AGOSTINHO PEDRO FERNANDO NEVE

ID UM56375BPR65381

COURSE NAME: PROJECT FINANCING

MASTER IN PROJECT MANAGEMENT

ATLANTIC INTERNATIONAL UNIVERSITY

SCHOOL OF BUSINESS & ECONOMICS
AGOSTINHO PEDRO FERNANDO NEVE
ID UM56375BPR65381
Table of Contents
1. Introduction .......................................................................................................................................... 3
2. Project financing ................................................................................................................................... 4
2.1. Basic Concepts .................................................................................................................................. 4
2.2. Project finance structure .................................................................................................................. 5
2.2.1. Technical feasibility stage ............................................................................................................. 6
2.2.2. Financial feasibility stage .............................................................................................................. 6
2.2.3. Market feasibility stage................................................................................................................. 8
2.2.3.1. Approach to banks .................................................................................................................... 8
2.2.3.2. Approach to bond underwriters ............................................................................................... 9
2.2.3.3. Board paper .............................................................................................................................. 9
2.2.3.4. Takeout (re)financing ................................................................................................................ 9
2.2.3.5. Piercing the sovereign ceiling ................................................................................................. 10
2.2.4. Funding sources .......................................................................................................................... 10
3. Project financial plan........................................................................................................................... 12
4. Project financial model ....................................................................................................................... 13
5. Analysis and financial reporting .......................................................................................................... 14
5.1. Definition of Financial Modeling ..................................................................................................... 14
5.2. Objectives of Financial Reporting ................................................................................................... 15
5.3. Importance of Financial Reporting ................................................................................................. 16
6. Conclusion and recomendation .......................................................................................................... 17
7. Bibliography ........................................................................................................................................ 18
1. Introduction
This assignment is regarding the courses of the curriculum designed for the Master
Program of Project Management course in School of Business & Economics at Atlantic
International University.

Project financing is a funding structure that relies on future cash flow from a specific
development as the primary source of repayment with that development’s assets, rights,
and interests legally held as collateral security. Where the sponsor/project developer
gives completion and start-up (financial) support this is called Type 1 project finance; and
where the project financiers rely on the builder/contractor to do this, it is labelled: ‘Type 2
project finance’ – the builder/contractor’s ‘package’ provides completion support.

The objective of the assignment is to bring knowledge about the PROJECT FINANCING.
In this course, the following aspects will be addressed in detail:
 Financial plan.
 Capital requirements.
 Financial model.
 Analysis and financial reporting.
 Project feasibility and risk analysis.

All these aspects will be discussed just to link them in the project management
environment and see how they can affect the achievement of the project objectives.

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2. Project financing
2.1. Basic Concepts
According to Tinsley, C. R. (2014)., project finance packaging appeals as a means to
attract high leverage, often to get the resulting debt off balance sheet, to quarantine the
project and its financing, and as a means to instil discipline with its associated powers
and protections across the various parties in a project venture.

Project financing can represent a meaningful skill in packaging an enterprise to operate

on a stand-alone basis to repay a debt, however funded. There are more than 180
structures, reviewed in this book, that can be employed to mitigate the many risks.

Advantages are many and the disadvantages controllable or avoidable. To succeed, the
risk trade-offs need to be woven into a workable, yet flexible, set of arrangements which
can be structured to survive the stresses of the future.

Project finance1 is the long-term financing of infrastructure and industrial projects based
upon the projected cash flows of the project rather than the balance sheets of its
sponsors. Usually, a project financing structure involves a number of equity investors,
known as 'sponsors', a 'syndicate' of banks or other lending institutions that provide loans
to the operation.

They are most commonly non-recourse loans, which are secured by the project assets
and paid entirely from project cash flow, rather than from the general assets or
creditworthiness of the project sponsors, a decision in part supported by financial
modelling. The financing is typically secured by all of the project assets, including the
revenue-producing contracts. Project lenders are given a lien on all of these assets and
are able to assume control of a project if the project company has difficulties complying
with the loan terms.

