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Chad-Cameroon Pipeline: Summary
•
Did the project finance create value for the sponsors?
– Gross Value: at least $15 million + value of time structuring the deal. (It must have
been worth it to spend the time and pay the $15 million in fees.)
– The fact that the sponsors used corporate finance for the field system suggests that
transaction costs of PF are high. The incremental benefit of arranging a PF for the
field system is exceeded by the incremental transaction cost.
•
Important sources of the value
– World Bank/ECAs participation mitigated political risk. The RMP constrains the
party (Chad gov’t) who controls the risks.
– Non-recourse debt shielded sponsors credit exposure.
– PF structure allowed the use of higher leverage (higher value of tax shields, and
reduced equity exposure).
•
•
Compared to the Busang/Bre-X deal in Indonesia, Chad and Cameroon all got
a pretty good deal.
But the cash flows that Chad receives is “back-loaded”—it gets more of the
cash flows later, rather than earlier. In other words, it ends up bearing more of
the reserve risk than the sponsors.
Chad-Cameroon Pipeline
Timing and Distribution of Project Cash Flow
$800
$700
$600
$500
$400
$300
$200
$100
$0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027
Chad CF
Cameroon CF
Sponsors CF
Classification of Project Risks
(No Market Exists)
Market
Risks
(e.g., country)
Demand = f(GDP)
Inflation
Exchange Rates
Interest Rates
Oil price
Force Majeure (political
Expropriation
(taxes, regulation, enforcement)
Currency Convertibility
Currency Devaluation
Macroeconomic
and
some Sovereign
Risks
(Market Exists)
Project
Specific
Risks
Force Majeure
(Acts of Nature)
Low
Operator Performance
Land Acquisition/Permits
Cost Over-run/Delay
Reserve risk
Support Roads (Infrastructure)
Expropriation
Environmental Risks
Ability to Control
High
Construction,
Operating,
and
some Sovereign
Risks
Generic Risk Management Strategies
(No Market Exists)
Market
Risks
(e.g., country)
INSURE
(with political risk insurance)
ALLOCATE
(with contract and profit sharing)
or
DETER
with WB/IFC participation
BEAR
HEDGE
(Market Exists)
INSURE
Project
Specific
Risks
OR
Influence
ALLOCATE
(with contracts)
DIVERSIFY
Low
Ability to Control
High
Principles of Risk Management

Allocate risk to the party that controls the risk or had the greatest impact on its outcome
(effectiveness).

Allocate risks to the party that can bear them at least cost (efficiency).
 When possible and cost effective to do so, write a detailed contract specifying
actions, quality, and performance. Contracts work best when the risks are
identifiable, outcomes are verifiable, and contracts are enforceable.
Predictable: note the difference between risk (known distributions) and
uncertainty (unknown distributions)
Verifiable: note the role of asymmetric information.
Enforceable: note the importance of legal systems, property rights, and
enforcement mechanisms.
 When negotiation, contracting, and other transaction costs make complete
contracting unfeasible, allocate residual risk and return to align incentives
and induce optimal behavior.
 If possible, allocate asymmetric, downside risks to debt holders; allocate
symmetric and upside risks to equity holders.
Murphy’s Law Applied to Project Finance
• Nature always sides with the hidden flaw.
• Anything you try to construct will take longer and cost more than you
thought.
• If everything seems to be going well, you don’t know what is going
on.
• The unexpected will always happen.
Source: Fortin, R. Jay, Defining force majeure, Project and Trade Finance, Jan. 1995.
Murphy’s Law Applied to Project Finance
• Project risks end up on those least able to resist them.