Project finance for business development

Table of Contents Cover Title Page Preface Acknowledgments About the Author CHAPTER 1: Introduction 1.1 ORIGINS OF PROJECT FINANCE 1.2 PROJECT FINANCE ADVANTAGES AND DISADVANTAGES 1.3 CORPORATE AND STRUCTURED VERSUS PROJECT FINANCE 1.4 THE PROJECT FINANCE MARKET 1.5 WHY A BUSINESS DEVELOPMENT APPROACH TO PROJECT FINANCE? 1.6 STRUCTURE OF THE BOOK 1.7 USE OF THE BOOK TO MAXIMIZE BENEFIT CHAPTER 2: Overview of Project Finance 2.1 PROJECT TAXONOMY 2.2 PROJECT FINANCE PHASES 2.3 KEY ELEMENTS OF PROJECT FINANCE 2.4 OWNERSHIP AND FINANCING STRUCTURE CONSIDERATIONS 2.5 PRIMARY PROJECT FINANCE ACTIVITIES 2.6 COMMON MISCONCEPTIONS AND MYTHS CHAPTER 3: The Record of Project Finance 3.1 THE RECORD OF PROJECT FINANCE DEALS 3.2 REASONS FOR PROJECT FAILURES 3.3 LESSONS LEARNED CHAPTER 4: Project Financing Processes 4.1 VARIANTS OF PROJECT FINANCING PROCESSES 4.2 NATURE OF PROJECT FINANCING PROCESSES 4.3 ACTIVITIES IN PROJECT FINANCE PROCESSES 4.4 MILESTONES OF PROJECT FINANCE PROCESSES 4.5 SUCCESSFUL PROJECT FINANCE PROCESS CHARACTERISTICS CHAPTER 5: Project Finance Organizations 5.1 THE NEED FOR PFOs 5.2 BUSINESS DEFINITION OF PFOs 5.3 PFO SKILLS AND QUALIFICATIONS 5.4 PFO CHALLENGES 5.5 PFO PERFORMANCE EVALUATION MEASURES 5.6 CHARACTERISTICS OF SUCCESSFUL PFOs CHAPTER 6: Project Development 6.1 PROJECT DEVELOPMENT PREREQUISITES 6.2 PREFEASIBILITY ASSESSMENT 6.3 PROJECT DEFINITION 6.4 TECHNICAL DESIGN AND ASSESSMENT 6.5 FEASIBILITY STUDY 6.6 DUE DILIGENCE 6.7 PROJECT AND FINANCIAL STRUCTURES 6.8 AGREEMENTS AND NEGOTIATIONS 6.9 PROJECT MARKETING AND RAISING FINANCING 6.10 DEVELOPMENT COSTS AND SUCCESS FACTORS CHAPTER 7: Participants and Responsibilities 7.1 ROLES OF THE PROJECT TEAM 7.2 ROLES OF THE HOST GOVERNMENT 7.3 ROLES OF PROJECT SPONSORS 7.4 ROLES OF THE PROJECT COMPANY 7.5 ROLES OF THE LENDERS 7.6 ROLES OF ADVISORS, CONSULTANTS, AND INSURERS 7.7 ROLES OF MULTILATERAL AND UNILATERAL INSTITUTIONS 7.8 ROLES OF THE EPC CONTRACTOR 7.9 ROLES OF TECHNOLOGY AND EQUIPMENT PROVIDERS 7.10 ROLES OF PROJECT OFFTAKERS AND SUPPLIERS 7.11 ROLES OF THE O&M COMPANY CHAPTER 8: Project Finance Forecasting 8.1 WHAT IS A GOOD FORECAST? 8.2 WHAT TO FORECAST AND SOURCES OF FORECASTS 8.3 FORECAST ASSUMPTIONS 8.4 PROJECT FORECASTING PROCESS 8.5 PROJECT DEMAND ANALYSIS 8.6 FORECASTING METHODS AND TECHNIQUES 8.7 FORECAST SANITY CHECKS 8.8 CAUSES AND CONSEQUENCES OF FORECAST FAILURES 8.9 FORECAST MONITORING AND REALIZATION PLANNING CHAPTER 9: Project Contracts and Agreements 9.1 STRUCTURE, PREREQUISITES, AND COSTS OF CONTRACTS 9.2 CONTRACT DEVELOPMENT AND NEGOTIATION PROCESS 9.3 COMMON PROJECT FINANCE CONTRACTS 9.4 CHALLENGES OF PROJECT FINANCE CONTRACTS 9.5 PROJECT CONTRACT SUCCESS FACTORS CHAPTER 10: Project Risk Management 10.1 OBJECTIVES AND IMPORTANCE OF RISK MANAGEMENT 10.2 TYPES OF PROJECT RISKS 10.3 SOURCES OF PROJECT RISKS 10.4 RISK MANAGEMENT UNDERTAKINGS 10.5 RISK MANAGEMENT PROCESS 10.6 RISK MANAGEMENT INSTRUMENTS AND MITIGANTS 10.7 RISK MANAGEMENT BENEFITS, CHALLENGES AND SUCCESS FACTORS CHAPTER 11: Project Due Diligence 11.1 DUE DILIGENCE COSTS AND BENEFITS 11.2 HOST COUNTRY AND INDUSTRY DUE DILIGENCE 11.3 TECHNICAL DUE DILIGENCE 11.4 ENVIRONMENTAL DUE DILIGENCE 11.5 COMMERCIAL DUE DILIGENCE 11.6 LEGAL DUE DILIGENCE 11.7 FINANCIAL DUE DILIGENCE 11.8 OPERATIONAL DUE DILIGENCE 11.9 RISK MANAGEMENT DUE DILIGENCE 11.10 GENERAL AREAS OF DUE DILIGENCE 11.11 REPORT, ASSESSMENT, AND QUALITY CHARACTERISTICS CHAPTER 12: Funding Sources and Programs 12.1 OFFICIAL PROJECT FINANCE SOURCES 12.2 PRIVATE SOURCES AND INSTRUMENTS 12.3 BENEFITS OF OFFICIAL FUNDING SOURCE PARTICIPATION CHAPTER 13: Structuring Project Finance 13.1 ELEMENTS OF PROJECT FINANCING STRUCTURING 13.2 EQUITY AND DEBT INVESTOR REQUIREMENTS 13.3 DECISIONS FROM SPC OWNERSHIP TO FINANCING STRUCTURE 13.4 DETERMINANTS OF PROJECT FINANCING 13.5 AMALGAMATION OF FINANCING CHAPTER 14: Project Financial Model 14.1 USES OF THE FINANCIAL MODEL 14.2 FINANCIAL MODEL INPUTS 14.3 FINANCIAL MODEL CALCULATIONS AND OUTPUTS 14.4 PROPERTIES OF GOOD PROJECT