There are differences of opinion on whether sustainable competitive advantage can be obtained by sponsors through project financing, but there are exceptions. Interestingly, opinions on whether competitive advantage can be obtained through project finance vary along the lines of interest of project participants. In order to assess the issue objectively and get a reality check, results of a benchmarking study which focused on the following three questions are presented:
1. What needs do customers seek to satisfy through project finance?
2. Can a sponsor company create a competitive advantage in project financing?
3. What are the required practices and support structures to establish a competitive advantage using project finance?
Study participants included customers, industrial companies, financial advisors,
commercial and investment banks, law firms, and the IBRD and IFC parts of the World Bank in order to obtain a comprehensive, balanced, and diverse view on project financing competitive advantage. Hence, the results of the study are presented from the
perspectives of sponsors and developers, customers, project financing advisors and sources of funding, law firms, and other project finance participants.
A. Sponsor–Developer Perspectives
There is agreement among well established sponsors and developers that project financing is necessary to get competitive advantage and win bids. However, there is a divergence of opinion about smaller firms that lack project volume and resources to strive for competitive advantage. Some of the views offered by sponsor and developer group participants are the following:
1. Project finance is a critical capability for sponsors and developers to have internally or through external relationships
2. There is disagreement and perceptions coincide with vested interests on whether a developer can create a competitive advantage through project finance, but there is agreement that project finance is required to compete in infrastructure industries 3. Sponsors and developers believe that superior understanding and management of
the project finance process can lead to competitive advantage. This requires the PFO to understand well the marketplace, facilitate relationships that help the transaction, focus on the process, validate financing structures with banks, and help with loan underwriting
4. Total cost minimization, helped by lower financing costs, is the principal reason for developing project financing capabilities
5. Project sponsors and developers need to lay out how project finance can support their business strategy. That is, they should have a clear vision and the ability to sustain the course initially laid out
6. Sponsors cultivate relationships, but alliances are on one by one case basis because financing institutions are common carriers of capital and relationships are
productive, but exclusive alliances are not
7. It is good to have a series of informal alliances, but prefer developing relationships with a few global institutions that can provide advice early on what is possible and eliminate not financeable projects early
B. Customer Perspectives
Customers generally confirm that financing is required, but lowest cost financing is not sufficient to win bids and they use total project solution costs instead to judge different proposals. The views stated are consistent across the set of customers interviewed and include the following points:
1. Customer interest in project finance is driven by lack of cash and a desire to share
risks, obtain better credit terms, and maximize value for money
2. Customers evaluate bids on a bottom line basis but lack experience with innovative financing methods. They feel that the longer the financing term, the better the deal 3. Sponsors and developers demonstrate commitment to a deal by bringing
significant equity and accepting a larger share of project risk
4. Risk sharing with sponsors/developers is important and so is off balance sheet financing and value for money for the host government
5. At times, government entities may constrain financing alternatives that could be used in a project due to established rules and regulations
6. Customers need to be educated on the processes of project financing and financial instruments
7. Customers look at the total project solution and do not select a proposal because of the financing and its lower costs alone
8. For credit impaired customers, project financing is very important and the lowest price generally wins bids
C. Financiers Perspectives
The necessity of project financing to win bids is confirmed by PFOs and financiers, but their views diverge on whether long term competitive advantage can be obtained
except only on a project by project basis. Some of the other views expressed are summarized below and include the following:
1. Leading sponsors have centralized PFOs that are independent and possess critical mass to strive for competitive advantage that may or may not be sustainable over the long run
2. Customer needs for project financing are not always clearly or correctly stated in their RFPs and successful PFOs recognize the need to educate customers on project financing and evaluation of proposals
3. There is no magical bullet. Innovative or effective financing proposals are those that meet customer needs, which vary by project and help win bids
4. There is no off the shelf financing arrangement in project finance; every project is different, and proposals are carefully tailored. This is an area of potential to create a competitive advantage through project financing solutions
5. Differences in costs are minimal across competing proposals, but the risks of poorly thought out financing arrangements is enormous and impacts both sponsors and customers
6. Leading PFOs are versatile in applying a wide variety of specific techniques to specific situations, but in build, operate, and transfer of ownership (BOT) projects and its derivatives, the transfer part is difficult to negotiate and is disliked by
sponsors and developers
7. ECA financing is the first choice and bulwark of project finance when supplier content is high, especially when its effectiveness is supplemented with ancillary support from other government sources
8. Lease financing, where the transaction is tax driven and the customer rents the project company assets, may be well suited for technology and credit impaired customers
9. Skills, competencies, and experience are required to get a competitive advantage and include: speed, leadership and triage
In project finance deals, speed is affected by experienced people preventing and avoiding unnecessary delays. Leadership means using senior people, capable of leading project development and financing effectively. Triage is a critical experience in cutting to the chase and identifying the projects that are not financeable early.
