Question

QUESTION ONE

Zambian government officials have in several for advocated for the use of Public Private Partnerships (PPP) to enhance the delivery of public infrastructure projects in the country. This comes from the backdrop that despite the PPP Act 14 being enacted in August 2009, very few projects have been implemented in Zambia through the PPP model.

With the aid of a practical example of a PPP project in Zambia, explain the term Public private partnership (PPP).           

Identify and briefly discuss five(5) models of PPP                                  

Briefly discuss the reasons(objectives) why public institutions enter into PPP agreements                                                                                           

Briefly discuss the challenges encountered in the implementation of PPP       

                                                                                                            

                                                                                                          

QUESTION TWO                                                                                                

The University of Lusaka (Unilus) intends to build a new campus on a newly acquired piece of land along the Great East Road. It intends to use the project finance model to realize this project and has therefore set up a special purpose vehicle (SPV) called University of Lusaka(2014) Limited(Unilus 2014).Unilus will hold 60% of the equity of Unilus 2014 while the other 40% will be shared equally between City Works Construction Limited and Top-Hole consulting Limited.

The total cost of this project is $2Million.The shareholders will provide $500,000 while the balance will be raised from the Zambian syndicated loan Markets. The idea to raise funds from via a syndicated loan was made by the consultants who were engaged to the best way of financing the project. The shareholders and project team have limited knowledge on what loan syndication entails.

Required:

Explain what loan syndication is and what the process involves.             

Different banks play different roles in the syndicated process. Discuss the roles banks play in the loan syndication process.                                                        

Explain the forms of compensation typically available to banks who participate in a syndicate.                                                                                              

Lead managers typically invite a number of banks to participate in the syndicate by way of booking the transaction on their balance sheets. However, in practice not all banks take up the invitation to participate. Discuss some of the reasons banks cite for their non-participation in a project finance deal                    

                                                                                                

QUESTION THREE

Big-Brain, a Lusaka company is considering a K9, 000,000 investment in a product called ‘ALPHA’ with a life span of four years. The scrap value of the equipment used in the production of ‘ALPHA’ is estimated to be K1, 500,000 at end of year four. The company has estimated production costs to be as follows:

Variable costs are K8 per unit and;

Fixed costs are K270,000 per year

The company expects to produce and sell 250,000 units per year. The estimated selling price for ALPHA is K21 per unit. Included in the fixed costs is depreciated of K15, 000 per year.

The project cost of capital is 10%.

Required:

Find the relevant cash flows for years zero through four                           

Calculate the NPV of the project and advise whether the investment is financially viable.                                                                                      

Calculate the payback period and discounted payback period                  

Calculate the PI and the ARR for the project                                         

Calculate the Internal Rate of Return (IRR) of the project and advise whether the investment is financially viable.                                                       

                                                                                                                                                                                                                                                                                                                   

QUESTION FOUR

In order to determine the ability of a project to meet its debt obligations, it is important to forecast the project cash flows. Explain why it is important to carry out a cash flow analysis in project finance and the five factors that need to be considered when calculating cash flows.                                                                                                                                 

Explain the two terms in relation to project finance Limited recourse and Non- recourse.                                                                                  

Identify three groups of potential risks to project finance and explain how you can hedge against such while managing the project.

QUESTION FIVE                                                                                        

Venture capitalists are businesses that will invest in new start-ups. They will give the new start-up financial backing and advice in return for a share of the company and any potential profits, this could be an effective way to raise project finances for start-up and other project ventures that have limited operating history, little experience and don’t have access to capital market.

List and explain the stages in the funding process.                                                                                                                  

List and explain the different types of capital funding available from Venture capitalists.                                                                                              

                                                                                                                                                                                                                        

The exit strategy is the venture capitalist way of cashing out on its investment in a portfolio company. List and explain three exit strategies for venture capitalist.                                                                                                                                                                                                                                                                                                                         

You are seeking K1.5million from a venture capitalist to finance the launch of your online financial search engine. You and the VC agree that your venture is currently worth K3million, and when the company goes public in an IPO in five years, it is expected to have a market capitalization of K20 million. Given the company’s stage of development, the VC requires a 50 percent return on investment. What fraction of the firm will the VC receive in exchange for its K1.5 million investment in your company?                                                                                                                                                                            

                                                                                                

Answer 1

1)

A Public Private Partnership (PPP) is a contractual arrangement whereby the private sector performs government functions of service delivery or infrastructure development, or uses state property, and assumes associated risks for the property, on behalf of Government, for a football picks defined and agreed period of time. The private sector in return receives financial remuneration in form of concession fees, user fees, or any other form of repayment that maybe agreed upon with the Government. In this process, the Government retains a significant role in the partnership as the main purchaser of services or the main enabler of the project.

