Project Financing

By: Manoj Singh Roll No. 20100114

Content
Project Background Characteristics of Project Financing Parties to a Project Financing Types of Project Financing Real World Cases- BP Amoco: Classic project finance

PROJECT BACKGROUND
A project can be defined as A scheme of things to be done during a specified period in future for deriving expected benefits under certain assumed conditions. A project may be in the nature of setting up a new industrial unit, modernization, expansion, diversification and promotion of R&D.

 To set up a project, certain capital expenditure needs to be incurred in acquiring assets and other infrastructural facilities like roads, water supply, railway sidings, etc., in addition to the Preliminary / Pre-Operative Expenses and margin on WC Limits. Promoters of an industrial project can constitute themselves into any of the following forms of business organizations to implement the project : Sole Proprietorship,Partnership, Co-operative Society & Joint Stock Company.

 Project Finance is the long term financing of infrastructure and industrial projects based upon the projected cash flow of the project rather than the balance sheets of the project. A project financing structure involves a number of equity investors known as sponsors, as well as a syndicate of banks or other lending institutions that provide loans to the operation. A Special Purpose Entity is created for each project. Risk Identification and allocation is the key component of project finance.

Characteristics of Project Financing

A separate project entity is created that receives loans from lenders and equity from sponsors. Component of debt is very high in project financing Debt service and repayments entirely depend on the project cash flows. Most appropriate for projects involving large amount of capital expenditure and involving high risk.( eg. Construction of power plants, transportation system, heavy manufacturing plants)

 A Project may be subject to a number of technical, environmental, economic, and political risks, particularly in developing countries and emerging markets. Project financing permits the risk associated with such projects to be allocated among a number of parties at levels acceptable to each party.

Parties to a Project Financing

Project Company Sponsors Borrower Financial Adviser Technical Adviser Lawyer Debt Financiers Equity Investors Regulatory Agencies

Types of Project Financing

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

Build Operate Transfer (BOT)

A project financing and operating approach that has found an application in recent years primarily in the area of infrastructure Build: A private company agrees to invest in a public infrastructure project. The company than secures their own financing to construct the project. Operate: The Private Developer then operates and manages the faculty for an agreed concession period and recover their investment through charges or tolls

 Transfer: After the concessionary period the company transfers ownership and operation of the faculty to the government. Advantages: The rise of the project are shared by private sector The project are conducted in a fully competitive bidding situation and thus completed at the lowest possible cost It Ensures efficiency and quality by using the best equipment

Build Own Operate Transfer( BOOT)

Involves a single organization who designs, builds, funds, owns, and operate the scheme for a defined period of time and then transfers ownership across to a agreed party. Stages of BOOT project Design Manage project implementation Finance Construct Hold Deliver

Real World Cases

BP Amoco: Classic project finance

Case : BP Amoco
Background: In 1999, BP-Amoco, the largest shareholder in AIOC, the 11 firm consortium formed to develop the Caspian oilfields in Azerbaijan had to decide the mode of financing for its share of the $8bn 2nd phase of the project. The first phase cost $1.9bn. Issues:
Size of the project: $10bn. Political risk of investing in Azerbaijan, a new country. Risk of transporting the oil through unstable and hostile countries. Industry risks: price of oil and estimation of reserves. Financial risk: Asian crisis.

Case: BP Amoco
Structural highlights:
Risk sharing: Increase the number of participants to 11 and decrease the relative exposure for each participant. Since partners are heterogeneous in financial size/capacity, use project finance. Sponsor profile: Get sponsors from major superpowers to detract hostile neighbors from acting opportunistically Staged investment: 2nd phase ($8bn) depends on the outcome of the 1st phase investment. Improves information availability for the creditors and decreases cost of debt in the 2nd phase.

Thank you