Revolutionising Iran's Private Sector

Part 3: 21st Century Funding

Chris Cook

I.C.C.I.M, Tehran, 2nd July 2012

Introduction

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Wimpole

Institute for International Energy Studies (IIES)

Is a Network of experts with unrivalled capabilities in the architecture and implementation of market instruments and infrastructure

For Research on international energy markets and energy economic issues

Session Three - Executive SummaryConventional Funding

Debt & Equity Hybrids

Capital Partnership Origins Nondominium Partnership Types

Energy Applications Capital Equipment Refinancing

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Conventional Funding of Productive AssetsDebt

Interest-bearing credit created by credit institutions ie banks

Secured by a claim over the asset – a 'mortgage' or 'charge'

Equity Ownership shares in a Limited Liability Joint Stock

Company Shares receive a dividend

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Conventional Funding - ConflictsConflict of interest between the ownership claim of the

shareholders and the debt claim of the bank Conflict of interests between the shareholders and the

management – the 'Principal/Agent' problem

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Hybrid FundingEquity hybrids – preference shares, redeemable

preference sharesDebt hybrids – convertibles, subordinated loans,

'mezzanine'New ownership instruments – Unit Trusts, Real Estate

Investment Trusts (REITs), Exchange Traded Funds ('ETFs'), Master Limited Partnerships, Income Trusts etc etc

Complex, and some conflict always remains

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Capital Partnership Origins – Hilton Deal 2002

Capital Partnership LLP10 UK Hotels

Gross Revenues

Hilton GroupCapital User

Consortium LLP Capital Provider

Bank PropertyDeveloper

HotelSpecialist

% %

%% %

UK Limited Liability Partnership (LLP)An “Open” legal vehicle – no need even for a written

agreementEnables infinitely flexible structuresThere are many 'Public/Private' LLPs City of Glasgow now has fiveThese municipal LLPs are public/private organisations

which borrow from banks and employ staff and managers in the conventional way

Capital Partnership can bring finance and management inside LLP

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Generic Capital Partnership - Nondominium

Users

Custodian

ManagersInvestors

Value

%Stock Units

Asset-based - Land Partnership

Occupiers

Custodian

ManagersInvestors

Rent

%Stock Units

People-based - Film Partnership

Viewers

Custodian

Me, Actors Producer

Investors

Revenues

%%

Refinery(Held by Custodian)

Investors

Oil Suppliers

Managers

Units

Domestic Refinery Partnership

واحدهاOil Product

Stock

Product Stock

ServicesMoney

How it WorksProblem: if the refinery sells products forward by

issuing 'stock' it is exposed to a rise in costs eg crude oil and labour

Solution: for as long as the Manager provides services, or the Supplier provides oil, they are entitled to a % of product flow

There is no purchase and sale of crude oilOil supplier and manager receive product 'stock'

which will be widely acceptable in exchange

Liquefaction Plant(Held by Custodian)

Liquefaction Plant(Held by Custodian)

Investors

Gas Pool(Public Sector)

Managers

Services % of Units

Units

Gas Partnership – Flared Gas

% of Units

UnitsMoney

Refinancing Existing LoansExisting interest-bearing loans may be replaced

with energy loans eg 'stock' returnable in payment for gas

Outcomes– Cost of funding reduced because no money is

paid for the use of money– New asset class for investors with a return in

energy

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Example – Qatar Gas LoanQatar requires $2bn to repay existing loan for LNG

train Qatar issues and sells 400 million Gas Units each

redeemable in payment for 1 MMbtu at $5.00 per Unit Chinese and Japanese participants each buy 200

million UnitsOutcome: a Gas Loan

Qatar – interest-free funding and a a forward 'hedged' sale of 400MMbtu of future gas production

China and Japan – an 'inflation hedge' investment in natural gas as an alternative to acquiring $ denominated 0% Treasury Bills giving negative real returns

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