- On August 29, 2014
It will come as no surprise that a discussion on infrastructure in Africa highlights the limited access to infrastructure across the continent. The estimated annual funding gap for infrastructure development is staggering. According to the World Bank’s Africa Infrastructure Country Diagnostic published in 2008, the cost of redressing Africa’s infrastructure deficit is estimated at around US$75 billion, with the current funding gap being around US$35 billion annually.
While its infrastructure is underdeveloped and spending needs are vast, Africa is hailed as a resource rich continent. About a third of the world’s mineral reserves are in Africa, including more than half of the world’s platinum group metals, cobalt and diamond reserves and nearly 40% of its gold reserves. Africa has among the largest reserves of manganese and chromium in the world, and is also a major producer of nickel, bauxite, and uranium.
The need for infrastructure development, including railways, ports, power capacity, water and information and communication technology, to making extracting these valuable resources viable means that the infrastructure spend for mining companies often dwarfs the spend required to construct the mine. As mining companies already anticipate that they will have to finance and deliver the infrastructure they require, there is an opportunity for governments to leverage mining-related infrastructure for regional economic development. Governments will try to coordinate delivery of this infrastructure with their national infrastructure objectives to narrow the funding gap.
Facilitating shared use of mining infrastructure between the mining company and third parties is the key to distributing the benefits of mining-related investments more widely. But this is by no means a simple solution:
- governments may prefer to target tax revenues rather than infrastructure sharing solutions;
- mining companies typically prefer vertically integrated logistics which they can control to ensure sufficient capacity for their operations; and
- potential third party users may have very different needs which infrastructure designed to service a mine may not be able to deliver.
To be a viable solution the mining and associated infrastructure project needs to align with the country’s longterm infrastructure strategy, and mining companies need to be offered the right incentives.
It is crucial that the parties involved explore the potential for shared use infrastructure in the early stages of structuring a project. There are a myriad of important issues to consider, and the earlier on in the process these issues are discussed with the relevant government, the better. In our experience acting for both lenders and sponsors, the parties frequently seek to progress a transaction on the basis of a term sheet which hasn’t been negotiated taking all possible stakeholders’ views into account. Dealing with bankability issues upfront in discussions with government, and in structuring the implementation of a transaction, goes a long way towards creating a package that is both practically workable for the mining company and bankable for its lenders.
This chapter considers the case for shared use infrastructure in the context of mining in Africa. It explores some of the key issues role players including governments, mining companies, third party users of infrastructure and funders will consider in relation to shared use infrastructure. It sets out some of the barriers to implementing the shared use of infrastructure and ways to facilitate it. It then proposes some structures for delivering shared use infrastructure, picking up on some of the more practical implementation issues.
The case for shared use mining infrastructure
Factors to consider: is it feasible in the circumstances?
It is important for governments planning for their current and future infrastructure needs to consider the potential benefits of leveraging off the demand to exploit their natural resources. Local communities also have an expectation that they will benefit from the development of mining and infrastructure projects in their region. A number of factors will influence whether it’s worthwhile for a government to press for a shared use model when granting infrastructure development concessions alongside mineral development rights:
The specific mineral to be extracted will dictate the infrastructure requirements of the mining company. For example, whilst coal mining will require rail networks and a port terminal with coal handling capability to get the product to market, processed gold may well be airlifted by helicopter.
Whether any processing will take place at the site of the mine will inform decisions as to whether there is a need to develop additional power capacity, or water storage or wastewater facilities.
The location of the mine will play into the strategic importance of shared use infrastructure and whether there will be any demand for its shared use. The rail links of remote mines may provide little benefit as passenger rail links, but may have the ability to make smaller scale mining by juniors in the area viable. This would enable the government to grant a greater number of mining concessions to investors who would not have been able to develop the necessary infrastructure themselves.
Alternative infrastructure which already exists or may be developed in the same area may compete with the newly developed infrastructure. The option to use a road or alternative rail line may result in more competitive access tariffs for third party users of all sectors. However, if the sponsors and funders of a new rail line are relying on the demand of other users to cover the costs of developing more capacity than the mining company needs, they are unlikely to support shared use if potential demand is likely to be low.
