1

Risk Management of a PPP

Presented by:Audrey Mwala

Director Project Finance & Risk AnalysisThe Public Private Partnership Commission, Malawi.

9/15/2015

05/01/2023 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC, Malawi

2

Project Financing Risks• Infrastructure projects are inherently risky.• A project may be subject technical,

environmental, economic and political risks. • Risk identification and allocation is a key. • Project financing is distributed among

multiple parties, so as to distribute the project risk.

• Financiers institutions at times conclude that the risks in a project are unbankable

• Riskier projects may require limited recourse financing, a surety from sponsors

Risk Analysis• Done at various stages of the project• Each party does their own risk analysis– Sponsors look at the return on equity– Bankability of the project to attract debt

• Review risk the along the way. Change in risk allocation after award of the bid compromises the benefit from competition that one could have obtained during bidding

• Market testing

05/01/2023 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC, Malawi

4

Determinants of risk allocation

• Choice the PPP model• Project type• Prevailing economic

environment• Payment mechanism• Performance

measurement

05/01/2023 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC, Malawi

5

Risk analysis• Construction (cost, delays, quality)• Operating risks • Demand risk • Force majeure and change in law • Political and regulatory risk and expropriation and

nationalization risk • Environmental risk • Social risk • Tenor and Refinancing Risk• Currency exchange risk • Interest rate risk

05/01/2023 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC, Malawi

6

Risk Impact Assessment

05/01/2023 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC, Malawi

7

Risk Probability

05/01/2023 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC, Malawi

8

Risk Allocation Determinants

• Allocate risks to the party that is best placed to manage them. Best able to:– control chance of occurrence– Control the impact– Absorb it at lowest cost

• With maximum risk to private sector:.– Increases risk premium/ high equity return– Hard to raise debt

05/01/2023 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC, Malawi

9

Risk AllocationRisk Event Impact Private party Shared Risk Government MitigationConstruction risk high InsuranceOperational- loss of revenue Medium pay for the whole yearCommercial risks low marketing & good serviceDamage of fixtures Medium security camerarent default Low advance payment

Lack of security MediumRound the clock security , & police presence

Land encroachment by staff membersMedium Warn teachers in advanceFire Catastrophic Anti-fire formPower fai lure Severe T rainingWater availabil ity severe boreholeFinancing servere Low gearing ratioExchange rate Medium stablisation fundInterest rate Low fixed interestConcession fees default Medium Close monitoringRegulatory Risk Medium Stabillisation fundResidual Value risk severe Compulsory maint.

05/01/2023 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC, Malawi

10

Limitation of risk allocation

• Level of detail of risk allocation ( cost /benefit)• Risk that can’t be transferred (e.g. political)• Extent of risk transfer- limited to equity and not full

value of debt• Force majeure

05/01/2023 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC, Malawi

11

Mitigating project risks, Lender’s perspective (negative covenants)

• Gearing restrictions• Debts service coverage ratios– Debt Service Cover Ratio (“DSCR”) – Loan Life Cover Ratio (“LLCR”) – Project Life Cover Ratio (“PLCR”)

• Cash flow waterfall priority• Reserve accounts– Major Maintenance reserve account– Debt service reserve account

• Insurance• Mezzanine finance

05/01/2023 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC, Malawi

12

The Cash flow waterfall• Construction, operating and

maintenance expenditure• Principal &Interest senior debt• Senior debt service reserve

account • Interest subordinated debt• Principal on subordinated debt• Maintenance Reserve Account • Shareholder subordinated loans • Distributions to shareholders

05/01/2023 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC, Malawi

13

The Cash flow WaterfallEBITDA

DSCR = ----------------=>1.5Debt Service

Operating Income or EBITDA

Revenue

O & M Expenses

Debt Payment Taxes Profit

05/01/2023 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC, Malawi

14

Risk Mitigation through host Govt.

• Gap funding– Capital or operational

• Step in rights• Availability payment • Compensation for project termination or force majeure event• Government Guarantees (Direct Agreements)• Collateral e.g. over project site• Challenge- increase Govt.’s contingent liabilities & reduces

VFM

05/01/2023 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC, Malawi

15

Mitigation by Govt. - Construction & Operation phase

•Liquidated Damages – payment for construction delay e.g. $3b Airport link tunnel PPP Queensland, Brisbane, 2013 •Performance Bond – against constructions challenges e.g. Gautrain •Parent Company Guarantees – to take on some of the obligations of the sub-contractor•Environmental assessment- Equator principles•Key performance indicators •Performance based payments

05/01/2023 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC, Malawi

16

Risk Management by Government• Gap funding- reduces risk premium• Reduce cost of finance –Govt. pass on concessional loans• Risk allocation• Contract performance monitoring

– Construction– Operation – key performance indicators, penalties

• Reporting obligations• Insurance• Key personnel• Certified Auditors• Renegotiation

05/01/2023 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC, Malawi

17

Risk Management by Project Sponsors• Leveraged capital structure • Establish Special purpose vehicle• Lenders monitoring• Subordinated loans• Contractors @ risk capital• Experienced O&M firm– Key performance indicators

05/01/2023 Presented by Audrey Mwala, Director Project Finance & Risk Analysis, The PPPC, Malawi

18

•Need for risk reporting framework•Monitor risk during:• Project preparation• Procurement• Implementation • Contract end•Significant shift on risk framework can be ground for renegotiation

Risk Monitoring