FINANCING PROJECTS

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FINANCING PROJECTS

• LECTURE 7

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INTRODUCTION

• Sources of financing
• Types of Financing

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Types of Financing

• Project Finance
• Non-project Finance

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Project Finance

• Rao (2004) defines project financing in two ways
  firstly the financing of a particular economic
  unit in which the lender is satisfied to look
  initially to the cashflows and earnings of that
  unit as the source of funds from which the loan
  will be repaid and the assets of the economic
  unit as a collateral

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Project Finance

• Baker and Mckenzie1 (undated) defined project
  financing as financing in which lenders of debt
  to a particular project look exclusively to the
  revenue stream created by the project for
  repayment of debt and largely to the assets as
  the sole collateral for the loan.

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Project Finance

• Advantages
• Since the debt is non-recourse, sponsors shift a
  large part of the risk associated with the
  project. Lenders thus share a greater degree of
  risk for project failure.
• In the international context, projects can be
  financed without the debt reflecting on the
  balance sheet of the company.

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Project Finance

• Disadvantages
• Given the high risk that lenders bear for the
  project, the interest rate on loans for project
  finance is high. In international transactions,
  the risk premium is usually up to 2.5 of LIBOR
  (London Interbank Offered Rate).
• Secondly, the procedure is relatively cumbersome.
  Since the lender carries more risk, much time is
  required to examine the request.

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Sources of Financing

• External
• External sources are those funding that do not
  originate from the organisation that owns the
  project. Examples of such include funding from
  banks, and international agencies.
• Local
• Foreign

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Sources of Financing

• Internal
• those that are generated from within the
  organisation.
• Examples are
• retained earnings,
• rights issue from shareholders.

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Sources of Financing

• Debt
• Equity
• personal resources,
• company resources,
• equity from non-owners,
• banks,
• leasing and other private sources.

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Sources of Financing

• Equity
• Long-term capital provided in exchange for
  shares, representing part ownership of the
  company.
• This provided primarily by sponsors and minority
  investors.
• Equity holders receive dividends and capital
  gains (or losses), which are based on net
  profits. Equity holders take risks (dividends are
  not paid if the company makes losses), but in
  return share in profits.

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Sources of Financing

• Debt
• Banks
• Finance houses,
• Insurance companies,
• bond issues
• mutual funds
• pension funds

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Sources of Financing

• Lenders seek
• projected cashflows that can finance debt
  repayment with a safety margin
• enough of an equity stake from sponsors to
  demonstrate commitment
• limited recourse to sponsors in the event of
  specified problems, such as cost overruns and
• covenants to ensure approved usage of funds and
  management of the projects.
•  

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Sources of Financing

• Commercial Banks
• Development Banks
• Universal Banks
• Merchant Banks

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Sources of Financing

• Subordinated Loans
• This source of funding if granted has repayment
  priority over equity capital, but not over
  commercial bank loans or other senior debt in the
  event of default or bankruptcy. Sponsors usually
  provide this.

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Sources of Financing

• Subordinated debt contains a schedule for payment
  of interest and principal but may also allow
  participation in the up-side potential similar to
  equity.

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Sources of Financing

• Suppliers Credit
• Long-term loans provided by project equipment
  suppliers to cover purchase of their equipment by
  the project company. Particularly important in
  projects where capital equipment is intensive.

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Sources of Financing

• Bonds
• These are long-term debt securities generally
  purchased by institutional investors through
  public markets, although the private placement of
  bonds is becoming more common.
• Institutional investors are usually risk-averse,
  preferring projects with an independent credit
  rating. Purchasers require a high level of
  confidence in the project (for example strong
  sponsors, contractual arrangements, and country
  environment) this is still a relatively new
  market in developing countries.

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Sources of Financing

• Corporate Resources
• This refers funds available to a company from
  cashflow from operations (that is, profit after
  tax plus non-cash charges minus non-cash
  receipts) that are retained and available for
  reinvestment in a project. In a financial plan,
  reinvested profits are treated as equity,
  although they will only be generated if
  operations are successful. Some assets could be
  sold or unprofitable business units divested.

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Sources of Financing

• Export Credit Agency (ECA) Facility
• Loan, guarantee, or insurance facility provided
  by an ECA. Traditionally, ECAs asked host
  governments to counter guarantee some project
  risks, such as expropriation. Recently, however,
  many have begun to provide project debt on a
  limited-recourse basis.

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Sources of Financing

• Multilateral/Bilateral Agency Credit Facility
• Loan, guarantee, or insurance (political or
  commercial) facility provided through a
  multilateral development bank (MDB) or bilateral
  agency. The tenure of this facility is usually
  long term. Loans may include a syndicated loan
  facility from other institutions, paralleling the
  MDB's own direct lending.

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Sources of Financing

• Tax Revenue
• In the case of public sector projects, government
  would provide funding from budgetary allocations,
  which emanate from taxes. The Government of Ghana
  has imposed taxes on petroleum products. Part of
  this goes to the road fund. This is used to
  maintain roads as well as finance the
  construction of feeder roads. There is a levy on
  water to finance rural water development. Rural
  electrification is also partly financed by levies
  on electricity usage.

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Sources of Financing

• Multilateral and Bilateral Lending Institutions
• The well known of these are the World Bank Group,
  International Monetary Fund (IMF) and African
  Development Bank.

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Sources of Financing

• Debt Swaps
• A Debt Swap constitutes the legal and financial
  transformation of a country's external debt, most
  often in foreign currency, into domestic currency
  obligations. In other words, a debt swap is a
  prepayment of foreign debt at a discount and paid
  in local currency (UNITAR 2005)1. The Paris
  Club introduced debt swaps as a means of debt
  management with debtors.

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ASSIGNMENT

• PRESENT A 20 PAGE REPORT ON GHANAS VENTURE
  CAPITAL FUND (Specifications double space A4
  paper size, Time New Roman, Typewritten, )
  Deadline 20th December, 2006
• Areas
• Legal backing
• Governance of the Fund
• Source of resources (funds) of the fund including
  seed money
• Projects eligible for financing
• Requirements to be met
• Review process
• Selection criteria (Financial indicators such
  IRR, NPV, profits etc.)
• Process of accessing the funds from the Fund
• Progress so far on disbursements and other
  achivements

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Sources of Financing

• Public Private Partnerships (PPP)
• Long term partnering relationships between the
  public and private sector to deliver services.
• A recent phenomenon
• Britain introduced PPP in 1992 (Heiler (2002)
• Mainly infrastructural services
• Roads, car parks, water and energy plants,
  conference centres etc.

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Sources of Financing- PPP

• Forms of PPP
• Build Operate Transfer (BOT)
• Build Own Operate (BOO)
• Build Operate Own Transfer (BOOT)
• Key Components BOT
• Build
• Operate
• Transfer

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Sources of Financing - PPP

• Parties
• Government
• Sponsor
• Construction Contractor
• Operations and Maintenance Contractor
• Financiers
• Other parties

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Sources of Financing - PPP

• Advantages
• Private sector mobilise finance instead of
  government
• Efficiency with private sector involvement
• Method of bidding results in transparency and
  lower cost