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https://en.wikipedia.org/wiki/Project_finance

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 2.2. Project finance structure
The stages of information gathering, feasibility, due diligence and approval in project
finance require time to prepare, present and digest. Early dialogue on each party’s
aptitude and information requirements will result in substantial savings in time and money
both before and after the ‘feasibility’ process. This will improve acceptance of the project
as a ‘bankable’ proposition that can be readily approved/rated and subsequently
syndicated.

Tinsley, C. R. (2014). Says that there are three stages in project finance for a new
development. For an existing enterprise, the first two have already passed:
 Stage 1: Construction (pre-completion) when the funding is required for capital
expenditures, interest during construction (IDC), working capital, fees, and
services. During this stage, interest is usually capitalised into the loan for both
types of project finance.
 Stage 2: Commissioning/completion when the project is starting up and testing the
option conditions to release recourse to the sponsor group’s balance sheet (Type
1) or the turnkey contract’s transition to an operating enterprise (Type 2).
 Stage 3: ‘Pure’ project finance where the debt parties can expect repayment only
from the project’s cash flows (primarily) backed up by a collateral package of rights
and interests.

Prior to entering these three stages, a company or sponsor group will have conducted
technical, financial, and market feasibility work before pressing ahead with board approval
or entering into a tender process. However, many projects may proceed to a full package
and only then address the issue of getting funding. By then it is probably too late to
reshape the concession, shareholders/joint venture arrangements, or the
market/contractual position. Certainly to try to reset these just to serve the interests of
project finance structures is difficult and usually treated as an unwelcome intrusion in an
otherwise ‘wonderful’ deal architecture. The danger, of course, of trying to retrofit clauses
is that all conditions and agreements are reopened.

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Early input on the preferred project finance structure can add greatly to the ease of
structuring and can often achieve better overall terms and conditions. Structuring ideas
should be drawn into the project early on by inclusion of financial advisers. These early
project finance inputs are usually incredibly simple and obvious. It is forgotten in the rush
to ‘feasibility’ that decades of project finance experience (in the French concession case,
this extends to centuries) can be mobilised to shorten the process overall, reduce the cost
to financial close, and make the deal more robust.

2.2.1. Technical feasibility stage

The depth of investigation at the technical feasibility stage can range from overnight
computerised performance runs to multi-year, multi-million dollar studies. The
preponderance of engineering input at this stage needs to be tempered with the overall
risks which require structuring solutions. Engineers do not gravitate naturally towards
project finance structuring since the trade-offs can be subtle and not subject to slide-rule
scrutiny. Many optimisation tools and risk determinations are overly quantitative, overly
back of the envelope, or overly prescriptive, proclaiming: ‘This is the way it’s done’ or
producing a ready-made base case. The main premise of this book is that a systematic
review of risk will flow to the choice of cash flow cases and suggest the selection of project
finance structures.

Project financiers, financial advisers, and lawyers seem to throw up this immensely
complex aura surrounding project finance; yet one can whittle down the whole process
dramatically through a systematic risk approach. The ultimate choices among project
finance structures can be reduced to two to three prime alternatives for any project very
quickly.

2.2.2. Financial feasibility stage

The decision to seek project financing rather than raising new equity, using the debt
capacity of the balance sheet, or using internal funding is usually very obvious. Project
finance is a well-proven tool to achieve high-leverage and long-term debt, to shed risk

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throughout, but especially after completion. About half of all project financings are done
to roll in political risk structuring. Any company seeking growth can effectively utilise
project finance as a stepping stone for some or all of its business.

It will come as no surprise that analysis of project finance loans showed that none of the
sponsor-related variables were found to be significant. Once the risks are known and the
structures established, the debt service cover ratio (DSCR) is adjusted by the cash flow
profile to match that risk set. Accordingly, project finance loan pricing does not reflect the
risk. It is the structure of the financing that does this and the risk adjustment is through
the DSCR.

