Infrastructure and project finance


Financier Worldwide Magazine

March 2013 Issue

March 2013 Issue

As increasing economic and population growth drive global infrastructure requirements, investors and developers face a range of challenges. Among these are price and cost volatility, currency concerns, and the uncertainty brought by political upheaval and natural disasters. Meanwhile, due in part to the impact of regulation such as Basel III, the traditional project finance market is constrained, with alternative sources of investment being sought. With an estimated $70 trillion worth of infrastructure investments required globally over the next two decades, investment from hedge funds and pension funds, along with PPPs, are becoming ever more attractive.

Haley: What developments have you seen in the infrastructure sector in the past 12-18 months? How has continued economic uncertainty influenced business strategies and investment decisions in the sector?

Cattaneo: Volatility, uncertainty, complexity, and ambiguity (VUCA) is part of the ‘new normal’ in terms of developing business strategies and making all types of investments decisions, but particularly in infrastructure and large-scale capital projects. Over the past 12-18 months we’ve seen investors and developers try to grapple with price and cost volatility, concerns over the euro, uncertainty over natural disasters, and a range of other risks. What’s become pretty clear is that, in our opinion, successful businesses should embrace decision-making under conditions of VUCA and develop the perspectives, tools and techniques that come with that. This means using risk and uncertainty management as a way of making better decisions – improving valuations, proactively uncovering tough problems and putting innovative strategies in place to manage these. I think we’re seeing a number of our clients doing this and that is helping them not only make better decisions, but to enter this environment with confidence. At the same time, many are struggling with outdated risk management approaches. Some might even think that this high level uncertainty will pass – this is likely a minority but it’s a dangerous place to be. However, most who are struggling are trying to grapple with how to deal with ongoing uncertainty, not why.

Sharma: India’s infrastructure sector has seen sluggish growth in the past 12-18 months. Due to continued economic uncertainty, the infrastructure sector has had to address financing and structural issues. The government has shown reluctance in awarding new projects or implementing policy initiatives for existing projects. It has also not been proactive in implementing the policies that would encourage or support infrastructure development. Infrastructure projects continue to suffer from issues relating to land allotment by the government, environmental clearances and inadequate financing options leading to project delays and cost overruns. Some strategic investors in this sector have explored opportunities to cash-in during the poor market conditions leading to cheaper valuations, thereby adding more stress on financing options.

Reidy: The public-private partnership (PPP) market in South East Asia has picked up pace, particularly compared to the dry period following the Lehman collapse in 2008. Many of the projects that were put on hold or cancelled during the credit crunch period are being reactivated and activity has been picking up. The closing of the Sports Hub PPP in Singapore at the back end of 2010 was a key PPP milestone regionally. More recently, the huge Ichthys LNG Project, which financially closed in December 2012 on the back of significant ECA financing support, represents another key milestone. The Central Java Power Project (CJPP) in Indonesia has also achieved commercial close, with international and some local banks now looking to participate in the financing. The CJPP is a good market sign as it was procured under the recently amended PPP regulations in Indonesia and is also supported in part by a guarantee from the Indonesian Infrastructure Guarantee Fund (IIGF).

Burbury: Infrastructure transactions in the GCC have picked up, although not in all sectors. Those sectors where the government is able to fund projects directly – as opposed to project finance – have generally had better success. We are seeing some project financed opportunities that would have easily closed pre-2008, but which cannot get off the ground now due to lending restrictions. The key exceptions are the major IWPPs and IPPs, some social infrastructure deals and district energy deals, which have all enjoyed a strong 2012. 2013 has started off on a positive note with the award of the Louvre Abu Dhabi project to Arabtec on 8 January 2013 for $650m and the announcement from Sadara Chemical Co. that it intends to achieve financial close for its $20bn joint venture with Dow Chemical Company in 2013. It is hoped that these and other recent positive announcements from governments in the GCC will provide the stimulus needed to set off a new wave of infrastructure projects in the region.

Haley: Which infrastructure sectors seem to be attracting the majority of investor capital? What notable projects have been launched in recent months?

