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Ljubljana, 24 11 2010
Project Finance: an overview
Graham Cheshire
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Review PPP/PPI
Definition of Project Finance and comparisonto conventional finance
What t e of develo ments are suited to
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Project Finance techniques?
Who are the involved parties?
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Popular terms in Project Finance
What are they ?
Public Private Partnership Private Finance Initiative
PPP / PFI
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and PPPs
The private sector has more
incentive to work efficiently
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Private sector companies design, finance, build,
and operate public sector projects
Often referred to as BOT(Build Operate Transfer)
Private Finance Initiative
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, ,
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European Central and regional governments, in the
wake of the financial crisis, lack the funds to finance
large scale capital investments
National Budget Savings
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Conflict of interest
The private sector is an attractive alternative to
public sector finance
However, the necessity for the private sector togenerate profits and the public sector to provide
low cost infrastructure, can lead to conflicts of
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interest
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Review PPP/PPI
Definition of Project Finance and comparisonto conventional finance
What t e of develo ments are suited to
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Project Finance techniques?
Who are the involved parties?
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Project Finance involves the pure application of
basic principles of finance and credit Managing risk and return for all parties
Each deal is uni ue but follows the same rinci les
Project Finance
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A Definition of Project Finance
The financing of an economicunit in which the lender issatisfied to consider the
cashflow and earnings of thateconomic unit as the sourcefrom which the loan will be
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The assets of the economicunit will provide the collateralfor the loan
The credit quality of thesponsor is not especiallyimportant
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Lets drill deeper .
Project Finance operations have common
features
Funding a new economic unit
Via a Special Purpose Vehicle company
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Several sponsors
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Project cashflows service debt
Project Assets act as collateral
Non-recourse credit support
Project viability and sensitivity to risks are critical
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Financiers expect high margins to reward their
long maturity exposures
Public projects are subject to rigorousprocurement procedures
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Funding Sources
Trade finance, export credits, IFIs,
development finance, commercial
debt, leasing mechanisms, bonds,
mezzanine finance, subordinated
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The World Bank
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Conventional Bank Loans
The bank expects a company acquiring an asset to
be entirely responsible for the loan repayment
regardless of the success or failure of the acquiredasset
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Working capital, new equipment,
inventory financing
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Project finance, compared to
traditional bank lending
Has a reduced
dependance on thepast
Is more concerned
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about the future
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Conventional loans
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Project Finance
a typical scheme ..
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The Flexibility of Project Finance
Each individual risk can be identified and allocated
either partially or wholly The project file takes on a unique profile
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Risk Allocation
If risks are compartmentalised, dealt with
individually and covered individually, then
the chance of one project partys failure
bringing the whole project down is greatly
reduced
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Indirect support is provided to financiers by
other parties through several types of
contractual obligations
Risk sharing
Equipment supply
Su l contracts
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Off-take contracts
Operating and maintenance
agreements
Special operating agreements
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A Common Terms Agreement
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Embodies all documentation by lenders in one common
agreement
Conditions of disbursement, covenants, warranties, events
of default, off-take and supplier agreements, etc
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Why SPVs or PUCs?
Isolates project from risk of sponsors failure!
Sponsors not subject to local regulations on
business operations
The project company is managed by a board of
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venture members independant
Limitation of political risk
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Market Influences
Each project will be subject to market risks,
supply and demand, economic cycles, political
events
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Review PPP/PPI
Definition of Project Finance and comparison
to conventional finance
What t e of develo ments are suited to
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Project Finance techniques? Who are the involved parties?
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Where to apply Project Finance
techniques Energy Plants gas, oil, windpower, hydro-electric power, coal, lignite powered
generators Energy supply oil and gas, refineries,
pipelines, liquid gas transportation
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Telecommunications
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Toxic waste, waste disposal, waste to energy
(bio gas)
Chemical and petro-chemical processing Tunnels, bridges, motorways, toll-roads
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Minerals
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Entertainment and
lesiure com lexes
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Railways, Metros
Schools, prisons,
hospitals, university
facilities
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Review PPP/PPI
Definition of Project Finance and comparison
to conventional finance
What t e of develo ments are suited to
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Project Finance techniques? Who are the involved parties?
Whi h P ti G t I l d i
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Which Parties Get Involved in
Project Finance ?
The project company usually a single
purpose vehicle
Project sponsors - may be one company or aconsortium of interest parties
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company !
Financiers and guarantors can be
international syndicate
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Involved Parties .
The arranger
The Manager Banks
Agent bank The engineering bank
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Guarantor Bank
LT funding provider
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Parties .
The Financial Advisor / National Center of Expertise
Technical Experts
Lawyers essential, numerous
Insurers essential role
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The host Government International agencies
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Key Concern for Bankers
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