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 Project s debt capacity fully utilized Financial obligations tailored to match project s cash flows Lenders have limited recourse Overview Criteria for success Historical perspective Overview of structured financing Obligations match project s cash flows Participants exit sequentially Criteria for Success Size doesn t 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 subsidiary s 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 Indonesia s cost of capital considering the financial arrangements expected NPV 58 million Approach 4 Discount dividends paid versus equity invested at SI s 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