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Project FinancingBuilding 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
Activities:Project Financings Announced Jan. 1, 1981 through Dec. 31, 1995
Electric Power Production
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:
Basic Extraction
Distribution&Marketing
Fabrication
Refining
PhysicalPhysicalRealmRealm
Service
Value Added at Value Added at Each StepEach Step
Support Activities:•Technology Development•Human Resources Development
GATHER AND APPLY IN THE PHYSICAL REALM
STORE AND TRANSFORM IN THE INFORMATION REALM
InfosphereGATHER
APPLY
PRESENT
DISTRIBUTE
SYNTHESIZE
SELECT
ORGANIZE
Virtual Value Chain & Information Operations
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 intermediate-
term 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.
Who gets paid?
Total Project Cash Flows
Am
ount
Lenders
1st H
urdl
e
2nd
Hur
dle
3rd
Hur
dle
Limited Partners
General Partner
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
Outcome
Through the 1990s and Beyond
• 1988: Freeport Copper & Gold (FCX) taken public on the NYSE
• 1989: new project financing arranged for Erstberg East deposit
• 1992, 1993, 1996, 2000: significant new deposits of copper and gold discovered
• February 2, 2011 stock split 2 for 1
Indonesia Today
• The world's largest archipelago, Indonesia achieved independence from the Netherlands in 1949
• Current issues include: Alleviating widespread poverty Implementing IMF-mandated reforms of the banking sector Effecting a transition to a popularly-elected government after four decades of
authoritarianism Addressing charges of cronyism and corruption Holding the military and police accountable for human rights violations Resolving growing separatist pressures in Papua New Guinea
• On 30 August 1999 a provincial referendum for independence was overwhelmingly approved by the people of Timor
Concurrence followed by Indonesia's national legislature, and the name East Timor was provisionally adopted
On 20 May 2002, East Timor was internationally recognized as an independent state.
Stock Price