Sharma: Although the road and power sectors have been major attractions for investment, since projects in these sectors are facing delays in land allotment, cost overruns, and assured fuel supply, as well as the reluctance of lenders to provide financing, the focus seems to have been shifted to telecom, logistics and renewable energy. The government has shown a keen interest in giving additional support to these sectors and framed a range of policy initiatives. Although the implementation of these policy initiatives remains mired in bureaucracy, these sectors are likely to attract substantial investment in the near future. The Department of Telecommunications completed auctions of the 2G spectrum. The government earned revenues of INR 94.07bn as a result of these auctions. In the renewable space, the Ministry of New and Renewable Energy released a draft policy for solar energy capacity building – the Jawaharlal Nehru National Solar Mission Phase II Policy. The draft policy attempts to address the key issue of raising affordable finance by seeking central government assistance in a viability gap funding scheme.

Reidy: In Asia, economic infrastructure PPPs remain the norm – encompassing the energy and power, and utilities sectors, as well as roads, air and sea ports. Availability-style PPP projects like those seen in the UK, Europe and Australia are not common in Asia. An interesting development regionally has been governments looking to update their domestic PPP regulatory regimes to help promote PPPs generally, and to promote private sector involvement in infrastructure. Over the last couple of years, new PPP laws have been enacted in countries such as Indonesia, Vietnam, Mongolia and Thailand. The Philippines has also made changes to its BOT Law to streamline certain aspects of PPPs. The IIGF in Indonesia is now actively looking to guarantee various sovereign and sub-sovereign PPPs being procured. One notable project launched recently is the Sumsel 9 and 10 mine-mouth power project in Sumatra, Indonesia. It represents another multi-billion dollar power project and is currently in pre-qualification stage, attracting strong international and local interest. 

Burbury: Based on our experience, the popular deals fall into two categories: brand projects and essential services projects. Brand projects are those where the government’s brand drives the commitment to delivering infrastructure. Examples include high profile tourism deals – such as the Louvre Abu Dhabi – and investment is coming from government. Essential services projects are being seen across the energy and utilities, social infrastructure, aviation and petrochemical sectors. There have also been one off major projects such as the UAE’s proposed LNG project in Fujairah. In the GCC, Saudi Arabia is set to remain the region’s largest projects market, however Qatar, with the 2022 World Cup beginning to loom, is likely to accelerate the pace of awards in order to meet its commitments. The Lusail City real estate project, along with the stadium, rail and metro links and accompanying services, are likely to provide a steady stream of work in the country for years to come.

Cattaneo: Activity varies across geographies. In the UK, rail transport has been a focus with Network Rail recently announcing a £37.5bn expansion plan. However, there are significant infrastructure needs in all sectors. In Australia, there is a strong push for onshore and offshore natural gas and LNG. When we look at the macro picture, particularly in energy, we can see huge growing demand. The International Energy Agency (IEA) forecasts that $38 trillion will be invested in energy projects by 2013. Much of this demand will come from emerging market economies – that is, non-OECD countries. This brings with it an entirely new set of risks for many investors – particularly when one thinks about infrastructure projects in new jurisdictions, geographies, and in many cases, projects that are being developed with new technologies. One of the main implications here is that investors should ensure that risks are adequately captured in their valuations. 

Haley: How would you describe the market for project finance, in terms of pricing, terms, availability of credit, and so on?

Reidy: The availability of credit, pricing and tenors will always depend on a number of key factors, including the nature of the project, the sector, the country or jurisdiction, the sponsors, and government support. The Ichthys LNG Project has recently achieved over $20bn in relatively long term – 10-15 years – non-recourse debt. ECA financing support represented over half the total debt raised by the sponsors. Generally, in Asia, for the right project with the right level of support – from both sponsors, and governments or procuring authorities – project financing with a 10-year or above tenor may be available, but this always depends on the sort of factors noted. There has been a lot of investigation from both the public and private sector in relation to project bonds to support projects being procured. This remains a ‘wait and see’ development across the region.