If the structuring adjustment cannot be made (and there are, therefore, elements of
venture funding) or there is significant participant risk remaining, then these may present
differences that require margin increases to reflect the risks. The most common instances
of this occur where there are (weak) sponsor supports and (weak) off-taker situations.

The comparison of a project finance debt to a corporate debt on a pricing basis alone will
usually see the project debt appear to have higher margins/spreads. But when stacked
against the risk shedding inherent in the selected structuring, project finance is cheap by
any measure, even with the cash flow: DSCR adjustment. And given the option to deploy
the balance sheet elsewhere, it is doubly good value. The project financier has agreed to
take just about all the risk for a fixed debt return, leaving all the upside for the benefit of
equity/the sponsors (after completion).

Project finance may be resisted because it is so highly structural and therefore meticulous
to negotiate and expensive to establish. However, the due diligence should be welcomed
as a second opinion and validation of the concept. The close structuring can protect the
equity investor too in cases where a particular risk threatens the cash flows at a later date.
The author has uncovered countless items simply missed or misjudged in the project
feasibility process that required tightening/tidying to the benefit of both the debt and equity
side.

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In certain cases, the project may have to be re-designed to suit the fund-raising sequence.
In most instances, the financing is raised as one major package to construct and
commission a system. However, other systems may have market or concession
requirements for continuous capex – such as telecoms and water projects.

2.2.3. Market feasibility stage

Either contracts are required, competitive analysis must be very smart, or the
traffic/subscribers studies excellent (in certain sectors). It is not difficult to gauge what
revenue break evens are necessary for the project financing, provided the base case has
been developed to properly reflect and test the risks.

The exact levels and project finance constraints will be valuable guidelines in concession
or contract negotiations. Again simple contract clauses may add great strength to the
project’s cash flows.

2.2.3.1. Approach to banks

Adopting a strategy of approaching the debt markets with a project financing is not
especially different to other financings, with exception of the time it takes. The highly
structural requirements to batten down risk mitigates needs more time to absorb and
concomitantly it opens more avenues of questions and due diligence. Banks have their
own teams accustomed to this lengthy process and capable of acting as the internal deal
‘champion’ to shepherd the credit committee application through the various internal
approval chains, culminating with credit committee approval.

Another feature of the banking market is a wide spread of skills and appetite for different
regions. The credibility of the regional/country manager may be paramount in successfully
steering a complex project finance through the project finance department, the regional
office, head office country limit committees, and even the head office economics group
(for forecasted assumptions). Alternatively, some banks regard project finance as an

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airline service – someone somewhere is in the air on their way from head office to do this
or the next deal.

2.2.3.2. Approach to bond underwriters

The capital markets for project finance debt is primarily bonds, notes and private
placements and the word ‘bond’ should be read interchangeably with notes and
placements. The approach to bond underwriters or the private placement market is less
iterative than with banks. A rating from two ‘name’ agencies means no further credit
review may be needed. Most project financings lie just inside ‘investment grade’, the level
above which many pension funds can only invest.

2.2.3.3. Board paper

When presenting a project financed deal to the board of the sponsor or to the minister’s
desk, it is advisable to attach a two to six-page term sheet/offer letter(s) along with a loan
outstanding chart, particularly if there is flexibility in the repayment profile.

Even more important is to make mention of the fact that different projects attract different
levels of project finance debt; therefore, the standard internal rate of return/net profit value
(IRR/NPV) benchmarks alone do not adequately express the position of this project
versus all others. Intelligent analysis will also examine the project’s cash flow effect on
the future of the group/ministry. The risk matrix used to assess the project finance
structure will also be of interest to the board. Directors are interested in cash, risk, returns,
and management, and usually are receptive to the whole concept of (both types of) project
finance.

