Overview of Project Finance

Question 1

Name the 3 key features of PF

Answer 1

1) Cash Flows: cash flow related lending; drives completion risk
2) Risk sharing: separation of project risk between project parties; limited/ non recourse financing
- > constituting features
3) off-balance: off-balance-sheet-financing; high leveraged SPVs; limited consequences of an equity exposure -> differentiating character

Question 2

Corporate Finance vs. PF

Answer 2

CF: the companies credit standing determines its borrowing capacity and pricing
PF: the SPVs cash flows (amount of stability) determine borrowing opportunities

Question 3

Key Players in PF

Answer 3

• Project Sponsors: entity that manages project; 4 types (industrial, public, contractor, purely financial)
• Loans/ Lenders
• Construction company
• Operator
• Advisors
• lawyers
• export credit agencies

Question 4

Definition PPP

Answer 4

Public-private partnership:
- special form of privatization
- government service or private business venture which is founded and operated through a partnership of government and one or more private sector companies and with assumed substantial financial, technical and operational risk in the project.
Government: interested in providing certain services; carries equity share; may provide capital subsidy
Private partner: founds SPV; develops, builds, maintains and operates project and its assets; provides agreed services

Question 5

Conflict of aims btw. government and privates:

Answer 5

Government: committed to public welfare

Private Partners: dedicated to maximize profits/ shareholder value

Question 6

Conflict of aims: Pros

Answer 6

Government: sovereign responsibility remains untouched; relief of stressed public budget; faster+cheaper project completion; invest without new debt
private partners: exploiting new, profitable fields of business

Question 7

Conflict of aims: Cons

Answer 7

Government: more dependent from private sector; contracts are often secret; lack of transparency/ governmental control; decline of public service quality
Private partners: business/ project failure

Question 8

PPP activity by region and by sector

Answer 8

by region:
- strong: Europe/ Central Asia/ Asia Pacific
- medium: America
- low: Japan and Africa
by sector:
- transportation/ infrastructure: 80%
- also: water, education, health care/ hospitals

Question 9

What is meant by Politicians postpone PPP?

Answer 9

• supervisory boards do usually comprise politicians who lack professional experience -> scope of these projects frequently overextends these peoples’ expertise and skills
• tendency to “survival of the unfits”: those projects are realized, that present the most advantageous numbers during planning

Question 10

Success factors of PF

Answer 10

• stability and reliability of the legal and regulatory environment
• proven technology
• existence of a strategic investor/ municipality (Kommune)
• important permissions are available
• qualified and financially solid project participants/ consultants
• sufficient project size

Question 11

Typical advantages and drawbacks in PF.

Answer 11

Advantages: non-recourse/ limited recourse financing; off-balance sheet debt treatment; leveraged debt; political risk diversification; risk sharing
Drawbacks: complexity of risk allocation; increased lender risk; higher interest rates; lender supervision; increased insurance cover; transaction costs may outweigh the benefit