cursul 1_introducere in finantarea proiectelor

8/13/2019 Cursul 1_Introducere in Finantarea Proiectelor

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PhD Prof. Cristian PUNWebsite: http://www.finint.ase.ro

Blog: http://cristianpaun.finantare.ro

Mail: [email protected]

Finanarea proiectelor europene


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Cursul I: Introducere n finanareaproiectelor europene


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Cnd se pune problema finanrii pe baz deproiect?

Project finance can be arranged when a particular facilityor a related

set of assets is capable of functioning profitably as an independenteconomic unit.

If sufficient profit is predicted (or estimated), the project companycan finance construction of the project on a project basis, whichinvolves the issuance ofequity securities and debt securitiesthat aredesigned to be self-liquidating from the revenues of the projectoperations.

Project finance is indicated to be used in the case of importantfinancing requirements: infrastructures projects (tolls, tunnels,

bridges), utility plants (nuclear or electrical plants, treatment plants,mines, mineral processing facilities, dock facilities, pipelines,refineries).

The terms of the debt and equitysecurities are adjusted to the cashflow characteristicsof the project.

The investors, in both debt and equity, require certain basic legal,regulatory and economic conditions throughout the life of the

project.


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Ce reprezint finanarea pe baz de proiect?

The objective of using international project financing to raise capital from

international financial markets is to create a structure that is bankable (of

interest to foreign investors) and to limit the stakeholdersrisk by sharing somerisksto parties that can better manage them;

IPF involves:

An agreementby financially responsible parties to complete the projectand to make

available to the project all funds necessaryto achieve completion;

An agreement by financially responsible parties (by purchasing project outputs) in

order to ensure that, when project completion occurs and operations begins, the

project will have available sufficient cash to cover all operating expenses and debt

service requirements(even taking into consideration the force majeure);

Assurance by financially responsible that, in the event a disruption in operation

occurs and funds are required to restore the project to operating conditions, necessary

funds will be available(using insurance policies or cash in advance payments).


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Caracteristicile finanrii pe baz de proiect:

Special Purpose Project Entity

New, highly leveraged (high debt to equity ratio), long-term capital structure

Debt is non-recourse (or limited recourse) to sponsors (no guaranties or

limited guaranties)

Risk allocation and credit support principally from contracts

Lender has security in project assets and contracts (project contracts, licenses

or rights to natural resources)


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O perspectiv istoric:

PF is not a newfinancing technique;

Limited recourse lending was used to finance maritime voyages in ancient

Greece and Rome.

Example: in 1299 the English Crown negotiating a loan from the

Frescobaldi (a leading Italian Merchant Bank) to develop the Devon silver

mines.

Its use in infrastructure projects dates to the development of the Panama

Canal, and was widespread in the US oil and gas industry during the early 20th

century.

In modern times, PF has long been use to fund large-scale natural resources

projects (Trans Alaska Pipeline System developed between 1969 and 1977,

Hibernia Oil Field Partnersin 1995 to develop a oil field on Newfaoundland).

The development of PF in different sectors (transportation, oil & gas, mining,

power, telecommunication.


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Exemple relevante de finanri pe baz de proiect:

Sector Cases

Transportation Airbus A3XX (cargo plane)

Empresas ICA and the Mexican Road Privatization Program A2 Motorway in Poland

Texas High-Speed Rail Corp

Mining An Tai Bao Coal Mining Project (400 mil. USD in a Chinese mine)

Ashanti Goldfields Company Limited (150 mil. USD in a Tanzanian mining

project)

Southport Minerals, Inc. (copper mine in Indonezia)

Oil & Gas BP Amoco: Financing Development of the Caspian Oil Fields (10 billions

USD)

The Chad-Cameroon Petroleum Development and Pipeline Project (4 billions

of USD)

Petrolera Zuata, Petrozuata C.A. (2.4 billions of USD)

Power Cape WindEnron Development Corporation: The Dabhol Power Project

Mid-Missouri Energy

Telecommunication Iridium LLC: the demise of his 6 billions satellite telecommunications

project.

Australia-Japan Cable (520 mil. USD)


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Condiii pentru a demara o finanare pe baz deproiect:

1. Technical Feasibility:

- lenders must be satisfied that the technologicalprocessesto beused in the project arefeasible for commercial use;

- providers of funds need assurance that the project will

generate output at its capacity;

- lenders generally require verifying opinionsfrom independent

specialists (engineers, consultants) if the project will involve

unproven technology or unusual environmental conditions.

2. Economic Viability:

- the providers of funds must be convinced that the project will

generate enough cash to service project debt and pay an

acceptable rate of return to equity investors

- the project must be able to deliver its products(or services) to

the market place.