FINANCIAL MODELS CHAPTER 15: Trends Impacting Project Finance 15.1 MAJOR RELEVANT MEGATRENDS 15.2 MEGATREND SOURCES AND CHARACTERISTICS 15.3 DEMOGRAPHIC TRENDS 15.4 TECHNOLOGY AND INDUSTRY TRENDS 15.5 TRENDS IMPACTING THE GOVERNMENT SECTOR 15.6 TRENDS IMPACTING SPONSORS AND INVESTORS 15.7 TRENDS IMPACTING FUNDING SOURCES AND FINANCING 15.8 ANALYSIS OF TRENDS AND THEIR IMPACT CHAPTER 16: Project Finance 16.1 SOURCES OF COMPETITIVE ADVANTAGE 16.2 MANIFESTATIONS OF COMPETITIVE ADVANTAGE 16.3 CREATING COMPETITIVE ADVANTAGE 16.4 COMPETITIVE ADVANTAGE REALITY CHECK APPENDIX A: Common Project Finance Abbreviations APPENDIX B: Commonly Used Project Finance Definitions Bibliography Index End User License Agreement List of Tables Chapter Table 1.4.1 Global Project Finance by Region, US$ Billion Table 1.4.2 Global Project Finance by Sector, US$ Billion Table 1.4.3 Infrastructure Project Periods Involved Table 1.4.4 Loans During 1994–2003, Percent of Financing Table 1.4.5 Bonds Issued During 2002–2012, Percent by Region Chapter Table 3.1.1 Total Projects by Industry, 1987–2014 Table 3.1.2 Defaults by Industry 1987–2014 Table 3.1.3 Total Default Rates by Region, 1987–2014 Table 3.1.4 Reasons for Project Defaults Across All Projects Table 3.1.5 Project Default Rates by Industry Table 3.1.6 Examples of Project Finance Deals and Reasons of Failures Chapter 10 Table 10.1 Statistics of Materialized Project Risks Table 10.5.1 Likelihood Ranges of Project Risk Occurrence Table 10.5.2 Impact Severity of Potential Risk Occurrence Table 10.5.3 Project Risk Matrix Chapter 11 Table 11.1 Due Diligence Report and Assessment Matrix List of Illustrations Chapter Figure 1.5 New Business Development Approach to Project Finance Chapter Figure 2.1 Typical Project Finance Structure Figure 2.2 Major Project Phases Figure 2.4.1 Key SPC Ownership Considerations Figure 2.4.2 Main Elements of Project Financings Figure 2.5 The Essence of Project Finance Chapter Figure 3.2 Project Finance Failures Root Cause Analysis Figure 3.3 Enterprise Model for Project Financing Chapter Figure 4.2 Amalgam of Project Finance Processes Figure 4.3 Project Finance Phases Figure 4.4 Project Finance Process Deliverables Chapter Figure 5.2.1.1 Elements of the PFO Business Definition Figure 5.2.1.2 Determinants of the PFO Business Definition Figure 5.2.3.1 Example of Effective PFO Governance Structure Figure 5.2.3.2 PFO Reports to the Company CFO Figure 5.2.3.3 PFO Reports to the Project Manager Figure 5.2.3.4 Project Subteams Report to the Project Manager Figure 5.2.3.5 PFO Resides in Project Management Chapter Figure 6.1 Project Development Stage Deliverables Chapter Figure 7.1 Participants in Typical Project Finance Chapter Figure 8.4 Forecasting Process for Infrastructure Project Decisions Chapter Figure 9.1 Signatories and Common Project Finance Contracts Chapter 10 Figure 10.7 Broad Method to Project Risk Management Chapter 11 Figure 11.1 The Nature of Project Due Diligence Chapter 12 Figure 12.1 Official Funding Sources Figure 12.2 Private Financing Channels and Facilities Chapter 13 Figure 13.1 Simplified typical project finance structure Figure 13.1.1 Elements of Financing Structuring Figure 13.3.1 Project Finance Structuring Framework Figure 13.3.2 Financing Structuring Process Activities Figure 13.4 Determinants of Project Financing Figure 13.5.1 Integration of Project Financing Decisions Figure 13.5.2 Illustration of Development of the Financing Plan Chapter 14 Figure 14.1 Purposes of the Project Financial Model Figure 14.3 The Central Role of the Project Financial Model Chapter 15 Figure 15.1 Trend Management Components Figure 15.8.1 Process of Identification and Assessment of Trends Figure 15.8.2 Progression of Quantifying Impacts of Trends Chapter 16 Figure 16.4 Project finance competitive advantage Wiley and SAS Business Series The Wiley & SAS Business Series presents books that help senior level managers with 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Statistic: The Art of Retail Analytics by Brittany Bullard project processes reasons risk