2.2.3.4. Takeout (re)financing

Another staging technique is to tailor the funds to the three stages of project finance. The
banks fund the first two stages: construction and commissioning/completion, with the

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project finance funded by way of a takeout by the bond investors post-completion – which
is their preference anyway.

2.2.3.5. Piercing the sovereign ceiling

Project finance deals are able to be rated higher than the sovereign rating, an unusual
but understandable circumstance given the tight structuring inherent in most project
finance transactions. The main projects thus far have been export oil and gas. Export
proceeds are definitively quarantined – labelled low ‘diversion’ risk – in an offshore
proceeds account.

2.2.4. Funding sources

Local currency funding
he availability of local currency bank lines should be wrapped into every project finance
transaction. Most local currency banks are conventional secured lenders. A local bank
may look to garner substantial collateral banking business such as wages, trade finance,
banking, cash management, and foreign exchange (FX). It is important that they are not
given any preferential security, such as property or receivables. Each should be
encouraged to share in the project’s security package on a pari passu basis.

Banks
Commercial banks are the main source of project finance debt. Most bank treasuries
heavily fund themselves on a floating rate basis with an elaborate liability management
strategy. There is usually no attempt to match fund a project financing. The great
advantage of banks in project finance is their ability to offer a genuinely flexible
transaction, which can respond dynamically to the project’s cash flows and the industry’s
changing condition. This is the significant difference with the far more monolithic capital
debt markets.

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Bilateral agencies
The relevant bilateral agencies are usually the export credit agencies (ECAs). Many only
commenced project finance in the mid-1990s. Prior to then, the ECAs could rely on a
bank, government, or large corporate’s guarantee. The concept of accepting the suite of
project finance risks upon completion is, therefore, relatively new to them.

The ECAs exist to promote that nation’s goods, services, investment and, in some
countries, imports (to that country) – this involvement is known as ‘tied’. Although
accustomed to the Berne Union rules concerning the financing of a bulldozer export (85%
financing, 15% down payment), the acceptance of (sole) repayment from a string of future
cash flows is a big leap for some.

Multilaterals
The multilateral agencies (MLAs) – sometimes referred to as multinational development
banks (MDBs) to avoid the acronym for mandated lead arranger – have developed project
finance expertise which is a natural result flowing from the thousands of projects financed
over decades of development financing. With similar sector preferences to those outlined,
the various teams have developed comprehensive programs, including due-diligence
studies, equity/convertibles/mezzanine, and classic project finance debt.

The project itself has to have a development purpose yet be economically viable – similar
to any project finance; it has to stand on its own feet after completion. It must also have
the support of the local government who has, in any event, entered into a counter-
guarantee/counter-indemnity to facilitate these MLA activities. The MLAs may also act as
the lender of last resort, which in itself is an important development backstop.

Capital markets
Project finance debt deals are most often done as bonds or notes. Because of their long-
term nature, the investor is essentially taking a private placement style of transaction with
not much effort made in trying to make any project finance bonds/notes issue a highly
liquid widely-traded issue. A publicly traded project finance bond issue is still rare.

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Developers
Project companies themselves can act as project financiers (no bank is involved). The
turnkey contractor might do the same.

