Project Finance in Practice: Case Studies
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Project Finance in Practice Case Studies i Project Finance in Practice Case Studies Carmel de Nahlik and Chris Jackson E U R B O O M O O K N S E Y Published by Euromoney Institutional Investor PLC Nestor House, Playhouse Yard London EC4V 5EX United Kingdom Tel: +44 (0)20 7779 8999 or USA 11 800 437 9997 Fax: +44 (0)20 7779 8300 www.euromoneybooks.com E-mail: [email protected] Copyright © 2014 Euromoney Institutional Investor PLC ISBN 978 1 78137 263 0 This publication is not included in the CLA Licence and must not be copied without the permission of the publisher. All rights reserved. No part of this publication may be reproduced or used in any form (graphic, electronic or mechanical, including photocopying, recording, taping or information storage and retrieval systems) without permission by the publisher. This publication is designed to provide accurate and authoritative information with regard to the subject matter covered. 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Typeset by Phoenix Photosetting, Chatham, Kent Contents Acknowledgements xi About the authors xiii Part 1 Project finance principles in practice 1 1 Introduction 3 2 A brief history of project finance 6 Overview 6 How were large projects financed in the past? 6 Islamic finance and its contribution towards project finance forms 10 Mudarabah 12 Musharakah 12 Murabaha 12 Salam and istisna’a 13 Ijarah 13 Sukuk 13 What today’s project financier can learn from history 14 3 Principles of project finance 15 Overview 15 What makes a project a project? 15 Cash flow or profit? 18 Are assets always valuable as security? 19 4 Different contexts for project finance approaches 20 Overview 20 Fish farming 20 Film finance 20 Computer gaming 21 Hotel financing 22 Start-ups 22 How governments have stolen the project finance ball 23 Project finance in smaller and less conventional transactions 26 Small agriculture projects 26 Small renewable energy ventures 27 Small creative projects 28 5 Impact of regulation 29 Overview 29 v Contents Banking from the 1960s to the late 1980s 29 Capital adequacy 30 Taxation 32 Environmental 34 Self regulatory organisations and independent bodies 35 Corporate governance 35 What next for regulation? 36 6 Risk mitigation in project finance 38 Overview 38 Credit analysis, monitoring and control 38 Technology 40 Hedging 41 Insurance 43 Credit Enhancement 45 Full or partial guarantees 45 Contingent credit support 46 7 Project management meets project finance 48 Overview 48 Principles of project management 48 Scope 49 Cost 51 What does it really cost? 51 Time 52 Key issues for the project management of the project 54 How project management has professionalised 56 Computer models 57 Lessons for project financiers from project management for best practice 59 Part 2 Case studies I: mature projects 61 8 How LASMO rode the waves and struck black 65 Why is this case interesting? 65 What was the project? 65 Macro environment 71 History of the project’s development 77 The Ninian Field 79 Sponsors 81 Structure 82 Financing decisions 83 The debt decision 83 An equity facet? 84 Investor profiles 85 vi Contents The sting in the tail 86 Lessons learned 88 9 Skynet – the private finance initiative boldly goes into space 91 Why is this case interesting? 91 Key project features 91 What was the project? 92 Macro environment 93 History of the project’s development 95 Sponsors 98 Structure 99 Financing decisions 101 Lessons learned 103 10 MTN (Nigeria) calling 105 Why is this case interesting? 105 What was the project? 106 Macro environment 112 History of the project’s development 116 Sponsors 117 Structure 117 Financing decisions 122 Investor profiles 125 Lessons learned 126 11 Liverpool manage to ‘walk on’ with a change of sponsor 131 Why is this case interesting? 131 What was the project? 132 Macro environment 135 History of the project’s development 140 Sponsors 142 Structure 143 Financing decisions 146 Lessons learned 147 12 When the NHS Foundation Trust becomes the patient in its new hospital 151 Why is this case interesting? 151 What was the project? 152 Macro environment 155 History of the project’s development 157 Sponsors 159 Structure 160 Financing decisions 162 Lessons learned 168 vii Contents 13 A-Model to follow? 172 Why is this case interesting? 172 What was the project? 173 The A-model and toll revenues 174 Macro environment 178 History of the project’s development 179 Germany’s most dangerous road 181 The interplay of public private partnerships and public procurement 181 Sponsors 181 Structure 182 Financing decisions 183 The A-models following the A1 184 Lessons learned 186 Part 3 Case studies II: projects in progress 189 14 Up, up and away: a Chinese aircraft leasing case 193 Why is this case interesting? 193 What is the project? 193 Macro environment 194 Global industry environment 194 China 194 Jet fuel price effects 195 Aircraft leasing in China 196 History of the project’s development 197 Financing decisions 199 Lessons learned 202 15 How Desert Hot Springs stayed cool – CPV’s Sentinel Standby Power Project 204 Why is this case interesting? 204 What is the project? 205 Macro environment 208 Electricity 208 California and the project locale 209 History of the project’s development 211 Sponsors 212 Structure 213 Financing decisions 215 Investor profiles 215 Lessons learned 217 16 Sadara: a large complex cracker! 218 Why is this case interesting? 218 What is the project? 218 viii Contents Macro environment 219 History of the project’s development 222 Sponsors 225 Structure 225 Financing decisions 229 Investor profiles 230 Lessons learned 231 17 Pret-a-Port privatisation: opportunities for project finance? 233 Why are these cases interesting? 233 Key project features of the main cases 234 Background to port privatisation 236 What are the projects? 239 Qingdao Port International Co Ltd, China 240 Background 240 The company 240 The fundraising 242 Risks 243 Post transaction developments 243 Mundra Port and Special Economic Zone, India 244 Background 244 The company 245 The fundraising 246 Risks 246 Post transaction developments 247 New South Wales Ports privatisation: Australia 247 Background 247 The companies 249 Port Kembla 249 Port Botany 249 The fundraising 250 Risks 253 Post transaction developments 254 Reflections on the port cases 254 18 Final reflections 256 Bibliography 257 ix Acknowledgements Books like this one are the product of many people’s thoughts and input … some of whom have asked to stay anonymous, most of whom are mentioned in the book by name. The willingness of people, some of whom the authors had not contacted for years, to give of their time and the encouragement that they provided whilst reviewing drafts and making suggestions for further review was appreciated. What also became apparent was the number of conversations these contributors had in turn that enabled them to comment in a rounded fashion on individual cases. So rather like the underlying projects, the finished article is a product of extensive teamwork, multiple view points and a number of compromises. We would like to thank everyone who contributed to the book, especially: Our families for putting up with long conversations, proof reading duties and the highs and lows of writing and researching the book. Thanks, Suzanna and Chris; Melissa Oshungbure of Euromoney Books for her support and encouragement; Everyone who gave ideas and feedback on the content; Andrew Bing at MTN Nigeria and Bram Moerman at Analysys Mason for providing some of the original Nigerian project and market data for inclusion within the book; Kai Nehen and Yijun Dong for writing the A1 Model and Cheng Jiu case studies; Everyone who gave us insights into political, practical and other issues that related to the project case studies, the experts who wrote commentaries on the cases and the peer reviewers who read through drafts of individual cases; Philip Fletcher, John Dewar and Munib Hussain from the Islamic Finance Team at Milbank and, Robert Jay, Annika Kiestra and Muhabbat Mahmudova of IJ Global for giving us permission to reproduce some key diagrams; Sarah Abel for copy editing. xi About the authors Chris Jackson is a structured corporate financier and risk management specialist with 25 years of experience gained in leading global banking institutions covering both the devel- oped and emerging markets.