Project Finance:

A Very Simplified
What & Why

Mongolia Economic Forum

Ulaanbaatar, March 31, 2016
Tuyen D. Nguyen, IFC Resident Representative, Mongolia

2016 is IFCs 60th Birthday, and Mongolias 25th

Anniversary of becoming a member
of the World Bank Group (in 1991)

IFCS GLOBAL REACH

108 regional offices present in 100
countries worldwide, AAA credit rating
3,358 staff (59% are based outside
Washington DC)
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IFC IN MONGOLIA
Diversified & Growing Investment and Advisory Portfolio

IFC Strategy in Mongolia: (i) Sustainable Infra and world-class Mining; (ii)
Access to finance via systemic banks, focusing on SMEs; (iii) Diversification
(services, agri) for jobs.
Excluding OT our cumulative investment in Mongolia is approx. $500m (half in
past 3 years, and increasing mobilization). Diversified portfolio include
banks, windfarm, hospital, dairy, hotels, telco, affordable housing.
Advisory to strengthen local institutions (governance, professionalization,
sustainability): (i) Corporate Governance (banks and starting with Erdenes

Mongol, the OT SOE JV entity); (ii) Trade & Competitiveness (Inspections and
Doing Business reforms, and upcoming Agri Commercialization); and (iii)
Sustainability (water in mining, banking sector).
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IFC PROJECT FINANCE EXAMPLES

Airport, Power & Energy, Oil, Gas & Mining (well-tested globally)

India

Petronet LNG
$150,000,000
Syndicated Corporate Loan

Lender

June 2007

WHAT DO THESE HISTORIC GLOBAL PROJECTS HAVE IN COMMON?

Completed by Project Financing Solutions

Eurotunnel: UK <> France

North Sea Oil Fields (UK)

Panama Canal

LNG Terminal (Texas)

WHAT DO THESE MONGOLIAN PROJECTS HAVE IN COMMON?

Two World-Class Projects Done with PF Others in Future?

Oyu Tolgoi

Salkhit Windfarm

CHP5

UB Waste & Clean Water

WHAT: DEFINITION & KEY FEATURES

Share Risks and Benefits, Ring-fence Project Risks, and Assure Greater Transparency

Project finance offers a means for investors, creditors, and other unrelated
parties to come together to share the costs, risks, and benefits of new
investment in an economically efficient and fair manner.
Project finance helps finance new investment by structuring the financing
around the project's own operating cash flow and assets, without
additional sponsor guarantees. Thus the technique is able to alleviate
investment risk and raise finance at a relatively low cost, to the benefit of
sponsor and investor alike.

As the emphasis on corporate governance increases, the contractually based

approach of project finance can also help ensure greater transparency.

WHAT: DEFINITION & KEY FEATURES

Well-tested Globally Over Many Decades. But Complex & Very Technical

How Common. Project financing is a very well established financing approach,

very common both in developed and emerging markets especially for
infrastructure. Project financing is IFCs core financing product.
Advantages. Especially suited for investments with well defined scope. Also for
investments with multiple Sponsors, where clarity of obligations is important.
Especially attractive for financings in emerging markets, where Sponsors may
need some element of political risk mitigation. Leverages potential returns to
equity holders.

Disadvantages. Lengthy process of choosing banks and advisors, complex

multiparty negotiations and legal documentation add to cost and time.

WHAT: APPLICATION FOR INFRASTRUCTURE PROJECTS

All Types, Well-tested, & Continuing to Broaden in Application

A Very Brief History:

19th Century infrastructure
(e.g. canals and railways)
1970s Oil, gas and minerals
industries
1980s US IPPs and
Eurotunnel
1990s Privatization, global
utilities and PFI
2000s Utilities and
Infrastructure (Broadening)

Oil and gas field production,

Downstream oil and gas (incl. LNG and
refining) Petrochemicals Pipelines
Power generation and transmission
Petrochemicals Pipelines Power

generation and transmission Minerals

mining Minerals processing Road,
bridges and tunnels Railways and
metros Road, bridges and tunnels
Railways and metros Airports and docks
Water supply and desalination Waste
treatment Telecommunications

A Very Tested Solution!

