For whom is it important to understand project financing ?
Why is it important to understand project financing?
What is a project?
Types of projects.
What is project financing?
Key characteristics of project financing.
Advantages of project financing.
Disadvantages of project financing.
Introduction – For whom is it important to understand project finance ?
Consultants and practitioners
Introduction – Why is it important to understand project finance ? The people involved in a project are used to find financing deal for major construction projects such as mining, transportation and public utility industries, that may result such risks and compensation for repayment of loan, insurance and assets in process. That’s why they need to learn about project finance in order to manage project cash flow for ensuring profits so it can be distributed among multiple parties, such as investors, lenders and other parties.
Railway network and service – both passenger and cargo.
Power plants and other charged utilities.
Port and terminals.
Airports and terminals.
Mines and natural resource explorations.
Large new industrial undertakings – [no expansion and extensions.
Large residential and commercial buildings.
Introduction – What is Project Financing? International Project Finance Association (IPFA) defined project financing as: “ The financing of long-term infrastructure, industrial projects and public services based upon a non-recourse or limited recourse financial structure where project debt and equity used to finance the project are paid back from the cash flows generated by the project.” Project finance is especially attractive to the private sector because they can fund major projects off balance sheet .
Introduction – Key characteristics of Project Financing.
The key characteristics of project financing are:
Financing of long term infrastructure and/or industrial projects using debt and equity.
Debt is typically repaid using cash flows generated from the operations of the project.
Limited recourse to project sponsors.
Debt is typically secured by project’s assets, including revenue producing contracts.
First priority on project cash flows is given to the Lender.
Consent of the Lender is required to disburse any surplus cash flows to project sponsors
Higher risk projects may require the surety/guarantees of the project sponsors.
Introduction - Advantages of Project Financing .
Eliminate or reduce the lender’s recourse to the sponsors.
Permit an off-balance sheet treatment of the debt financing.
Maximize the leverage of a project.
Avoid any restrictions or covenants binding the sponsors under their respective financial obligations.
Avoid any negative impact of a project on the credit standing of the sponsors.
Obtain better financial conditions when the credit risk of the project is better than the credit standing of the sponsors.
Allow the lenders to appraise the project on a segregated and stand-alone basis.
Obtain a better tax treatment for the benefit of the project, the sponsors or both.
Introduction – 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 60bp
Project debt is substantially more expensive (50-400 basis points) due to its non-recourse nature.
Stages in Project Financing – Monitoring and Review
Project is running on schedule
Project is running within planned costs.
Project is receiving adequate costs.
First hand information.
Project completion status reports.
Project schedule chart.
Project financial status report.
Project summary report.
Stages in Project Financing – Financial Closure / Project Closure Financial closure is the process of completing all project-related financial transactions, finalizing and closing the project financial accounts, disposing of project assets and releasing the work site. Financial closure is a prerequisite to project closure and the Post Implementation Review (PIR). A project cannot be closed until all financial transactions are complete, otherwise there may not be funds or authority to pay outstanding invoices and charges. Financial closure establishes final project costs for comparison against budgeted costs as part of the PIR. Financial closure also ensures that there is a proper disposition of all project assets including the work site. Project closure and commencement take place after financial closure.
Stages in Project Financing – Repayment & Subsequent Monitoring