Finanarea proiectelor europene

PhD Prof. Cristian PUN

Website: http://www.finint.ase.ro Blog: http://cristianpaun.finantare.ro Mail: cpaun@ase.ro

Cursul I: Introducere n finanarea proiectelor europene

Cnd se pune problema finanrii pe baz de proiect?

Project finance can be arranged when a particular facility or a related set of assets is capable of functioning profitably as an independent economic unit. If sufficient profit is predicted (or estimated), the project company can finance construction of the project on a project basis, which involves the issuance of equity securities and debt securities that are designed to be self-liquidating from the revenues of the project operations. Project finance is indicated to be used in the case of important financing 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 equity securities are adjusted to the cash flow characteristics of 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 stakeholders risk by sharing some risks to parties that can better manage them;
IPF involves:
An agreement by financially responsible parties to complete the project and to make available to the project all funds necessary to 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 new financing 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 Partners in 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 Transportation Cases 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) 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) Cape Wind Enron Development Corporation: The Dabhol Power Project Mid-Missouri Energy

Oil & Gas

Power

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 de proiect:

1. Technical Feasibility:

- lenders must be satisfied that the technological processes to be used in the project are feasible for commercial use;
- providers of funds need assurance that the project will generate output at its capacity;

- lenders generally require verifying opinions from 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 production must 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 on long-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 apelor uzate:

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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 de proiect:

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 reduce agency 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 flow from the project (typically, in IPF all free cash flow is distributed to the projects equity investors); Project finance reduces asymmetric information.
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Avantajele finanrii pe baz de proiect vs. finanarea direct (corporativ sau public):
Criterion 1. Organization Direct Financing Large business are usually organized in corporate form; Cash flows from different assets and businesses are combined. Project Financing The project can be organized as a partnership or limited company in order to use more efficient the tax benefits of ownership; Project related cash flows are separated from the sponsors other economic activities; 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.

2. Control and monitoring

Control is based on the companys management (board of directors will monitors corporate performance on behalf of the shareholders); Limited direct monitoring is done by investors

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Criterion

Direct Financing

Project Financing

3. Allocation of risk

Creditors have full recourse to the project sponsor; Risks are diversified across the sponsors portfolio of assets; Certain risks can be transferred by insurance policies or hedging activities.
Financing can typically be arranged quickly; Internally generated positive funds can be used to finance other projects.

Creditors typically have limited recourse 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.
Higher information, contracting and transaction costs are involved; Financing arrangements are highly structured and timeconsuming; Internally generated cash flows can be reserved for projects owners.

4. Financial flexibility

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Criterion 5. Free cash flow

Direct Financing Managers have broad discretion regarding the allocation of free cash flow between dividends and reinvestment; Cash flows are mixed and then allocated in accordance with corporate policy 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.

Project Financing Managers have limited discretion o cash flows; By contract, free cash flows must be distributed to equity investors;

6. Agency costs

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 of debt contracts

Creditors look to the sponsors entire asset portfolio for financing conditions (debt service, debt repayments, maturity); Typically, debt is unsecured (when the borrower is a large corporation).
Debt financing is based on the sponsors debt capacity.

Creditors look to a specific asset or pool of assets for their debt service; Typically debt is secured by additional contractual provisions; Debt contracts are tailored to the specific characteristics of the project.
The sponsors debt capacity can be effectively expanded; Credit support from other sources (project outputs or inputs) can be channeled to support project borrowings.

8. Debt capacity

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Criterion 9. Bankruptcy

Direct Financing Costly and time-consuming financial distress can be avoided; Lenders have benefits from the sponsors entire asset portfolio;

Project Financing The cost of solving financial distress 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 aftertax 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)

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 projects Management 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 costs due to creation of an independent entity; - Very complex organizational structure; - Not much flexibility; - Long negotiations and 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 project contracts.
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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 project is usually the government department responsible for providing services to the public. The department is primarily concerned with ensuring the provision of services of sufficient quantity and quality, and on a non-discriminatory basis. The sponsors of a project usually participate in promoting a project.

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Banks are involved at least as short-term lenders and frequently as longterm lenders and financial arrangers (underwriters). On large projects, several banks may form a consortium to raise funds together. The equity investors usually select one or more lead banks to manage the consortium or the process of raising funds. This selection is based on the banks experience and capacity for raising funds in a certain industry and country. Although the bank usually raises debt, it may also raise equity. The project may also hire a financial adviser to formulate a financing strategy. The adviser is usually independent of the lenders and underwriters to avoid conflicts 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 sponsor and take an equity interest in a project. As with construction and management companies, the suppliers primary interest in the project is usually the supply contract with the project company. End-user financing can be prepayment for the future delivery of 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, licenses and other commitments. Management and employees may promote or sponsor a project. This is more common in a straight privatization, where the government provides incentives 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 companys equity and/or debt is 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 sponsors with the direct financial support from banks and non-financial institutions and an indirect financial support from suppliers and endusers. 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:

Type of contract Build own operate transfer (BOOT Contract) Description SPV build the facility SPV owns and operates the projects facility for a set period of time 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 Offtaker a public company) Known as design build finance operate (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) A BOT Contract financed through leasing agreements A BOT Contract where the facility is transferred to the public body only after the construction of this facility The facility will remain in the ownership of the SPV company; In the case of BOO Contract the SPV gets the benefits of any 26 residual value

Build operate transfer (BOT Contract)

Build lease transfer (BLT Contract) Build transfer operate (BTO Contract) Build own operate (BOO Contract)
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Tipuri de contracte exemple:

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