Burbury: The market for project finance has certainly improved during the last 12-18 months, but only in small cap deals. The low historic default rates and the premium offered in the GCC region compared to equivalent projects in developed markets play favourably in attracting FDI, especially given the low yields currently on offer in other parts of the world. There was a significant gap in the project finance market in the GCC back in 2009 and 2010, with a number of banks withdrawing from the market entirely, significantly the European banks. This led to a lack of competition in the local market which in turn caused the cost of debt to rise. Over the last 12 to 18 months, regional banks have been noticeably taking a more active role in plugging the funding gap left by the departed international banks, however the number of project financed deals completed in 2012 was relatively low, estimated at $8.6bn compared to $23bn in 2011. There are a number of transactions due to close in 2013 and 2014 which should bring some impetus back to the market such as the Sadara Chemical Project in Saudi Arabia and Phase two of the Emirates Aluminium project.

Cattaneo: The traditional project finance market remains constrained in spite of low borrowing costs. This is partly a function of the increased levels of uncertainty I’ve described as well as the impacts of regulations that constrain capital – for example Basel III. One of the interesting aspects in the UK recently, and indeed globally, is the increased role and interest among pension funds and hedge funds in infrastructure and capital projects. This spans the likes of Canadian pension funds to Chinese, French and Brazilian investors and developers in transport and energy. We have also seen hedge funds increasingly replace banks as traditional financiers of infrastructure projects. I think we will continue to see more infrastructure financing coming from capital markets rather than banks. This can create its own risks – for instance, S&P has recently warned about the potential for a bubble in infrastructure finance given the more illiquid nature of shadow finance.

Sharma: The macroeconomic situation has affected financing in the infrastructure sector and there has been an overall slowdown along with high levels of inflation. To curb price rises, the Reserve Bank of India (RBI) has adopted a tight monetary policy which has pushed up the domestic cost of borrowing. The infrastructure sector in India has primarily relied on domestic bank borrowing. Government backed institutions such as Power Finance Corporation and Rural Electrification Corporation continue to provide or arrange financing to large scale power projects. The infrastructure sector – with a longer gestation period – has struggled to find reasonable sources of financing. Private equity or fund investment has not been forthcoming since these players insist on assured returns and assured exits. Another important source of long term funds in the infrastructure sector has been external commercial borrowings (ECB) from overseas lenders and financial institutions. The RBI has allowed infrastructure companies to gain from ECBs with reduced withholding interest rates on borrowings permitted facilitative transactions such as bridge financing and take out financing. In the past, the bulk of cross-border financing was provided by European banks. However, now, due to continued regulation and cost cutting pressures, there is hardly any appetite left for investing in developing markets like India. Accessing capital markets overseas such as on the AIM market has been explored as an option by some companies, though more as an exception.

Haley: To what extent are governments introducing policies and incentives to attract private investment for infrastructure development?

Burbury: There is an increasing trend towards implementing a legislative framework for PPPs in a number of GCC countries. Kuwait introduced its own PPP law in 2008 to cover multiple sectors. Qatar has just announced plans to introduce a PPP law in 2013 to complement the project development plans for Qatar’s Vision 2030. Dubai passed a ‘PPP law’ in 2011, but Abu Dhabi has not yet enacted a specific PPP law. The UAE government has, however, a strong track record of involving the private sector in infrastructure development. Examples go back to the first oil and gas concessions through to the UAE’s successful IWPP and IPP program. In recent times, the UAE has entered into bilateral government arrangements to further promote private investment in infrastructure. More recently, we have seen an increase in ‘PFI style’ deals in the UAE. These have taken the form of ‘private concessions’ that are modelled on private finance initiatives (PFI) contractual schemes, between state-owned entities and the private sector. These types of infrastructure deals, many of which have been or are being project financed, have been successful in the utilities and social infrastructure sectors, and look set to continue based on our pipeline of work.

