Project Finance for Business Development

John E. Triantis

• Publisher: Wiley
• Year: 2018
• ISBN:
  9781119486091
• Edition: 1
• Topic: Business
• Subtopic: Finance
• Index: Business

Raise the skill and competency level of project finance organizations

Project Finance for Business Development helps readers understand how to develop a competitive advantage through project finance. Most importantly, it shows how different elements of project finance, such as opportunity screening and evaluation, project development, risk management, and due diligence come together to structure viable and financeable projects—which are crucial pieces missing from the current literature.

Eliminating misconceptions about what is really important for successful project financings, this book shows you how to develop, structure, and implement projects successfully by creating competitive advantage. By shedding light on project finance failures, it also helps you avoid failures of your own.

• Offers a roadmap for successful financing, participant roles and responsibilities, and assessing and testing project viability

• Considers project finance from a broad business development and competitive advantage

• Provides a strategic decision-forecasting perspective

• Delves deeper than existing treatments of project finance into decisions needed to create and implement effective financing plans

Helping readers develop, structure, and implement projects successfully by creating competitive advantage, this book is a useful tool for project sponsors and developers, helping them structure and implement projects by creating competitive advantage.

CHAPTER 1
Introduction
Why Project Finance for Business Development?

The treatment of project finance has primarily been for the infrastructure industry, but the processes and techniques used are also applicable to other off‐balance‐sheet financings of separate entities, joint ventures, and projects in other industries. Project finance has traditionally been treated from a financial engineering or from a contract finance perspective with applications in infrastructure projects in underdeveloped or developing countries lacking sufficient public and private resources to fund needed projects. Projects of such characteristics are the most challenging and once experience is obtained from such projects, it is easily transferable to projects in other industries and developed countries.

The globalization of business has intensified competition among project sponsors/developers, construction contractors, technology and equipment providers, and some funding sources. The result is coopetition in project development and financing that has increased the need for effective project finance solutions and better‐structured partnerships and joint ventures. In this environment, to win large project bids, sponsors need an overall competitive advantage. To create profitable investment projects, they need a disciplined, new business development approach to project finance.

Project finance is not a stand‐alone function based on contract finance or legal engineering as it is being treated in the current paradigm. It has been developed to advanced levels for the primary purpose of facilitating new project and business development activities with the nonrecourse aspect as an ancillary factor. It should be treated as part of new business development with its focus on striving to maintain or obtain competitive advantage. Hence, our approach to project finance is different than the one in the current literature and its novelty lies with the value created through addressing it from a broad, new business‐development perspective. Why? Because project finance is part of new business development and has to be viewed in that context and not as a stand‐alone discipline, and because its key objective is to get competitive advantage through new investments. Other reasons for and benefits of using this approach are explained later in the chapter.

Infrastructure projects are large investments by the public and/or private sectors that require major financial and human resource commitments to build physical assets and facilities needed for economic development and social functioning of a country. Infrastructure projects include power plants, pipelines, railroads, roads and bridges; ports, terminals, and airports; telecommunication networks, and water and sewage treatment plants. They also include social and healthcare facilities such as public housing, elder care facilities, prisons, hospitals, schools, and sports stadiums.

Due to their large and special financing requirements and challenges, infrastructure projects are usually placed in four categories:

1. Greenfield projects, where new facilities are built requiring larger capital investments than investments in existing project companies in operation
2. Brownfield projects, where investment is made to upgrade and refurbish existing facilities and equipment in order to increase productivity or extend their economic life
3. Stock or extraction projects, where natural resources are extracted and sold until depletion, such as coal and mineral mining, and gas and oil extraction
4. Flow‐type projects, where the project assets are used to generate income by selling their output or the use of their services. They include pipelines, toll roads and bridges, ports and airports, and so on

There are several definitions of project finance for different types of projects, all valid but each stressing some more than other parts of the discipline. However, we prefer the broader definition shown in the box. To understand what project finance is all about, the definition needs to be expanded to include the structuring of the project company, known as a special purpose company (SPC) or a special vehicle company (SPV); the characteristics of projects, what project finance involves, and the risks associated with a project. That is, it includes:

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Project finance is the art and skill of piecing together new business development elements, financial engineering techniques, and a web of contractual agreements to develop competitive projects and make the right decisions to raise funding for industrial or infrastructure projects on a limited/nonrecourse basis where lenders look to the cash flow for loan repayment and the project assets for collateral.

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1. Structure of the company: Common SPC structures are corporations, joint ventures, partnerships, limited partnerships, and limited liability companies
2. Properties of projects: Infrastructure projects require large capital expenditure, entail massive negotiations and contracts, and require long operating periods
3. What project finance involves: It requires the creation of a legally separate, single purpose entity that is a shell company to build the project assets and capture revenues. Financing is of a limited/nonrecourse basis and it is based on cash flows and the assets owned by the SPC that is responsible for loan repayment
4. Risks associated with a project: Financing is provided to the SPC and not to the sponsors and this gives rise to risks usually mitigated through contracts, insurance, and credit enhancements. A common set of risks in project finance includes primarily political, demand, price, supply, currency, interest rate, and inflation risks
5. Project development complexities: Addressing them entails the undertakings of project screening and the feasibility study, project development, financial model development, and economic evaluation. It also requires project risk management, due diligence, a financing plan, financial structuring, creation of a project company business plan, and project implementation

A key objective of project finance is to minimize or avoid uncertainty. Unlike asset‐based finance, where the asset va...

Table of contents

• Cover
• Title Page
• Table of Contents
• Preface
• Acknowledgments
• About the Author
• CHAPTER 1: Introduction
• CHAPTER 2: Overview of Project Finance
• CHAPTER 3: The Record of Project Finance
• CHAPTER 4: Project Financing Processes
• CHAPTER 5: Project Finance Organizations
• CHAPTER 6: Project Development
• CHAPTER 7: Participants and Responsibilities
• CHAPTER 8: Project Finance Forecasting
• CHAPTER 9: Project Contracts and Agreements
• CHAPTER 10: Project Risk Management
• CHAPTER 11: Project Due Diligence
• CHAPTER 12: Funding Sources and Programs
• CHAPTER 13: Structuring Project Finance
• CHAPTER 14: Project Financial Model
• CHAPTER 15: Trends Impacting Project Finance
• CHAPTER 16: Project Finance
• APPENDIX A: Common Project Finance Abbreviations
• APPENDIX B: Commonly Used Project Finance Definitions
• Bibliography
• Index
• End User License Agreement