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Project Finance > Unit 2: Project Finance Basics > Flashcards

Unit 2: Project Finance Basics Flashcards

Give overview of history of PF. Explain rationale for utilising PF. ID key economic motivations. ID major players & describe role & functions of each

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1
Q

What are some of the early examples of PF? /

How did project finance develop?*

A
  1. 1299 AD first Project finance - Devon silver mine example. Paid florentine bank with mine’s outputs. The lender looked at what is needed to keep the mine operational, and took what was left.
  2. Shipping - proceed voyages were shared between investors voyage per voyage. This is considered PF, because of the finite nature of the funding. (ie. voyage per voyage)
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2
Q

Why is Project Finance useful?

A

Projects too large for individual investors (infrastructure) - therefore pull together various investors & roleplayers

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3
Q

How does technology influence Government budget constraints?

A
  • Telkom SEO that is no longer making as much money, due to the increase of digital solutions
  • Uber / AirBNB - didn’t pay taxes (VAT / tourism levies)
  • Platforms allow us to share assets we couldn’t share before
  • You can’t tax what you don’t understand
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4
Q

What is Project Finance (definition)

A
  • Financing of a major independent investment opportunity, separated from other assets and obligations
  • World bank: use of non-recourse / limited recourse debt. Repay only from cashflow
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5
Q

What are the characteristics of Project Finance?

A
  • Limited / no-recourse
  • Finite lifespan
  • High Transaction Cost
  • Capital Intensive
  • Highly leveraged
  • Use of proceeds highly defined
  • Fixed dividend policy
  • Specific use of funds
  • Long lead time (takes time to conclude / negotiate)
  • Gray Directors
  • Multiple stakeholders
  • Long Term
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6
Q

Who can be sponsors in an SPV?

A
  • Banks
  • Governments
  • Operators
  • Private Equity
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7
Q

Why could an operator also be a sponsor?

A

Operators Could become a sponsor by doing some of the pre-feasibility (ie. pay to play). Sponsors come together before operators are selected. Therefore if you as operator become part of the sponsor group (pre-feasibility) you are more likely to become the operator.

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8
Q

What is the difference between limited-recourse and no-recourse debt?

A

Limited Recourse: require some security for construction risk. ie. Guarantee.
No-recourse - the lender has no claim from the borrowers if the project fails

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9
Q

Why are PF deals usually structured with limited- or no-recourse debt?

A

At T0, there are no or little assets within the SPV company to be used as security. Government can therefore provide a guarantee, but If Gov gives you a guarantee, but the Sov. Rating is low, you will have higher risk project.

Therefore sponsors would require a higher ROI to account for this risk.

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10
Q

Who is responsible for the dividend policy in an SPV?

A

In South Africa company’s act, the board is responsible for dividend policy. In SPV, the FUNDERS agree on the dividend policy.

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11
Q

Why is PF considered expensive?

A
  • Highly specific nature of contract = higher cost
  • Reduced liquidity, can’t just sell the instruments.
  • Highly detailed contracts
  • High evaluation and monitoring cost.
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12
Q

Why is the fact that it is an off-balance sheet project not necessarily a good thing?

A

you might not be able to service all your debt

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13
Q

Why are community stakeholders important?

A

Community stakeholders should be CONSULTED, because they are smart, politically active, and outspoken. They have the power to derail the project.

As resources become more scarce, this will become more important as people will have a stronger perception on their rights related to a resource.

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14
Q

What is the difference between Viability and Sustainability?

A

Sustainability refers to the ability to maintain a project or company over the long term at a certain level. It does not necessarily make a judgment on the quality produced. (long term sustainability speaks to the environmental / social footprint)

Viability refers to the ability to LIVE successfully. This means the project will (1) accomplish its aim, (2) produce returns, and (3) maximise the shareholder / sponsor wealth

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15
Q

What is the difference between analysing / assessing / evaluating?

A

Analyse - examine (something) methodically and in detail, typically in order to explain and interpret it.

Assess - evaluate or estimate the nature, ability, or quality of. / calculate or estimate the price or value of.

Evaluate - Get a measure of the impact. / form an opinion of, check something out, form an impression of, make up one’s mind about, get the measure of, weigh up

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16
Q

What is an adhesive contract?

A

When you have no option but to accept a contract

(example - Shell / Chevron Nigeria Gas Deal: Ghana has no recourse against the supplier, but has downstream responsibilities, and has penalties imposed when responsibilities aren’t met.)

