Presentation Public Private Partnerships PPPs Tladi Josias Ramushu Vice President Loita Capital Partners Internatio

1. Presentation Public Private Partnerships (PPPs) Tladi Josias Ramushu Vice President Loita Capital Partners International & Executive Director Loita SA

2. Presentation Outline Introduction PPPs � Concept and Rationale Key Financial Issues in PPPs Financial Structures in PPPs

3. About the Loita Group Pan-Africa Investment Banking and Information Technology Group Majority management owned and controlled Strategic investment from the Southern African Development Fund in 1999 SAEDF is a US based multi million dollar fund

4. About the Loita Group 300 employees in Africa Focus on US-style investment banking products: Structured finance (trade, project and asset backed) Corporate finance (debt and equity advisory) Capital markets (bond issues) Correspondent banking/asset management IT and IT Financial infrastructure solutions for Banks (card and switching systems) Strategic Consultancy Key components of Loita�s trade and project finance activities include provision of advisory services to regional and domestic banks including PTA bank

5. Strategic relationship forged with Barclays Bank Offshore (Mauritius), East African Development Bank (EADB) and Development Bank of Southern Africa; joint venture alliances (Lloyds TSB), Finance Bank Zambia, Versus Bank Cote d�Ivoire and Animal Resources Bank (Sudan) Leading provider of trade and project finance services Loita Investment Bank a 100% owned subsidiary in Malawi ICC Zambia � largest asset backed financing company in Zambia ICC South Africa � JSE listed Regional offices in Kenya, Mauritius and South Africa Finance Bank Zambia About the Loita Group (Cont�d)

6. Presentation Outline Introduction PPPs � Concept and Rationale Key Financial Issues in PPPs Financial Structures in PPPs

7. PPPs � Concept and Rationale Public Private Partnerships (PPP) essentially transfer of management of Public assets to Private Sector to enhance and expand service delivery mechanisms through their financing, operating and maintaining public infrastructure and services as part of Government economic reform programme/ strategy Old model to economic reform was Privatization involving sale of State assets However, this fell out of favour as perceived to be: �selling family silver ware�; and �new wine in old bottles�. Simply put, PPPs are partnership between Government and appropriately qualified private sector entities PPPs considered more palatable approach to economic reform as they: Reduce burden of State coffers and allow for redeployment to social programmes Stimulate new/ expansion of infrastructure rather than sale of what is already existing Can pass on efficiency gains to consumers through introduction of new technology Promotes regulation to yield benefits for consumers

8. PPPs � Concept and Rationale (cont�d) Different forms of PPPs Service contracts - Simplest form & involves performing services at fixed fee Management contracts � Simple service for fee & incentive fee for efficiency gains Asset Leases � Hire out of State assets with operational risk and returns transfer Joint ventures/Partnerships � Agreed contributions to venture and share of returns Concessions � Take different forms such as; Build operate transfer (BOT) Rehabilitate operate transfer (ROT) Concessions represent highest level of risk to include design, construct, finance and market in regulated environment Main difference between varying types of Concessions is level of exposure to market risk

9. PPPs � Concept and Rationale (cont�d) There are 3 critical elements:- Contractual agreement Substantial risk transfer to the private sector Outcome based financial reward

10. PPPs � Concept and Rationale (cont�d) Benefits Acceleration of infrastructure provision via private sector Faster implementation as Government does not have to wait until it can address the matter Private sector efficiencies tend to reduce costs Better incentives to perform due to payment incentives Enhanced public sector management due to reduced loads Stimulates capital market development Constraints to growth in PPPs on continent Affordability � peoples willingness to pay Low population densities - limits market potential Undeveloped legal and business environments � doing business difficult Country risks � continent perceived as politically unstable, limiting foreign investment

11. PPPs � Concept and Rationale (cont�d) In South Africa PPPs have been used for the following:- Fleet Management Hospital machinery and equipment Eco-tourism Information systems District hospitals Water services Electricity generation Toll roads Air traffic control Prisons

12. PPPs � Concept and Rationale (cont�d) Most important rationale is that Government might not be the best provider of services in terms of cost, quality, ability to absorb commercial risk and quite often securing financing Objective is to achieve value for money (benefits should out way costs)

13. Presentation Outline Introduction PPPs � Concept and Rationale Key Financial Issues in PPPs Financial Structures in PPPs

14. Key Financial Issues in PPPs PPPs especially those of an infrastructure nature invariably require financing Normally involves funding the initial investment costs that are repaid from future revenue streams of the project Financing could be from either public or private sector Due to long term nature of PPPs, the approach utilized from the financing side would normally involve project financing techniques - In essence this is project financing Project financing: there are 3 possible approaches Debt Equity Combination of both

15. Key Financial Issues in PPPs (cont�d) Equity route primarily involves groups of investors (sponsors) who will draw on their equity Debt is normally provided by banks and specialized institutions such as Infrastructure Funds There is normally an argument against using private sector debt funding ostensibly because of cost. The counter is that in international capital markets, the project can use the credit rating of the sponsor under the PPP to access credit it would not otherwise access.

