project financing and sources of funding

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TRAINING WORKSHOP

RESULTS MEASUREMENT FRAMEWORK (RMF)Universit LavalQuebec, Canada July 2 13 2012

Gilles Couture, MBAConsultant in financial arrangements

3055 Blvd Wilfrid-Hamel, suite 225, Quebec city, G1P 4C6, Quebec, Canada [email protected] | tel +1418 914 2120 | Fax: + 1 418 914 3530

Module 9 :Project financing and sources of funding

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Agenda

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1. Introduction

2. Project financing

3. Research of funding

4. Conclusion

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1. Introduction


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An overview of Africas 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.

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Global Investors in infrastructure cannot afford to ignore Africas 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 Africas potential (suite)

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An overview of Africas 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. Africas Infrastructure: A Time for Transformation World Bank, Group, Investment Climate Surveys

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2. Project financing


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Project financeis 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

April SSA projection = IMF SSA Outlook (April 24)

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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


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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.


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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 expensesTaxable incomeIncome taxesNet 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

Operatingactivities

Investing activities

Financingactivities

+

+


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, consultants 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.


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3. Source of funding


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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.

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Typical project financing stage

Source : Laiki Group


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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 entrepreneurs 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.


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Overview of financiers and their roles


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Overview of financiers and their roles (suite)



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Investment Grade Characteristics of Infrastructure Assets

Source : Global Infrastructure Partners


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Infrastructure Financing Key Characteristics

Source : Global Infrastructure Partners


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ConclusionThe 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.

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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 Qubec

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/


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Gilles Couture, MBA

Consultant financial arrangementE-mail : [email protected] : Qubec 418 524-1288

For any further information

project financing and sources of funding

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