Sharma: Generally, the functioning of government has become increasingly prone to delays and has displayed a lack of decision making when granting approvals for projects, owing to a fear of investigation. The ECB regulations have been amended to facilitate borrowing in the infrastructure sector. The withholding interest payments on ECBs have been reduced from 20 percent to 5 percent for infrastructure sector companies. The limit for raising ECBs under the automatic route has been raised from $500m to $750m. Qualified foreign investors (QFIs) have been allowed to invest a total of $10bn in mutual fund equity schemes and $3bn in mutual fund debt schemes that invest in the infrastructure sector, subject to a ceiling of $25bn. Also, QFIs have been permitted to invest in mutual fund schemes holding at least 25 percent of assets – either debt or equity or a mix of both – in the infrastructure sector.

Reidy: A key development over the last few years has been governments looking to implement formal PPP regulatory and procurement laws at national and sub-sovereign level. Investors commonly identify the regulatory regime to be one of the key elements for assessing whether or not to invest in a jurisdiction and development of regulatory regimes represents an important step for regional countries in attracting private sector investment. The goal now needs to be actually procuring projects utilising these regimes, and that is already happening in places like Indonesia and the Philippines.

Haley: Have you seen an increased appetite for public-private partnerships (PPPs) and private finance initiatives (PFI) in the current market?

Cattaneo: We think that we can expect an increase. The OECD estimates that governments across the globe need to make US$50-70 trillion worth of infrastructure investments over the next two decades. This is at least $2.5bn in government spending each year. When you consider fiscally constrained governments in Western Europe and other OECD countries, then PPPs start to enter the conversation quickly. However, we think this will vary across geographies. The PPP market is more mature in the UK than even in other Western European jurisdictions. In France, for instance, PPP legislation was only introduced in 2004.

Sharma: There does not seem to be an increased appetite for PPPs or PFI in the current market. Despite certain positive initiatives by the government, the overall macroeconomic situation has resulted in the near-stagnation of interest displayed in PPPs and private finance initiatives. High inflation and increased financing costs are leading to circumstances where private developers are seeking an exit from projects where they had made aggressive bids. The government has shown a distinct interest in not funding their equity in cash and requires the private party to finance its future capital contributions. Many private players with excess cash reserves and no experience were drawn to this space but could not sustain continuity owing to poor management.

Reidy: There is quite clearly substantial infrastructure investment required across Asia. Governments will not be able to meet anywhere near their infrastructure requirements unless they look to attract and involve private sector capital. Governments can look to improve regulatory regimes, to create a good pipeline of projects going forward, and to aid the development of capital financing markets in order to promote PPPs. Private sector appetite is definitely apparent in Asia for feasible and well procured projects.

Burbury:  We have seen an increase, particularly in the utilities, education and aviation sectors. Examples include the Madinah airport PPP project in KSA; the Jabal Omar District Cooling PPP project in KSA; the UAE’s Abu Dhabi airports and Saadiyat Island and Capital Centre district energy projects; Qatar’s Lusail City projects; and in Kuwait’s hospital PPPs. A recent study has found that GCC countries plan to invest up to US$2 trillion in PPPs and infrastructure over the next 10 years. For example, over US$140bn has been committed to infrastructure projects and smart city development in Qatar’s Vision 2030 plan across the energy, transport, education, health and tourism sectors.

Haley: Could you explain some of the common objections directed towards PPPs, such as loss of government control and the potential increase in pricing under private ownership? How are such concerns being addressed?

Sharma: Concerns about loss of government control have been raised in many sectors such as roads, ports, airports and telecom. These concerns are sometimes genuine, owing to security concerns. However, with government shareholding and participating in management – by the way of board representation of special purpose companies – the government remains in the loop. Those raising objections about the loss of control need to understand that the government’s function is not to run businesses, but to facilitate, support or regulate them. This perspective could take a long time to sink in, since the government has been involved in the business sector for the last six decades or more. Although private sector participation invariably results in an increase in pricing, owing to capital cost recovery through the revenue model, the tax-paying public gets better maintained facilities. The government has initiated steps to control unregulated price increases by appointing regulators in some sectors. The functioning of the regulators is still at a nascent stage and more mature ways of addressing these issues will evolve as they gain more experience.

