Post Graduate Programme in Management

2016-17
TERM: IV
TITLE OF THE COURSE: PROJECT APPRAISAL AND FINANCING (PAF)
CREDITS: 4
COURSE: Elective Course
Instructor:
Email:
Tel. Number
Prof. Keyur Thaker [email protected] 0731-2439537

No. of sections: 2
Faculty Block and Room No.
B-104

COURSE DESCRIPTION
Project finance provides an interesting setting that would deepen and sharpen the
understanding of how value of investment projects is enhanced by financing and
structuring. Project finance is an efficient and effective way to finance certain assetsspecifically large, tangible assets with limited lives. It involves carefully identifying of
the project risk and allocating to those parties who can bear it at lower cost and
manage the specific project activities more efficiently than the sponsors and mitigating
the remaining risk. An independent project company is created for the purpose of
investing. The capital assets are financed with equity sponsoring firm(s) and nonrecourse debt. The central theme of the course is that Capital Structure Matters viz.
financing and investment are not separable and independent activities. The financing
strategy does create value for the project.
COURSE OBJECTIVES
At the end of the course students can expect to understand.

Project financing and structuring decisions and its implication

Project Feasibility Analysis and Valuation
Risk Management and Structures in Projects
PPP Structure & Infrastructure projects
Syndicated Lending
Basel Accord on Capital Adequacy and Project financing
Financing Projects and avenues such as Islamic finance

Given the growing importance of project finance also called asset based financial
engineering, as a strategic, financing and risk management tool, the senior corporate
finance and strategy executives, bankers, consultants, entrepreneurs and government
officials need to understand what project finance is, why it creates value, and how to
structure transactions that have a high probability of succeeding both operationally and
financially. The objective is to provide participants with an understanding to enhance
attractiveness of the investment opportunity they choose to plunge in. In the process
participants would also improve their ability to realize entrepreneur aspirations.

PEDAGOGY/TEACHING METHOD
The course will be delivered through the international and Indian cases related to large
projects that illustrate how various aspects of project appraisal, financing and
structuring creates value for the project.
The course requires extensive preparation prior and after the class. Students must be
willing to put in more efforts to take benefit of the course.
EVALUATION
Group Assignment & Presentation
Class Participation
Exam / Quizes
Total

Weightage
30%
20%
50%
100%

SCHEDULE OF SESSIONS
Module I
Structuring
Module Objective
The objective of this module is to introduce participants to project finance, appraisal
and structuring. The rationale and motivations for financing an investment on a project
basis or otherwise, its structuring, managerial and strategic Implications would be
discussed.
Sessions and Objective
Sessions 1 and 2: Introduction
Objective: The session provides an introduction to the course and the field of project
finance. The case documents a set of stylized facts leverage ratios, ownership
structures, board structures, and capital structures for project companies and
illustrates the agency cost motivation among sponsoring firms to create an optimal
governance systems for the project assets. Further a framework to help identify the
assets that are most appropriate for project finance would be discussed.
Reading: Esty; Benjamin C. and Sesia; Aldo (2011, September 30), An Overview of
Project Finance and Infrastructure Finance - 2009 Update, Harvard Business School, 9210-061
Case: Esty; Benjamin C., and Ferman; Carrie, (2003, January 22) Australia-JapanCable:
Structuring the Project Company (HBS/9-203-029), Harvard Business School, 9-201-098
Session 3: Corporate Strategy and Project Finance
Objective: The session is devoted to illustrate how the profit opportunities in the power
industry created by changes in technology and regulation affects strategy, investment
and as a consequence its financing. The case discuses the importance of adapting a
company's financial strategy from Project finance to corporate finance to support a
new, high-growth competitive strategy.
Reading: Finnerty, Chapter 2. The Rational for Project Financing.
Case: Esty; Benjamin C., and Kane; Michael, (2003, January 21), Calpine Corporation:
The Evolution from Project to Corporate Finance, Harvard Business School, 9-201-098
Sessions 4 and 5: Project Finance Decisions
Objective: It is argued that capital structure decisions are relevant and investment and
financing decisions are not separable. The two sessions would be devoted to decision on
policy of financing projects and understand how structure of Project company differ in
project finance and direct finance. The session would end with the review of agency
cost, risk management and debt overhang motivations for project finance decision.
Cases:
1.
Esty; Benjamin C., and Kane Michael, (2010, May 4), BP Amoco (A): Policy
Statement on the Use of Project Finance. 9-201-054
2.
Esty; Benjamin C., and Kane Michael, (2010, May 4), BP Amoco (B): Financing
development of the Caspian Oil Fields. 9-201-067

