Project financing and sources of funding

TRAINING WORKSHOP
RESULTS MEASUREMENT FRAMEWORK (RMF)
Université Laval
Quebec, Canada – July 2 – 13 2012
Gilles Couture, MBA
Consultant in financial arrangements
3055 Blvd Wilfrid-Hamel, suite 225, Quebec city, G1P 4C6, Quebec, Canada
cessinstitute@cessinstitute.org | tel +1418 914 2120 | Fax: + 1 418 914 3530
Module 9 :Module 9 :
Project financingProject financing
and sources of fundingand sources of funding

© CESS Institute 2012
Agenda
© CESS Institute 2012 cessinstitute@cessinstitute.org
1. Introduction
2. Project financing
3. Research of funding
4. Conclusion

1. Introduction

© CESS Institute 2012© CESS Institute 2012 cessinstitute@cessinstitute.org
An overview of Africa’s potential
According the World Economic Forum Summit
2010, over US$ 2 trillion dollars are needed
every year for the next decade for global
infrastructure investment in energy, water,
transportation, telecommunications, mining,
and municipal service delivery.
In July 2010, African leaders launched a new
programme for infrastructure development in
Africa PIDA to promote socio-economic
development and poverty reduction through
improved access to integrated regional and
continental infrastructure networks and
services.

Global Investors in infrastructure cannot
afford to ignore Africa’s huge potential. In
Sub Saharan Africa, parterships private public
PPP investments reached US 12,6 billions in
2010.
The World Bank Group in 2011 has extended
a total of around $3.8 billion to support the
financial close of 50 PPP transactions in
energy, transport, and water, of which: 14
independent power plants for more than
US$1.3 billion of financial support ; 10 rail
concessions, approximately US$1.1billion.
An overview of Africa’s potential (suite)

An overview of Africa’s potential (suite)
Key issues and challenges
Source: AICD. 2008. “Financing Public Infrastructure in SSA
McKinsey & Company. 2010. “Lions on the Move: The Progress and Potential of African Economies.”
World Bank. 2010. Africa’s Infrastructure: A Time for Transformation World Bank, Group, Investment Climate Surveys

2. Project financing

Project finance is the long term financing of
infrastructure and industrial projects based
upon the projected cash flows of the project
rather than the balance sheets of the project
sponsors. Project Finance also involves a
corporate sponsor investing in and owning a
single purpose, industrial asset through a
legally independent entity financed with non-
recourse debt.
Definition

9
• Sponsors and investors: they are generally involved in the construction and the
management of the project. Other equity-holders may be companies with commercial
ties to the project, i.e., customers, suppliers…
• Lenders: The needed finance is generally raised in the form of debt from a syndicate of
lenders such as banks and less frequently from the bond market.
• Government: project company need to obtain a concession from the host government.
– Role of type of contract: Build-own-operate (BOO) or Build-transfer-operate (BOT).
– Control on revenues such as for example: Doraleh Container Terminal Djibouti, etc
• Suppliers and Contractors: Role of turnkey contracts to make sure that construction is
completed within costs and on schedule. Turnkey contracts specify a fixed price and
penalties for delays.
• Customers: Depending on the contract, multiple or a single customer.
Parties to a Project Financing

The most usual parties to a project financing are:

Characteristics of project financing
• Project cash flows
• Normally higher levels of debt
• Variety of contractual obligations and undertakings
to manage and reduce risk
- Bank Guarantees
- Letters of Credit to cover greater risk during
construction period

• A variety of funding sources
- export credits
- development funds
- specialised asset finance
- conventional debt and
- equity finance
Characteristics of project financing (suite)

Why use Project Finance
•Amount too large for company Balance Sheet
•Too much risk for one company
• Company policy for off balance sheet with or
without recourse
• Political risks : local regulations, foreign
shareholdings
• Existing covenants
• Project development time
• Protect the project from sponsor failure

What are typicals steps in project finance
Source : Slivker, A., « What is projet finance and how does it work », april 2011, page 4

A simplified project structure example
A “nexus
of
contracts”
that aids
the sharing
of risks,
returns,
and
control
Source: Esty, B., “An Overview of Project Finance – 2002 Update: Typical project structure for an independent power producer”

Major project contracts
• The Offtake Contract:
– A framework under which
Project Company obtains
revenues
– Provides the “offtaker”
(purchaser) with a secure supply
of project output, and the
Project Company with the ability
to sell the output on a pre-
agreed basis
– Can take various forms, such as
“Take or Pay” Contract:
• “Power Purchase
Agreement” (PPA)
• Input Supply Contract:
– The Offtake Contract for the
input supplier
– Provides the Project Company
the security of input supplies on
a pre-agreed pricing basis
– The terms of the Input Supply
Contract are usually crafted to
match those of the Offtake
Contract (such as input volume,
length of contract, force
majeure, etc.)

