The information gathering and verifying aspect of due diligence is half of the work needed in order to benefit by it. The other half is evaluating its findings and developing
recommendations on whether to proceed and do required changes to make the project company a better structured, run, and sustainable operation. This is a unique
contribution of the due diligence effort and the more that is invested in it, the greater the ability to implement the project successfully, harness performance improvements, and create possible future synergies.
To be effectively communicated, the information and findings of the due diligence is organized by due diligence category. A good presentation approach to all project
stakeholders is the due diligence report and assessment matrix of Table 11.1. For each due diligence area, the principal factors listed are: new data and information obtained, items verified and referenced, unusual transactions or events, positive and negative findings, guarantees and insurance, and action items. An important feature of the due diligence report and assessment matrix is that responsibilities are clearly delineated and assigned to associates with experience in the different functional areas.
Table 11.1 Due Diligence Report and Assessment Matrix Due
Diligence Area
New Data and
Information
Items Verified and
Referenced
Unusual Practices and
Events
Positive Findings
Negative Findings
Guarantees and
Insurance Host country
Technical
Environmental Commercial Legal
Financial Operational Risk
management Customer or user
Supplier
Other
The analysis of information, materials, and input obtained takes place in order for the due diligence to validate the project company's prospects in its entirety. Once the analysis is completed, the evaluation of impacts is summarized in the due diligence report, which brings together findings, analysis, and the implications of findings and provides a set of recommendations for decision makers. The due diligence report must be concise and show the assessment of findings and their impact on the project and all affected
stakeholders and its recommendations should be specific and clearly articulated to the project team. Once the lender and project teams have digested the report and its
recommendations, a briefing of other project stakeholders takes pace. At that point, the project team and the lender draw their own conclusions on how to proceed with the project based on their assessment of the findings. Reconciliation of views may be achieved through changes in project structuring and support required from different stakeholders.
The items included in the due diligence report vary according to project particulars, but should at least include the following items:
1. Summary listing of the due diligence findings concerning the project's technical feasibility, economic viability, and credit worthiness and security agreements 2. Show the lenders' review of the due diligence report and their assessment of the
project's economic viability
3. Outline areas of additional analyses and evaluations needed to uncover more information and identify risks heretofore not identifiable
4. Recommend actions the project team needs to address and obtain additional support and insurance coverage
5. Make suggestions on changes needed to optimize the project financing structure and the project company's profitability
6. Raise questions and suggest additional plausible scenarios for project team members to investigate and prepare plans to address adverse eventualities
7. Opine on the project financial model architecture, assumptions, inputs, and outputs, and the validity of their evaluations
The due diligence phase is crucial in creating a sound basis for the decision to proceed with a project and contributes to project success. Experienced project teams begin the due diligence effort in the prefeasibility stage before full blown project assessment begins, and use external experts and lenders to finalize it as negotiations are coming to an end.
On the other hand, inexperienced project teams leave the due diligence effort until the negotiations stage. By that point, there is insufficient time to do a thorough investigation of project's risks or verify the representations of other stakeholders and generate the information needed to make right decisions.
Objectivity in analysis and interpretation of findings is another key quality characteristic of an effective due diligence, which requires experience and industry knowledge to assess issues properly. In acquisition and joint venture projects, the due diligence covers many other elements, but any effective due diligence must be speedy and bring issues to
conclusion rapidly. The due diligence report should also include recommendations
concerning the ability to manage risks when they materialize and how to obtain potential synergies.
The last two elements of project due diligence quality are completeness of due diligence and effective communications during and after the report is issued. The due diligence recommendations must be supported by facts and communicated in such terms that the meaning is conveyed clearly and its language does not create overly negative impressions.
That is, the basis of recommendations is included in a minimum impact phrasing
developed for the information memorandum and other external purposes. The internal communications are done by the project manager and the lead lender, while externally they are handled by experienced public affairs or investor relations personnel and external advisors (at appropriate times).
CHAPTER 12
Funding Sources and Programs
Essential Knowledge and Alliances
Most large capital infrastructure projects are not pure project finance deals; instead, they involve the participation of several funding sources and the use of various facilities and instruments. Thus, the discussion of funding source programs and instruments for international infrastructure projects is an introduction to pragmatic project finance. In the sections that follow, we present in summary the major funding institutions and facilities made available by official and private sources.
Multilateral and bilateral institutions play a major role in international project finance and their close relationships with governments enables them to manage difficult credit issues and coordinate financing for projects. In addition to help in project finance, funding institutions offer important nonfunding services, such as the knowledge and expertise they bring to project development and their influence on host governments to move projects forward.
The role of funding sources is to provide financing for viable projects, but in order to make funding available, they perform reasonableness checks and become drivers of processes and mobilize resources. These advantages, however, can result in extending project timelines because of the discipline introduced by their particular approval processes. Figure 12.1 gives a picture of the official funding sources that commonly participate in international project financings.
Figure 12.1 Official Funding Sources
In Section 12.1 we preview multilateral, bilateral, and unilateral institution funding programs and instruments. Section 12.1.1 briefly explains the World Bank, International Monetary Fund (IMF), New Development Bank (NDB), and contingent reserve
arrangement (CRA) programs and instruments, while Section 12.1.2 deals with those of regional development banks. The programs provided by the US EXIM Bank to exporters of capital goods and services or to importing customers are representative of those of developed countries and are addressed in Section 12.1.3. Many countries around the world have their own government programs to support economic development and
infrastructure projects. However, the loan terms and support levels of ECAs vary widely from country to country. Hence, the discussion of Section 12.1.4 is limited to domestic US federal and state financing programs.
Section 12.2 deals with the variety of private sector funding sources and instruments.
First in this discussion are the private equity channels and facilities discussed in Section 12.2.1. Project debt channels and facilities are the topic of Section 12.2.2. Other private and public sector project funding instruments that are often used are shown in Section 12.2.3. Due to the importance of multilateral institutions, ECAs, and regional
development bank funding, Section 12.3 discusses their roles in funding infrastructure projects, their requirements, and the benefits of their participation that make a difference in projects.