Reidy: A key objection is that PPP contracts tend to be more complicated than conventional procurement contracts. This primarily arises due to the need for the private sector to expend considerable resources evaluating a project prior to bid submission. In addition, there are typically significant legal costs in contract negotiation due to the complex nature of PPP project documents. Such concerns are being addressed by governments streamlining the PPP procurement process as outlined above. As mentioned, loss of management control by the public sector – or at least a perceived loss of control – is a key public policy concern. We have seen this addressed by government’s imposing strict performance standards on the private sector. This helps to ensure that the key stakeholders continue to receive the desired benefit. Another common objection is that the private sector’s weighted cost of finance – debt and equity – is higher than the public sector’s cost of debt. Objectors suggest this adds to the overall cost of a PPP, regardless of the improved risk profile for the public sector.

Burbury: There are many true government-to-private sector PPPs. The last major one was a toll road, which failed. I think the common objections directed at PPPs in the GCC revolve around the lack of transparent rules and regulations and the perceived lack of government will to adopt the principle. I don't think this perception reflects reality. Governments not used to PPPs yet are introducing legislative frameworks to regulate the implementation of PPPs in various jurisdictions. Despite the success of some PPP projects in the region, the cancellation of some high profile PPP deals such as the Landbridge rail project in Saudi Arabia and the Abu Dhabi-Mafraq highway PPP has deterred some private sector investors from becoming more active in the region. Further government support is required to convince private entities that the PPP projects are worth investing in. 

Cattaneo: PPPs are controversial quite simply because of the inherent tension between the investors’ need to make a profit and the public sector objective – not to mention public opinion and perception – of the provision of a public good. We think that PPPs are likely to remain complex and controversial, particularly in key sectors such as healthcare. These can be partially addressed through greater collaboration and disclosure. We have also seen the UK aim to overhaul its PPP program in a way that offers the government a greater stake in projects. However, because of the very nature of PPPs, we think that the lead times on many of these projects will continue to remain long and risk levels sometimes quite high.

Haley: Broadly speaking, what steps should private sector investors take when structuring and executing deals in the infrastructure sector, to optimise their future returns? 

Reidy: PPPs in Asia remain different from equivalent projects being procured in more mature PPP jurisdictions. Returns can of course be higher in Asia but the overall risks are also usually greater – most projects will pass demand-related risk either in full or at least in part to private sector proponents. International investors in particular will struggle if they involve themselves on the basis that their involvement must always have the same sort of risk profile and credit terms as those they may have for their projects elsewhere in the world, particularly in the more mature global PPP markets. Many Asia-based investors have been able to successfully utilise multilateral type support which can sometimes alleviate some elements of political risk and improve overall chances of success.

Burbury: Broadly speaking, private sector investors must ensure that they engage suitable transaction advisers at an early stage. Qualified commercial, technical and legal advisers with sector specific GCC experience can assist with structuring and documenting the deal and preparing financial models based on realistic assumptions which take into account all potential risks. Key risks to consider are political risks, ownership risks, exit strategies, contractual ability to recover costs – for example Increased Costs regimes – and a correct pass through of most development risks to the EPC contractor. This is just a high level summary, but these will ensure that future equity returns are optimised.

Cattaneo: One of the most important things that investors can do is to truly understand the risk exposure that a project faces. This is about much more than simply adjusting the discount rates that are used in making valuation decisions. Most investors and sponsors can do a lot more to understand the full suite of risks that a particular project faces – that is, strategic, operational, market and reputational risk – and incorporate this understanding in valuation decisions. This can help to determine whether a particular opportunity is over or under-valued and whether the way in which the deal is structured can reduce exposure. For example, investors might be able to put some well-designed covenants – that is, tailored rather ‘box-ticking’ agreements – around the management of operational or reputational risk, or may consider how the consortium structure might reduce political risk. In addition to this, some investors are increasingly looking at a project’s risk profile over time, rather than only at the pre-final investment decision stage. This is, in our opinion, best practice and it can similarly lead to valuable insights. A detailed understanding of project risk can allow investors to be more innovative across individual projects and portfolios and optimise potential returns.

