the most complicated
financing ever carried out in Poland, and everyone involved should take that as a
compliment. (Mike Webster, Baker & McKenzie)
The deal marks the first public/private partnership in Poland and is a considerable
turning point for project finance transactions for Central and Eastern Europe, given the
absence of any such road infrastructure project in the region since Hungarys 1996 M5
project.
The deal is notable for being the first time the EIB has provided subordinated
debt(and) the first time the EIB has directly extended a 17-year facility to a project.
(Many)factors apparently contributed to a pricing [and structure] with no premium
attached for being the first such project in Poland or for being dependent on uncovered
revenues.