SEPTEMBER 25, 2018

Question One:

(a) Before agreeing to lend to a particular product, the lenders will pay specific attention
to each of the, parties that will have an involvement in project . Examine some of the
key issues that lenders normally focus on. ( 10 marks)

Project Company Structure: Lenders assess the legal structure of the project company. Whether it’s a
special purpose vehicle or another entity, they evaluate its independence, financial stability, and risk
allocation.

Sponsor Strength: Lenders analyze the financial health and reputation of project sponsors. Strong
sponsors enhance project credibility and provide support during challenging times.

Cash Flow and Revenue Streams: Lenders focus on the project’s ability to generate steady cash flow.
Reliable revenue streams assure lenders of repayment capacity.

Risk Mitigation: Lenders consider risk allocation mechanisms. Non-recourse or limited recourse
financing structures provide security by linking debt repayment to project assets and cash flow.

Legal and Regulatory Environment: Lenders assess the legal framework, contracts, and regulatory
compliance. Stability and enforceability are crucial

(b) Explain the meaning of the following terms (10 marks)

Non-Recourse financing: Non-recourse financing is a type of project financing where lenders base their
credit decisions solely on the cash flows generated by the project. ing

Controlled dividend policy: A controlled dividend policy refers to a deliberate approach taken by a
company’s management to regulate the distribution of dividends to shareholders

Special purpose vehicle: A Special Purpose Vehicle (SPV) is a legal entity created for a specific
purpose, often used in project financing. It isolates risks and liabilities related to a particular project,
allowing investors to participate without affecting their other assets. SPVs are commonly used in
infrastructure projects, securitization, and joint ventures.

Hard infrastructure: Hard infrastructure refers to the physical and tangible components of a country’s
built environment. It includes roads, bridges, railways, airports, utilities, and other physical structures that
support economic activities, transportation, and public services. These assets are essential for a
functioning society and contribute to overall development and productivity.

Critical infrastructure: Critical infrastructure refers to essential systems and assets that, if disrupted,
would have severe consequences for public safety, national security, and socio-economic well-being.
These include energy grids, transportation networks, water supply, telecommunications, emergency
services, and more. The proper functioning of critical infrastructure is crucial for societal resilience and
stability.

(c) Explain the role of the following in a project financing arrangement (10 marks)

(i) Facility Agent : facility agents are essential for smooth loan operations and effective
communication in project financing.
(ii) Third-Party Equity Investors: third-party equity investors are crucial for financing and
risk absorption in project ventures.
 (iii) Technical Bank: A technical bank typically plays a crucial role in assessing the technical
feasibility and viability of the project. Technical banks contribute significantly to project
viability by ensuring technical soundness and risk management.

(iv) Multilateral Agencies: Multilateral institutions, including entities like the World Bank and
regional development banks, play a pivotal role in project finance. Their involvement is
particularly crucial for large infrastructure projects that drive economic growth and
societal development. These institutions play a central role in financing developmental
projects, shaping the economic landscape, and promoting sustainable development
worldwide.
(v) Insurance Bank: An Insurance Bank plays a critical role in managing risk and ensuring
project viability. Insurance banks safeguard project stakeholders by managing risks and
providing financial protection in project financing arrangements.

Question Two

(a) Describe any six characteristics of infrastructure projects

Stable and Steady Cash Flows: Infrastructure assets generate predictable cash flows due to regulated
revenue models or long-term contracts. For instance, a sewage system with a government contract
ensures consistent income.

Non-Cyclical: Unlike businesses affected by economic cycles, infrastructure assets (e.g., bridges, roads)
remain essential regardless of economic conditions. Their usage persists throughout different economic
stages.

Low Variable Costs: Infrastructure incurs minimal variable costs per use. For example, each car
crossing a bridge adds negligible operational expenses.

4.High Leverage: Infrastructure projects can handle substantial debt due to stable cash flows. However,
excessive leverage poses risks.

ESG Considerations: Environmental, social, and governance (ESG) factors play a crucial role in
infrastructure. Balancing community impact, environmental concerns, and social disruptions is essential
during construction.

Long-Term Impact: Infrastructure projects significantly influence a country’s development, connectivity,

and overall well-being. Their effects extend far beyond the project’s completion

(b) Explain how infrastructure projects contribute to growth of a country through

structural change

Multiplier Effect: Infrastructure investment has a strong impact on economic growth. A study found that
the economic multiplier for public investment including infrastructure is 1.5 times greater than the initial
investment within two to five years much higher than other forms of public spending.

Supply and Demand Channels: Infrastructure directly impacts growth through supply and demand-side
channels. Investments in energy, telecommunications, and transport networks serve as essential inputs in
the production of goods and services.

Sustainable, Resilient, and Inclusive Infrastructure: To maximize impact, infrastructure should be

sustainable, resilient, and inclusive. Transformative outcomes benefit both people and the planet,
supporting short-term recovery and long-term stability
 Question Three
a) Describe any six sources of financing development projects. (12 marks)

Domestic Public Resources: These include funds generated within a country through taxation, fees,
and other government revenue sources. Governments allocate these resources to finance development
projects.