A major focus for mining companies is the development of rail and port access, which are also two of the most complex types of infrastructure for which to grant access to third party users. However, the economic benefits for a country in developing these types of infrastructure in the right geographic locations cannot be underestimated. For example, forestry and agriculture in fertile but rural areas can be properly developed where there is a means to transport the timber and crops to urban markets, processing plants and ports for export. ‘Stranded’ mining assets can also be accessed by junior miners using shared infrastructure, allowing development where majors would previously have had the competitive advantage. Mining companies are showing an increased willingness to contribute to this strategic economic development. Rio Tinto states in relation to its Simandou iron ore project in Guinea (which is being developed with associated rail and port infrastructure) that it is ‘making sure its investments are in line with Government’s development priorities’.
“The shared use of mining infrastructure requires coordination between the government, the mining company, the mining company’s funders and potential third party users of the infrastructure, including other mining companies and local users”
Access to finance sources
Planning infrastructure around mineral resource exploitation would allow mining companies to involve private and public finance options which would not otherwise have been available. Both commercial banks and development funders such as development finance institutions (DFIs) and export credit agencies (ECAs) are more likely to participate in financing infrastructure where the cash flow and other risks can be mitigated by guaranteed use of the infrastructure by the mining company.
Economies of scale
The economies of scale and lower marginal costs derived from shared use infrastructure, particularly in the context of rail links and port terminal usage, means increased profit margins for mining companies. It also generates higher tax revenues for the government.
|Nigeria: capitalising on coal reserves
As part of its efforts to boost power generation in Nigeria, the federal government is capitalising on the country’s coal reserves. In August 2013 the Nigerian Ministry of Mines and Steel Development signed a memorandum of understanding with Chinese-Nigerian consortium HTG-Pacific Energy relating to the mining licence granted for the exploitation of the Ezinmo coal block in Enugu State. The consortium will develop a mine to extract coal and as part of phase 2 develop a 1000MW coal-fired power plant near the mine site. Total development costs in the region of $3.7 billion are expected to be funded by foreign institutions. Power generated is expected to supply the national grid: developing this infrastructure alongside the mine will substantially increase power capacity in Nigeria
Perspectives of different role players
A balancing act
Mining companies are already incentivised to raise large amounts to spend on infrastructure development: there is the potential to offer them additional incentives to develop extra capacity to be taken up by third party users. To make this work, governments have to address the concerns of the mining company to ensure an efficient, cost effective mining and logistics operation. They also have to address the concerns of the project’s funders who are seeking to mitigate construction, operational, cash flow and interface risks.
The shared use of mining infrastructure requires coordination between the government, the mining company, the mining company’s funders and potential third party users of the infrastructure, including other mining companies and local users. Each of these participants has a different assessment of the risks, and a preferred approach to designing, funding, delivering, accessing and owning the infrastructure. These must be carefully balanced and negotiated to achieve a successful outcome.
The mining company’s approach
Mining companies are typically not incentivised to coordinate their infrastructure development efforts with a country’s national infrastructure development plans. A mining company’s objective is to ensure it has sufficient infrastructure capacity to meet its needs. To guarantee the highest level of efficiency, mining companies typically seek to implement a vertically integrated operations and logistics model and require control of the construction and operation of their infrastructure.
A mining company needs:
- Priority access rights to its required capacity
- Operational control to avoid disruptions, delays and additional repair and maintenance costs, and have flexibility to deal with breakdowns and force majeure events
- To maintain competitive and first mover advantage
In addition to capacity and efficiency, a mining company may also have other concerns with a proposal that it share its infrastructure. Where the mining company is required to share with competitors mining in the same region, it may lose the competitive and first mover advantages gained by controlling access to the region and having an integrated business. The more costly and strategic the infrastructure, the more incentives governments will have to offer to encourage the mining company to develop multi-user infrastructure.
A mining company will also be concerned with being exposed to the credit risk of its competitors if another user of the infrastructure becomes unable to pay its way. The mining company will either accept this risk (and have to become comfortable that it may be underwriting its competitor) or seek to cover the risk with security from each other user of the infrastructure. Depending on the quantum of the security, that requirement alone can make the shared use of infrastructure unviable.
|Vale builds a rail link in Mozambique
Given the limited capacity of the Sena railway connecting its Moatize mine with the port of Beira (which is currently being expanded and rehabilitated), Vale is constructing a multimillion dollar 912 km long railway line linking the mine in Tete province to Nacala in Nampula province, where Vale will build a deep-water sea port. The railway will pass through southern Malawi. There has been talk of allowing other companies developing mines in the region, including Rio Tinto and Beacon Hill Resources, access to the railway line. Vale is familiar with sharing infrastructure with third party users – it currently operates railway lines in Brazil which offer logistics services to third parties, and operates long distance passenger trains along stretches of those lines.
