Natural Resource and PPP Infrastructure Projects and Project Finance: Business Theories and Taxonomies

192 Pages·2019·1.63 MB·English

by  Takao Higuchi

Economics, Law, and Institutions in Asia Pacifi c
Takao Higuchi
Natural Resource
and PPP
Infrastructure
Projects and Project
Finance
Business Theories and Taxonomies
123
Economics, Law, and Institutions in Asia Pacific
Series Editor
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and Chief Research Officer, Research Institute of Economy, Trade and Industry
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Youngsub Chun (Professor of Economics, Seoul National University, Republic
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More information about this series at http://www.springer.com/series/13451
Takao Higuchi
Natural Resource and PPP
Infrastructure Projects
and Project Finance
Business Theories and Taxonomies
Takao Higuchi
Attorney-at-Law
Nagashima Ohno & Tsunematu
Tokyo, Japan
ISSN 2199-8620 ISSN 2199-8639 (electronic)
Economics, Law, and Institutions in Asia Pacific
ISBN 978-981-13-2214-3 ISBN 978-981-13-2215-0 (eBook)
https://doi.org/10.1007/978-981-13-2215-0
Library of Congress Control Number: 2018958316
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Preface
This book is the English version my book Fundamental Theories of Natural
Resource and Infrastructure PPP/Project Finance, which was published in Japanese
by Kinzai Institute for Financial Affairs, Inc. (Ippan Shadan Houjin Kinyu Zaisei
Jijyo Kenkyukai) in 2014. Although the English and Japanese versions of this book
generally address the same topics, they do differ in certain respects. The Japanese
version deals with certain topics that are particular only to Japan and thus are not
mentioned in this book. Furthermore, the English version contains certain topics
that reflect relevant developments that are not mentioned in the Japanese version
published in 2014.
Public–private partnership (PPP) is now a common arrangement implemented
throughout the world, but for each person involved in such projects, the definition of
PPP is different. In addition, PPP is not the sole arrangement by which private com-
panies provide public services. For certain infrastructure projects involving the pro-
vision of public service, deregulated privatization might be preferable over PPP.1 In
this book, I have categorized some types of PPP projects to which several well-
established business theories for PPP are applied. I believe that only PPP projects
that fall within such categories should be considered true PPP projects, but this is a
matter of definition. However, the reader should understand at least that if PPP is
defined more broadly, the abovementioned well-established business theories for
PPP would apply only to specific types of PPP projects and not all PPP projects.
To clearly comprehend the foregoing, we need to understand the fundamental
business theories that create the foundation for actual projects or project finance
structures. This book clarifies such fundamental business theories that underpin
those projects and project finance transactions. Particularly, it is critical for persons
in the public sector with responsibility over PPP to have a firm understanding of the
business methods and strategies used by the private sector in implementing PPP
projects.
1 See Engel E., Fischer R., and Galetovic A. The Economics of Public–Private Partnerships: A
Basic Guide. Cambridge University Press, 2014, pp 72–76.
v
vi Preface
Also, both (i) natural resource projects and infrastructure PPP projects and (ii)
project finance are covered equally, and the relationship between them is explained
in this book.
In this book, I do not provide a detailed explanation of natural resource projects.
The structure of these projects may differ depending on the type of natural resource
involved in the relevant project and also the particularities of such projects. However,
I believe that the fundamental business theories for many natural resource projects
and project finance financing for such projects are basically the same as those for
infrastructure PPP projects and project finance financing for those projects.
Finally, I wish to express my sincere gratitude to Mr. Paul M. Iguchi, my col-
league at our firm, Nagashima Ohno & Tsunematsu, as well as to Babel Transmedia
Center K.K. and Mr. Yoki Nakajima. They provided me with much advice and many
suggestions in preparing the English language version of this book.
Tokyo, Japan Takao Higuchi
June 2018
Contents
1 Introduction and Basic Understandings Regarding NRI-PPP
Projects and Project Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2 Major Steps in NRI-PPP Projects and Project Finance
and Structure of This Book . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
3 Parties Concerned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
3.1 Host Country/Off-taker . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
3.2 Sponsor (Shareholder) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
3.3 Project Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
3.4 O&M Operator . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
3.5 EPC Contractor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
3.6 Senior Lender . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
3.7 Independent Consultant/Independent Engineer . . . . . . . . . . . 10
4 Contractual Relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
4.1 Project Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
4.2 Financing Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
5 Two Illustrative Cases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Reference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