International Development Cooperation: Countries provide financial assistance to support other

nations in reaching their development goals. This can include grants, concessional loans, and technical
assistance.

Private Sector Investment: Businesses and corporations contribute by investing in development

projects. This can be through direct investments, public-private partnerships (PPPs), or corporate social
responsibility initiatives.

Multilateral Development Banks: Institutions like the World Bank, Asian Development Bank, and African
Development Bank provide loans and grants to developing countries for infrastructure, education, health,
and other projects.

Bilateral Aid: Countries provide aid directly to other nations. This can be in the form of grants, loans, or
technical assistance. Bilateral agreements facilitate cooperation and resource sharing.

Debt Markets and Capital Markets: Developing countries can issue bonds in international debt markets
to raise capital for projects. Investors purchase these bonds, providing necessary financing

(b) Briefly describe the following PPP models (8 marks)

(1) Supply and management contracts

Supply contracts within PPPs involve the private sector providing goods, equipment, or materials
necessary for a project. Management contracts transfer the responsibility for operating and maintaining a
public asset to the private party.

(ii) Turnkey contracts: Turnkey contracts in Public-Private Partnerships refers to a specific type of
contractual arrangement. Turnkey contracts streamline project delivery by bundling multiple phases and
functions under a single agreement. They play a crucial role in ensuring efficient asset creation and
management

(iii) Lease Agreement: Lease agreements allow private entities to manage and operate public assets
efficiently while ensuring service delivery continuity.

Question Four:

(a) Explain five objectives that the procurement process should NI fill when infrastructure projects
are procured through the PIT route. (10 marks)

Efficiency and Cost-Effectiveness: Ensure that the procurement process is efficient, minimizing delays
and unnecessary costs in project delivery.

Transparency and Fairness: Promote transparency by clearly defining evaluation criteria, selection
methods, and contract terms. Fairness ensures equal opportunities for all potential suppliers.

Risk Mitigation: Identify and allocate risks appropriately among project stakeholders. Effective
procurement helps manage risks related to quality, time, and budget.
Quality and Performance: Procurement should prioritize quality outcomes. Select suppliers based on
their ability to deliver high-quality infrastructure assets.

Sustainability and Long-Term Value: Consider the entire lifecycle of the asset. Procurement decisions
should lead to sustainable infrastructure that provides value over its operational lifespan

(a) Explain how government support is critical in implementation of infrastructure

projects. (10 marks)

Funding and Financing: Governments provide the necessary capital for infrastructure development.
They allocate budgets, secure loans, and mobilize resources to fund projects.

Policy and Regulation: Governments create a conducive environment by setting policies, regulations,
and legal frameworks. These guidelines ensure project feasibility, safety, and compliance with
environmental standards.

Risk Mitigation: Infrastructure projects often involve risks related to construction, operation, and
maintenance. Governments help manage these risks through guarantees, insurance, and risk-sharing
mechanisms.

Public Goods: Infrastructure benefits society as a whole. Governments prioritize projects that enhance
public welfare, such as transportation networks, water supply, and energy systems.

Stakeholder Coordination: Governments coordinate efforts among various stakeholders—private

companies, local communities, and international partners. Effective collaboration ensures smooth project
execution

Question Five:
(a) Describe any live typical agreements and contracts applied in financing infrastructure
projects (10 marks)

Power Purchase Agreement : A contract between the project developer often an independent power
producer and the utility or off-taker. It defines the terms for selling electricity generated by the project to
the off-taker over a specified period.

Operation and Maintenance Contract: This contract outlines the responsibilities for operating and
maintaining the infrastructure asset. It ensures smooth functioning and longevity of the project.

Supply Contracts: These contracts cover the supply of essential resources such as fuel, water, or raw
materials needed for project operation. They secure a steady supply to meet project requirements.

Land Lease Agreement: When infrastructure projects require land, a lease agreement with the
landowner allows the project to use the land for a specified period. It addresses terms, rent, and other
conditions.

Engineering, Procurement, and Construction Contract: The contract involves the design, procurement,
and construction of the infrastructure asset. It outlines the scope, timelines, and quality standards.

Offtake Agreement: For projects like power plants, an offtake agreement ensures that the generated
output is purchased by the off-taker usually a utility or industrial consumer at agreed-upon terms

(b) Discuss any five risks associated with infrastructure projects. (10 marks)

Environmental Risks: These include biodiversity loss, environmental degradation, and habitat
disruption. Infrastructure development can harm ecosystems and natural resources.
Dependency Risks: Projects often rely on external factors such as suppliers, contractors, or technology.
Any disruptions in these dependencies can lead to delays or cost overruns.

Regulatory Risks: Changes in regulations, permits, or compliance requirements can affect project
timelines and costs. Legal uncertainties pose risks to infrastructure development.

Communicatory Risks: Poor communication among stakeholders—government, investors, contractors

—can lead to misunderstandings, delays, and conflicts during project execution.

External Risks: These include geopolitical tensions, economic downturns, and cyber attacks.
Infrastructure projects are vulnerable to external events beyond their control