Project Finance: an overview

Graham Cheshire
Ljubljana, 24 11 2010

 Review PPP/PPI
D efinition ofProject Finance and comparison
to conventionalfinance
W hat type ofdevelopments are suited to
Project Finance techniques?
W ho are the involved parties?

Project Finance:Ljubljana 24 11 2010

PPP / PFI

Popular terms in Project Finance

W hat are they ?
Public Private Partnership
Private Finance Initiative

The IM F has endorsed PFI

and PPPs
The private sector has more
incentive to w ork efficiently

Project Finance:Ljubljana 24 11 2010

Private Finance Initiative

Private sector companies design,finance,build,
and operate public sector projects
O ften referred to as BO T
(Build O perate Transfer)
O r D BFO (D esign,Build ,Finance O perate)

Project Finance:Ljubljana 24 11 2010

N ationalBudget Savings
European Centraland regionalgovernments,in the
w ake ofthe financialcrisis,lack the funds to finance
large scale capitalinvestments

Project Finance:Ljubljana 24 11 2010

Conflict ofinterest
The private sector is an attractive alternative to
public sector finance
H ow ever,the necessity for the private sector to
generate profits and the public sector to provide
low cost infrastructure,can lead to conflicts of
interest

Project Finance:Ljubljana 24 11 2010

 Review PPP/PPI
D efinition ofProject Finance and comparison
to conventionalfinance
W hat type ofdevelopments are suited to
Project Finance techniques?
W ho are the involved parties?

Project Finance:Ljubljana 24 11 2010

Project Finance
Project Finance involves the pure application of
basic principles offinance and credit
M anaging risk and return for allparties
Each dealis unique but follow s the same principles

Project Finance:Ljubljana 24 11 2010

A D efinition ofProject Finance

The financing ofan economic
unit in w hich the lender is
satisfied to consider the
cashflow and earnings ofthat
economic unit as the source
from w hich the loan w illbe
repaid
The assets ofthe economic
unit w illprovide the collateral
for the loan
The credit quality ofthe
sponsor is not especially
important
Project Finance:Ljubljana 24 11 2010

Lets drilldeeper .
Project Finance operations have common
features
Funding a new economic unit
Via a SpecialPurpose Vehicle company
W ith high proportion ofdebt finance
Severalsponsors

Project Finance:Ljubljana 24 11 2010

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Project cashflow s service debt

Project A ssets act as collateral
N on-recourse credit support
Project viability and sensitivity to risks are critical
to success
Financiers expect high margins to rew ard their
long maturity exposures
Public projects are subject to rigorous
procurement procedures

Project Finance:Ljubljana 24 11 2010

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Funding Sources
Trade finance,export credits,IFIs,
development finance,commercial
debt,leasing mechanisms,bonds,
mezzanine finance,subordinated
debt and equity.
The World Bank

Project Finance:Ljubljana 24 11 2010

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ConventionalBank Loans
The bank expects a company acquiring an asset to
be entirely responsible for the loan repayment
regardless ofthe success or failure ofthe acquired
asset

W orking capital,new equipment,

inventory financing
Project Finance:Ljubljana 24 11 2010

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Project finance,compared to
traditionalbank lending
H as a reduced
dependance on the
past
Is more concerned
about the future

Project Finance:Ljubljana 24 11 2010

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Conventionalloans

Project Finance:Ljubljana 24 11 2010

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Project Finance
a typicalscheme ..

Project Finance:Ljubljana 24 11 2010

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The Flexibility ofProject Finance

Each individualrisk can be identified and allocated
either partially or w holly
The project file takes on a unique profile

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Risk A llocation
Ifrisks are compartmentalised,dealt w ith
individually and covered individually,then
the chance ofone project partys failure
bringing the w hole project dow n is greatly
reduced

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Risk sharing
Indirect support is provided to financiers by
other parties through severaltypes of
contractualobligations
Equipment supply
Supply contracts
O ff-take contracts
O perating and maintenance
agreements
Specialoperating agreements

Project Finance:Ljubljana 24 11 2010

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A Common Terms A greement

Embodies alldocumentation by lenders in one common

agreement
Conditions ofdisbursement,covenants,w arranties,events
ofdefault,off-take and supplier agreements,etc
Project Finance:Ljubljana 24 11 2010

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W hy SPVs or PU Cs?
Isolates project from risk ofsponsors failure!
Sponsors not subject to localregulations on
business operations
The project company is managed by a board of
directors and not by a committee ofjoint
venture members independant
Limitation ofpoliticalrisk

Project Finance:Ljubljana 24 11 2010

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M arket Influences
Each project w illbe subject to market risks,
supply and demand,economic cycles,political
events

Project Finance:Ljubljana 24 11 2010

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 Review PPP/PPI
D efinition ofProject Finance and comparison
to conventionalfinance
W hat type ofdevelopments are suited to
Project Finance techniques?
W ho are the involved parties?

Project Finance:Ljubljana 24 11 2010

23

W here to apply Project Finance

techniques
Energy Plants gas,oil,w indpow er,hydroelectric pow er,coal,lignite pow ered
generators
Energy supply oiland gas,refineries,
pipelines,liquid gas transportation
Telecommunications

Project Finance:Ljubljana 24 11 2010

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 Toxic w aste,w aste disposal,w aste to energy

(bio gas)
Chemicaland petro-chemicalprocessing
Tunnels,bridges,motorw ays,toll-roads
A irports and harbours/seaports
M inerals

Project Finance:Ljubljana 24 11 2010

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 Entertainment and
lesiure complexes
Railw ays,M etros
Schools,prisons,
hospitals,university
facilities

Project Finance:Ljubljana 24 11 2010

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 Review PPP/PPI
D efinition ofProject Finance and comparison
to conventionalfinance
W hat type ofdevelopments are suited to
Project Finance techniques?
W ho are the involved parties?

Project Finance:Ljubljana 24 11 2010

27

W hich Parties Get Involved in

Project Finance ?
The project company usually a single
purpose vehicle
Project sponsors - may be one company or a
consortium ofinterest parties
The borrow ers may not be the project
company !
Financiers and guarantors can be
internationalsyndicate

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Involved Parties .

The arranger
The M anager Banks
A gent bank
The engineering bank
The Security Trustee
Guarantor Bank
LT funding provider

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Parties .

The FinancialA dvisor / N ationalCenter ofExpertise

TechnicalExperts
Law yers essential,numerous
Insurers essentialrole
The host Government
Internationalagencies

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Key Concern for Bankers

BANKABILITY !

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