management root-cause analysis screening/preparation skills/competencies strategy/project objectives technical issues Project finance advantages/disadvantages agreement application business development approach competitive advantage contracts corporate finance/structured finance, contrast deals documents due diligence elements essence failures host government ceding agency capabilities, assessment involvement market misconceptions/myths model new business development approach nonrecourse finance off-the-shelf financing arrangement options, creation origins participants phases principles, expertise sources structure/structuring structuring framework/process activities techniques usage, suitability Project-financed deals, high-quality counterpart benefit/support Project finance organizations (PFOs) absence accountability activities, scope analytical competencies analytics assignment associates business definition challenges characterization charter of responsibilities, clarity (absence) enhancement, changes (impact) exclusion functional links/relations, maintenance functions, alignment global relationships, formation goals/objectives governance institutions/techniques/instruments, knowledge knowledge management skills members, skills/competencies, sharpening mission, support mission/vision necessity participants, roles/responsibilities distribution performance processes progress, monitoring project objectives/expectations/priorities project performance, monitoring reports services skills/qualifications success team values/principles Project finance prerequisites Project finance processes activities characteristics deliverables evaluation milestones Project financial model calculations/outputs cost-benefit considerations inputs modular approach outputs, evaluation properties reviews role uses Project financing deals decisions, integration determinants development/bank perspective elements enterprise model examination/monitoring final structuring inexpensiveness method, characterization models, development/usage plan, development processes professionals, perspective risks solutions structure structuring support time, reduction trends, impact Project life cover ratio (PLCR) Project management efficiency framework, establishment function PFO, presence pre-conditions processes, skills Project managers PFO reports project subteams report support Project objectives corporate strategic objectives, divergence creation development failure factor identification Project risk management costs method validation Project risks analysis assessment/allocation assistance evaluation/mitigation identification matrix occurrence, likelihood ranges/impact severity profiles sources structure, management decisions types Project sponsors internal challenges perspective roles strategy, failure factor Project stakeholders expectations/management, assessment failure organizations, internal links requirements/objectives, harmonization risk transfer Project teams activities effectiveness formation members/advisors nimbleness/dexterity participants, forecast errors roles skills/competencies/training Proprietary information disclosure, sensitivity Proprietary material, leaks Public infrastructure investment, increase Public-private infrastructure advisory facility Public-private partnership (PPP) agreements private finance initiative, contrast projects Public sector assistance Public sector comparator Purchasers Q Qualified institutional buyer Quantitative/qualitative models, usage R RAB Finance Real Estate Investment Trusts (REITs) Refinancing, necessity Regional development banks (RDBs) Regulatory capture Request for proposals (RFPs) Reserve life index (RLI) Resource scarcity Resource shortages Retainage Return on investment (ROI) Revenue forecasts Revenue projections Risk allocation, balance analysis/mitigation avoidance categories contingency planning core team re-assessment factors identification/assessment/allocation insurance matrix minimization mitigation project lifecycle management quantification/mitigation register, usage risk-related