Sharma: Private sector investors need to be more diligent in feasibility studies and analysis. The focus areas they should concentrate on are: risk assessment; the assessment of project internal rates of return in comparable projects; the benchmarking of particular infrastructure sectors based on government policy stance, execution issues and risks; and the assessment of funding required and availability of funds – both debt and equity. Investors should also consider case studies of commercially successful projects; land acquisition issues and the availability of land; the availability of critical inputs such as fuel, water; issues relating to environmental clearances; and the assured revenues model. 

Haley: What are some of the key practical challenges associated with infrastructure investment in general, such as dealing with legal, regulatory, tax and political risk?

Burbury: One of the key challenges associated with infrastructure investment in the GCC is the lack of a comprehensive legal and regulatory framework within which investors, contractors and lenders alike are able to operate and execute projects with certainty and comfort. For example, there is no PPP law in the UAE and no industry specific laws for district energy. The exceptions are IPPs and IWPPs, which have a well documented investment structure. 

Cattaneo: The challenges are many and they are increasing. We can probably think about external and internal challenges. Externally, regulatory issues can be complex and lead to project delays because of, for instance, increased permitting times. Investors should also look to minimise their exposures to regulatory risk by, for instance, optimising their legal structures or realigning their JV partnership models. There is financial risk, of course, and risks associated with the project’s technology. However, areas that investors and sponsors generally grapple with the most are around political and reputational risk, particularly because they are difficult to quantify and as a consequence, are too readily dismissed. We believe investors can and should be trying to quantify these types of risks. Internally, it’s important for investors and sponsors to examine how a project’s governance and organisation can exacerbate risks. For instance, what are the incentives project managers have to move the project through its stage gates – could this exacerbate or reduce risk?

Sharma: Although there has been active regulatory support from the government, encouraging private sector investment, the age-old problem of land acquisition and obtaining of regulatory and environmental permits in a timely manner is still the biggest impediment that project developers face while developing a project. While in the past project developers were able to acquire land for projects at sub-market rates with active state support, such acquisitions are usually questioned in the present political environment. Under the proposed land acquisition bill – in its present form – project developers will be required to buy approximately 70 percent of the land at market rate, which would substantially increase project costs. Foreign investors in India are further discouraged by corruption, red tape and bureaucracy in the government.

Reidy: The often mentioned ‘risks ought to lie with the party best able to manage them’ maxim still ought to apply to PPPs in Asia, however there remains a common misconception, at least from a public sector point of view, that PPP means all risks must be passed to the private sector. Regional projects have failed as there have been unrealistic expectations at government level which can lead to un-bankable risk allocation frameworks for particular projects being proposed. A ‘stop start’ approach to infrastructure usually scares investors away from applicable countries, especially in Asia where there remain alternative opportunities for investors. Rather than looking at considerations for allocating risks at specific project level, at country and regional level in Asia it would be preferable to: promote adequate legal frameworks and regulatory regimes; promote proper feasibility and financial analysis on projects before going to the market; and develop resources and capacity within centralised government PPP units.

Haley: Are investors doing enough to implement robust risk management strategies to protect their investments? What insurance solutions are available to offset risk?

Cattaneo: While many investors are not doing enough on risk management, there are investors and operators who are clearly using risk management as a source of competitive advantage. So, these groups are doing all of the things that I’ve mentioned – using risk to value a project more accurately, using their understanding of risk to shape the deal, and so on. They are also looking at a project’s ‘cash flow at risk’ in dynamic terms – that is, looking at the probable future paths of cash flows rather than simply a static risk snapshot taken at one point in time. Again, this is also about not only considering risk just at the investment decision, by throughout the life of a project. One of the things that this group of companies also recognises is that insurance is a ‘safety net’, not a ‘complete solution’ to the exposure to a particular risk. It provides compensation in the event of a loss, but it tends not to be complete. What this group is able to do that others aren’t is to use insurance as an additional layer of protection – when the price is right to do so – and to be far more discerning about insurance products on the market. For instance, they tend to be acutely aware of what a political risk insurance policy may or may not bring to the table on a particular opportunity.

