“Beyond Insurance – Risk and the PPP Model of Development” HK SAR Gov. Efficiency Unit PPP Project Financing Seminar

1. 30 September 2005 “Beyond Insurance – Risk and the PPP Model of Development”HKSAR Gov. Efficiency UnitPPP Project Financing Seminar James A. Maguire Marsh (Hong Kong) Limited 26/F Central Plaza, 18 Harbour Road Wanchai, Hong Kong Tel: 2301 7264

2. Beyond Insurance: Risk & the PPP Model of Development

3. Beyond Insurance: Risk & the PPP Model of Development

4. Beyond Insurance – What is Project Finance? Key Aspects of Project Finance • Financing technique widely used to raise funds for capital-intensive projects • Limited or non-recourse! SPV is ‘man of straw’, therefore risk transfer vital • Lender is satisfied to look at the cash flow, revenue stream or earnings of a project as the source of funds from which a loan will be repaid and to the assets of the project as collateral for the loan or to repay debt • Lenders look to the underlying assets of the project itself - the most critical being the contractual obligations of the parties under the numerous project contracts (rail tariff setting, concession agreement, power purchase, fuel supply, construction, operation and maintenance, lease, etc) - for collateral or security and as a source of revenue for debt service. • Contracts represent the framework for project viability and control the allocation of risks. • Project finance is essentially a form of cashflow financing.

5. Lenders Goals • Security that the project is completed • Security to ensure that the project remains economically viable • Security that lender is fully repaid on schedule Beyond Insurance – What is Project Finance? Project Finance Issues • Developers / Sponsor can undertake a large debt commitment with a minimum of risk – Highly leveraged structure (75/25 debt to equity ratio) • Projects are evaluated on the merits of the project itself - its “Bank-ability”: credit worthiness of the borrower is often not relevant • Elimination of or restriction on, the recourse nature of financing projects: non-recourse or limited recourse versus potentially restrictive loan covenants in other debt or equity arrangements

6. Project Finance & Lenders – Why Do They Drive BMWs? • Finance arrangements often on a limited or non-recourse basis • Real risk takers are therefore, the lenders • Insurance is a principal recourse to funds if something goes wrong • Lenders’ requirements must be taken into account to achieve a bankable project

7. Lenders & Insurance – What Do They Want (Besides BMWs)? Customary Lenders’ Insurance Requirements: • Waiver of insurers rights of subrogation against Lenders • Loss Payee provisions – Designated accounts onshore or offshore • Lenders named as Additional Insured • Notification to Lenders of cancellation/other amendments • Non vitiation conditions (whereby non-compliance with policy conditions by other insureds will not prejudice Lenders rights under the policy) • Minimum insurer financial ratings (at least A-) • Comprehensive cover with deductibles/waiting periods not exceeding pre-agreed amounts: Customarily, as low as possible or else additional funding risk with SPV • Assignment of insurance and/or reinsurance contracts • Political Risk Insurance • Terrorism Insurance

8. Project Finance – The Role of Insurance Insurance and Bankability • Funds loss of or damage to project assets • Secures income streams which are fundamental to loan repayment • Funds delay in project completion • Minimizes the completion risk of the project • Enhances project credit • Insurance in a project becomes a form of collateral or an enhanced form of security for the Sponsor and the Lenders

9. Project Finance & InsuranceParties Exposed to Project Risk • Owner / Joint Venture Partners / Principal • Investors / Finance Institutions / “Lenders” • Contractors / Sub-contractors • Suppliers / Manufacturers • Operator • Contractors / Engineers / Consultants • Community • Project Participants (Fuel Supply, EPC, Offtake, Concessionaire) will assume risk and require insurance • Project Documents (Supply, EPC, Offtake Concession, Common Terms Agreement) Will Allocate Risk And Impose Insurance Requirements Need for control on insurance