17
Q

What is corporate finance?*

A

Raising money on a corporate level. When you raise finance, it is not necessarily purpose specific. Funders do not have a say in how the money is applied or used.

18
Q

What are the roles within Project Finance?*

A
  1. Government
  2. Project Sponsors or owners
  3. Project Company
  4. Contractor
  5. Operator
  6. Supplier
  7. Customer
    1. Funders (Banks)
    1. Funders (Capital Markets)
    1. Funders (Direct Equity Investments)
    1. Funders (Multilateral Orgs)
    1. Funders (Export Credit Agencies)
19
Q

What are the major business, economic, financial development etc. considerations of each player?*
(I don’t know the answer - need help)

A
  1. Government
  2. Project Sponsors or owners
  3. Project Company
  4. Contractor
  5. Operator
  6. Supplier
  7. Customer
    1. Funders (Banks)
    1. Funders (Capital Markets)
    1. Funders (Direct Equity Investments)
    1. Funders (Multilateral Orgs)
    1. Funders (Export Credit Agencies)
20
Q

What are some of the principal agreements governing the relationships of each?*

A
  1. Government - concessions, licenses, grant of land
  2. Project Sponsors or owners (see funders)
  3. Project Company - has agreement with other parties
  4. Contractor - construction agreement
  5. Operator - operating agreement
  6. Supplier - supplier agreement
  7. Customer - off-take purchase agreement
  8. Funders - shareholder / loan agreement
21
Q

What is the role of Government within Project Finance?

A

Indirectly

  • Approval of project
  • Control of state company that sponsors
  • Licenses
  • Guarantees
  • Industry regulation
  • Operating concessions
22
Q

What is the role of Government within Project Finance?*

A

Indirectly

  • Approval of project
  • Control of state company that sponsors
  • Licenses
  • Guarantees
  • Industry regulation
  • Operating concessions
23
Q

What is the role of Project sponsors or owners within Project Finance?*

A

Equity stake
30% of project costs
Do not put their corporate balance sheets directly at risk
Indirect risk by financing equity through corporate balance sheet

24
Q

What is the role of Contractors within Project Finance?*

A

Constructing according to tech spec

Own stakes

25
Q

What is the role of Project Company (SPV) within Project Finance?*

A

Concludes all agreements within the SPV

26
Q

What is the role of Operator within Project Finance?*

A

Maintain quality of assets

Not uncommon to hold equity stake

27
Q

What is the role of Supplier within Project Finance?*

A

Provide critical input to project

28
Q

What is the role of Customers within Project Finance?*

A

Purchase output

Willing to sign long-term off-take

29
Q

What is the role of Commercial Banks within Project Finance?*

A

Primary source of funds

DFIs -NB in syndication for projects

30
Q

What is the role of Capital Markets within Project Finance?*

A

Cheaper, less restrictive than banks
Longer periods than commercial banks
Fixed interest rates
SSA = lack of market liquidity

31
Q

What is the role of Multilateral Organisations within Project Finance?*

A

Lenders / co-financiers
Programs to improve regulatory frameworks
eg. World Bank / International Finance Corp / AfDB

32
Q

What is the role of Direct Equity Investment Funds within Project Finance?*

A

Take Minority stakes

eg. AIG Asian Infrastructure Fund / Global Power Investments / EU-Africa Infrastructure Trust

33
Q

What is the role of Export Credit Agencies within Project Finance?*

A

Loan guarantee or funding that does not exceed the value of exports that the project will generate for ECA’s home country
approx. $10b a year

34
Q

What are the disadvantages of using Capital Markets for funding?*

A
  • Necessity for more extensive disclosure doc
  • Less likely to assume construction risk
  • Bond trustee plays greater role
  • More disparate investors
  • Credit agency ratings
35
Q

What is agency cost?

A

When the managers of a project, act in a way that is not aligned to the interests of the principal

36
Q

What are the Various types of concessions used?

A

BOT (Build, Operate, Transfer)
BOOT (Build, Own, Operate, Transfer)
BOO (Build, Operate, Own)

37
Q

How does the concession type (BOT / BOOT / BOO) influence the agency cost?

A

If there is no ownership portion of the deal, it is likely to increase the Agency Cost, because there is the increased risk of misalignment between the principal and agent.

Project Finance (4 decks)

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