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Doing good while doing business

Introduction

International-FinanceThe International Finance team comprises individuals with significant expertise and experience in a wide range of multi-disciplinary fields. Collectively this small team boasts skills that span the fields of project finance, modelling, legal, institutional, project management and engineering. In the fields of development finance and transaction advisory services, great reliance is placed on such wide ranging multi-disciplinary expertise and experience in order to ensure sound risk management and creativity but also innovative solutions to clients’ problems. Within the context of development finance our key capabilities in the IF team include:

  • Financial modelling and structuring of projects
  • Legal risk and compliance management
  • Technical planning
  • Programme design
  • Arranging of funding

What is however even more important is how these capabilities have been packaged into products and services that can meet the need of our clients. The wheel-diagram below is intended to highlight this. Around the inner circle of our capabilities & skills, our four key product areas are shown. Each of these product areas is aimed at a wide range of client needs and wants which are shown in the outer circle. By selecting the client need that is the closest match to your own need, you can quickly identify the relevant product area and then refer to the product sheet that gives more detailed information on that product area. Hopefully this will assist to highlight how we can be of service and facilitate a more focused response to any query or enquiry that may be lodged.

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Arranging services

Bigen Africa’s intimate knowledge of infrastructure development and finances enables the firm to provide a unique funding arrangement service. Such funding includes both public funds as well as commercial finance provided through the private sector and various development finance institutions (DFIs) such as DBSA, IDC, ADB, AfDB, DEG, FMO, EBRD, Finnfund, Norfund and Swedfund.

Arrangement of public sector funding

Public sector funding is characterised by numerous funding programmes administered by different national and provincial departments and local authorities (municipalities). Project owners are often not aware of all the potential funding sources available to them. Bigen Africa has a thorough knowledge and understanding of the various funding programmes but more importantly of how to access and integrate these funding sources. As part of arrangement of public sector funds Bigen Africa provides the following services:

  • Preparation of project business plans
  • Preparation of funding motivations and funding applications
  • Recommendations regarding the source and application of funds

 

The real challenge to successfully access and secure public sector funding is the integration and consolidation of the various funding sources. To this end Bigen Africa has developed a unique concept on the integration of funding sources with the aim of overcoming the blockages (attributed to administrative procedures) which are often experienced on projects.

Arrangement of commercial funding

Project Finance offers an opportunity to every project sponsor to finance and implement large scale infrastructure projects. In order to secure such funding Bigen Africa offers a Project Preparation Service to clients in both the public and private sectors. Banks and other lending institutions that offer Project Finance typically require the owner (i.e. municipality or project sponsor) of the project to invest a significant portion of the Project Capital prior to their funding becoming available. This is to ensure that the risk profile of the project is at an acceptable level for the banks and other lenders, by the time their money is used on the project. The activities conducted by the owner to get to that point (“Financial Close”) is labeled “Project Preparation” by Bigen Africa.

Arrangement of Project Preparation Funding

The quantum of Project Preparation Funding required on a typical infrastructure project is prohibitive for many municipalities or sponsors. Bigen Africa has the capability and expertise to secure or arrange funding to supplement the funds of the municipality or sponsors from various sources (banks, financial institutions, grant agencies, MIGA and DBSA). Due to the high risk nature of the project during the project preparation phase, institutions which are willing to provide Project Preparation Funding will take extra care and measures to manage their risk exposure. The key mechanisms through which they will manage their risks are:

  • Reliance on the expertise, track record and risk management capabilities of Bigen Africa; and
  • Employing a strict development regime based on a suitable legal agreement.
  • In most instances, the high risk nature of the funding facility will also dictate a return that is commensurate with that risk

 

Project Preparation

Typical forms of Project Preparation Funding include:

  • Grant funding
  • No recourse loan
  • Limited recourse loan
  • Full recourse loan

Arrangement of long-term project finance

During the project preparation process, the owner must secure sufficient long-term funding to implement the project. In this process, the owner will rely extensively on the documentation generated throughout the project preparation process by Bigen Africa (feasibility study and financial models). The interaction with potential funders, lenders and financiers must be extended to include the negotiation and documentation of specific terms and conditions as well as information memoranda for each of the financing facilities envisaged. This process is labelled “arrangement”. Often the procurement of funding is driven through a suitable competitive (tender) process which will be conducted by the “arranger”. Bigen Africa understands the requirements of various lenders and financiers and has the capability and expertise to successfully arrange long term project finance for infrastructure projects.

Project preparation

The ability to raise suitable finance is a key success factor in the implementation of most infrastructure projects. Due to their limited borrowing capacity, many municipalities and project sponsors are constrained in their ability to finance and implement large scale infrastructure projects. Municipalities are increasingly dependent on government and other grant funding to eradicate infrastructure backlogs or eliminate ‘bottlenecks’ that are restricting economic growth and development or leading to poor service delivery.

In recent years it has become clear that the available fiscal transfers and grant funding is generally not sufficient to cover the infrastructure investment needs of most governments. This is demonstrated by the general acknowledgement that infrastructure backlogs are growing rather than shrinking. 

