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: cpaun@ase.ro
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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Criterion Direct Financing Project Financing
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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Criterion Direct Financing Project Financing
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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Criterion Direct Financing Project Financing
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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Criterion Direct Financing Project Financing
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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