2 Business Theories of NRI-PPP Projects . . . . . . . . . . . . . . . . . . . . . . . . 21
1 Nature of NRI–PPP Projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
1.1 Build–Operate–Transfer (“BOT”) Project . . . . . . . . . . . . . . . 21
1.2 Difference Between Build–Lease–Transfer (“BLT”)
Projects and BOT Projects . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
1.3 Relationship Between BOT and PFI/PPP . . . . . . . . . . . . . . . 23
1.4 Relationship Between PFI and PPP . . . . . . . . . . . . . . . . . . . . 24
1.5 PPP Projects that Involve Only the Provision of Goods
and/or Services Without the Aspect of Design
and Construction of Facilities . . . . . . . . . . . . . . . . . . . . . . . . 25
1.6 Design–Build–Operate (DBO) Project . . . . . . . . . . . . . . . . . 26
1.7 Accommodation PFI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
vii
viii Contents
2 Reasons NRI–PPP Projects Are Used . . . . . . . . . . . . . . . . . . . . . . . . 28
2.1 Source of “Wealth” in NRI–PPP Projects . . . . . . . . . . . . . . . 28
2.2 Indicators to Measure the Benefits for the Host Country/
Off-taker . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
2.3 Indicators to Measure Benefits for Sponsors . . . . . . . . . . . . . 34
3 The Essence of an NRI-PPP Project . . . . . . . . . . . . . . . . . . . . . . . . . 35
3.1 Reasons an SPC Is Used in an NRI-PPP Project . . . . . . . . . . 35
3.2 True Reason the Project Company, an SPC, Is Used
in an NRI-P PP Project – “Investment” by Private
Business Entities in an NRI-PPP Project . . . . . . . . . . . . . . . . 39
4 Characteristics of an NRI–PPP Project . . . . . . . . . . . . . . . . . . . . . . . 48
4.1 Operation Is the Essential Chapter of an NRI-PPP
Project . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
4.2 Principle of Owner–Operator . . . . . . . . . . . . . . . . . . . . . . . . . 50
4.3 Conflict of Interests Between Sponsors and EPC
Contractors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
4.4 Principle of Single Business in One Project,
and the Project Company’s Status as being an SPC . . . . . . . 52
4.5 Back-to-Back Provision, Pass-through of Risks,
and the Project Company as being a Paper Company . . . . . . 53
4.6 Principle of Single Point Responsibility . . . . . . . . . . . . . . . . 55
4.7 The “Sponsor/O&M Operator” Is the Key Player
in an NRI-PPP Project . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
4.8 Design/Construction Period and Operation Period . . . . . . . . 64
4.9 Two Types of NRI-PPP Projects . . . . . . . . . . . . . . . . . . . . . . 66
4.10 Fixing of the Project During the Project Period. . . . . . . . . . . 69
4.11 Project Company Lacks Cash–Paying
Capability by Nature . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
4.12 Difficulties and Sustainability of an NRI–PPP Project . . . . . 72
5 Characteristics of Key Project Agreements . . . . . . . . . . . . . . . . . . . . 73
5.1 Characteristics of the Concession Agreement/Off-Take
Agreement/PPP Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . 73
5.2 Characteristics of an O&M Agreement . . . . . . . . . . . . . . . . . 97
5.3 Characteristics of an EPC Contract . . . . . . . . . . . . . . . . . . . . 98
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
3 Business Theories of Project Finance . . . . . . . . . . . . . . . . . . . . . . . . . . 103
1 Fundamentals of Project Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103
1.1 Definition of Project Finance . . . . . . . . . . . . . . . . . . . . . . . . . 103
1.2 Difference Between Project Finance and Aircraft
Finance that Uses a Finance Lease . . . . . . . . . . . . . . . . . . . . 104
1.3 Difference Between Project Finance and Securitization . . . . 105
1.4 Difference Between the Project and the Asset . . . . . . . . . . . . 105
2 Reason Project Finance Is Used . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106
2.1 Source of “Wealth” in Project Finance . . . . . . . . . . . . . . . . . 106
Contents ix
2.2 Advantages of Project Finance for the Sponsor . . . . . . . . . . . 107
2.3 Advantage of Project Finance for the Senior Lender . . . . . . . 116
2.4 Limitations/Disadvantages of Project Finance
for the Sponsor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116
2.5 Limitation of Project Finance for the Senior Lender . . . . . . . 119
2.6 Benefits and Limitation of Project Finance
for the Host Country/Off–Taker . . . . . . . . . . . . . . . . . . . . . . . 120
3 The Essence of Project Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123
3.1 Financing that Depends on the Sponsor’s Business
Performance Capability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123
3.2 Long–Term Business Finance . . . . . . . . . . . . . . . . . . . . . . . . 124
3.3 Review of the Project by the Senior Lender . . . . . . . . . . . . . 125
3.4 Monitoring by the Senior Lender . . . . . . . . . . . . . . . . . . . . . . 130
4 Characteristics of Project Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . 131
4.1 Debt-Equity Ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132
4.2 Waterfall Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134
4.3 Cash Flow Structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142
5 Characteristics of the Key Financing Agreements . . . . . . . . . . . . . . . 157
5.1 Financial Completion and Completion Guarantee . . . . . . . . . 158
5.2 Sponsor Support . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 162
5.3 Security Package . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163
5.4 Security Interests in Project Finance . . . . . . . . . . . . . . . . . . . 164
5.5 Direct Agreement and the Right to Step–In . . . . . . . . . . . . . . 171
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180
Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 181