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Property (incl. hotels) Hospitals

WHAT: BREAKDOWN BY REGION & SECTORS

Asia, Power, Oil & Gas, Transport are top PF Recipients

Source: Thomson Reuters

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WHY: FDI CRITICAL TO MONGOLIA GROWTH (PF IS A SOLUTION)

No Country Can Be An Island: Partners & Stable Investment Climate Vital

FDI has dropped sharply

Causing growth to fall

Source: Bank of Mongolia (BoM)

FDI is not just capital but also expertise,

technology, management
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WHY: MONGOLIA GOVERNMENT DEBT AT CEILING

Project Financing (via PPPs) to Raise Needed Capital (and Expertise) from Private Sector

Strong LT outlook but near-term

vulnerabilities in debt service

FX reserves & new financing

critical to service debt in 2017-18

Government alone will not have the capital (or expertise)

to develop, fund, implement & operate efficient projects
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WHY: GLOBAL & MONGOLIA INFRASTRUCTURE GAP IS IMMENSE

Without Infrastructure, Growth Is Limited (Companies, Govt, Households)

Mongolia will need $20-30 billion investments in new

infrastructure (next 5-10 years) for LT sustained growth
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WHY: A FOOTBALL (SOCCER) TEAM NEEDS MANY POSITIONS

Each Player Contributes Different Skills For The Teams Shared Goal

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WHY: A PROJECT TEAM ALSO NEEDS DIFFERENT PARTNERS

Each Partner Shares Different Risks & Benefits And Project Is Aligned and Completed

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WHY: WHAT DO THE PARTIES WANT

Each Partner Shares Different Risks & Benefits And Project Is Aligned and Completed
Borrower (SPV)

Lender(s)

Freedom. To borrow more, for as long as

Control. Limit other borrowings, limit non project

spending, limit distributions, report more, give
lenders more rights

possible, to spend more, to report less, to invest,

to grow, to manage the Project independently
and to distribute to shareholders

Cost. Pay higher spread, higher fees, more

expenses !

Cost. Pay lower spread, fees, expenses

Risk. To share risks with lenders, to give as little
security or support for the loans as can be
negotiated, to be able to walk away with the least

Risk. To share risks with the Shareholders, get all

possible security, as much Sponsor support for as
long as possible, make it as hard as possible to
walk away.

damage if everything goes wrong.

The Shareholder(s)
The Shareholders want the same as the Borrower. Shareholder interests and goals in negotiating the PF
are fully aligned with the Borrowers interests and goals.
Government (In PPP): To get best value for money for (Infra) services invested & delivered (to Society)
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WHY: WELL-TESTED & OBJECTIVE DISCIPLINE

Professional, Legal and Market Discipline
Tried and Tested. While PF is complex and while there are project specific features in all deals, PF is built
upon firmly established market and legal practice.
Independence and Rigor. PF is a multi party financing process which relies on independent objective advice
and rigorous due diligence which all parties can take comfort from. The PF documentation creates legally
binding, consequential obligations on all parties to disclose material information and make representations

other parties can rely on. The advisors in the process have both legal obligations and business and moral
interests to act with integrity and professionalism to protect their reputation and standing.
Market Pricing. Price setting is by a sealed bid market process involving multiple lenders with full access to
all relevant information who are legally obligated to act independently.

This auction process establishes a

full and fair clearing price reflecting the true market adjusted risk/reward of the financing.
Alignment of Interests. Lenders share common interests which they, with the assistance of their legal
counsel, will negotiate hard to protect. The borrower, with the assistance of the Sponsor and their team of
legal advisors will negotiate just as hard to protect their competing interests. Whats good for the borrower in
a PF is also good for ALL Shareholders.
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(A LITTLE OF HOW): THE PROCESS

Project Phases & Risks Assessment (Due Diligence)

Project Phases
1. Development > Financial Close
2. Construction > Project Completion
3. Operation > Termination (Transfer)

Lender Due Diligence

Risk identification, assessment,
allocation and sharing

Project Assets
1. Cash
2. People
3. Site (Land)
4. Plant, Building, Inventory
5. Agreements (Concessions, Licenses)

Environment
Technical
Commercial
Markets
Financial
Insurance
Legal

OT historic PF closing (Dec

2015) result of many years
of detailed working together
with many partners
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Thank You

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