Potential Benefits of Public Private Partnerships:

While recent attention has been focused on fiscal risk, governments look to the private sector for other reasons:

Exploring PPPs as a way of introducing private sector technology and innovation in providing better public services through improved operational efficiency

Incentivizing the private sector to deliver projects on time and within budget

Imposing budgetary certainty by setting present and the future costs of infrastructre projects over time

Utilizing PPPs as a way of developing local private sector capabilities through joint ventures with large international firms, as well as sub-contracting opportunities for local firms in areas such as civil works, electrical works, facilities management, security services, cleaning services, maintenance services

Using PPPs as a way of gradually exposing state owned enterprises and government to increasing levels of private sector participation (especially foreign) and structuring PPPs in a way so as to ensure transfer of skills leading to national champions that can run their own operations professionally and eventually export their competencies by bidding for projects/ joint ventures

Challenges in PPP:

Development, bidding and ongoing costs in PPP projects are likely to be greater than for traditional government procurement processes - the government should therefore determine whether the greater costs involved are justified. A number of the PPP and implementation units around the world have developed methods for analysing these costs and looking at Value for Money.

There is a cost attached to debt – While private sector can make it easier to get finance, finance will only be available where the operating cashflows of the project company are expected to provide a return on investment (i.e., the cost has to be borne either by the customers or the government through subsidies, etc.)

Some projects may be easier to finance than others (if there is proven technology involved and/ or the extent of the private sectors obligations and liability is clearly identifiable), some projects will generate revenue in local currency only (eg water projects) while others (eg ports and airports) will provide currency in dollar or other international currency and so constraints of local finance markets may have less impact

Some projects may be more politically or socially challenging to introduce and implement than others - particularly if there is an existing public sector workforce that fears being transferred to the private sector, if significant tariff increases are required to make the project viable, if there are signficant land or resettlement issues, etc.

There is no unlimited risk bearing – private firms (and their lenders) will be cautious about accepting major risks beyond their control, such as exchange rate risks/risk of existing assets. If they bear these risks then their price for the service will reflect this. Private firms will also want to know that the rules of the game are to be respected by government as regards undertakings to increase tariffs/fair regulation, etc. Private sector will also expect a significant level of control over operations if it is to accept significant risks

2)

“Syndication” means a temporary association of parties for financing and execution of some specific business purpose

EBF also defines “Syndicated Loan” as loans extended by multiple banks where the overall credit involved exceeds an individual lender’s legal lending or other limits

Syndicated loan is made available by a group of FIs in predefined proportions under the same credit facility following common loan documentation formalities

Loan syndication is different from club financing (where many banks finance a single borrower) in terms of deal origination, mechanism, documentation, disbursement, monitoring, management, etc.

Essential Characteristics: (i) single borrower, (ii) more than one lender, (iii) common loan & security documentation

Banks are restricted to take funded exposure on a single borrower up to 15% of their capital, and non-funded exposure up to 20% of their capital

Banks also set prudential loan limit internally to restrict loan exposure on a single customer Bangladesh Bank further limits percentage of total credit portfolio that can be in form of large loan (i.e. loan size exceeding 10% of Bank’s capital) based on percentage of classified loan. For example, large loan can be maximum 56% of portfolio for NPL below 5%, maximum 52% for NPL exceeding 5% but less than 10%, etc.

Advantages of Loan Syndication:

Diversification/sharing of risks, cost sharing and pooling of resources and reputation

Participating banks play useful roles by providing informative opinions and/or additional expertise even after the funding has been extended

Popular scheme for financing large and medium scale projects

The ability of the customer to deal with single Bank/FI (“Lead Bank” and “Agent Bank”) as a one-stop service point

Syndication provides borrower with a complete menu of financing options, which usually results in more competitive loan pricing, product innovations and wider cooperation

The opportunity for the borrower to establish a track record with many banks from just a single transaction

Parties to a Loan Syndication

1. Borrower: An institution or individual that raises funds in return for contracting into an obligation to repay those funds, together with payment of interest over the loan. Borrower selects/mandates a bank to work as the Lead Arranger for the deal.

2. Lead Arranger: Responsible for raising/arranging the fund. Lead Arranger or Bank co-ordinates all activities related to a particular syndication deal from proposal origination to final disbursement of the loan. It also performs following functions:

Assists the borrower to structure the project and set important loan parameters, prepare the information memorandum, formulate a plan to raise the fund within an agreed time schedule

Has the responsibility for much of the loan selling

Acts as the first port of call for questions and answer them authoritatively in order to head off problems and sensitivities before they arise