Project Finance in Construction A Structured Guide to Assessment

by Merna, Tony; Chu, Yang; Al-Thani, Faisal F.

• ISBN13: 9781444334777
• ISBN10: 1444334778
• Edition: 1st
• Format: Paperback
• Copyright: 2010-08-16
• Publisher: Wiley-Blackwell

Summary

Project finance has spread worldwide and includes numerous industrial projects from power stations and waste-disposal plants to telecommunication facilities, bridges, tunnels, railway networks, and now also the building of hospitals, education facilities, government accommodation and tourist facilities.Despite financial assessment of PF projects being fundamental to the lender's decision, there is little understanding of how the use of finance is perceived by individual stakeholders; why and how a financial assessment is performed; who should be involved; where and when it should be performed; what data should be used; and how financial assessments should be presented.Current uncertainty in financial markets makes many sponsors of construction project financings carefully consider bank liquidity, the higher cost of finance, and general uncertainty for demand. This has resulted in the postponement of a number of projects in certain industry sectors. Governments have seen tax receipts drastically reduced which has affected their ability to finance infrastructure projects, often irrespective of the perceived demand. Equity providers still seek to invest, however there are less opportunities due to market dislocation. Due to the demand for global infrastructure it is believed that project financings will return to their pre-crunch levels, or more so, however lenders' liquidity costs will be passed on to the borrowers. Lenders will also be under stricter regulation both internally and externally.The steps outlined in the guide are designed to provide a basic understanding for all those involved or interested in both structuring and assessing project financings. Secondary contracts involving constructors, operators, finance providers, suppliers and offtakers can be developed and assessed to determine their commercial viability over a projects life cycle.Special Features a structured guide to assessing the commercial viability of construction projects explains economic metrics to use in the decision making process detailed case study shows how stakeholders apply the concept of project finance

Author Biography

Anthony Merna is senior partner of Oriel Group Practice, a multidisciplinary research and consultancy practice based in Manchester and a visiting lecturer to Manchester Business School at the University of Manchester. He has been teaching Project Finance for the last 14 years to a number of UK and overseas universities, businesses and government agencies.

Yang Chu is a graduate of the School of Mechanical, Aerospace and Civil Engineering at the University of Manchester and a research consultant with Oriel Group Practice specialising in the areas of project finance and risk modelling. He is currently carrying out risk management research at Manchester Business School.

Faisal Al-Thani is Senior Development Manager, Middle East for Maersk Oil based in Doha and a board member of the Marsh International Risk Council.

Table of Contents

List of illustrations

List of tables

About the Authors

Preface

Introduction

The development of project finance

Financial assessment

What is financial assessment?

Why perform a financial assessment?

Who is involved in the risk assessment process?

Where should a financial assessment be performed?

When should a financial assessment be performed?

What data are to be used?

How should assessment outputs be presented?

Purpose of this guide

Scope of the guide

Project finance

Introduction

Definition of project finance

The key characteristics of project finance

Special project/purpose vehicle

Contractual arrangement

Non-/limited recourse

Off-balance sheet transaction

Robust income stream of the project as the basis for financing

Legal and financial considerations in project finance

Legal

Financial

Financial instruments and cash flow modelling

Introduction

Debt finance

Senior debt

Mezzanine finance

Subordinate debt

Bond finance

Equity finance

Sources of debt and equity

Cash flow modelling and project financing

Risk management

Introduction

Risk

Risk management process

Risk identification

Risk analysis

Risk response

Typical risks in project financing

The financial assessment process

Introduction

The financial assessment structure

SPV assessment

Lenders' assessment

SPV and lender final assessment

Case study

Introduction

Independent power project

Supply and offtake contracts

Supply contracts

Offtake contracts

Applications of supply and offtake contracts

Assumptions for initial assessment

Developing the base case model

Introduction

SPV's initial assessment

Identify the estimated activities, time, costs and revenues of the project

Development of the base case model

Identify major project risks

Assessment of base case model incorporating risks

Initial economic assessment by lenders

Introduction

Financial package assessment

Finance package (1)

Finance package (2)

Finance package (3)

Conclusions

Financial engineering

Introduction

Financial instruments used in financial engineering

Forward rates

Financial futures

Swaps

Options

Caps, floors, collars, swaptions and compound options

Asset-backed securities

Refinancing

Reappraising public-private partnerships

Techniques applied in the reappraisal of PPP concession agreement

Other financial engineering techniques

Final assessment to determine project commercial viability

Introduction

Detailed risk assessment

Financial engineering

Tax holiday

Financial collar

Extending the concession

Increasing debt

Grace period

Phasing construction and operation

Upfront payments

Existing concession revenues

Summary

Financial close

Introduction

Due diligence

Technical

Legal due diligence

Trigger step in rights

Model audit and sensitivity analysis

Risk valuation

Term sheet

Inter-creditor agreement

Hedge strategy

Letters of credit

Reserve account

Escrow and ring-fenced facilities

Economic indicators

Taxation

Insurance

Financial close

Credit committee approval process

Due diligence report

Technical closure

Financial close

Technical commencement

Execute interest rate swaps

Islamic finance and project finance

Introduction

Islamic finance

Shariah

Qiyas and Litihad

Core principles of Islamic finance

Sharing (profit/loss and risk)

No unfair gain

No speculation

No uncertainty

No investments that are not in the public interest

No hoarding of money

Deception

Islamic financial institutions

Shariah supervisory boards

Project finance

The Ijara principle

Ijara Mawsufah Fi Al Dhimmah (forward lease)

Istisna'a

Sukuk

Sukuk al Istisna'a

A typical SAI deal

Hedging

Swaps

Other Islamic finance techniques for projects

Musharaka (equity financing)

Bai salam (forward financing)

Risks and liabilities

Summary

Conclusions and recommendations

Review

Conclusions

Recommendations

Appendix

Glossary

References

Index

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