Project finance lenders, whether banks or DFIs, lending to companies developing mines and infrastructure assets typically require extensive risk analysis and due diligence. They focus particularly on completion risk and ensuring cash flows will be available to service debt during the operational phase. Lenders are also concerned with interface risk, and accordingly prefer to finance an integrated development of the mine and associated infrastructure as this is the most predictable structure allowing lenders to have the greatest level of control. The less integrated the project, the greater the complexity and associated costs and risks from a lender’s perspective. A single EPC wrap with integrated completion testing is possible in an integrated project, resulting in minimised completion interface risk and delays.
However, where there is a proposal that certain aspects, such as the rail or port, will be shared use, a fully integrated approach may not be the funders’ preferred structure. Lenders will want to know in advance who the future users of the assets will be, or have the right to consent to new users being granted access to the infrastructure if their identity is unknown at the outset. This can mean that a third party mining company seeking to access the infrastructure is exposed to extensive due diligence by its own lenders and the lenders of the mining company developing the infrastructure. This level of scrutiny may not be acceptable to a third party user if it is concerned with information about its development flowing back to its competitor (as the developer of the infrastructure).
Lenders may also require additional sponsor completion if one or more of the infrastructure assets will be owned separately. Lenders will closely scrutinise the pricing and risk allocation between the various entities (usually SPVs) that hold each asset.
Different users means different issues
|Shared use infrastructure: the Richard Bay coal terminal
An existing example of infrastructure developed for the shared use of mining companies is the Richards Bay Coal Terminal in South Africa, the largest coal export terminal in the world. RBCT is run independently, with its shares held by mining heavyweights Anglo American, BHP Billiton, Glencore, Exxaro, Sasol Mining and Total Coal, amongst others. The railway servicing the RBCT is owned and operated by stated-owned Transnet, who is considering developing another coal terminal near RBCT to service the needs of other, smaller mining companies who have limited access to the RBCT.
Third party users of mining infrastructure will differ depending on the circumstances. It may be that a mining company is required to share its infrastructure assets with other miners in the region – this may be the case where a large-scale mining operation is adjacent to junior mines or undeveloped mineral deposits. Alternatively, the focus may be on allowing one or more diverse users access to the mining company’s infrastructure – in the context of rail or road infrastructure this may mean allowing forestry or agriculture players, or even passengers, to use the transport network. Different issues will arise where the shared use is between multiple users with similar requirements, such as multiple miners, and where the shared use is between multiple users with different requirements, such as a miner and passengers using the same railway line. For example, on shared rail infrastructure passengers are usually given priority over freight which can become problematic for the developer of the infrastructure, particularly if that developer requires priority access to the infrastructure.
In all cases where the third party users are reliant on their rights to access the mining company’s infrastructure, the users will aim to obtain access rights which secure their required capacity, are granted for a long term, and to which reasonable and predictable access tariffs apply.
Where the third party users are other mining companies, these users may seek an equity share in the infrastructure asset to secure access to excess capacity – this will usually depend on the timing of the project and the financial resources of the user. Alternatively, these users may only seek access on the basis of user fees once the infrastructure is completed, in which case they may prefer a third party operator to manage the asset.
|Shared rail infrastructure options tabled in Cameroon
Sundance Resources has had formalised discussions with several other mining companies with projects neighbouring Sundance’s Mbalam iron ore project in Cameroon, including Equatorial Resources, Core Mining and Legend Mining, to explore sharing the rail and port infrastructure it is developing alongside its mine. Options being considered are direct investment by other miners in the infrastructure, or granting access on a fee for service basis.
Governments may seek to intervene to ensure that users are granted access rights for a reasonable tariff. Neither the forestry nor agriculture players, and certainly not the passengers, who are relying on the infrastructure will have the financial resources to fund access charges which seek to recover capital and all operating costs. Government subsidies and regulatory intervention are likely to feature heavily in these contexts, particularly where the infrastructure investment to accommodate other users diverges from the mining company’s requirements – passenger rail links require additional safety measures, stations for regular stops, and different rolling stock for trains which travel faster. A mining company is likely to look for government support for capital expenditure and the operation of these aspects, although the government will be looking to the mining company to subsidise the use of the infrastructure by those users less able to pay.
