PROJECT FINANCE Caiaphas Mwanakwale Habasonda (MA (Econ), BA (Econ & Business Administration) & Bachelor of Laws (LLB) +260965479526 /0955452130 0978452130 Email:assegai@coppernet.zm INTEL-SOFT FINANCE LIMITED

COURSE OBJECTIVES Conceptualize Project Finance Know the Project Finance Cycle Know Financial Instruments used in project Finance Understand the Due Diligence Process Identify Sources and Uses Of Funds Identify, assess & treat risk

COURSE OUTLINE SYLLABUS Concepts in Project finance Rationale for Project Finance Stakeholders Project Finance Cycle Due Diligence Process Financing Instruments/Options Project Characteristics, Risk Analysis/Mgt Public Private Partnerships

RECOMMENDED READINGS

WHAT IS A PROJECT? A GUIDE TO THE PROJECT MANAGEMENT BODY OF KNOWLEDGE (PMBOK GUIDE) FOURTH EDITION) PROJECT MANAGEMENT INSTITUTE p6. A temporary endeavor undertaken to create a unique product, service or result “Temporary” connotes a definite beginning and end; not short duration/not apply to product service or result; outcomes often outlast project End reached when Project objectives achieved Project terminated cos objectives will/can not be met

PROJECT FINANCE DEFINED Finance Invested in a project Non-recourse: dependent on creditworthiness of sponsors Not Collateral-based Cash-flow driven Gati S Project Finance in Theory and Practice

PROJECT FINANCE DEFINED The International Project Finance Association (IPFA) : “The financing of long-term infrastructure, industrial projects and public services based upon a non-recourse or limited recourse financial structure where project debt and equity used to finance the project are paid back from the cash flow generated by the project.”

RATIONALE FOR PROJECT FINANCE Facilitation of Project Development Public Debt Reduction Reduce/Eliminate Impact on Balance Sheet (Limited Recourse/Non-Recourse) Optimization of Risk Allocation (Structured Finance) Management of Project Costs (Fixed Time/ Fixed Price/Lump Sum Contract) Value for Money Optimization of Return on Investment Attraction of Private Sector in Public Goods & Services Investment

DISTINCT FEATURES DEBTOR is a project company (SPV), financially and legally independent from sponsors; LENDERS have limited or no recourse to sponsors after project completion PROJECT risks are allocated equitably among all parties involved-risks allocated to contractual parties best able to control/manage them

DISTINCT FEATURES CASHFLOWS generated by SPV must be sufficient to cover operational costs, service debt in terms of capital and interest COLLATERAL-given by the sponsors to lenders as security for receipts and assets tied up in managing the project

KEY TERMS IN PROJECT FINANCE The Project Project Sponsor/Promoter/Developer Government (Concession/PPP) Special Purpose Vehicle (SPV)-Investment Vehicle Equity Provider(s)-Returns Lenders-Terms/Conditions & Debt Service Capacity Off-taker (Buyer) Contract(s) Supply Contract(s) Engineering, Procurement, Construction( EPC) Contract(s) Operation & Maintenance (O & M) Contract Insurance Cash Flow Security or Collateral Packaging

National Development Strategy Post Implementation Evaluation THE PROJECT CYCLE National Development Strategy Identification Preparation Appraisal Approval Implementation Monitoring Post Implementation Evaluation

BASICS OF PROJECT DEVELOPMENT

PROJECT STRUCTURE Givers Non Givers

ADVISORS Financial Technical Legal Marketing Environmental Social Insurance Others

ROLE OF ADVISORS Expertise Experience Network Credibility Work Load Reduction Blame Game / Punch Bags Time Management Project Management Process Management

PROJECT ENVIRONMENT Political Economic Social Technological Legal and Regulatory Environment

ALTERNATIVE I CORPORATE INANCE Alternative -Corporate Financing (on-balance sheet) New Project incorporated into existing corporate structure All assets/Cash-flows from existing entity, guarantee additional credit All residual assets/cashflows can be used as source of repayment for new/old creditors

ALTERNATIVE II PROJECT FINANCE Off-balance Sheet New Project incorporated-Separate Economic, legal and Financial entity Assets/Cash-flows of SPV, completely not available at all or available to creditor claims on a limited recourse basis Failure of project limited to SPV Existing shareholders not affected by project failure

DISADVANTAGES OF PROJECT FINANCE Legal, Technical, Insurance and other advisors need a long time to evaluate project Transaction Costs High-typically 5-10% of total Investments Costs Cost of Monitoring the project in process extremely High Lenders expected to charge significant costs in exchange for taking on greater risk

ADVANTAGES OF PROJECTFINANCE High level of risk allocation-possible to support higher debt-equity ratio than otherwise-hence higher equity Internal rate of return Accounting wise, contracts between sponsors and SPVs are essentially commercial guarantees; Collateral limited to assets of the project; does not extend to those of sponsors which could be available, in case further recourse were needed. SPV makes possible complete isolation of the Sponsors from project financing, hence risk in case of failure

MAIN DIFFERENCES BETWEEN CORPORATE AND PROJECT FINANCE FACTOR CORPORATE FINANCE PROJECT FINANCE Guarantees for Financing Assets of Borrower (already in place) Project Assets Effect on Financial Elasticity Reduction of financial elasticity for Borrower No, or heavily reduced effect on sponsors Accounting Treatment On-balance Sheet Off-balance Sheet Main variables underlying the granting of financing Customer Relations Solidity of balance sheet Profitability Future Cash flows Degree of Leverage Utilized Depends on effect on borrowers balance sheet Depends on cash flows generated by the projected. Leverage usually higher

SOURCES Gatti, S (2008) Project Finance in Theory and Practice, Elsevier Inc. London. Project Management Institute Inc., (2008) A Guide to the Project Management Body of Knowledge (PMBOK), Fourth Edition, Project Management Institute Inc. Pennsylvania Malumo, S Appraisal of Infrastructure Projects with Private Sector Participation, Presentation made to SADC DFI Participants, Gabarone, Botswana 2012   .

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