project finance course

project finance course

Exploring the Fundamentals of Project Finance: A Comprehensive Course

1. Introduction to Project Finance

However, the foregoing sequence tremendous amount of due diligence, documentation of terms, conditions, and myriad covenants for the disbursement of capital from many investment banking firms, commercial and development banks, and insurance agencies. Often the fees and interest rates for these political and financial risks are higher than if the project had been done on a turnkey or corporate-financing basis. Additionally, the financial engineers structure unique financial products in order to offset and distribute the risks across a universe of debt and equity participants. Built into these financial products are means to predetermine the financial burden on the project should a series of discrete discretionary actions occur during the construction and operation phases of a 20-30 year project.

Exploring the fundamentals of project finance: a comprehensive course. Project finance is a unique form of financing designed specifically for large-scale infrastructure projects placed on a fast track. The framework is also suitable for sponsoring the development and operation of facilities such as toll roads, hospitals, power plants, ports, and managed facilities, wherein the financial structure and repayments are based on the contractual cash flow of the project rather than the balance sheets of the corporate sponsors. The strength of project finance lies in laying the risks on those parties which can best handle them. It embraces risk identification, analysis, allocation, documentation, funding, and control as its main mission.

2. Key Concepts and Terminology in Project Finance

These concepts and processes are not set in stone. For example, in certain regions such as Europe, certain features are standardized, a phenomenon we term as ‘Eurosation’. These features change over time much in the same way as the structure of securitisation terms change. For example, in many PPP structures including those developed by government departments which are not full private companies, risk is taken by the senior party that would not be able to provide this cover if it was a fully fledged private limited liability company.

We will discuss these terms and concepts without heavy discussions of modelling or details of particular arrangements as we feel this module is more concerned with describing the main features in a way that is comprehensible.

There are many key concepts and terms associated with project finance which can be quite confusing to those not familiar with the subject. Some of the terms have developed over time from general finance principles and have specific meanings in the context of project finance. Some terms are relatively new and typical courses may not include them.

2.1 Introduction 2.2 Project finance in brief 2.3 Key concepts and terminology in project finance 2.4 Definitions of project finance 2.5 How a public-private partnership (PPP) structure fits in? and other structures 2.6 Vasari case study 2.7 Comprehension test 2.8 Simple summary and website links

Guide to the Module 2

3. Structuring Project Finance Deals

The strong structure will attempt to ensure that the default of a contractor does not involve rights that allow that lender control rights. Investors are all firm that are willing to pay rates of return for taking on the market risk of the project and difficulties of project development that are acceptable to other stakeholders. In order to minimize the cost of finance, the structure should involve the use of debt so far as is efficient. Because of high transaction costs, complexities of transfer, and potential illiquidity, equity is generally much more costly for a project to maintain. Structures to facilitate debt include providing a limited recourse, clear, and predictable revenue streams.

Project finance transactions usually involve high relationship costs. Transparency and understood sharing of economic interests are vital. A good structure should enable all parties to have a clear scenario and should incorporate ways to address any uncertainty. Structures can range from strict contractual deals to more complex deals that involve more equity partners. A direct agreement between lenders and the concessionaire is to improve management. This should enable lenders to achieve faster rates of recovery in the unexpected situation that the concession is terminated. In maintenance contracting, the lender might have the ability to maintain employ separate completion contractors. Formal structures for management should be well-known and the obligations clear to save problems.

4. Risk Management and Mitigation Strategies in Project Finance

Recall that in infrastructure development projects, risks are shared between the public and private sectors, and project finance is a popular way of risk allocation that relies on the cash flow generated through the life of the project. The sale of goods or services provides debt finance to the business venture (our education fund). Upon successful investment in the project, the debt is quickly repaid from project cash flows, and the balance of the cash flow is profit. Thus, careful structuring of the project arrangements is essential to minimize project risks, while transferring risk from project finance parties is pushed to the extent consistent with the project construction costs to be competitive. It is impossible to recite all the lessons and issues that may arise in a project involving investment in infrastructure facilities. I will, therefore, approach the study of the project development process with this caveat in mind.

Welcome to the fourth installment of the comprehensive Project Finance learning lesson. My name is Dr. Jo Abekah, and today we will resume where we left off and continue our deep-diving into the fundamentals of Project Finance. Our focus today is on understanding and managing risks in project finance for infrastructure facilities, as well as the typical risk allocation mechanisms and mitigation strategies used in a typical project finance structure.

5. Case Studies and Real-World Applications

Assuming that you have digested all the material presented in the fundamentals, the objective here is to set some of those concepts, terms, principles, and practices into a variety of practical as well as specific geographical and industry contexts. Much of the course follows Part 5: Financing of the fundamentals, which is intended to be a modular stand-alone section exploring the issues faced at different stages of project finance transactions. So, Section 5.2 covers material related to the stages of a project finance transaction; Sections 5.3 through 5.6 are arranged along some of these attributes too: multi-sourced deals; refugee companies; project financing during construction; and refinancing. Other case studies cover conceptual material related to the financing of different sectors; the imperatives of stakeholders; the role of financial advisors; weak sponsors; the role of export financiers; off balance sheet financings; and the sorts of project risks specific to project finance. We finish the course in Section 5.11 with a review of case-study questions to help with your own progress through the material. At all times, the case studies and real-world examples build upon the fundamentals presented.

This chapter builds on the fundamentals of project finance by means of a set of case studies and real-world examples. Each of these illustrates an important aspect of a project finance transaction and, taken together, the set provides a comprehensive course through the material covered in the fundamentals.