D. Other Participants Perspectives
Contractors, equipment providers, and law firms maintain that competitive advantage cannot come from project financing alone. The totality of the project proposal makes the difference and wins bids and for that to happen, the interests and concerns of these participants must also be considered. Key points made by these contributors are summarized in the following responses:
1. Customer needs and competition are often driving contractors and equipment suppliers to become project sponsors and developers
2. Advisors, contractors, and law firms confirm the importance of lowest total project costs, but downplay the significance of lowest financing costs alone
3. Equipment suppliers and contractors believe that project finance enables them to ensure lower total project costs and give them a competitive advantage
4. The objectives of all project stakeholders must be considered and different criteria must be met because lenders focus on debt cover ratios, customers on lowest cost, and sponsors and developers look to maximize their after tax return on equity 5. Contractors, equipment providers, and legal advisors agree that sponsors and
developers need project financing to compete, but they do not view it as a source of competitive advantage by itself
6. Every proposal submitted by successful suppliers includes financing, but since financing techniques cannot be patented, project financing alone cannot create competitive advantage
7. Project financing is offered to be competitive and a contractor or supplier gets
eliminated from future projects if they do not offer it E. Competitive Advantage Requirements
Participants with expertise in different areas of project finance disagree on its role in creating a sustainable competitive advantage and division of opinion falls along lines of self interest. The various perspectives are compressed in the following statements:
1. Lawyers and some financial advisors feel that sustainable competitive advantage is not possible because deal structures are public knowledge and because of the
commonality of available financing instruments and funding sources
2. Outsourcing aspects of project finance is worthy of consideration when there is uncertainty regarding a company's ability to develop sustainable competitive advantage using project finance
3. Constraints to competitive advantage through project finance come mostly from conservative financing approaches and limited experience and tools
4. Sponsors and developers report five sources of competitive advantage: A clear vision of project finance goals, bringing equity to the deal, having experienced project teams, developing strong relationships, and meeting customer needs 5. Competitive advantage requires a clear vision and enterprise capabilities that
support project finance. That is, vision concerning project financing processes, identification and screening, risk assessment and mitigation, economic
assessment, commercial structuring, and closing
6. Enterprise capabilities needed for competitive advantage through project finance require appropriate corporate and PFO organizational structure and culture, the right image, sound core processes, strong skills and competencies, efficient
systems, selective alliances, and understanding of customer financing needs and requirements
7. Success in project finance requires a team orientation, access to quick decisions, and tenacity because of massive negotiating and finalizing contracts and
agreements
8. Experienced professionals with knowledge of global markets and key participants are needed where experience is defined as: Having worked on deals through
closing, possessing knowledge of financing sources, instruments terms, and knowing key participants; namely, advisors and experts, and principals in local government and finance
It is interesting to note that benchmarking study participants considered competitive advantage in project financing from the contract finance and financial engineering perspective alone and not as part of new business development. Hence, the resulting general view that competitive advantage cannot be obtained through project financing.
When a different participant group with a broader, new business development perspective
was interviewed, three major points came through very clearly:
1. Assessment of competitive advantage in the infrastructure industry does not necessarily apply to other types of projects or industries
2. Competitive advantage can be achieved when the success factors of project
development and financing go beyond contract finance and financial engineering are incorporated throughout
3. Sustainable competitive advantage in the era of coopetition may be possible through partnerships and joint ventures
The potential for acquiring or developing a competitive advantage in infrastructure projects through project finance can be realized only if both customer needs and requirements are fully met and the sponsor company delivers proven advantages to customers that competitors cannot. Figure 16.4 is a clearly illustrated summary of key points on competitive advantage. One point, however, has been left out from participant responses: Using lessons learned in previous projects through post mortem analysis.
Successful sponsors are using post mortems to improved processes, productivity, and reduce project development costs and total bid costs.
Figure 16.4 Project finance competitive advantage.
Source: Long Range Planning Associates.
Successful global infrastructure sponsors and developers possess project finance and overall company competitive advantage because they:
1. Assess accurately the likelihood of winning bids early in the screening phase by understanding well customer needs and ensuring all customer and project
requirements are met
2. Determine whether and how they can meet customer and project requirements and offer competitively priced bids that include efficient project financing
3. Structure projects more effectively by putting themselves in the customers' and
competitors' heads and developing projects more effectively by putting themselves in their competitors' position
4. Evaluate in a parallel effort to what extent they possess the needed advantages and if they are worth acquiring them to compete or to outsource them
5. Evaluate in the final step the two sides of the equation to determine whether there is potential for obtaining a competitive advantage knowing that financing alone may not always enable them to do so