Major project contracts (suite)
• Construction Contract:
– A contract defining the “turnkey”
responsibility to deliver a
complete project ready for
operation (Engineering,
Procurement, Construction (EPC)
Contract)
• Operation and Maintenance
Contracts:
– Ensures that the operating and
maintenance costs stay within
budget, and project operates as
planned.
• Permits:
– Contracts that ensure permits
and other rights for construction
and operation of the project, as
well as for investing in and
financing of the Project Company
– May be provided by central
governments and/or local
authorities
• Government Support Agreements:
– Provisions may include
guarantees on usage of public
utilities, compensation for
expropriation, tax exemptions,
and litigation of disputes in an
agreed jurisdiction

SPONSOR + PROJECT?
Finance separately with non-recourse
debt? (Project Finance)
Finance jointly with corporate funds?
(Corporate Finance)
What Does a Project need?
Customized capital structure/asset specific
governance systems to minimize cash flow volatility
and maximize firm value.

Corporate Finance Model v. Project Finance Model

Structural decisions may affect the existence and magnitude of costs
due to market perfections:
* Agency conflicts
* Financial distress
* Structuring and executing transactions
* Asymmetric information between parties involved
* Taxes
Value Creation
Organizational Structure
Contractual Structure
Governance Structure
Why does structure matter?

A Typical Format used for Presenting Cash Flow Statement
Income statement
Revenues
Expenses
Cost of goods sold
Depreciation
Debt interest
Operating expenses
Taxable income
Income taxes
Net income
Cash flow statement
+ Net income
+Depreciation
-Capital investment
+ Proceeds from sales of
depreciable assets
- Gains tax
- Investments in working
capital
+ Working capital recovery
+ Borrowed funds
-Repayment of principal
Net cash flow
Operating
activities
Investing
activities
Financing
activities
+
+

Points of Consider
•Sunk Costs : a cost that has already been incurred and
cannot be recovered irrespective of the decision to accept
or reject the project : r&d, market research, consultant’s fees
•Opportunity Costs: resources have multiple uses you can use
them in one way to the exclusion of other uses and this gives rise
to opportunity costs
•Project Externalities: the effect of a new project (positive or
negative) on an existing project or division of a firm
•Change in Net Working Capital : net working capital is defined as
current assets minus current liabilities. Investment in working capital is
a cash outflow during the year in which investment takes place

Disadvantages of Project Financing
• Often takes longer to structure than equivalent size
corporate finance.
• Higher transaction costs due to creation of an
independent entity. Can be up to 60 basis points
100 basis points = 1%
• Project debt is substantially more expensive (50-400
basis points) due to its non-recourse nature.
• Extensive contracting restricts managerial decision
making.
• Project finance requires greater disclosure of
proprietary information and strategic deals.

3. Source of funding

Definition
Project financing refers to the means of finance employed for
meeting the cost of the project.
The means of finance refers to the long-term sources of finance
used for meeting the cost of the project.
Sources of finance :
· Equity capital and preference capital
· Convertible and non-convertible debentures
· Terms loans
· Deferred credit
· Sales tax deferment and exemption
· Unsecured loans and deposits, etc.

25
Typical project financing stage
Source : Laiki Group

26
The “Secrets” to Successful Financing
1. Choosing the right sources of capital is a decision that will
influence a project for a lifetime.
2. The money is out there; the key is knowing where to look.
3. Raising money takes time and effort.
4. Creativity counts. Entrepreneurs have to be as creative in their
searches for capital.
5. The World Wide Web puts at entrepreneur’s fingertips vast
resources of information that can lead to project financing.
6. Be thoroughly prepared before approaching lenders and
investors.
7. Entrepreneurs should not underestimate the importance of
making sure that the “chemistry” among themselves, their
project, and their funding sources is a good one.

27
Overview of financiers and their roles

28
Overview of financiers and their roles (suite)

29
Investment Grade Characteristics of Infrastructure Assets
Source : Global Infrastructure Partners

30
Infrastructure Financing Key Characteristics
Source : Global Infrastructure Partners

Conclusion
The future of the market
Intenatinal deal makers are expecting further transactions in
energy generation, particularly hydro-power with some roads
and rail projects emerging in 2012. They are confident, that
African market will benefit from the recovery and will continue
in the positive trend. Project finance will not be as aggressive as
prior to the financial crisis and more conservative structures will
build the standard form in future. The future of Eropean and
USA debts is very difficult to predict given the volatility of the
financial markets. Well structured projects will probably have
more chance for success.

Webographie
• Project Finance Magazine www.
projectfinancemagazine.com
• Project Finance International http://www.pfie.
com/
• Trade Finance Magazine http://www.
tradefinancemagazine.com/
• Euro Week http://www.euroweek.com/
• AirFinance Journal http://www.airfinancejournal.com/
• Finance Québec
http://www.finance-quebec.com
/financement_projet.html
• C.R.E.A.M Europe
ttp://www.cream-europe.eu/en/index.php
• African Venture Capital Association http://www.
avcanet.com/

Gilles Couture, MBA
Consultant financial arrangement
E-mail : gilles.couture1@hotmail.com
Phone : Québec 418 524-1288
For any further information

Project financing and sources of funding

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