Legal and Related Challenges of Funding Infrastructure Projects in Emerging Economies

1. Legal and Related Challenges of Funding Infrastructure Projects in Emerging Economies Challenges in Meeting Public Sector Financing Needs: Financing Key PPP Projects Perchstone & Graeys Annual Law Seminar Lagos, 25th April 2008 Opuiyo Oforiokuma CEO/Managing Director

2. About Lekki Concession Company • LCC’s mission is to provide high quality road infrastructure and related services along the Lekki Peninsular of Lagos, Nigeria, and to be recognized as the pioneer for change in the way road infrastructure is delivered throughout Nigeria • Lagos Infrastructure Project (LIP), the first PPP Toll Road Concession in Nigeria, is already in the process of execution • LCC is an initiative of the ARM Group, which has a broad-based ambition to develop major infrastructure projects throughout Nigeria and West Africa • ARM Group is a leading player in the Nigerian asset management sector, with approximately NGN147 Billion under management

3. About Our Project • Scope Public-Private Partnership with Lagos State, to design, build, finance and operate: Phase I - Lekki Epe Expressway (49.4 km) Phase II - Coastal Road (20km) plus option to do the Southern Bypass • Funding Financed by the Concessionaire, LCC, on a limited-recourse basis. Estimated project cost during construction is $300 Million • Toll Concessionaire will collect tolls and charges on the Concession Roads to recoup cost of investments • Concession Period 30 years

4. Typical Emerging Market Financing Challenges • Viewed as high risk; hence, difficult to attract capital to them at all, or at reasonable cost – there is global competition for investment funds • General lack of local understanding of the various infrastructure models and what they entail – affects both public and private sectors, and civil society at large • Lack of skills and experience in key areas, eg, deal development/packaging, project structuring/financing, and major project management/execution • Under-developed financial/banking sector, lacking experience in project financing of major infrastructure transactions • Lack of enabling legislation and/or non-existent/weak regulatory institutions • Political instability and/or lack of continuity • Economic instability and/or poor track record of management • Corruption, lack of transparent procurement processes, and lack of adherence to the rule of Law

5. Typical Stages in Infrastructure Development & Delivery The process to financial close has been known to take years, especially in emerging economies where little or no track record exists LEGISLATIVE / REGULATORY FRAMEWORK DEVELOPMENT PPP PROCUREMENT NEGOTIATION & AWARD DEAL STRUCTURING & FINANCING PROJECT EXECUTION • Procurement process (can be open tender or negotiated) • Bidding and selection of PPP Partner • Agree and negotiate final PPP contractual terms • Develop capital structure • Arrange financing (equity, debt, etc) • Financial close • Construction programme • Operation & Maintenance • Service Delivery • Asset transfer at end • Opportunity identification • Opportunity evaluation (feasibility studies, EIA/Social Impact studies, due diligence, etc) • Review/establish regulatory framework • Determine PPP Model to use The 1st two stages are sometimes combined or reversed, especially in negotiated deals

6. General Overview of The PPP Model • PPPs involve collaboration between the Public Sector and the Private Sector • Usually for the construction and/or management of a specific asset or a group of assets • Helps to assign risk to the partner best equipped to deal with it • Helps to secure specialist skills and experience not readily available in the Public Sector, for public interest projects • Enables Public Sector funds to be used for other programs, where private sector financing is part of the PPP package • Various Models of PPP exist • Service contracts, Operations & Maintenance Contracts, etc • Concessions – transfers the rights to develop and operate defined assets, within a defined area, over a defined term • Other PPP models include PFI, BOT, BOOT, DBFO, DBF, etc • They should not be confused with “privatization”, which involves a transfer of ownership of the assets (eg, through the sale of shares) • PPPs are common in asset intensive and/or Utility type industries, eg, Roads, Water, Power, Airports