3. Project financial plan

Before embarking on a major project, a financial plan is a requirement. A project financial
plan — also known as a project budget — identifies all of the costs associated with a
project. These costs are then tailored to fit within the financial resources available for a
particular project. Once complete, the project financial plan provides an outline of what
can be spent on each area of the project to ensure it remains on budget. A financial plan
does not need to be complex, but there are a few key things to know before creating one.
 Understand the top-down approach to project to project budgeting. There are
two approaches to creating a project budget. The first is known as the top-down
approach, and this refers to projects where the total allowable cost is known before
the project begins. The project budget must therefore be within those costs;
 Understand the bottom-up approach to project budgeting. The bottom-up
approach is the alternative to the top-down approach, and this refers to figuring out
what every part of the project will cost, and then adding it up to determine the total.
o If a customer approaches you to re-build a parking lot, and asks for a quote,
you could use a bottom-up approach. You would consider everything that is
necessary for the project, and then determine the total cost.
o In this case, you determine the cost of the project by figuring out what every
piece will cost and then calculating a total. In the top-down approach, the
cost is determined by available resources, and you must work within those
limits.
 Choose the approach for you. Sometimes, you may not have a choice, and you
may need to work within the confines of somebody else's budget (meaning you
would need to use a top-down approach). Other times, if you have full control over
a project, you can select an approach;

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  Discuss the needs of the project with key stakeholders. Regardless of the
approach you choose, you will need to discuss what the project will require with
key project members. Knowing the needs of the project can allow you to determine
what the costs of the project will be. This is called the "scope" of the project and it
defines the requirements and limits of the work to be performed;
 Determine your core costs. These are the absolutely essential costs to complete
the project. Core costs would include things like labour, equipment and materials.
The bulk of any projects costs will come from these key components;
 Consider non-core expenses. Many projects go over-budget because they forget
to include non-core expenses. Think very carefully about all the things outside of
labour, materials, and equipment that you may need. Consider things like any
required travel, insurance, legal advice, accounting advice, fuel, food/drinks, and
extra telephone/internet bills;
 Add a reserve to help reduce your risk. After your direct and indirect costs have
been added up, consider adding extra money to your total costs just in case your
cost estimates were too low. In addition, often times projects are delayed, issues
occur, or items cost more than was initially planned;
 Create a table to record your costs. The final aspect of a financial plan is to
record all your information. To do this, you can open up Microsoft Excel or any
other table creating program, and create a table with four columns. From left to
right, they would state: Expenditure, Cost, Running Total, and Notes.

4. Project financial model

A financial model is constructed by the sponsor as a tool to conduct negotiations with the
investor and prepare a project appraisal report. It is usually a computer spreadsheet
designed to process a comprehensive list of input assumptions and to provide outputs
that reflect the anticipated real life interaction between data and calculated values for a
particular project.

Properly designed, the financial model is capable of sensitivity analysis, i.e. calculating
new outputs based on a range of data variations.

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5. Analysis and financial reporting
In any industry, whether manufacturing or service, we have multiple departments, which
function day in day out to achieve organizational goals. The functioning of these
departments may or may not be interdependent, but at the end of the day they are linked
together by one common thread – Accounting & Finance department. The accounting &
financial aspects of each and every department are recorded and are reported to various
stakeholders. There are two different types of reporting – Financial reporting for various
stakeholders & Management Reporting for internal Management of an organization. Both
this reporting are important and are an integral part of Accounting & reporting system of
an organization. But considering the number of stakeholders involved and statutory &
other regulatory requirements, Financial Reporting is a very important and critical task of
an organization. It is a vital part of Corporate Governance. Let’s discuss various aspects
of Financial Reporting in the following paragraphs.

5.1. Definition of Financial Modeling

Financial Reporting involves the disclosure of financial information to the various
stakeholders about the financial performance and financial position of the organization
over a specified period of time. These stakeholders include – investors, creditors, public,
debt providers, governments & government agencies. In case of listed companies, the
frequency of financial reporting is quarterly & annual.

Financial Reporting is usually considered an end product of Accounting. The typical

components of financial reporting are:
 The financial statements – Balance Sheet, Profit & loss account, Cash flow
statement & Statement of changes in stock holder’s equity;
 The notes to financial statements;
 Quarterly & Annual reports (in case of listed companies);
 Prospectus (In case of companies going for IPOs);
 Management Discussion & Analysis (In case of public companies).

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The Governments and the Institutes of Chartered Accounts have issued various
accounting standards & guidance notes which are applied for the purpose of financial
reporting. This ensures uniformity across various diversified industries when they prepare
& present their financial statements.

