Introduction to Project Finance

Question 1

Project Finance (2)

Answer 1

• structure in which lenders look at the cash flow generated by project for repayment; projects assets serve as lenders security
• fair and equitable allocation of risk

Question 2

Non-recourse (1)

Answer 2

• the project with no repayment guarantees given by project sponsors or host government to the lenders

Question 3

Limited-recourse (1)

Answer 3

• project sponsors remain responsible to cover default during a limited period of time

Question 4

Advantage of Project Finance (6)

Answer 4

• reduce overall level of risk
• increase availability of finance
• risk limited to investment
• risk sharing among parties best be able to manage particular risk
• greater borrowing opportunities
• potential greater leverage than corporate borrowing

Question 5

A disadvantage of Project Finance (2)

Answer 5

• time

- cost

Question 6

Special purpose vehicle (2)

Answer 6

• highly leverage

- new company is formed by project sponsor to own and operate the project

Question 7

Major features of project finance (4)

Answer 7

• defined revenue stream
• debt financing is highly structured (loan agreement)
• extensive due diligence by lenders and sponsor to identify and mitigate risk
• non-recourse and limited recourse project debt

Question 8

Project finance sectors (4)

Answer 8

• telecommunication
• energy generation
• pipelines and refineries
• mining

Question 9

Basic project finance model (

Answer 9

• Sponsor – Financing – Lenders
• contracting authority - project co – subcontractors (soft service, design build, maintainence)
• offtake – intake

Question 10

Concession (4)

Answer 10

• form of privatization in which government authority agree to allow private sectors to operate a project or provide a service over an extended period
• shorter life than useful life
• responsible for financing new fixed investment
• private firm “lease” assets from public authority to provide service

Question 11

Six components of project finance (6)

Answer 11

• financing
• insurance
• EPC
• O&M
• Intake/feedstock
• offtake

Question 12

EPC (2)

Answer 12

• risk transferred away from SPV

- turnkey (completion date, cost of work, plant performance, warranty period)

Question 13

Key aspects of EPC contract (5)

Answer 13

• suspension and termination
• security
• owner’s risk
• relief events
• contract scope

Question 14

O&M (2)

Answer 14

• SPV transfers O&M operations to a contractor with experience and expertise
• planning, mobilization, operations

Question 15

Fee basis of O&M (4)

Answer 15

• incentive
• penalties
• fixed: unpredictable and lifecycle cost away from SPV (against CPI)
• cost plus: fixed fee to cover labour and project margin pass through SPV

Question 16

Intake/Feedstock (10)

Answer 16

• 3rd party outsourcing
• public infrastructure: minimum usage guarantees
• put and pay: provide specified minimum volume to SPV (commodities)
• take or pay: project company buy specified minimum volume, risk of disposing of unwanted input
• take and pay: SPV only buys input supplier needs, risk of disposing of unwanted input remains with supplier
• pull tolling: offtakers handle and take risk of securing input
• push tolling:output is sold to competitive market and input supplier take price risk
• fixed or variable: agreed maximum or minimum under take or pay or take and pay
• output dedication: input suppliers dedicate entire output from specific source to project company
• interruptible: offer lower cost where project company agrees that input supplies can be interrupted for specific maximum period each year

Question 17

Offtake (2)

Answer 17

• long term agreement where project commits to delivering certain volume/ quantities
• pay predefined sum of money or set free for a certain period in exchange for good/service

Question 18

Insurance (3)

Answer 18

• network of contracts with mandatory by law
• project must be bankable
• take out by SPV, EPC, or OM contract

Question 19

Key consideration of financing (5)

Answer 19

• debt and equity ratio
• fixed interest rates
• covenant
• hedging and derivative
• financing cost vs alternative solution

Question 20

Define sponsors (4)

Answer 20

• multinational industrial
• purely financial investors
• contractors
• public sponsors

Question 21

Key criteria of sponsor (3)

Answer 21

• cash equity
• target IRR
• business rationale

Question 22

Define lenders (5)

Answer 22

• multi-laterial development institution
• export credit agencies
• bonds
• commercial bank loan
• private loan from institutional investors and insurance companies

Question 23

Regulatory compliances (3)

Answer 23

• political
• permits
• environmental

Question 24

Public Private Partnership (5)

Answer 24

• competitive process
• integration of roles
• long term duration
• defined output specification
• long term performance-based approach to procuring public infrastructure where the private sector assumes a major share of the risks in terms of financing and construction and ensuring effective performance of the infrastructure, from design and planning, to long term maintenance

Question 25

Process of PPP (5)

Answer 25

- DBB: design bid build - DB: design build - DBF: design build finance - DBFM: design build finance maintains - DBFOM: design build finance operation maintains

Question 26

Structure finance (4)

Answer 26

- hybrid of corporate and project finance - based on balance sheet of borrower or guarantor - limited recourse with special purpose company borrower or project cash flow as source of repayment

Question 27

Key criteria of lenders (3)

Answer 27

- creditworthiness - risk allocation - predictable cash flow