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ACADEMY OF ECONOMIC STUDIES FACULTY OF INTERNATIONAL BUSINESS AND ECONOMICS. International Project Finance. Lect. Cristian P ĂUN. What is International Project Finance ?.
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ACADEMY OF ECONOMIC STUDIES FACULTY OF INTERNATIONAL BUSINESS AND ECONOMICS International Project Finance Lect. Cristian PĂUN
What is International Project Finance ? • The objective of using international project financing to raise capital from international financial markets is to create a structure that is bankable (of interest to foreign investors) and to limit the stakeholders’ risk by sharing some risks to parties that can better manage them; • IPF means: • An agreement by financially responsible parties to complete the project and to make available to the project all funds necessary to achieve completion; • An agreement by financially responsible parties (purchasing project outputs) in order to ensure that, when project completion occurs and operations begins, the project will have available sufficient cash to cover all operating expenses and debt service requirements (even taking into consideration the force majeure); • Assurance by financially responsible that, in the event a disruption in operation occurs and funds are required to restore the project to operating conditions, necessary funds will be available (using insurance policies or cash in advance payments).
Characteristics of International Project Finance • Special Purpose Project Entity • highly leveraged, long-term capital structure • debt is non-recourse (or limited recourse) to sponsors • risk allocation and credit support principally from contracts • lender has security in project assets and contracts
The disadvantages of PF • - Higher transaction costs due to creation of an independent entity; • Very complex organizational structure; • Not much flexibility; • Long negotiations and long time to close; • Important fees; • Project debt is substantially more expensive (50-400 basis points) due to its non-recourse nature. • Higher restrictions on managerial decisions due to the project contracts.
International Project Finance Participants Sponsors usually include construction, supply, management and empowerment companies. They may derive other opportunities (e.g. construction, supply or management contracts) from projects such as toll roads or power plants, but also from any project that requires significant capital investment. For this reason, other investors may require the sponsors to hold their investment for a minimum period of time. The promoter of a project is usually the government department responsible for providing services to the public. The department is primarily concerned with ensuring the provision of services of sufficient quantity and quality, and on a non-discriminatory basis. The sponsors of a project usually participate in promoting a project.
International Project Finance Participants Banksare involved at least as short-term lenders and frequently as long-term lenders and financial arrangers (underwriters). On large projects, several banks may form a consortium to raise funds together. The equity investors usually select one or more lead banks to manage the consortium or the process of raising funds. This selection is based on the banks’ experience and capacity for raising funds in a certain industry and country. Although the bank usually raises debt, it may also raise equity. The project may also hire a financial adviser to formulate a financing strategy. The adviser is usually independent of the lenders and underwriters to avoid conflicts of interest. Non-bank financial institutions include pension, insurance and trade union funds, with a primary function of investing their assets in medium or long-term securities. Although these institutions often have significant resources, they are generally quite limited, by law and/or mandate, in their investment options.
International Project Finance Definition ? Suppliers may also provide funding in the form of short- to medium-term debt or extended terms on accounts payable. A supplier may also be a sponsor and take an equity interest in a project. As with construction and management companies, the suppliers’ primary interest in the project is usually the supply contract with the project company. End-user financing can be prepayment for the future delivery of services, but is more often a take-or-pay contract in which the end-user commits to purchasing a minimum amount of services over a period. Government may not necessarily directly finance a project, but it often provides indirect financing through guarantees, take-or-pay contracts, licenses and other commitments. Management and employees may promote or sponsor a project. This is more common in a straight privatization, where the government provides incentives such as subsidized loans. Management and employees are usually part of the overall sponsor team that bids for a project, as they will ultimately continue as employees of the project.
International Project Finance Definition ? Public participation in the financing of a project usually comes at the operating stage. The process of listing a company’s equity and/or debt is often included in an understanding between the sponsors, the government and the lenders, to allow the original equity investors to plan their exit strategy. Conclusion: a project finance is initiated by agroup of promoters (government and private companies), is developed by a group of sponsors with the direct financial support from banks and non-financial institutions and an indirect financial support from suppliers and end-users. In the operating stage, public can play an important role in providing significant capital resources to the project.
Project Finance – Global Market Statistics Potential reforms posed by Basle II could further weaken the project finance market, particularly in higher-risk Emerging and Developing economies. USD bn
Project Finance – Top Region and Sector Statistics • From 1999, the sector drawing the most global project finance dollars during the past five years has been infrastructure; • Driven by the boom in the high technology business, telecommunications represented anywhere from a quarter to a half of infrastructure financing from 1998- 2001; • The second most popular sector was energy and power industry, which ranked as the second strongest sector both in terms of dollar value and deal numbers. • For some sectors, such as pulp and paper (considered a part of the commercial/ industrial sector), and natural resource exploration, project finance has never been the most common financing method. • Western Europe has actually been the most popular region for project finance, followed by North America. The next most popular project finance destinations were Latin America/ Caribbean andSoutheast Asia.
Project Finance on Emerging Markets • In the emerging market economies, the sectors that attracted the most investment were infrastructure, natural resources and energy/power. • The emerging market countries that received the most project finance dollars were Latin America, followed by Southeast Asia. • Within Latin America and the Caribbean, Brazil was by far the dominant country, both in terms of number of deals signed and dollars invested. In fact, Brazil was the destination country for about 18% of all project finance investment flowing into all emerging markets combined. Coming in a distant second was Chile, which attracted almost $18 billion in financing for 45 signed deals (compared to Brazil’s $85.8 billion for 156 deals). • In Southeast Asia, Taiwan attracted the largest amount of project finance (US$30.1 b), followed by China (US$27.1 billion) and Hong Kong (US$23.3 billion). China had by far the greatest number of signed deals (105), accounting for about 30% of all the deals signed in Southeast Asia. Taiwan followed with 94 completed deals. • Despite the relatively less important role of public financial institutions in Emerging Market project finance, development bank and ECA involvement may increase in the future(ECA were only involved in 143 projects or 11% of all signed project-financed transactions in the richer Emerging Market countries since 1998).
Project Finance on Eastern Europe • 26 Eastern European countries were project finance destinations since 1998; • In the Eastern Europe, the sectors that attracted the most investment were infrastructure, equipment and energy/power (related to the privatization of public telecommunication system, gas distribution and oil refinery/LNG - liquid natural gas plants); • Poland, Russia, the Slovak Republic, and Hungary were the countries that attracted the most project finance investment; • The most influential Eastern European project finance banks are supranational; • EBRD and HypoVereinsbank were more consistently influential in terms of dollars financed, activity level, and financial arranging; • In terms of activity level, the public financial institutions become less dominant, HypoVereinsbank tops the list as by far the most active bank;