information, database maintenance Risk management benefits/challenges/success factors characterization due diligence instruments/mitigants method objectives/importance process undertakings Rule 144A S Sanity checks Scenario building/planning method development, steps S-curve models Secondary investors Secondary loss Section 129 loans Securitization Security agreements packages, problems Senior lenders Senior management interests/objectives, identification Emerging (7E) countries Shadow tolls Shareholders agreement profit distributions Short-term financing, conversion Signatories Silk Road (Silk Route) Silk Road Economic Belt Silk Road Fund Site legacy risk Situational analysis 63–20 issuance Smoothing models Social impact bond Social infrastructure projects Sovereign funds Sovereign loans/credits Special purpose company (SPC) ownership perspective structures/options, implications Special purpose vehicle, creation Special vehicle company (SVC) Sponsor(s) agreement contacts equity experience guarantees industry knowledge inexperience involvement/commitment organization, regional sales/marketing plans partnership agreement, development perspective PFO analytics/evaluation processes projects sponsor-company processes, compartmentalization sponsor-project portfolios, optimization tax benefits trends, impact Sponsor company business units regional sales organizations Stakeholders delivery abilities, determination expectations/contributions, identification/assessment objectives Standby finance State government agencies State infrastructure banks (SIBs) Stock projects Strategic objectives Strategic planning, selection/validation Strategic plan review Strengths, weakness, opportunities, threats (SWOT) analysis Structural risk Structured finance, project finance (contrast) Subrogation Subtrends causes Success factors Sukuk bond Sunset date Supplier agreement Supplier credit Swaps Syndication System dynamics models T Take and pay contract (take or pay contract) Target repayments Tax increment finance Tax revenues, increase Technical design/assessment Technical due diligence Technical engineering/design Technical evaluation details Technology advisors collection/evaluation providers, roles technology-related project risks/issues, identification trends Testing Termination sum Term loan B Third-party claims, provision Third-party liability insurance Third-party risks Timeline targets, development Tolling contract Total default rates Total projects, ranking Training costs, substantiation Tranche Transportation Infrastructure Finance and Innovation Act (TIFIA) finance Travel-related expenses Trends analysis characteristics government sectors, impact identification/assessment, process impact quantification management components response planning Trillion-sensor infrastructure Tripartite deeds Trust funds/donor programs Typical project finance structure U Uncontrollable factors, branding Undertakings Unilateral institutions Unitary charge Univariate time series Unlisted direct equity Unwind cost US Agency for International Development (USAID) US Export-Import Bank (US EXIM) US government agencies US National Intelligence Council (NIC) V Value for the money (VFM) requirements Variances, explanation Variation bonds Viability gap funding (VGF) W Warrantees Warrants Waterfall Waterfall accounts Windfall gains Working capital World Bank Wrapped bonds WILEY END USER LICENSE AGREEMENT Go to www.wiley.com/go/eula to access Wiley’s ebook EULA ... 1.1 ORIGINS OF PROJECT FINANCE 1.2 PROJECT FINANCE ADVANTAGES AND DISADVANTAGES 1.3 CORPORATE AND STRUCTURED VERSUS PROJECT FINANCE 1.4 THE PROJECT FINANCE MARKET 1.5 WHY A BUSINESS DEVELOPMENT. .. ACTIVITIES IN PROJECT FINANCE PROCESSES 4.4 MILESTONES OF PROJECT FINANCE PROCESSES 4.5 SUCCESSFUL PROJECT FINANCE PROCESS CHARACTERISTICS CHAPTER 5: Project Finance Organizations 5.1 THE NEED FOR PFOs... of formalizing a comprehensive presentation of project finance for new business development has its origins with experiences in projects I did as a business consulting economist The quest for