The purpose of identifying and assessing trends is to evaluate their impacts on the business and to plan to take advantage of them or minimize adverse impacts. The
different elements and the process of identifying trends and their impacts affecting the project company's operations are illustrated in Figure 15.8.1. The process begins with
identifying megatrends, subtrends, and PESTLED trends and determining which ones and to what extent they are relevant for a particular country and industry. At this junction, it
is important to ensure that fads are separated from trends and determining how the relevant trends are likely to impact the industry the project company is in. This step is helpful in assessing trend effects on the industry structure and likely changes in the operating environment's competitive forces.
Figure 15.8.1 Process of Identification and Assessment of Trends
Once the effects of trends affecting the industry are well understood, the process examines how industry relevant trends will affect the project company's future and determine the magnitude of impacts on its financial performance over its lifetime. The evaluation of trends impacting the project company specifically includes an assessment of trend effects on future technology; host country legal and regulatory changes; unmet customer/user needs and changes in preferences; and potential threats to the project company's success. While the process of identifying relevant trends is fairly
straightforward, the quantification of their impacts requires a thorough analysis of
analogs from competitors and other industries, and the evaluation and input of industry experts.
The identification of trends and their impacts on project finance deals is crucial because of project characteristics, sizable investment requirements, and required quality of
financial projections to make projects financeable. The quantification of trend impacts requires building up strong competitive analysis competencies that support the sponsor organization's strategic planning, business development, and PFO efforts. This involves activities such as:
1. Attending industry conferences and networking with others who are knowledgeable in
identifying trends and have experience in quantifying their effects
2. Identifying industry leaders and watching actions of those industry leaders in response to trends impacting them
3. Doing host country market research and assessing competitor plans and initiatives there and in similar countries
4. Obtaining the views and opinions of industry experts and consultants and getting the insights of industry analysts
5. Reading industry reports and industry analyst commentaries and assessments about trends
6. Obtaining and evaluating opinions and predictions of futurists and analyzing their reports, academic articles, and papers on trends and impacts on different industries 7. Monitoring industry reports and checking trade magazines, such as the D&B First
Research Industry Profiles and Frost and Sullivan's Market Analysis
8. Researching home and host country government reports on PESTLED trends and their effects on different industries
9. Getting the perspective of project bond rating agencies and insurance companies on the effects of trends on project finance transactions
10. Researching multilateral agency and ECA reports on future trends and developments in project finance
11. Leveraging the knowledge of relationships in various funding sources and obtaining their perspective on trends and future scenarios
12. Asking the right questions and listening closely to customers and users
A variant of Figure 15.8.1 is a sketch summary of the progression of identifying relevant trends and quantifying their impact on a project is shown in Figure 15.8.2, with
assessment of trend impacts focused on:
Figure 15.8.2 Progression of Quantifying Impacts of Trends
1. Understanding the sources of trends and changes caused by them 2. Identifying areas of innovations affecting each project stakeholder
3. Evaluating impacts of technology changes on project pricing and project delivery 4. Quantifying and examining trend impact scenario effects on the project financial
model outputs
5. Assessing trend effects on sponsor competitive position and project financing The first order in the assessment process starts with selecting the most relevant
megatrends followed by a thorough host country environmental analysis and, having the benefit of the insights of futurists, determine how different trends are likely to affect the project company. Once the identification of country, industry, and company impacting trends is complete, trend impacts affecting the nature of a product or service and delivery are evaluated. How? By leveraging knowledge of industry experts, building plausible
scenarios for forecasting models, and analyzing the effects of trends on pricing, demand, and the supply of the project company's output.
The evaluation of scenario outputs and sensitivity analysis facilitates a reasonably good assessment of the project company's SWOT analysis under the impact of trends. It also helps in the development of sponsor strategy and plans to deal with adverse trend impacts or prepare to take advantage of the opportunities presented by them. However, trend
analysis and impact quantification are far more valuable when taking into account the impact of trends on all project stakeholders. This is needed because, for example, what impacts sponsors one way may affect equipment suppliers, host governments,
contractors, and funding sources differently and/or with different lags. Note that
ordinarily the evaluation of other trend impacts on stakeholders is of lesser rigor than that of on sponsors and the project company. However, differential impacts need to be considered and may require reconciling to satisfy adversely impacted parties.
