Project Financing
Building Infrastructure
Key Idea
Projects with different risks
are likely to possess differing debt
capacities with each project,
therefore necessitating a separate
financial structure.
Core Concepts
Projects with
different risks
are likely to possess
differing debt capacities
with each project, so need
separate financial structure
Key Attributes of Project Financing
Risks hedged to maximum possible extent
Projects debt capacity fully utilized
Financial obligations tailored to match
projects cash flows
Lenders have limited recourse
Overview
Criteria for success
Historical perspective
Overview of structured financing
Obligations
match projects cash flows
Participants exit sequentially
Criteria for Success
Size doesnt matter
Project financing works in many activities
Community of interest is crucial
Infrastructure is crucial
Distribution by Size
8
$1 billion or more
$500-999 million
20
$400-500 million
11
24
$300-400 million
47
$200-300 million
34
$150-200 million
$100-150 million
71
$80-100 million
41
$60-80 million
50
95
$40-60 million
Median size: $40 million
111
$20-40 million
under $20 million
284
0
50
100
150
200
250
300
Activities:
Project Financings Announced Jan. 1, 1981 through Dec. 31, 1995
Project Financings Announced Jan. 1, 1981 through Dec. 31, 1995
60
50
Oil & Gas Development
Cogeneration Power
40
Real Estate Development
Plant Construction
30
Renewable Fuels Power
R&D Partnerships
Mining
20
Independent Power
Miscellaneous
10
0
Project
Financings
Electric Power Production
100%
80%
60%
Smaller Corp
Fortune 500 Corp
Independent
40%
Solar
Geothermal
Hydro
0%
Cogeneration
20%
Communities of Interest
Cogeneration power production
example: Seadrift Plant
Host site
greater the productivity & less waste
backup power
Utility company
higher employment activity in its region
greater planning flexibility
Simplified resolution of financial distress
Communities of Interest
Communities of interest in manufacturing
example: BevPak
Economies of scale
Full utilization of capacity
Independence
from specific brands
Reduced liability exposure
Communities of Interest
Mining, oil and gas
example: Hibernia Field
Pooled risks
Growth opportunities
New deposits
Transmission
Refining
Stimulates regional economy
Communities of Interest
Research and Development
example: NaTec, Ltd. (Partnership of CRS
Sirrine & Industrial Resources, Inc.)
Pooled expertise
Reduced free-rider problem
Costs
shared among beneficiaries
More opportunities can be pursued
Nurturing the Community of Interest
The community of interest must be
adequately reflected in contracts
Participants must have reasonable
expectation that there will be continuity in
honoring government commitments
Nurturing the Community of Interest
Adequate supporting infrastructure must be
already in place
Or
provided within the community of interest
Nurturing the Community of Interest
Governments must be willing to allow
significant positive expected net present
value
necessary
to attract private sector participants
Stable Contracting Environment is Crucial
Expeditious enforcement of contracts
Continuity of government participation
as
new officials replace old ones
as power bases shift
Environment reasonably free of political
risks
Geodesic Networks
Project financing
involves network of
participants
Community of interest
Often global
Non-hierarchical,
web-like structure
No central node
Long history
Historical Examples
11th Century English mine
Medieval trading networks
Construction contractors in ancient Rome
Future Possibilities
Renewable Fuels Power
Geothermal
Ocean Thermal Layers
By-product
is fresh water
Tidal
Hydrogen Conversion
The Physical Value Chain From a Global Perspective:
Support Activities:
Technology Development
Human Resources
Development
Service
Distribution&
Marketing
Fabrication
Refining
Basic Extraction
Physical
Physical
Realm
Realm
Value
Value Added
Added at
at
Each
Each Step
Step
Virtual Value Chain & Information Operations
GATHER AND APPLY IN THE PHYSICAL REALM
STORE AND TRANSFORM IN THE INFORMATION REALM
APPLY
PRESENT
DISTRIBUTE
SYNTHESIZE
SELECT
ORGANIZE
Infosphere
GATHER
Background:
Structured Financing
Structured Financing:
Obligations Match Cash Flows
Debt capacity fully utilized
Loans staggered to match project timetable
Lines of credit provide debt support prior to full establishment of
project cash flows
Limited partners provide majority of equity
General partner provides small portion of equity
During early years, debt service consumes most of the
expected cash flow
Level of expected cash flow determines capacity for intermediateterm loans
Derivatives used to stabilize cash-flow match
Structured Financing:
Cash Flow Distribution
Early years:
Most of cash flows go to debt service
Little to limited partners
Small or none to general partner
Middle years (after debt substantially reduced):
Specified percentage to limited partners
Remainder to general partner
Late years (after debt paid & L.P.s receive specified
return):
Small or none to L.P.s
Most to G.P.
3rd Hurdle
2nd Hurdle
1st Hurdle
Amount
Who gets paid?
General
Partner
Limited
Partners
Lenders
Total Project Cash Flows
Political Risk
Expropriation
take
property outright
revise agreements
Blocked Funds
Exchange Risk
Lagged adjustments for inflation
Unrealistic official rates
Limits on removal of capital
Issues in Analyzing Foreign
Investments
Parent vs. Project Cash Flows
tax
regulations
exchange controls
Three-Stage Approach
subsidiarys
standpoint
parent company standpoint
add indirect benefits & costs
Southport Minerals, Inc.
Case Study
Questions
Is infrastructure provided?
Is there a viable community of interests?
How thoroughly are risks covered?
Is there profit potential for Southport
Minerals?
Which Approach?
Approach 1. Discount at Southport Minerals cost of
capital, ignoring the financial arrangements (zero
NPV)
Approach 2. Discount at a premium above Southport
Minerals cost of capital, ignoring the financial
arrangements (negative NPV)
Approach 3. Discount at Southport Indonesias cost of
capital, considering the financial arrangements
(expected NPV $58 million)
Approach 4. Discount dividends paid versus equity
invested at SIs cost of capital (expected NPV $10
million)
Outcome
Balance Sheet 1972-1987
Debt
Net Worth
$140
$ millions
$120
$100
$80
$60
$40
$20
1986
Debt
1987
1984
1985
1982
year
1983
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
$0
Outcome
Profit & Dividends 1972-1987
Profit
Dividend
$60
$40
$30
$20
$10
year
1987
1986
1985
1984
1983
1981
1982
1980
1979
1978
1976
1977
1975
1974
1973
$0
-$10
1972
$ millions
$50
Through the 1990s
1988: Freeport Copper & Gold (FCX) taken
public on the NYSE
1989: new project financing arranged for
Erstberg East deposit
1992, 1993, 1996, 2000: significant new
deposits of copper and gold discovered
Indonesia Today
The world's largest archipelago, Indonesia achieved independence from the
Netherlands in 1949
Current issues include:
Alleviating widespread poverty
Implementing IMF-mandated reforms of the banking sector
Effecting a transition to a popularly-elected government after four decades of
authoritarianism
Addressing charges of cronyism and corruption
Holding the military and police accountable for human rights violations
Resolving growing separatist pressures in Papua New Guinea
On 30 August 1999 a provincial referendum for independence was
overwhelmingly approved by the people of Timor
Concurrence followed by Indonesia's national legislature, and the name East Timor
was provisionally adopted
On 20 May 2002, East Timor was internationally recognized as an independent
state.
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