10. Project Finance & InsuranceOwner Controlled Insurance Program (OCIP) • Precise control over premiums • Cover designed for the full project period irrespective of packaging or phasing • Will ensure Delay in Start Up (DSU) can be easily effected • Simple transfer from construction to operational phase • Owner has choice of insurer security • Claims paid directly to Owner and/or designated account • Continuity and interface with Owner’s existing insurance programme and insurers • Where there is a phased handover • Where financing institutions are involved. Limited or Non Recourse Finance • All Project parties covered for same risks – single point responsibility • Same principle as EPC contract • Where Delay in Start Up (DSU) is required

11. Beyond Insurance – Why Project Monitoring? Construction Manager Developer Underwriter Time Sheets Field Reports Drawings Photos Specialty Contractor Architect Change Orders Budgets RFI Meeting Minutes Schedules RFP Job Reports Contractor Engineer Owner

12. Beyond Insurance:Project Monitoring – Who Benefits? • Mitigating risk is a project issue (not an Owner/Sponsor/Contractor/ Supplier/Lender issue) • Independent from the day-to-day Project Level • Provides assurance and mitigates risk for Owners, Contractors, Lenders, Insurers and other invested parties

13. Beyond Insurance – Safety!

14. Beyond Insurance - Safety and the 7 Ss • Safety Culture • Source of Labour (Foreign workers) • Skill & perceptions • Supervision • Safety infrastructure • Subcontracting • Self regulation

15. Beyond Insurance – Safety and the Financial Costs! • Losses due to the injured worker(s). • Losses due to inefficiency of the worker(s) who just recovered from injury upon resuming work. • Losses due to medical expenses. • Losses due to fines & legal expenses. • Losses of productivity of other employees. • Losses due to damaged equipment or plant. • Losses due to damaged materials or finished works. • Losses due to idle machinery or equipment.

16. Beyond Insurance - Foster a Safety Culture • Line Management Responsibilities • Top-down Management • Lead by Example • Safety is joint Principle-Contractor obligation • Reputation risk

17. Beyond Insurance – Terrorism in Asia • Statistics show that terrorism is widespread in Asia • Many Asian countries have a dependence on western governments, which is creating a backlash • Asia today is an ethnic and religious melting pot which creates the conditions for terror cells to coexist with local populations • Terrorists increasingly targeting the infrastructure sector • Infrastructure assets are now seen as critical to the fabric of society (Power & Utility, Transport, Water Treatment) • The risk of terrorism is a concern to lenders

18. Beyond Insurance - What Works in PPP & Project Finance? • Management of Risk is fundamental to PPP and Project Finance! • Address “risk” issues in the early stages of project development • Develop Sponsors Risk Management Philosophy • Foster a Safety Environment on the project site • Control the procurement and placement of project insurance program • Most PPP or Project Financed Infrastructure Projects will require Owner Control Insurance Program (OCIP) • Ensure insurance clauses of all project agreements should be “back to back” to avoid gaps both in risk transfer and redundant insurance • JV/ EPC/ project leases/ concession/ finance/ regulatory agreements

19. Think of insurance as: • prepaid line of credit • security instrument • Project Monitoring to minimize contractual claims exposures • Insurance is only one instrument in the project security package • Insurance market volatility prevails • The impact of Katrina “Risk is a choice, rather than a fate.” Peter Bernstein Beyond Insurance - What Works in PPP & Project Finance?

20. Suddenly, a heated exchange took place between the king and the moat contractor.

21. China One of the first limited recourse water treatment plants Vietnam The first two limited recourse power stations in Vietnam China The largest automobile manufacturing facility in China Philippines One of the largest power plants in the Philippines Taiwan The tallest building in the world Korea The first two limited recourse power stations & Water Treatment Plants China The largest foreign invested IPP China The first foreign invested semi-conductor chip manufacturing plant Taiwan The largest rail project in the world Marsh Infrastructure Projects in Asia We provided sponsors insurance advisory services to essential infrastructure projects in Asia Sarawak The largest hydro IPP under construction in S.E. Asia Laos The largest cross border hydro IPP under construction in S.E. Asia