Technical Workshop on Concessioning and Investment in TFCA’s in SADC

WHAT MAKES A PROJECT BANKABLE?

Martin Potgieter, Tourism SBU

1 September 2014

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Introduction to IDC Tourism SBU Funding Activities

Sectors covered by SBU:

SBU Approach to development of these sectors

Accommodation: Hotels, guest houses, game lodges (efficiency of room size currently under

review)

Niche Tourism: Adventure & sports tourism, business tourism, attractions (including theme parks

and natural attractions), health tourism.

Exclusions: Stand alone restaurants (unless linked to an attraction), casinos and gambling

facilities, property development, timeshare/fractional developments.

No direct funding of public sector → Require PPP

• Proactive development of projects in subsectors through identifying potential projects, project

scoping, pre-feasibility and feasibility studies.

• Assessment and funding of applications as received

• Active participation and sponsorship of industry events (HICA, Sports Exhibitions, Imvelo)

Key elements to IDC’s funding approach outside RSA:

• Strategic alignment towards supporting development of business-oriented accommodation supply in

ROA

• Funding outside RSA largely limited to debt funding

• Min. project sizes apply (R5m in SACU; USD3m in SADC; USD10m in ROA)

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Financing Criteria of the IDC

• Consider funding of start-ups, expansions and refurbishments

• Project must demonstrate significant development impact

• Security is tailored to the transaction and may include personal suretyship,

corporate guarantees, bonds over fixed and movable assets, pledge and

cession of shares

• Comprehensive business plan/bankable feasibility study must be submitted.

• Minimum local (RSA) content requirement, where >25% of value of IDC

funding needs to consist of goods and services procured from RSA

• Appropriate funding structure, with general starting assumption being a 50/50

debt/equity ratio, and with equity having been secured.

• Maximum IDC exposure of overall funding requirement of 60%.

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The Business Plan / Bankable Feasibility Study

The Business Plan / Bankable Feasibility Study must:

• Be concise but comprehensive

• Cover all of the elements mentioned before, i.e.

• legal requirements;

• business structuring;

• marketing study;

• development cost estimation;

• developed concept, design and product offering;

• financial feasibility;

• competitive analysis;

• SWOT analysis;

• identified operator;

• HR, skills development and CSI plan; and

• Any other pertinent and material aspects to the relevant project.

• Must present a compelling investment case

So let us unpack the above a little more…

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What Makes a Project Bankable?

Marketing Study, Competitive Analysis PLUS Strategy

• Does the study evidence a clear understanding of the target markets, their

relevant buying patterns and decision-making processes, and potential

factors that will impact demand from these markets?

• Does the study evidence a clear understanding of the competitive

landscape, as well as provide reliable information regarding the existing

and expected performance thereof?

• Does the business plan present a feasible and acceptable expected

positioning and performance vis a vis the competitive landscape?

• Does the study provide a compelling enough understanding of the

intended marketing strategy to be used, tailored to the relevant market

and competitive landscape?

Over-reliance on generic

national tourism statistics

remains a risk. Data and

information need to be as

specific as possible to project.

Failure to frame competitive

landscape appropriately, in

global terms, also remains a

risk. An understanding of

global positioning is of critical

importance.

A non-generic, specific

understanding of the marketing

channels that are most

effective vis a vis the target

market must be evidenced.

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What Makes a Project Bankable? (Cont.)

Development Cost Estimation PLUS Project Team

• Periodically updated to remove risk of cost escalations in the interim

• Are the costs prepared by a suitably qualified and experienced, and

independent QS expert?

• Will the development be managed by a suitably qualified and

experienced professional team?

• Use of fixed-cost contracts, and contractors that provide liability

insurance and carry working capital flows?

Potential cost overruns

remains a key concern,

especially in ROA. The

comprehensiveness of cost

estimates and quality of

professional team are key in

managing this risk.

Concept, Design and Product Offering

• To which extent does the overall design and product offering support its

intended positioning within the competitive landscape?

• Have the inclusions been properly motivated?

Operator

• If a sizeable project, has a reputable operator been appointed?

• Has the design, product offering, architectural plans and costings been

discussed and signed-off by the identified operator?

• Will operator be agreeable to the required terms and conditions of the

funding provided?

The impact of scope creep on

capital cost & serviceability of

funding needs to be managed.

Failure to involve operator early

on in design and project

development could lead to

eventual complications

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What Makes a Project Bankable? (Cont.)

Legal Requirements

Business Structuring

• Is the structuring of shareholding and ownership sufficiently nimble to cater

for funders’ needs, but not overly complicated?

• What ‘leakage’ is being introduced in terms of distributable cash flows, and

what potential disincentives for investment are being created?

• Have all the appropriate project development steps been followed and

completed?

• If not completed, what are the residual risks that remain, and the expected

time for completion?

• Are all the licensing and approvals in place and aligned to actual project

plan?

• Concession/PPP agreements; EIA and geotech studies; building

approval; operating licenses

• Has the potential funder been provided with a bird’s eye view of the legal

framework impacting on the relevant project, and how it is positioned to meet

these?

TFCAs could involve complex

legal frameworks, and the

failure to frame these correctly

for the funder could delay the

assessment process

significantly.

Funders will be very sensitive

to any value extraction prior to

the servicing of the funding

provided.

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What Makes a Project Bankable? (Cont.)

Financial Feasibility

SWOT Analysis

• Does the SWOT analysis reflect a comprehensive and accurate

understanding of the strengths, weakness, opportunities and threats of the

business?

• Are these properly addressed in the rest of the business plan?

• Do the forecasts provide a clear and comprehensive view of the

underlying assumptions used, especially relating to revenue line items

and key cost components?

• How comprehensive and conservative are the forecasts?

• How do these forecasts reflect on the level of understanding and

sensitivity present among the promoters regarding the key business risks

Overly optimistic forecasts

raise concerns regarding level

of understanding of business

risks and market dynamics by

promoters.

Complimenting the SWOT with

a Risk Mitigation Matrix could

be of value.

HR, CSI and Skills Development

• Are community participation and relevant CSI activities in the project

appropriately structured, to add value to community and the project?

• Will the required skills necessary to deliver an appropriate guest

experience be and remain available to the project?

Community participation should

be meaningful and sensible.

Availability of skills is a key

business risk.

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Potential Constraints Experienced in Projects

• Suitability of the land for the intended development

• Challenges in raising the required equity contributions

• Support and buy-in from affected communities

• Onerous EIA and other regulatory requirements

• Availability of bulk infrastructure services (energy; water; sewage)

• Accessibility to key demand markets

• National, provincial and local government support and effectiveness of

services provided

• Ability to secure debt funding, relating to ability to cede/assign concession or

lease

Tourism SBU

Industrial Development Corporation

19 Fredman Drive, Sandown

PO Box 784055, Sandton, 2146

South Africa

Telephone (011) 269 3509

E-mail: lorrainema@idc.co.za

Website: www.idc.co.za

Thank you