This document provides an overview of project financing, including what it is, the key parties and stages involved, and its advantages and disadvantages. Project financing refers to financing long-term infrastructure or industrial projects based on the future cash flows generated by the project rather than the balance sheets of its sponsors. The stages discussed include project identification, risk assessment, feasibility analysis, equity and debt arrangement, documentation, disbursement, monitoring, and closure. Advantages include off-balance sheet treatment for sponsors, while disadvantages include higher costs and complexity.

1. Muhammad KAMRAN – FCA.

2. Objectives To understand what project financing is and what steps are involved in securing and managing it.

3. Part – 1 Introduction 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.

4. Introduction – For whom is it important to understand project finance ? Financial managers Sponsors Lenders Consultants and practitioners Project managers Builders Suppliers Engineers. Researchers Students.

5. 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.

6. Introduction – What is a Project? A Project is normally a long-term infrastructure, industrial or public services scheme, development or undertaking having: large size. Intensive capital requirement – Capital Intensive. finite and long Life. few diversification opportunities i.e. assets specific. Stand alone entity. high operating margins. Significant free cash flows. Such projects are usually government regulated and monitored which are allowed to an entity on B.O.O or B.O.T basis.

7. Introduction – Types of Project. Motorway and expressway. Metro, subway and other mass transit systems. Dams. 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.

8. 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 .

9. 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.

10. 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.

11. 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. Extensive contracting restricts managerial decision making. Project finance requires greater disclosure of proprietary information and strategic deals.

12. Part – 2 Stages in Project Financing. Project identification Risk identification & minimizing Pre Financing Stage Technical and financial feasibility Equity arrangement Negotiation and syndication Financing Stage Commitments and documentation Disbursement. Monitoring and review Financial Closure / Project Closure Post Financing Stage Repayments & Subsequent monitoring.

13. Stages in Project Financing – Project Identification. Identification of the Project Government announced Self conceived / initiated Identification of market Product of the project Users of the product Marketability of the product Marketing Plan

14. Stages in Project Financing – Risk Identification and Minimizing. Risk Solution Completion Risk Contractual guarantees from contractors, manufacturer, selecting vendors of repute. Price Risk hedging Resource Risk Keeping adequate cushion in assessment. Operating Risk Making provisions, insurance. Environmental Risk Insurance Technology Risk Expert evaluation and retention accounts. Interest Rate Risk Swaps and Hedging Insolvency Risk Credit Strength of Sponsor, Competence of management, good corporate governance

15. Stages in Project Financing – Risk Identification and Minimizing. Currency Risk Hedging Political and Sovereign Risk Externalizing the project company by forming it abroad or using external law or jurisdiction External accounts for proceeds Political risk insurance (Expensive) Export Credit Guarantees Contractual sharing of political risk between lenders and external project sponsors Government or regulatory undertaking to cover policies on taxes, royalties, prices, monopolies, etc External guarantees or quasi guarantees

16. Technical feasibility Location Design Equipment Operations / Processes. Financial feasibility Business plan / model Projected financial statements with assumptions Financing structure Pay-back, IRR, NPV etc. Stages in Project Financing – Technical and Financial Feasibility .

17. Stages in Project Financing – Equity arrangement. Sponsors Lead sponsors Co – sponsors Private equity participation Angel investors – Private equity funding Financial institutions Non-financial institutions.

18. Stages in Project Financing – Negotiation and syndication. Lenders Banks. Non- banking financial institutions. International lending institutions. Syndication Lead arranger. Co-arrangers. Negotiation Pricing. Documentation. Disbursement.

19. Stages in Project Financing – Documentation. Commitment letters / MOUs Commitment letters from sponsors and investors MOU signing with financiers. Documents Offer Letters Lending agreements Security documents Disbursement plan Contracts Management/shareholder agency relationship Inter corporate agency relationship Government/corporate agency relationship Bondholder stockholder relationship

20. Stages in Project Financing – Disbursement. Equity Disbursement Shares application. Shares proceeds. Share certificates. Loan Disbursement Sponsor loans Advance payments Progress Payment

21. Stages in Project Financing – Monitoring and Review Why? Project is running on schedule Project is running within planned costs. Project is receiving adequate costs. How? First hand information. Project completion status reports. Project schedule chart. Project financial status report. Project summary report. Informal reports.

22. 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.

23. Stages in Project Financing – Repayment & Subsequent Monitoring Repayments Grace period. Monthly installment. Quarterly installments. Dividends Monitoring? Appointment of directors and managers. Management meetings. Board meetings.

24. Part – 3 Conclusion. A typical project financing structure. Highlights of project financing structure.

25. Conclusion – A Typical Project Finance Structure.

26. Conclusion – Highlights of Project Financing Structure. Independent, single purpose company formed to build and operate the project. Extensive contracting As many as 15 parties in up to 1000 contracts. Contracts govern inputs, off take, construction and operation. Government contracts/concessions: one off or operate-transfer. Ancillary contracts include financial hedges, insurance for Force Majeure, etc.

27. Conclusion – Highlights of Project Financing Structure. Highly concentrated equity and debt ownership One to three equity sponsors. Syndicate of banks and/or financial institutions provide credit. Governing Board comprised of mainly affiliated directors from sponsoring firms. Extremely high debt levels Mean debt of 70% and as high as nearly 100%. Balance of capital provided by sponsors in the form of equity or quasi equity (subordinated debt). Debt is non-recourse to the sponsors. Debt service depends exclusively on project revenues. Has higher spreads than corporate debt.

28. Thank You.