case study: doraleh container terminal djibouti · doraleh container terminal – the facts...
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Case Study:
Doraleh Container Terminal
Djibouti
IFC Ports PPP Seminar, Cairo
April 2010
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Table of contents
Project description
Financing approach
The importance of cashflow
The most valuable asset – the concession agreement
Understanding and mitigating the risks that impact on a
project’s cashflow
Doraleh Container Terminal - challenges
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1. Project description
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Doraleh Container Terminal – the facts
Greenfield container terminal in Djibouti
The $396 million project represents the first ever PPP style
financing in Djibouti
Joint venture between the Djibouti government and DP World
30 year concession
Djibouti port has a monopoly position for Ethiopian imports and
exports
The port is also strategically situated on the main east-west
shipping lanes which makes it very competitive for transhipment
traffic
The new terminal has an annual capacity of 1.5 million TEU
(twenty foot equivalent container units)
Project financing of $263m
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2. Limited recourse lending (project
finance)
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Financing a private sector port
development:
No loan to government
Borrower is a single purpose business
Separate legal and financial entity with ring-fenced cash flows
Sponsor guarantees don’t cover all the risks
High leverage and long repayment terms
Contracts with major project parties are a key credit support
mechanism
Security rarely covers the nominal value of the loan
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Doraleh, a strategic location for transhipment
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Shareholding structure
100%
DP World Government
of Djibouti
DP World
Djibouti
Port Autonome
International de
Djibouti (PAID)
Doraleh
Container
Terminal
100%
33.3% 66.7% Concession
Agreement
Management
Agreement
JV
Agreement
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DCT contract structure
Direct
Agreement
Direct
Agreement
Procurement
Agreement
Management
Contract Port Services
Agreement
Dredging
Contract Equipment
Contract
Fixed Price
Construction Contract
Direct
Agreement
Finance
Agreement
Doraleh Container
Terminal
PAID DP World
Djibouti FZCO
Government
of Djibouti
Financiers
Civils Crane
Supplier Dredging
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Economic Performance
is a catalyst for growth, private sector development, and
trade
created jobs (500 during construction and 600 permanent
jobs during operation) and enabled a transfer of technology
for Djibouti
allows the shipping lines serving Djibouti and Ethiopia to
lower their transportation costs by USD 30 million
an Economic Net Present Value (ENPV) of about USD 234
million in constant 2007 prices (discounted by 12% real). The
Economic Internal Rate of Return (EIRR) is estimated as
24.4% real
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3. The most valuable asset – the
concession agreement
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Concession agreement
A bank does not finance a port, it finances the right to develop and
operate a port i.e. the Concession Agreement
Lenders therefore need to have rights linked directly to the
Concession Agreement itself rather than the concessionaire /
borrower
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Government
Entity
Revenue
Port
Company
Lenders Concession
Agreement
$$
$$
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Government
Entity
Revenue
Port
Company
Lenders Concession
Agreement
$$
Direct
Agreement
Port
Company
$$
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Concession agreement
Direct Agreement between lenders and government or the grantor
of the concession
Temporarily prevents termination of concession
Lenders step-in rights
Right to replace operator
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Concession agreement
Termination compensation
Key risk sharing mechanism for sponsors and lenders
Governments compensate project sponsors for capital investment
and related finance costs in the event of early termination
Aim is to leave both parties whole
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4. The Importance of cash flow
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Cash flow
Cash flow is central to project finance
The entire debt of the project is repaid from the project’s own cash
flows
Strength of cash flow determines debt capacity of the project
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Free cash flow
Amount of debt and repayment profile is a function of the quantity
and timing of free cash flow
Free cash flow =
net operational cash flow
after tax
less working investments and capital expenditure
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Debt service cover ratio
Capital structure – debt / equity ratio is driven by the DSCR
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1 2 3 4 5
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
Debt Equity Average DSCR
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Cash flow
Typical minimum DSCR’s across industries:
Government procurement PPP – 1.1x
Minerals and metals – 1.5 to 2.5x
Greenfield telecoms > 2x
Ports:
Greenfield container terminal - 1.6x
Brownfield container terminal - 1.4x
Greenfield mixed use port >2x
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5. Understanding and mitigating the risks
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Risks
All risks should be considered in terms of their impact on a
project’s cashflows
The risk profile of the project has a direct influence on the
financing structure of the project
Three main (risk) phases in a project life cycle:
development (equity only),
construction (sponsor guarantees), and
operation (non-recourse)
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Typical risk categories
Completion Risk
Delays
Cost overruns
Cash flow impact
Funding shortfalls = additional debt
Increased repayments
Mitigants:
Guarantees
Standby equity
Fixed price contracts
Final project approvals and authorisations (environmental
certification; business licences; direct agreements)
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Typical risk categories
Market / Revenue Risk
Reduced demand
Competition
Congestion
Cash flow impact
Reduced revenues
Mitigants
Contracts with shipping lines / co-ownership with lines
Government undertaking not to introduce competing terminals
Supporting infrastructure – rail, roads, customs processes
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Typical risk categories
Political Risk
Transferability / convertibility
Interference with tariffs
Expropriation / nationalisation
Cash flow impact
Increased operational costs
Lower revenues
Termination - no rights to revenues
Mitigants
Clear responsibilities and obligations in concession agreement
Government ownership aligns interests with concessionaire
Termination provisions allow clear understanding of rights
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Typical risk categories
Operating Risk
Inefficiencies
Maintenance
Congestion
Cash flow impact
Reduced revenues
Increased costs
Mitigants
Experienced operator
Clear performance standards in the concession agreement
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Private port financing - summary
Partnership between governments, financiers and investors
Common goals
Clear roles and responsibilities
Solution driven approach – everyone is in it for the long term
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6. Doraleh Container Terminal
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DCT financing challenges:
Structuring:
Multiple contractors
Government co-ownership
Reliance on Ethiopia (transit port)
Syndication
First major international funding in Djibouti
Financial crisis – impact on liquidity
Islamic and conventional financing
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DCT financing challenges:
Funding requirements of the Sponsors resulted in an interim
funding solution
Standard Chartered Bank jointly arranged the interim funding
solution bringing together an initial group of 5 banks
The initial group of banks funded total debt amount of $263m
under an Islamic structure
10 year term including a 2 year construction phase
Financial close achieved in December 2007
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DCT financing challenges:
Standard Chartered Bank sought to partner with African
Development Bank (AfDB) and Proparco to join the financing
Significant benefits of working with Multilateral institution and the
Development Finance Intuitions
AfDB / Proparco and SCB worked together to arrange a structure
allowing for the partial refinancing of the interim funding solution
by a conventional facility funded by AfDB and Proparco
This process required the support of the Government of Djibouti,
the Borrower; the Sponsors; the interim banks and the contractors
Significant efforts by all led to completion of the financing in
December 2009
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Lenders
In total 7 financing institutions have committed to support the
project. These are a mixture of commercial lenders, multilateral
financing institutions and development finance institution;
Islamic Tranche USD160m
Bank of London & The Middle East
Dubai Islamic Bank
Islamic Development Bank
Standard Chartered Bank
WestLB AG
Conventional Tranche USD103m
African Development Bank
Proparco
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Q&A