16. Key Financial Issues in PPPs (cont�d) In the context of PPPs and especially in developing market, the use of project financing approaches and structures allows the lenders to obtain:- political risk insurance (thereby reducing borrowing costs) export credit financing (where there is equipment export) As in all forms of debt and equity relationships the higher the risk, the higher the expected return On a scale of risk basis, bankers generally agree as follows:- Public finance � low Senior debt/bonds � low Subordinated debt � medium Pseudo equity (e.g. mezzanine finance) � medium to high Equity � high

17. Key Financial Issues in PPPs (cont�d) Project financing imposes a very thorough investment appraisal process because of:- sole reliance on the cash flows; Lenders and other parties will undertake their own independent due diligence exercises to get comfort (could take time), focusing on following key risk areas: Country/political risk business enabling environment Sponsor risk to stand by commitments & ability to perform Technical & operational risks to deliver agreed outputs Market risks in terms of quantifying potential revenue streams Financial risks in terms of managing interest / price risks through hedging Environmental & social risks to ensure project sustainability In summary project financing is the basis of the development of PPPs Assumptions used to forecast cash flow must be able to being independently verified; and Risk analysis can demonstrate acceptable commercial returns

18. Presentation Outline Introduction PPPs � Concept and Rationale Key Financial Issues in PPPs Financial Structures in PPPs

19. Financial Structures in PPPs Mirror the financial requirements to cash flows of a project Structures and approaches will to a large extent reflect the 3 possible funding routes:- Debt Equity Combination of Debt/Equity

20. Financial Structures in PPPs (Cont�d) Debt Route or Structure Relies on project finance principles Highly quantitative with risk analysis at its core and against a structured exit Primarily provided by the international commercial and multilateral development banks Infrastructure and other specialized debt funds increasing source of debt finance For Africa, a principal concern by debt providers relates to country and political risk given the long term nature of PPPs Structured approaches include political risk cover from institutions such as MIGA, African Export and Import Bank and export credit agencies (ECAs)

21. Financial Structures in PPPs (Cont�d) Debt Route or Structure (cont�d) Once this fundamental risk coverage structure is in place, there are many innovative approaches that can be adopted as part of the financing plan or approach based on principle of tailoring finance to project�s cash flow patterns Debt approach in project finance is particularly useful in those areas of the economy where there are no traded or limited markets such as infrastructure, utilities and government long term demands such as hospitals, schools, prisons. Imperative when going the debt route that the project sponsor has one selected investment banker or advisor, who can then co-ordinate the approach to the banks and other debt providers

22. Financial Structures in PPPs (Cont�d) Debt Route or Structure (cont�d) It is critical that any debt approach: considers a large number of alternative sources of funds (senior, junior, mezzanine) has a good grasp of the choice between domestic and external funds; long term or short term, hedging mechanisms for external sources etc; keeps pace with developments in the financial markets. the domestic financial and capital markets are also a good source of debt funding through the issue of capital market instruments the instruments issued could be structured to mirror the tenor and risk of the underlying projects; currency linked instruments could obviate the need for offshore borrowing.

23. Financial Structures in PPPs (Cont�d) Equity Route or Structure Primarily relies on a �sponsor of substance� or a combination of �sponsors of substance� Equity could come from the sponsors own cash flows or through structured underlying debt Development Finance institutions (DFIs) & increasing number of Infrastructure focused Equity Funds are a good source of equity finance

24. Financial Structures in PPPs (Cont�d) Equity Route or Structure (Cont�d) Sectorially focused equity funds could also be a good source of �come along equity� A prospectus on the project is critical, most likely prepared by the investment banker or advisor The primary objective of any equity fund structures are to maximize capital gains as often the nature of PPPs means dividends are distant (7 -10 years). This means clear exits or use of a projects cash flows are important in unlocking value. The capital markets both domestic and international could also be critical for the provision of equity finance to raise expansion capital via IPOs or as a means of exit.

25. Conclusion PPPs offer exciting alternative to Privatization They involve expansion rather than �selling family silver ware� Create stimulant for new economic activity & investment Reduce capital expenditure burden on State allowing redeployment of constrained resources into social programmes that financiers otherwise find unattractive to fund Facilitates introduction of up-to-date technologies and cost cutting measures to benefit consumers through more competitively priced services Facilitates risk sharing to those best able to manage and offset risks Encourages inflows of foreign and domestic investment as well as lead in time to deepening of capital markets