The message from treasury and other government departments increasingly stresses the need for municipalities to leverage their available funds with borrowings from the banking sector and capital markets to meet their infrastructure investment needs. Against the background of limited borrowing capacity this raises a serious dilemma for most municipalities. The limited borrowing capacity of municipalities and project sponsors typically refers to their inability to raise finances against their own balance sheets. This is the traditional financing mechanism used by most governments. When it comes to infrastructure finance, there is an alternative financing mechanism that is deployed successfully world-wide, project finance. 

Project finance can be implemented in a wide range of applications and in different forms – unfortunately this often causes confusion about its true nature. Project finance is, for example often used in concessions and in public private partnerships and this has led to its association in many government and non-government institutions with privatisation. Resistance to privatisation amongst these institutions has in turn led to resistance against project finance. This is unfortunate as there is no fundamental basis to associate project finance with privatisation.

The fact remains that project finance is a highly suitable financing mechanism through which project sponsors can fund most of their infrastructure. In order to access this type of finance it is critical to ensure that the (infrastructure) project is not only feasible but also “bankable”. To achieve this, special care and attention must be paid to various financing aspects and risks throughout the development or preparation of a project. This requires a wide range of skills and expertise not normally available within municipalities or associated with consulting engineering practices. Banks, who are the traditional experts in limited recourse project finance, are often reluctant to become involved in projects at a too early stage. This creates the dilemma on how to structure a project to ensure that the necessary financing will be available.

Bigen Africa has the necessary in-house project finance skills to deploy with engineering and project management skills to ensure that bankable projects are developed. This is achieved through a comprehensive project development or project preparation process 

Through its project preparation activities, Bigen Africa will enable a project sponsor to raise long term, limited recourse project finance in the market through a suitable competitive process. Moreover, it is clear that both central government and grant funding agencies and investors are focusing more on the long term sustainability of projects prior to approving funding for projects. As such, the requirements of government and grant funding agencies on the one hand and project finance institutions on the other hand are converging. Comprehensive project preparation is thus not only the key to securing project finance but will in future also become the key to securing grant funding as well as funding through the fiscus.

Through its project preparation activities, Bigen Africa will enable a project sponsor to raise long term, limited recourse project finance in the market through a suitable competitive process. Moreover, it is clear that both central government and grant funding agencies and investors are focusing more on the long term sustainability of projects prior to approving funding for projects. As such, the requirements of government and grant funding agencies on the one hand and project finance institutions on the other hand are converging. Comprehensive project preparation is thus not only the key to securing project finance but will in future also become the key to securing grant funding as well as funding through the fiscus.

Project preparation

Project preparation is defined by Bigen Africa as the integration and deployment of the following five key capabilities:

  • Modelling and structuring
  • Technical planning
  • Legal risk and compliance management
  • Programme design
  • Arranging of funding

Advanced modelling and risk analysis

Modeling (financial, demand, etc.) is a key activity throughout the project preparation process. The financial model for example, is the single instance where all the critical information about a project is collated, integrated and summarised. It is used to present and evaluate a project and is the basic instrument through which fundamental risk analysis is conducted. A financial model of a project also serves to ‘translate’ between different groups of stakeholders who do not always speak the same ‘language’ – it translates the technical inputs of engineers to the language of financiers; the needs of social groups to the language of engineers; the language of financiers to that of consumers, etc.

In the project preparation process, the modeling and risk analysis plays a pivotal role and it is essential that this activity be conducted (i) with the utmost diligence, insight, understanding and expertise as well as (ii) the ability to effectively communicate with all role players and stakeholders and (iii) to disseminate relevant and critical information effectively and rapidly.

Against this background, various models (including the financial model) become critical tools through which risks are identified, quantified and their potential impact on projects assessed. To gain full value from the modeling activity it is, however, essential that information flow is not one-way, but two-way. 

Although many risks are generic in nature when dealing with infrastructure projects, it is also true that each project possesses its unique blend of risks, for that reason the deliverables cannot all be agreed upfront. Identification, quantification, analysis, mitigation and management of risks are thus an on-going and dynamic process.

Thus information from the model should have feedback to, impact on and modify all aspects of the project to ensure (i) that risks are adequately mitigated and (ii) the bankability of the project. This counter-flow of information essentially entails the structuring activity which is indispensable in a comprehensive project preparation process.

From the above it is clear that the skills and expertise required for this activity go way beyond the financial and programming skills required to build a model. Bigen Africa has assembled a team with a wide range of experience, skills and modeling capabilities to conduct this critical activity as part of its service offering.

A critically important goal or objective of the project preparation process is to ensure that the risk profile of the project declines steadily as risks are mitigated until it reaches the point where the risk of the project is acceptable to its financiers (irrespective of their identity and the nature of funding provided). This is of course why risk management forms such a critical part of any project’s life-cycle.

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Contact persons

Bigen Africa Services (Pty) Ltd
Tel: +27 (0)12 842 8700
Fax +27 (0)12 843 9000

January 22, 2015 By admin No comments yet