“Ultimately the government’s stance on a particular project will depend on the strategic importance of developing the specific type of infrastructure in the specific region”
The government’s focus
Using the exploitation of resources to build long-term assets has the potential to support sustainable and inclusive growth. This may provide greater benefit for the country than focusing purely on tax revenues and other fiscal advantages of granting mining rights.
Governments already take into account certain non-fiscal returns such as social and environmental development in the area adjacent to mines. However to incentivise mining companies to participate in shared use infrastructure models and compensate them for the capital expenditure required to develop excess capacity, governments may have to consider fiscal trade-offs such as agreeing to lower tax revenues.
|The Putu Project in Liberia: power to the people
In Liberia, the government requires the mining company developing the Putu iron ore project to ensure that the power plant being constructed as part of the project has excess capacity to service local communities within a 10km radius of the mine. Charges for the electricity provided must be based on residential users’ ability to pay, and for commercial users should be reasonable rates based on their usage.
This means governments have to internally prioritise the benefits of granting mineral extraction and infrastructure concessions. Where the minister of finance may be pushing for increased tax revenues, the minister of transport will be seeking to deliver logistics solutions for industry and possibly public transport solutions, while the interior minister is focusing on social welfare and employment opportunities – not all of these priorities can be achieved in every instance. This is where discussions with government early in the structuring process can yield real results for the sponsor by ensuring the best possible package is negotiated.
Ultimately the government’s stance on a particular project will depend on the strategic importance of developing the specific type of infrastructure in the specific region.
Implementing shared use infrastructure
Cost and timing implications
Shared use infrastructure has short and long term cost implications: initial capital costs for construction, possible expansion or future development costs to increase capacity, and maintenance and on-going operating costs. Who will bear each of these costs, and in what proportion, will be a critical aspect of any shared used negotiation.
|Access requested to ArcelorMittal’s railway in Liberia
ArcelorMittal has been requested by the government of Liberia to grant access to its railway line, linking iron ore mining operations with Buchanan port, to Sable Mining and other third party users, to facilitate the export of iron ore from Guinea. Expansion of the rail line will be required to ensure excess capacity is available for shared use whilst maintaining capacity for ArcelorMittal’s operations – how potential users will contribute to the costs of the expansion is under discussion.
To accommodate excess capacity for third party users the initial capital costs may well exceed the mining company’s original estimates. Where users have similar needs to the mining company, the additional costs will be lower – for example where the other users of a rail line are mining companies, costs will include additional spurs, loading facilities and extra rolling stock. Where the users have different needs there is a potential for vast sums of additional capital costs – for example, if passengers will have access to a rail line being built to transport coal, different rolling stock with enhanced safety specifications, and new passenger stations, will be required. This is one of the many reasons why sharing mining rail infrastructure with passengers is so difficult to achieve in practice.
Similar considerations apply to the operating costs. Multipurpose infrastructure has to be carefully coordinated to ensure each user has access to its required capacity, at the times and intervals most efficient for its operations. Of course this depends on the infrastructure in question – it is easy to see complex coordination issues arising where coal freight and passengers use the same line, especially where it is only single-track, but a power station is unlikely to face the same coordination issues as long as it has sufficient capacity to supply all its users.
Mining companies should seek appropriate incentives and support from governments to mitigate these costs and risks.
The timing of construction can also become an issue, particularly if multiple mines are sharing the same infrastructure. The infrastructure must be fully available for use whether only one, or all, the associated mines are operating and ready to access it. The result is that the early user may end up paying disproportionately high tariffs until other users start accessing the infrastructure. Alternatively, later users may be required to enter into take or pay arrangements for their access rights, paying tariffs whether or not they are ready to access the infrastructure. To mitigate this, mines would need to developed in line with the infrastructure development timetable, which reduces the flexibility of the mining company to speed up or slow down the mine development based on changes to market conditions. In Australia proposals for shared use infrastructure projects have not proceeded due to this scenario being unacceptable to the parties involved – this is likely to be the case in Africa too.
The ownership dilemma and government’s golden share
One of the principal dilemmas in facilitating the shared use of infrastructure is how to structure the ownership of the infrastructure and mining concessions.
