Transcript Document

Financing Mega-Projects
Prof. Azhar M. Khan PhD(USA), PE, PMP
Alumnus of Georgia Tech and Harvard University
CEO Business Masters and Consultants LLC,
Connecticut USA
CEO Institute of Project Management and
Emotional Intelligence
Adjunct Professor SKEMA and Center for
Advanced Studies
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Mega Project
• A megaproject is an extremely largescale investment project. Airbus A-380 ($ 13 Bn),
Caspian Oil Fields, BP Amoco ($ 10 Bn), Three Gorges
Dam ($ 26 Bn)
• Costing more than US$ 500 Million
• Attracting a lot of public attention and have Great
Impacts on Communities and Nations
• They can Generate Financial, Developmental
and Social Returns
What is Project Finance?
Raising of funds to finance an economically
separable capital investment project in which fund
provider looks at cash flows from the project as
the sources of funds to service their loans and
provide return of and return on their equity
invested on the project.
A financing of economic unit in which lender is
satisfied to look at cash flows (earnings) of the
unit for repayment of loan
Project Finance Contd.
Project finance involves creation of a legally
independent project company financed with
non-recourse debt.
Thus, non-recourse debt is typically limited to 50%
or 60% loan-to-value ratios.
Dates back to 1299 when English Crown
Established Leading Florentine Merchant Bank
to Aid Development of Devon Silver Mines
Key Aspects of Project Finance
1. Investment decision involving industrial asset
(Including infrastructure)
2. Stock type projects: Oil/gas or other ores
(proceeds used to service debt and generate
equity return)
3. Flow type projects: toll roads, telecomm,
pipelines, power plants (rely on asset use)
4. Project finance is off-balance sheet finance
5. Project companies have highly leveraged
capital structures
Means of Project Finance
Share Capital: Comprises Equity capital and
preference capital
Equity funds: through ownership capital or cash that is debt free. The
use of such funds incurs an opportunity cost. Being a risk capital
carries no fix rate of dividend.
Preference Capital: Contribution made by preference shareholders
Term Loans Borrowing money from banks or other financial
organizations (e.g., insurance companies and pension
funds). It is a secured borrowing.
Issuing bonds. These debt obligations are normally longterm, as opposed to short- term, obligations for the
purchase of supplies and raw materials.
Financing projects through issuing bonds is a method of obtaining
capital funds that is probably less popular than borrowing money
from a bank at a stated interest rate.
Debenture Capital
Deferred Credit: Payment of plant or machinery can
be made over a period of time.
Incentive Sources: Financial support (subsidy)
provided by the government to have industrial
estates, eco-conservation parks etc, in the form of
Seed money
Tax breaks/ deferment etc.
Miscellaneous Sources:
Unsecured loans/ Bridge financing
Public deposits
Leasing and hire purchase finance
PPP
Financing of Govt. Projects
Taxation like income tax, property tax, sales tax and
road user tax etc.
Issuance of bonds
Resource mobilization (Income generation):
Toll Road, Municipally owned power plant, charge for service performed
Loans, subsidies and grants
Money is passed from one government authority to another
Low or No interest loans
Insured loans
Use of Federal funds entail no monetary returns to the
government but benefits to the society (Consumer
surplus)
Cost-sharing agreements with States and Provinces
International Donor funding
Implications - Capital Market
Imperfections
• Agency conflicts
• Asymmetric information
• Financial Distress
• Cause Deadweight Financing Costs on Firms
• Small relative costs become large absolute costs
• 5 % of asset value for $ 20 million investment is
only 1 million and is $ 100 million for a $ 2 billion
investment
Empirical Studies on Performance of Large
Projects
1. Miller and Lessard (2000) studied large
engineering projects ($ 1 Billion average). They
found 40 % of projects were abandoned or
restructured for financial distress.
2. Merrow et al (1988) studied 47 Megaprojects
and found that only 4 of them came on budget
and 26 failed to achieve profit objectives. They
concluded that megaprojects with greater
public ownership showed worse performance.
3. Flyvberg, Bruzelius and Rothengatter
concluded that “over-optimistic forecasts of
viability are the rules for major investments
rather than the exception.
Second Dimension of
Investment
Financial Analysis of Mega-Projects
Conclusion
1. The Most Comprehensive Study on
Performance of Project Loans Conducted by
Leading Project Finance Banks & S&P Risk
Solutions Showed that Project Loans have
Lower Default Rates and Higher Recovery
Rates than Corporate Loans.
2. There Exists a Direct Relationship
between Project Finance and Project
Management
Conclusion Contd.
3. To make optimal investing, financing
and operating decisions, senior
executives must possess functional
expertise across a broad range of
disciplines. They must understand
issues related to Competitive Strategy,
Business-Government Relations,
Marketing/ Sales.
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