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2. Economic Viability (cont.):

- the project must be able to produce at a cost-to-market price;

- the project must keep the profitability in the face of potential

adverse conditions (increasing the construction costs, inflation, increasing

of the interest rate).

3. Availability of Raw Materials and Human Resources:

- natural resources, raw materials and other factors of productionmust be available in the quantities needed;

- lenders can be convinced only if:

1. the quantities of raw materials dedicated to the project must enable it to

produce and sell an amount of outputs that ensures the debt service;

2. unless the project entity directly owns its raw materials supply, other inputs

should be supplied based onlong-term contracts;

3. the terms of the contracts with inputs suppliers cannot be shorter than the

term of the project debt.


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Finanarea public a unei instalaii de tratare a apeloruzate:


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Finanarea privat (corporativ):


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Finanarea pe baz de proiect:


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Argumentele pentru a utiliza finanrile pe baz deproiect:

Project finance arrangements involve strong contractual relationship

among multiple parties(based on a common interest among them);

If managements relative abilities differ significantly across the

projects located in different countries, it is better to incorporate at

least some of the projects separately and hire separate management to

run them;

Project finance reduceagency costs(this costs occur because security

holdings in large corporations are widely dispersed, and monitoring

them tends to be very costly and incomplete);

Project financing give investors a powerful control over free cash

flowfrom the project (typically, in IPF all free cash flow is distributedto theprojectsequity investors);

Project finance reduces asymmetric information.


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Avantajele finanrii pe baz de proiect vs. finanareadirect (corporativ sau public):

Criterion Direct Financing Project Financing

1. Organization Large business are usuallyorganized in corporate form;

Cash flows from different

assets and businesses are

combined.

The project can be organized asa partnership or limited company

in order to use more efficient the

tax benefits of ownership;

Project related cash flows are

separatedfrom the sponsorsother economic activities;

2. Control and

monitoring

Control is based on the

companys management(boardof directors will monitors

corporate performance on

behalf of the shareholders);

Limited direct monitoringisdone by investors

Management remains in control

but is subject to closer monitoring

than in a typical corporation;

Higher control on free cash

flows;

Contractual arrangements

governing the debt and equity

investment contain provisions that

facilitate and increase monitoring.


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3. Allocation ofrisk Creditors have full recourse tothe project sponsor;

Risks are diversifiedacross the

sponsors portfolio of assets;

Certain risks can be

transferred by insurance policies

or hedging activities.

Creditors typically have limitedrecourse to the project sponsors;

Contractual arrangements

redistribute project related risks;

Project risks can be allocated

among the parties who are the

best to bear them.

4. Financial

flexibility

Financing can typically be

arranged quickly;

Internally generated positive

funds can be used to finance

other projects.

Higher information, contracting

and transaction costs are involved;

Financing arrangements are

highly structuredandtime-

consuming;

Internally generated cash flows

can be reserved for projectsowners.


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5. Free cash flow Managers have broaddiscretion regarding the

allocation of free cash flow

between dividends and

reinvestment;

Cash flows are mixed and then

allocated in accordance with

corporate policy

Managers have limiteddiscretion o cash flows;

By contract, freecash flows must

be distributed to equity investors;

6. Agency costs Equity investors are exposed to

the agency costs of free cash

flow;

Making management

incentives related to specific

projects is more difficult;

Agency costs are greater than

for project financing.

The agency costs of free cash

flows are reduced;

Management incentives can be

linked with the project

performance;

Closer monitoring by investors is

reducing the agency costs;

Agency costs are lower than for

direct financing.


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7. Structure ofdebt contracts Creditors look tothe sponsorsentire asset portfolio forfinancing conditions(debt

service, debt repayments,

maturity);

Typically, debt is unsecured

(when the borrower is a large

corporation).

Creditors look to a specific assetor pool of assets for their debt

service;

Typically debt is securedby

additional contractual provisions;

Debt contracts are tailored to the

specific characteristics of the

project.

8. Debt capacity Debt financing is based on the

sponsors debt capacity.The sponsors debt capacity canbe effectively expanded;

Credit support from other

sources (project outputs or inputs)

can be channeled to support

project borrowings.


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9. Bankruptcy Costly and time-consumingfinancial distress can be

avoided;

Lenders have benefits from the

sponsors entire asset portfolio;

The cost of solving financialdistress is lower;

Lenders chances of recovering

principal are more limited;

The debt is generally not

repayable from the other

unrelated projects of the sponsors.

Conclusions (based on this comparative analyses):

- Project finance should be pursued when it will achieved a lower after-

tax cost of capital than conventional financing;

- The relative advantages and disadvantages of these two alternatives

of financing a project should be carefully weighed to determine which

technique will be more advantageous for the project sponsors

shareholders.