Mining companies, particularly large scale iron and coal miners, want to avoid the coordination costs and loss of control which result from separate ownership. They prefer an integrated approach where the mine and infrastructure are owned by the same entity. However, where the mining company owns the infrastructure governments may be concerned that it will exert its monopoly power, possibly charging high access tariffs and restricting access directly or indirectly by limiting available capacity.
A separation of ownership of the infrastructure and the mine, typically with the mine acting as the anchor tenant of the infrastructure, incentivises the owner (or third party manager) of the infrastructure to maximise profits. This model facilitates shared use because the infrastructure is designed and operated to maximise capacity. However, this focus on profits, often in an environment with no competitors, means that the infrastructure is likely to be expensive for users, including the mining company, which may ultimately hinder third party access.
The natural alternative is to follow the ‘golden share’ approach, where ownership is separated into different SPVs which may have some common shareholders, and where the government holds an ownership stake in the infrastructure SPV allowing it to influence key strategic decisions.
|Separate ownership: the Simandou project, Guinea
The development by Rio Tinto of the Simandou iron ore project in Guinea provides a good example of separate ownership of mine and infrastructure, and an interest held by the government. The Simandou project consists of an open-pit mine in South East Guinea, a 650km long railway and a port at Conakry, along with associated infrastructure generally required for the operation of the mine such as water supply, power plants and access roads. The mine and the rail and port infrastructure will be developed as two separate projects: The mine will be developed and owned by project company Simfer, held by Rio Tinto, China’s Chalco and the IFC, with share options held by the Government of Guinea. A third party consortium will fund, build and own the rail line and the port infrastructure. This infrastructure will be accessed by multiple users, opening up the interior of Guinea.
Acknowledging the risks
Ideally a discussion of the potential for the shared use of mining infrastructure should take place early on between the mining company and the government, so all stakeholders are aware of and can manage and negotiate the risk allocation.
Having these negotiations early on alongside the negotiation of the applicable fiscal regime means that governments will be in a better position to clearly set out the full incentive package to the sponsor. This may include protections and compensation for the mining company in the event that it suffers losses directly related to granting access to third parties – for example, government guarantees to support the obligations and liabilities of third party users. Mining companies may also look to governments to provide additional flexibility in markets where commodity prices are falling, acknowledging that the profitability of the project will be affected in these circumstances.
It also means that once the design stage commences, the parties are clear on the capacity constraints and requirements which must be achieved, and incremental capital costs can be avoided.
The role of a regulator and controlling tariffs
Currently, there is little or no regulatory incentive for private developers to design projects, or expand them, to create excess capacity (other than potential excess capacity the mining company may require in the context of an expansion of its mining operations). Alongside bilateral negotiations with mining companies, governments are likely to start implementing a regulatory framework that encourages sharing infrastructure with third parties.
They are also likely to put in place strong regulators to oversee the implementation of shared use infrastructure. For example, a regulator may be required to set, or if there is regulation in place which already does so, enforce the application of maximum access tariffs to ensure users are not exploited.
What are the possible structures for delivery?
When it comes to structuring delivery of the various types of infrastructure required by mining companies, there are a range of options to consider. The mining company may look to:
- Develop and finance all related infrastructure itself under a single financing or series of separate financings; or
- Develop and finance only parts of the infrastructure itself and instead participate with other interested parties in the financing and development of the remaining required infrastructure.
Typically mining infrastructure will be delivered using a project finance solution under which there is limited recourse for the lenders against those developing the infrastructure. Instead, lenders’ recourse will be to the assets and cash flows of the relevant project. Therefore it is on these assets (including project contracts) and cash flows that the lenders will perform due diligence to establish the extent to which the project is ‘bankable’.
It is important that the mining company carefully plans the proposed delivery solution at project inception stage to achieve a cost effective and bankable solution. Any bankability concerns later will usually give rise to a lender requirement for the mining company to provide liquidity support to meet contingent risks not adequately transferred into the contracting structure.
You don’t have to look far to see examples of projects falling at the final hurdle prior to financing because of bankability issues in the structure that were not properly addressed through the project planning stage and which cannot, in the view of the lending market, be appropriately mitigated by the mining company.