5.2. Objectives of Financial Reporting

According to International Accounting Standard Board (IASB), the objective of financial
reporting is “to provide information about the financial position, performance and changes
in financial position of an enterprise that is useful to a wide range of users in making
economic decisions.” The following points sum up the objectives & purposes of financial
reporting:
 Providing information to the management of an organization which is used for the
purpose of planning, analysis, benchmarking and decision making.
 Providing information to investors, promoters, debt provider and creditors which is
used to enable them to male rational and prudent decisions regarding investment,
credit etc.
 Providing information to shareholders & public at large in case of listed companies
about various aspects of an organization.
 Providing information about the economic resources of an organization, claims to
those resources (liabilities & owner’s equity) and how these resources and claims
have undergone change over a period of time.
 Providing information as to how an organization is procuring & using various
resources.
 Providing information to various stakeholders regarding performance management
of an organization as to how diligently & ethically they are discharging their
fiduciary duties & responsibilities.
 Providing information to the statutory auditors which in turn facilitates audit.
 Enhancing social welfare by looking into the interest of employees, trade union &
Government.

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 5.3. Importance of Financial Reporting
The importance of financial reporting cannot be over emphasized. It is required by each
and every stakeholder for multiple reasons & purposes. The following points highlights
why financial reporting framework is important:
 In help and organization to comply with various statues and regulatory
requirements. The organizations are required to file financial statements to ROC,
Government Agencies. In case of listed companies, quarterly as well as annual
results are required to be filed to stock exchanges and published.
 It facilitates statutory audit. The Statutory auditors are required to audit the financial
statements of an organization to express their opinion.
 Financial Reports forms the backbone for financial planning, analysis,
benchmarking and decision making. These are used for above purposes by
various stakeholders.
 Financial reporting helps organizations to raise capital both domestic as well as
overseas.
 On the basis of financials, the public in large can analyse the performance of the
organization as well as of its management.
 For the purpose of bidding, labour contract, government supplies etc.,
organizations are required to furnish their financial reports & statements.

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6. Conclusion and recomendation
There are several parties in a project financing depending on the type and the scale of a
project. The most usual parties to a project financing are Sponsor (typically also an Equity
Investor), Lenders (including senior lenders and/or mezzanine), Off-taker(s), Contractor
and equipment supplier, Operator, Financial Advisors, Technical Advisors, Legal
Advisors, Equity Investors, Regulatory Agencies, Multilateral Agencies/Export Credit
Agencies, Insurance Providers and Hedge providers.

To decide the correct financial model for the certain project, it’s important to consider the
risk involved in project and/or organization environment.

Financial reporting is very important from various stakeholder’s point of view. At times for
large organizations, it becomes very complex but the benefits are far more than such
complexities. We can say that financial reporting contains reliable and relevant
information which are used by multiple stakeholders for various purposes. A sound &
robust financial reporting system across industries promotes good competition and also
facilitates capital inflows. This, in turn, helps in economic development.

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7. Bibliography

 Cunningham, C. G. (2004). Your Financial Action Plan: 12 Simple Steps to Achieve

Money Success. Hoboken, NJ: Wiley.
 Gajek, L., & Ostaszewski, K. M. (2004). Financial Risk Management for Pension
Plans (Vol. 1st ed). Amsterdam: Elsevier Science Ltd.
 Thumann, A., & Woodroof, E. A. (2009). Energy Project Financing: Resources and
Strategies for Success. Lilburn, GA: Fairmont Press.
 Tinsley, C. R. (2014). Advanced Project Financing: Structuring Risk (Vol. Second
edition). London: Euromoney Books.
 https://www.edupristine.com/blog/financial-reporting
 https://www.wikihow.com/Create-a-Project-Financial-Plan
 https://en.wikipedia.org/wiki/Project_finance

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