Module II
Feasibility Analysis and Valuation
Module Objective
To discuss the aspects related to feasibility of the projects and its valuation from
sponsors, social and financiers perspective. Further the module focuses to analyse the
real options of the project from different perspectives.
Sessions and Objective
Session 6: Feasibility analysis and estimation of cash flows
Objective: The objective is to make student understand various aspect of project
appraisal and feasibility analysis. A model project report would be reviewed and
discussed to understand the various aspects of feasibility analysis leading to cash flow
estimation. Attempt is also to make students understand basic economics of projects
with reference to market, economic and technical feasibility. In the process student
would realize difficulties with project valuation and its implication on structuring and
management decisions.
Reading: Finnerty, Chapter 5. Analyzing Project Viability.
Case: Detailed Project Report on Medium Density Fiber board. (Uploaded on Data
Server)
Session 7: Social Cost Benefit Analysis and multilateral financing
Objective: The focus of the session is to equip students to value the project from the
social cost benefit perspective. Students would understand concerns of multilateral
agencies in financing large projects. The framework of Social cost benefit analysis and
difference between private and social returns and its implications on project value
would be discussed.
Readings:
Esty, Benjamin C., Lysy; Frank J. and Ferman; Carrie, (2003, February 7) An Economic
Framework for Assessing Development Impact, Harvard Business School, 9-202-52
Murthy, Dhavala, Gosh & Singh (2006); Social cost benefit analysis of Delhi metro;
Institute of Economic Growth, Delhi University, Working Paper (uploaded on data
server)
Case: Esty; Benjamin C., Lysy; Frank J., and Ferman; Carrie, (2003, May 27), Nghe An
Tate & Lyle Sugar Company (Vietnam), Harvard Business School. 9-202-054
Sessions 8 and 9: Project Valuation (Lenders perspective)
Objective: The sessions are devoted to familiarize students with cash flow estimation
process and analysis and valuation of cash flows from sponsors (Equity - ECF) and
lenders perspective. The objective is to make students review the use of techniques like
IRR, NPV and APV from overall project financial viability and lenders perspective.
Subsequently the aim is to introduce students with credit ratios important from lenders
perspective and its implications on financing. Student would be also exposed to cash
flow sculpting; cash waterfall, structuring and its implication.
Readings:
1.
Tinsley, Chapter 3. Cash Flows; Chapter 5. Credit Ratios
2.
James, M, Koeller T., Valuation in Emerging Markets, The McKinsey Quarterly, No.
4, 2000, pp. 78-85

Case: Esty; Benjamin C., (2002, March 07), Petrolera Zuata, Petrozuata C.A., Harvard
Business School. 9-299-012
Session 10: Valuation and Estimating the Discount Rates in Emerging Markets
Objective: The Projects located in developing countries are exposed to non-traditional
risks, involve both subsidized and guaranteed cash flows and have high and changing
leverage ratios. The objective is to describe the strengths and weaknesses of the
approaches used by bankers, consultants and academicians in determining the
appropriate discount rate and explain the adjusted version of the method recommended
by Erb, Harvey, and Viscanta (1996).
Readings:
1.
Kester; W. Carl, and Morely; Julia, (1997, August 7), Cross-Border Valuation,
Harvard Business School. 9-295-100
2.
Erb, C.B., C.R. Harvey, and T.E. Viscanta, 1996, Expected Returns and Volatility
in 135 Countries, The Journal of Portfolio Management, Spring, pp. 46-58.
3.
Ruback, R., Capital Cash Flows: A Simple Approach to Valuing Risky Cash Flows,
Financial Management, Summer 2002, pp. 85-103
Session 11: Embedded Optionality and Project Valuation
Objective: The case on Sutton bridge project of Enron corp. in UK exposes students to
various contractual innovations and prompts them to analyze those real options
(contracts). The students would appreciate the complexity involved in valuing those real
options in a rapidly evolving gas and electricity markets.
Readings:
1.
Luehrman; Timothy A., (1995, March 22), Capital Projects as Real Options: An
introduction, Harvard Business School. 9-295-074
2.
Scott Mathews & Vinay Datar (2007); A practical method on Valuing Real Options:
The Boeing approach; Journal of Applied Corporate Finance; Vol 10, 2, Spring
2007, pp 95-06 (uploaded on data server)
Case: To Be Announced