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Beneficiile finanrii pe baz de proiect pentru teri (clieni,participani la pia)

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Lower product of service costs

Additional investment in public infrastructure

Risk transfer

Lower project cost

Expertise of private sector

Reducing the tendency of public sector to over-engineer the projectsManagement of long term maintenance

Third party due diligence: lenders control the project

Transparency: the costs are more easily monitored

Additional inward investment: PF is a good promoter of new investments (good

for emerging markets)

Technology transfer


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Dezavantajele finanrii pe baz de proiect:

- Higher transaction costsdue to creation of an independent entity;

- Very complex organizational structure;

- Not much flexibility;

- Long negotiationsand long time to close;

- Important fees;

- Project debt is substantially more expensive (50-400 basis points)due to its non-recourse nature.

- Higher restrictions on managerial decisions due to the projectcontracts.


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Mecanismul unei finanri pe baz de proiect:


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Participanii la finanarea pe baz de proiect:

Sponsors usually include construction, supply, management and

empowerment companies. They may derive other opportunities (e.g.construction, supply or management contracts) from projects such as toll

roads or power plants, but also from any project that requires significant

capital investment. For this reason, other investors may require the

sponsors to hold their investment for a minimum period of time.

The promoter of a projectis usually the government departmentresponsible

for providing services to the public. The department is primarily

concerned with ensuring the provision of services of sufficient quantityand quality, and on a non-discriminatory basis. The sponsors of a project

usually participate in promoting a project.


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Banksare involved at least as short-term lendersand frequently as long-

term lenders and financial arrangers (underwriters). On largeprojects, several banks may form a consortium to raise fundstogether. The equity investors usually select one or more lead banksto manage the consortium or the process of raising funds. Thisselection is based on thebanksexperience and capacity for raisingfunds in a certain industry and country. Although the bank usually

raises debt, it may also raise equity. The project may also hire afinancial adviser to formulate a financing strategy. The adviser isusually independent of the lenders and underwriters to avoidconflicts of interest.

Non-bank financial institutions include pension, insurance and trade

union funds, with a primary function of investing their assets in

medium or long-term securities. Although these institutions often

have significant resources, they are generally quite limited, by law

and/or mandate, in their investment options.


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Suppliers may also provide funding in the form of short- to medium-term

debt or extended terms on accounts payable. A supplier may also be a

sponsorand take an equity interest in a project. As with construction andmanagement companies, the suppliers primary interest in the project is

usually the supply contract with the project company.

End-user financingcan beprepayment for the future deliveryof services, but

is more often a take-or-pay contract in which the end-user commits to

purchasing a minimum amount of services over a period.

Government may not necessarily directly finance a project, but it often

provides indirect financing through guarantees, take-or-pay contracts,

licensesand other commitments.

Management and employeesmaypromoteor sponsor a project. This is more

common in a straight privatization, where the government providesincentives such as subsidized loans. Management and employees are

usually part of the overall sponsor team that bids for a project, as they will

ultimately continue as employees of the project.


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Public participation in the financing of a project usually comes at the

operating stage. The process of listing a companysequity and/or debtis often included in an understanding between the sponsors, the

government and the lenders, to allow the original equity investors to

plan their exit strategy.

Conclusion: a project finance is initiated by a group of promoters

(government and private companies), is developed by a group of

sponsorswith the direct financial support from banks and non-financial

institutions and an indirect financial support from suppliers and end-users. In the operating stage, public sector can play an important role

in providing significant capital resources to the project.


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Tipuri de contracte n finanarea pe baz de proiect:

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Type of contract Description

Buildownoperatetransfer(BOOT Contract)

SPV build the facility

SPV owns and operates the projects facility for a set period oftime

SPV earns the revenues of the project

SPV transfer back the facility to the public sector at a specific

date (the facility will be transferred to an Offtakera public

company)

Buildoperatetransfer (BOTContract)

Known as designbuildfinanceoperate (DBFO)SPV never owns the assets used to provide services to the

project

SPV build the facility, earns the revenues

The nature of the project (the assets should remain in public

ownership)

Buildleasetransfer (BLTContract)A BOT Contract financed through leasing agreements

Buildtransferoperate (BTOContract)

A BOT Contract where the facility is transferred to the public

body only after the construction of this facility

Buildownoperate (BOOContract)

The facility will remain in the ownership of the SPV company;

In the case of BOO Contract the SPV gets the benefits of any

residual value

Ti i d t t l


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Tipuri de contracteexemple:

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cursul 1_introducere in finantarea proiectelor

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