Sharma: Investors are increasingly implementing risk management strategies to protect their investments by evaluating the interdependency of risk events and the actions of project participants, depending upon the type of the projects and the stage of the infrastructure project. Economic slowdown, coupled with limited exit options, has ensured that investors are more proactive than ever in implementing risk management strategies. Infrastructure projects are generally placed in the engineering projects category by insurers and private developers are now inclined to take political risk insurance cover. In the Indian market, available insurance products include machinery breakdown insurance; contractor plans and machinery policies; electronic equipment insurance policies; fire insurance; and industrial all-risks policies, among others.

Reidy: A key feature of PPPs is the transfer of risk from the public to the private sector. The private sector expends considerable resources to properly assess and evaluate the risk profile of a project. This places the private sector in a strong position to implement robust risk mitigation and management strategies to address the risks identified. The insurance sector has developed a variety of products suitable for each stage of a PPP project. Effective insurance coverage will depend on the risk allocation for the relevant PPP. The customary insurance package for PPPs includes coverage of construction risks, material damage claims, and civil liability before third-parties.

Haley: How important is due diligence in managing risks and regulatory challenges when executing infrastructure deals? Do you believe businesses and investors fully appreciate the importance of this process?

Sharma: Due diligence forms the foundation of building a durable business plan. However, there have been many instances where companies have rushed in to sign the contracts without proper feasibility or due diligence studies.

Reidy: Due diligence is a necessary step in an investor’s bid process because it provides the only real way for a potential investor to evaluate and measure the risk profile of the project. In order for a potential investor to price a project and submit a tender bid, the investor must have an appreciation for the risk profile of the project. This can only be achieved through satisfactory due diligence. This is particularly relevant in the Asian region, where varying regulatory and jurisdictional issues may arise, and where there is often less historical PPP precedent existing when compared to the more mature PPP markets. We consider that the private sector generally has an appreciation for the importance of undertaking necessary due diligence. In some respects, it is the public sector that needs to improve in this area. An issue we have seen in some projects is the government taking a blanket position that risks should be, where possible, passed to the private sector without consideration of the party best able to manage the risk. This results in a sub-optimal risk allocation and a higher project price.

Burbury: Due diligence is essential. We have been working with a transaction adviser on three separate infrastructure deals in the UAE, all modelled on PFI schemes. In each case there has been rigorous due diligence on all aspects of each deal. This means appointment of technical, insurance, legal and financial advisers. Many of these projects are ‘first of kind’ and have required additional due diligence with government authorities to vet proposed schemes and legal opinions on transaction structures. Infrastructure deals can take more than 12 months to complete, so it is critical to have experienced advisers engaged as early as possible.

Cattaneo: Due diligence is of course very important in this sector. This importance increases not only with the size and complexity of any project, but also when considering the jurisdiction in which it will take place, for instance, a jurisdiction that is characterised as more opaque, as is the case with some emerging markets; the partners, for example, the level of experience the consortium partners have with each other; and the type of project, particularly if it involves new technology or untested modes of financing. Again, it is difficult to generalise but we see those investors and sponsors who get this consistently ‘right’ use due diligence to go beyond simply examining the financial accounts and legal documents. They look at JV partner reputation, sponsor track record, political and regulatory risk, and understand the technologies involved in the project. They also do not limit themselves to pre-investment decision due diligence but use due diligence to examine the project’s risk profile over time. They are able to convert information received on this issue into knowledge and insights – which then informs good decision-making.

Haley: What key trends do you expect to see in infrastructure and project finance through 2013 and beyond?