Module III
Risk Management
Module Objective
The objective is to understand the project risks and its mangement through various
structures inculding PPP. Moreover the implications on financing of projects would be
discussed.
Sessions and Objective
Sessions 12 and 13: Project Risk Identification and Mitigation (including PPP and
BOOT)
Objective: The goal of the module is to discuss management of various project risk
through deal structure including various forms of Public Private Partnership. Further
discussion would be on how major risks have been identified, assessed and mitigated in
such a way that senior lenders are adequately protected without need of further equity
sponsor support. The case in this module would enable students understand typical
form of Public Private Partnership and how lenders look at it in the context of
investment in public infrastructure.
Readings:
1.
Tinsley Chapter 8. Structures (risk)
2.
Verma JR (2001);Regulatory Dilemmas in Infrastructure Financing, in S. Morris
(ed.), India Infrastructure Report 2001: Issues in Regulation and Market Structure,
Oxford University Press, New Delhi.
Case: Esty, Benjamin C., (2003, April 15), Poland A2 Motorway, Harvard Business School.
9-202-030
Module IV Financing
Module Objective
The module is devoted to discuss some of the important and interesting avenues of
project financing such as Islamic finance as compared to well-established western
financing and the lenders perspective thereof. The module also discusses the role and
economics of syndicated lending and the nuances of Basel Accord on project finance
industry and the bankers resposne thereof.
Sessions and Objective
Sessions 14 and 15: Syndicated Lending
Objective: The first two sessions in this module focuses on process, participation and
economics of syndicated lending and issues in loan syndication strategy from lenders
perspective.
Cases:
1.
Esty;
Hong
2.
Esty;
Hong

Benjamin C., (2003, April 14), Chases Syndication Strategy for Financing
Kong Disney Land (A), Harvard Business School. 9-201-072
Benjamin C., (2003, March 17), Chases Syndication Strategy for Financing
Kong Disney Land (B), Harvard Business School. 9-201-086

Session 16: Islamic Finance

Objective: This part of the module is devoted to discuss important and interesting
avenues of project financing - the Islamic finance in general and Islamic project finance
in particular. Due to the importance of investor clientele the project are structured to
incorporate Islamic finance trench along with the western finance trench. Students
would appreciate various complications and possible solutions when used jointly with
western project finance.
Reading: Quereshi; Fuaad A, and Millett; Mathew M., (2000, February 16), Introduction
to Islamic Financing, Harvard Business School. 9-200-002
Case: Esty; Benjamin C., (2003, April 4), The International Investor: Islamic Finance and
the Equate Project, Harvard Business School. 9-200-012
Sessions 17 and 18: Bank Capital Standards
Objective: The final session of this module renders students to the capital accord Basel
II in settig capital standards for banks and its implication on the project and corporate
loans from bankers perspective.
Case: Esty; Benjamin C., and Sesia, Jr., Aldo M., (2004, January 26), Basel II: Assessing
the Default and Loss Characteristics of Project Financing (A) & (B), Harvard Business
School. 9-203-035 and 9-204-094
Module V
Review Of Learning
Module Objective
To discuss lessons of project finance in the context of capital structure theories and
review the learnings thus far.
Sessions and Objective
Session 19: Default of Iridium Project: A Review
Objective: The objective of the session is to provide comprehensive review of the topics
in the four modules in the context of Iridium project: The motive for using project
finance, valuing a project with cyclical investment needs, identifying the major risks
and the project structuring and the selection of financing sources apart from sequencing
of raising the debt capital and equity capital. In addition, we examine the capital
structure theories to illustrate how capital structure decisions related to the amount of
debt and the senior of debt affect managerial incentives to create value.
Readings:
1.
Simpson and Avery, The Role of the Capital Markets in Project Financings, The
Journal of Project Finance, Spring 1995, pp. 43-48. (uploaded on data server)
2.
McKeon, High Yield Debt: Broadening the scope of Project Finance, The Journal
of Project Finance, Fall 1999, pp. 62-69.
Case: Esty; Benjamin C., (2003, April 11), Iridium LLC, Harvard Business School. 9-200039)
Session 20: Review of Learning
Reading: Brenda G., (2011); Capital structure theories: A critical Approach; Studia UBB,
Oceonomica; Volume 56 (2). Pp 29-39

Additional Readings
1.
2.
3.
4.

Finnerty, John D (1996), Project Financing: Asset Based Financial Engineering,

John Wiley publication.
Raghuram, G., Rekha Jain, Sidharth Sinha, Prem Pangotra and Sebastian Morris
(Eds.) (1999). Infrastructure Development & Financing: Towards a Public-Private
Partnership, Macmillan
United Nations Industrial Development Organization, Manual for the Preparation
of Industrial Feasibility Studies, UN.
Richard Tinsley (2000), Advanced Project Financing: Structuring Risk, Euromoney
publications PLC.
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