“It is important that the mining company carefully plans the proposed delivery solution at project inception stage to achieve a cost effective and bankable solution”
Construction risk is a key concern for lenders, since until the relevant works are completed there is no project and no access to cash flows to service debt repayment – but at the same time the lenders will have money out of the door and in the ground. A key mitigant to construction risk for lenders will be the manner in which the works are delivered and the party delivering them.
Single versus multi-contract approaches
The lenders will prefer to see the works being delivered under a lump sum, turnkey engineering, procurement and construction (EPC) contract arrangement. Under this contracting structure, the contractor will guarantee completion of the works on time, on budget and to a required specification. Depending on the covenant strength of the contractor and the security package it offers, lenders are likely to be more comfortable that completion support (or at least uncapped support) will not be required from the mining company when contracting on this basis. Conversely, where a multi-contracting solution is adopted using, for example, engineering, procurement and construction management (EPCM) arrangements, the lenders will typically see interface risk which may give rise to time and cost overrun exposure that is not easily transferred into and managed by the contracting structure. Consequently, lenders are more likely to require completion support and other contingencies and reserves from the mining company.
Key for the mining company will be to secure a position where recourse to its balance sheet, the requirement for uncapped credit support and other forms of liquidity support is limited to the fullest extent possible.
Fully integrated infrastructure delivery solution
A fully integrated solution under which the mining company finances all aspects of mine and infrastructure delivery using a single EPC contract arrangement will provide least complexity from a delivery and financing perspective.
Lenders prefer to finance an integrated development of the mine and associated infrastructure, such as a rail link and port terminal, as this is the most predictable structure allowing lenders to have the greatest level of control.
The EPC ‘wrap’ of project delivery risk will facilitate an integrated completion test and will minimise project-toproject interface risk. Accordingly, it is this structure that is least likely to require mining company completion support. This being said, it is likely that the EPC contractor will include significant contingency within its price to manage known and unknown risks. This can give rise to affordability concerns. There is also the risk that there may be no single contractor prepared to accept full project delivery risk or indeed, even if there is such a contractor, lenders may not accept that it has the covenant strength to manage this risk in a cost overrun scenario.
Whilst a single integrated completion test may be possible, there will be the possibility to stagger the financing and phase the manner in which the individual infrastructure projects are brought on-line. This may assist in opening up cash flows to the lenders to start servicing debt at the earliest point possible, to the extent that any aspect of the infrastructure is able to operate on a standalone basis. Naturally the lenders will want to control use of this cash flow until such time as the fully integrated project is completed. Lenders are also likely to require that mining company support remains in place for each aspect of the project infrastructure until the fully integrated project is complete.
Rail and port infrastructure will lend itself to a multiuser solution. Mining companies have tended to take a monopolistic approach to rail infrastructure, in particular, not wanting to open up opportunities for competitors and wanting to retain operational freedom on the infrastructure which will best enable it to achieve efficiencies and a stronger internal rate of return. This being said, the cash flow advantages that shared use can bring cannot be ignored.
Provided that the mining company retains design control and is able to manage the extent of spare capacity that is able to be used on a multi-user basis, it may feel that it retains sufficient control for such shared use of its infrastructure not to impact materially on its operations. Also, it is more likely to achieve government support if access is opened up, both in terms of restrictions being placed on competing infrastructure and subsidies on tariffs charged, for example, to private individuals using a rail line. It may also be able to obtain first refusal rights on future expansion as operations grow.
It is likely that the government will want control over tariff setting and indeed there may be independent regulation in this regard. Project finance lenders may want to see a floor price below which the local government will subsidise tariffs and they may even seek a guaranteed level of usage to remove, to some extent, demand risk from the project. It is not unusual for lenders to look for the mining company itself to accept take-or-pay obligations in respect of infrastructure usage, again to mitigate against any demand risk being assumed by lenders.
Non-integrated infrastructure delivery solution
In contrast to the fully integrated solution, limited or no integration of the separate infrastructure projects is likely to lead to increased complexity. By way of example, this may involve separate funding and a separate EPC arrangement for each aspect of the infrastructure.
A non-integrated infrastructure delivery solution for the mine, port and rail giving rise to increased interface risk.
Infrastructure company formed by key stakeholders to procure infrastructure on a long-term concession basis.
Whilst increased complexity will be seen because of the interfaces created under the separate funding solutions, it is these separate funding solutions that will provide enhanced flexibility with regard to the project-wide funding mix. This may be of particular advantage where the level of debt required for one project cannot be satisfied by one source or type of funding. The structure and risk profile for each infrastructure type can, under these proposals, be shaped to suit preferred categories of debt and equity providers.