Reidy: The PPP market in Asia is certainly becoming more active. Multilateral organisations such as the ADB have published many studies on the need for infrastructure investment in Asia over the next decade and it is clear that governments will not be able to meet their infrastructure requirements without attracting far greater levels of private sector investment. Economic infrastructure PPP projects will continue to be the norm across Asia. Countries are attempting to bolster their PPP regulatory frameworks and pipeline of projects in order to better attract foreign investment, and countries regionally will continue to examine the possibility of government-backed guarantee funds for PPPs. Investors regionally ought to be cognisant of the fact that the risk profile for their projects will not be the same as equivalent projects in some more developed markets, but there are still potential rewards for private sector participants in the case of well-structured and viable PPP projects.

Burbury: Based on our pipeline of work in 2013, I would say that essential services projects will continue in the UAE, as will work on industrials and petrochems, ports and transport-related projects.

Cattaneo: We will likely continue to see a market marked by volatility and uncertainty. Traditional project financing is likely to remain constrained. I think we will also see many investors and sponsors continue to grapple with all types of project risks. There will be more ‘war stories’ of some projects sputtering because of delays, cost overruns or the manifestation of risk. However, I think we will continue to see a group of investors and project sponsors who will differentiate themselves in large part because of the way in which they approach risk management. This group will expand their use of risk management for competitive advantage.

Sharma: A number of policy initiatives taken by the government of India in 2012, particularly in the last quarter, did bring about a sense of optimism with respect to the infrastructure sector. Such policy initiatives included a directive to the government-owned Coal India Ltd to sign fuel supply agreements; the restructuring of distribution utilities; the constitution of the Cabinet Committee on investments; the rationalisation of ECB regulations; as well as progress on the Land Acquisition Bill. However, expectations of an immediate revival of the infrastructure sector are somewhat misplaced as addressing of the fundamental challenges in the sector is likely to be a long drawn affair. Construction delays, equity shortage and revenue generation are expected to continue to be major challenges. Key steps which may be undertaken in 2013 could be bond market issuances from strong projects, a fall in interest rates and the launch of infrastructure debt funds.

Geoffrey Haley is the founder and chairman of the International Project Finance Association (IPFA), the largest international independent non-profit trade association for the Project Finance industry. Mr Haley lectures extensively on PPPs and has had many articles published. He also advises governments, municipalities and private sector consortia on the introduction and implementation of PPPs, and conducts training courses for governments and the private sector.

Ben Cattaneo works within the Cross-Industry and Resources team in Accenture’s Risk Management consulting practice. Based in London, Mr Cattaneo possesses over 12 years of experience helping clients manage the risks associated with complex infrastructure, energy and natural resources projects. He combines deep risk management, strategy and change management expertise to help companies and investors involved in such projects become and remain high-performing businesses.

Munish Sharma is a partner at Dua Associates. His legal practice focuses on mergers and acquisitions, private equity, inbound and outbound investments, public-private partnership concessions, infrastructure projects, project finance, capital markets, corporate finance, cross-border transactions, joint ventures, business restructuring and corporate and commercial transactions. Mr Sharma has been involved in infrastructure projects in energy, oil, gas, power, airports and roads and in other sectors such as insurance, telecommunications, consumer goods, public relations, advertising, business process outsourcing.

Julien Reidy is of counsel in Hogan Lovells’ Singapore office and is part of the infrastructure and project finance practice. He has over a decade of experience advising both public sector procuring bodies and private sector sponsors and lenders on infrastructure, PPP, utility and energy projects in South East Asia, the Middle East and Europe. He is a member of the Asia branch of the International Project Finance Association and a regular presenter at PPP and infrastructure conferences throughout South East Asia.

Tim Burbury is a partner in King & Spalding’s Global Transactions Practice Group based in Abu Dhabi. He is a project development lawyer with particular skills in construction, operation & maintenance and financing of major energy, PPP and infrastructure projects. Mr Burbury advises government entities, master developers, energy and utility majors, sponsors, equity investors and infrastructure funds on their energy, utilities, transport, social infrastructure and real estate development projects, BOT/BOO concessions, PPPs and project financings.

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Geoffrey Haley



Ben Cattaneo



Munish Sharma

Dua Associates


Julien Reidy

Hogan Lovells


Tim Burbury

King & Spalding

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