What is also important in overall trend assessment is that trend impacts need to be
evaluated for specific areas of a given project. Namely, impact evaluation on the following project areas:
1. Design, engineering, specifications, and requirements 2. Feasibility study, development, and sustainability 3. Competency and knowledge requirements
4. Procurement, logistics, and project delivery
5. Risk identification, mitigation, and enhancements required 6. Project economics, financeability, and funding
7. Costs and efficiencies and potential synergies
8. Sponsor company's competitive advantage in project development and financing Once trends are identified, analyzed, and their impacts quantified, planning and preparation to take advantage of trends or avoid adverse effects take place. Here, the value added of experts in competitive analysis and strategic decision forecasting are crucial in the development of response and expectation realization planning. Why?
Because the various trend impacts need to be integrated into an overall project value impact. This requires extensive industry knowledge, skills, and experience, and seasoned judgment to make the integration by assigning appropriate weights to different trends.
CHAPTER 16 Project Finance
A Source of Competitive Advantage?
Competitive advantage is the superiority of a company that enables it to deliver a project, product or service at a lower cost, better quality, or in a manner that markets perceive as superior to that of competitors. It is the competencies and capabilities that a company can leverage to offer higher value by matching them to market opportunities when presented.
Simply stated, it is what makes a company better than its competitors in the minds of customers and it is a key goal of business strategies and new business development to win bids and be more profitable than competitors. Sustainable competitive advantages are the unique, quantifiable, and substantial resources, assets, and capabilities that give a company an advantageous position over the long run and are difficult to duplicate.
Sustainable competitive advantage is a short term occurrence that may be replicated a number of times, but which is very difficult to maintain over long periods.
Competitive advantage is an important consideration in the business development and project finance disciplines because:
1. The selection of project proposals is based on least total cost considerations, other things being the same
2. It creates a strong image of competence, financial strength, and trust to deliver on promises
3. It provides security and comfort to decision makers having selected a sponsor or developer that has a competitive advantage when things go wrong and problems arise 4. It is an ingredient of winning bids that is partly due to long term relationships with
construction contractors, equipment providers, funding sources, and insurers known for providing best value in their industries
5. Contract negotiations and agreements with sponsor companies possessing a
competitive advantage gain approval from funding source decision makers quicker because of their positive reputation
6. Companies that have one type or another of competitive advantage deliver proposals that win contracts that deliver superior value to customers
Chapters 3 to 15 discussed the primary elements of what makes effective organizations, sound processes, and successful project implementation. Application of the
understanding of what it takes to outdo competitors in project finance is a source of competitive advantage built on foundations such as:
1. Knowledge of the causes and sources of failures, learning from failures of project finance deals, and addressing reasons of project failures
2. Integrated project financing with strategic planning and new business development
processes and effective project management
3. Superior project finance organization competencies and capabilities applied to various project idiosyncrasies to provide effective financing solutions
4. Proper early project screening, planning, and development and management of stakeholder expectations
5. Clarity of roles and responsibilities of internal sponsor organizations and among other project participants
6. Thorough project economic evaluations based on sound strategic decision forecasting grounded on tested and reasonable assumptions and scenarios
7. Appropriately structured and negotiated agreements that are sustainable and enforceable in the project's host country
8. Thorough ongoing risk identification, assessment, and mitigation based on cost–
benefit and best able to bear considerations
9. Comprehensive due diligence that tests, verifies, and validates all aspects of project economics, risk management, and financeability
After a thorough due diligence is completed, other foundations of building a competitive advantage are based on the following:
1. Good understanding of megatrends and subtrends, their impacts on the industry and the project, and the ability to take advantage of them, create synergies, or avoid
negative impacts
2. Well structured, complete, and tested financial model and thorough testing and assessment of its outputs and their implications
3. Extensive knowledge of funding sources and facilities, experience with their products and processes, and global financing alliances
4. Breadth of experience in structuring successful project financings under different project and customer challenges and changing markets
In the sections that follow we look at successful project participant attributes from a competitive advantage perspective. Specifically, Section 16.1 deals with the common sources of competitive advantage necessary for the business development and project financing functions to be successful. The question of how a company would know that it has a competitive advantage is addressed in Section 16.2, which shows manifestations of competitive advantage, while Section 16.3 discusses strategies and options to strive for gaining competitive advantage. Section 16.4 is a reality check on whether creating and maintaining a competitive advantage in the long run is possible. It is based on interviews with project finance stakeholders and presents key findings of a benchmarking study on project finance best practices.