7. Political Risks eg, political instability, lack of continuity Legal Risks eg, lack of respect for contract, ineffective judiciary, absence of key legislation, litigation culture Economic Risks eg, unstable FX rates, high inflation Technical & Operating Risks eg, unfamiliar environment, lack of experience & skills, technology failure Financial Risks eg, loan tenors too short, loan rates too high, onerous loan conditions, lack of insurance cover Revenue Risks eg, rigid price controls, uncertainty over volumes Balancing Project Risks & Returns is Key Project returns must be commensurate with the risks involved otherwise knowledgeable investors will be unwilling to participate in the project Regulatory Risks eg, lack of transparency, weak institutions, rigidity/overzealousness, highly politicized Note: Risks shown are not an exhaustive list

8. POLITICAL/REGULATORY DRIVERS eg, provision of essential infrastructure, standards, government policy CONCESSIONAIRE COMMERCIAL / INVESTMENT DRIVERS eg, return on investment, risk management CUSTOMER DRIVERS eg, affordability, value for money, quality and consistency of service Effective Regulation Requires Balance • Regulation typically covers economic (eg, price-setting, ROI), and technical/operational matters (eg, performance standards, investment programmes) • The drivers, however, do not always pull in the same direction, at the same time, in the same way, and with the same amount of force • Regulation should be transparent, fair, balanced and apolitical • Interests of the key stakeholders should be balanced over the long-term

9. Understanding Project Risk is Critical • Risk is an indication/measure of uncertainty and unpredictability • Identifying, managing and/or eliminating risk is critical in any project – this is a skilled exercise, supported by thorough due diligence • A fundamental element of structuring and executing infrastructure projects is the allocation of risk to the parties best able to deal with them – normally done through contract • Various instruments, eg, insurance, interest rate/currency hedges, etc, can be purchased to help lay-off risk to 3rd parties willing to underwrite them TYPICAL BOT PROJECT

10. Revenues from Operations Equity Investors Concessionaire Investors & other Providers of Capital Risk Management & Protection Lenders Insurance Project support, eg, Bonds & Guarantees Conceptual Project Financing Structure • Key consideration is how risk is distributed across the financing structure (“recourse”) • Financing agreements will document the roles and relationships across the structure

11. Contractual Framework: Lekki Toll Road Concession Sponsors

12. Committed Sponsors Experienced Concession & Project Manager Turnkey D&C Contractor + Maintenance Govt. Support & Commitment + Enabling Legislation (2004 Lagos Roads Law) Legal & Regulatory Expertise Technical and Engineering Financial Structure * Feasibility * EIA/SIA Studies * Tolling Strategy * Surveys * Design * Debt/Equity Mix * Tenor * Currency Financial Advisors & Arrangers (robust financial model) Project Credibility & Bankability In developed economy environments, well researched and structured projects, backed by credible, experienced players, are usually easier to finance

13. Key Project Financing Considerations • Efficient project financing utilizes a mix of financing sources to achieve the optimum balance between equity investors, lenders and other providers of capital – Share Capital, Loans, Mezzanine Finance, Grants, etc • Long loan tenors (15 years or more ideally) are key to the financing of major infrastructure • The cost of long term financing must be reasonable and commensurate with the risk of the relevant project – providers of finance need to understand how to properly price risk so as not to overburden the project • Concessionary financing from governments, multi-lateral agencies, and other similar institutions can help to significantly bring down the cost of financing and improve project economics and bankability • There should be adequate security for both lenders and investors, however, this does not mean “asking for everything plus the kitchen sink” • Where the market exists, and it is cost effective to do so, it is advisable to hedge against some risks, eg, currency fluctuation (where foreign currency financing is used) and interest rates (where they are floating) • Flexibility to repay loans early at zero or minimal exit cost, will facilitate refinancing later on (eg, through a bond issue) when the project risk profile has diminished and returns are stable • Take out appropriate insurance cover if you can get it – “a stitch in time saves nine”

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