“Whilst the mining company will not be controlling the development of the relevant infrastructure, it will have a seat at the table with an opportunity to shape the development to meet its own particular requirements”
Rail and port infrastructure may be developed on a fully open access basis and this may improve the credit profile for these funding packages. The funders may still require the mining company to be the anchor user under a take-or-pay type arrangement and the funder for the mine will perform extensive due diligence on these arrangements and the mining company’s access rights and exposure to tariff escalation.
The inherent interface risk created under this structure is likely to give rise to a requirement for credit support from the mining company, particularly with regard to construction completion. The key risk for the mine funder, for example, will be non-delivery of infrastructure required to transport raw or processed materials to market. The sizing of any completion support required from the mining company by its lenders is likely to take into account worst-case scenarios but perceived risk may be mitigated through the use of contingent facilities required to be utilised cost to completetype tests are failed.
Funders of each of the separate portions will also be sensitive to intercreditor risks, particularly as the rail and port lenders will be structurally subordinated to the mine lenders due to the direction of cash flows through the project as a whole. Cross default provisions will have to be carefully structured to balance risk between the different groups of lenders.
Collaborative approach to infrastructure delivery
An alternative approach would be for the mining company to participate in the development of one aspect of the infrastructure, for example the rail or port, along with the third party users, whether they are other mining companies or users from other sectors also requiring development of infrastructure to more fully exploit a commodity or product, such as investors in the agricultural sector. Investment in small holding farmers by international food producers (such as that by Nestle and Unilever) to generate reliability in crop supply and quality will yield little if the international markets cannot be opened up due to the lack of transportation infrastructure required to get product to market.
Early feasibility planning in respect of the relevant infrastructure may be performed by government bodies or other quasi-governmental agencies with a view to attracting key stakeholders. The relevant interested parties may then form a development company (InfraCo) to coordinate completion of feasibility studies, outline the design and agree a share in development cost risk. These arrangements must be sufficiently flexible so as to allow new participants to join during the development process, subject to the interests of the other parties not being materially affected.
Whilst the mining company will not be controlling the development of the relevant infrastructure, it will have a seat at the table with an opportunity to shape the development to meet its own particular requirements.
Once the proposals have been agreed and the outline design finalised, the project may be procured by the relevant government on a concession basis with a private sector bidder financing, constructing and operating the infrastructure for the agreed concession period. It is likely that members of the InfraCo would retain a right to contribute equity in the project to retain a level of control over key issues around access and tariff setting.
The concession will be likely to prescribe the means by which tariffs will be set but it is also likely that these aspects will need to be subject to independent regulation. The concessionaire will enter into direct access agreements with the relevant participants.
Whilst the mining company will have less control over the development, it will also have a reduced risk in the development when compared to the other structures discussed above. Its lenders for the mine development will scrutinize the shared use arrangements and will require that the mining company has certain controls (akin to a golden share type arrangement) over the granting of new access, use of spare capacity and the revision of tariff levels. The credit exposure for this lender could also be said to be mitigated through open use as an element of the demand risk to which the mining company may otherwise be exposed is reduced.
Delivering infrastructure on a shared use basis is not without its challenges and the above examples represent only suggestions as to how this may be achieved.
It is clear, however, that the success of any such strategy will require cooperation and planning, starting at central government level. This must be used to foster public and private sector investment, participation and innovation to properly harness the potential that Africa has to offer.
The infrastructure shortage in Africa is a hindrance to economic development and wider prosperity. It is therefore necessary for infrastructure development to be planned from a strategic point of view at a national and cross border level if such infrastructure is to properly support broad based economic development.
The opportunities for governments to leverage off the demand for their natural resource wealth should not be underestimated, but as this chapter highlights, doing so is not without its challenges. Key issues to consider are the incentives which drive each of the stakeholders and how ownership and risk allocation should be structured.
Ultimately, the higher the benefits of shared use and the more stakeholders are involved, the more important it is for the government to play an active role in negotiating and incentivising, facilitating the delivery of infrastructure with sufficient capacity, and overseeing the operation of a shared use access model.
Shared use is always going to require a give-and-take approach from all parties involved, and governments will have to take the lead in ensuring collaboration and coordination between the multiple stakeholders.