Whether it regards the construction of an oil refinery in Turkey, of gas pipelines in the Baltic Sea or of a Liquefied Natural Gas Plant in Russia: global mega projects are highly complex and cost a lot of money. Companies from places all over the world are frequently involved as either project sponsors, financiers or suppliers. In most cases the investment volumes amount to billions of euros. But how can the immense investment amounts for mega projects be raised? What are the stumbling blocks for financing them? What is the role of Export Credit Agencies?
Why is the financing of larger projects more difficult today than it used to be 10 years ago?
Heiko Lentge: Two relevant tendencies can be identified: Firstly, as a consequence of the financial markets crisis banks are more restrictive today regarding the issuing of loans for the financing of mega projects. Secondly, the number of mega projects with very high investment volumes has increased massively over the last years. Notably, in the emerging markets specifically the demand for energy and infrastructures is growing rapidly. As a consequence, we currently see a very large number number of mega projects in these two sectors.
Many of these projects have total investment volumes amounting to double-digit billion figures. How can the project sponsors be in a position to raise such massive amounts?
Alexander Wuermeling: That task requires a lot of creativity. Both project sponsors and financiers have to co-operate very closely and must develop innovative financing concepts. As a rule, the money does not come from one single financier but will be raised from the most different sources: Commercial banks, investment aid institutions and the World Bank are all contributing to it. An utterly pivotal role for the financing of larger projects is given to the national Export Credit Insurers, the so-called Export Credit Agencies – in acronym: ECAs – of the participating states.
Why are Export Credit Insurers so important for the financing of global mega projects?
Lentge: The aim of every ECA is to promote the exports of its domestic products and services to foreign countries. That is the reason for them to grant protection against certain Project risks. In the past the focus used to be on political risks. Nowadays, the ECAs are increasingly also insuring commercial risks. Also the German State is assisting domestic companies with mega projects abroad by granting Export Credit Guarantees.
What effects do these Guarantees generate?
Lentge: They are reducing the risk of the participating banks and project sponsors, as the State will step in in the case of an emergency. In many cases this is critical for the provision of long term credit for a project financing. The relevant project sponsor will need to evidence the commercial viability of his project as a precondition to his enjoyment of the guarantees. This evidence can be delivered by international firms such as PwC. My team is offering so-called Expert Reports for larger projects in order to make it possible to assess whether the relevant specifically established project company will be in a position to pay back the raised loans.
That are the criteria for your assessment of a mega project´s robustness?
Wuermeling: At the core of our Expert Reports you will find a due diligence process: In the course of that process we will examine whether there is a fair burden sharing amongst the parties; we will analyse the contracts and the commercial, legal, tax and technical assumptions. In accordance with the tenor of the relevant loan, these assumptions will be forecast for a period of up to 20 years. A specific focus will be on the financial model: We will be calculating whether it will be feasible to repay the loans even under unfavourable market conditions. One example: A market expert has forecast heavily volatile prices, and hence equally volatile revenues, for the next forthcoming years. With a view to the financing documents, we will need to find a way in that situation to keep the lenders´ risk profile as low as possible. We are knowledgeable where it comes to the critical issues in drafting the finance documents, and to identifying the issues of outstanding relevance to the German Federal Government. If our experts consider a project sustainable, this fact will be a relevant pre-condition for the decision made by the Federal Government and hence for the granting of an Export Credit Guarantee.
Where it comes to the financing of a mega project, many parties will be sitting at a table.
What is the course of such negotiations?
Lentge: We have already participated in projects where representatives of a dozen of ECAs were at one table. Where 80 individuals negotiate with each other, one may have to put on the microphone before delivering a statement. Quite a lot of negotiating skills are required to find a position acceptable to all parties, since the commercial as well as the political motifs of the negotiating parties and the financiers will be fairly diverse.
What is relevant for the negotiations?
Wuermeling: In many cases, the deal will initially not yet be appropriate for receiving support from the German Federal Government, as the sponsors will in most cases propose a project concept not acceptable from a lenders point of view, for instance suggesting an equity rate way too low, or financing conditions way too sponsor friendly. That situation is the motif for us to also offer consultancy services in the context of negotiations for financings, in order to develop analyses and suggestions for solutions leading to a project concept ready for coverage. On this difficult task it is of great help to us that we have gathered many years of projects experience, which is why our services are also requested for the role as advisors to international ECAs all around the globe.
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