Project Finance: an Innovative and Timely Financing Technique

Abstract

The use of non-recourse project financing has grown steadily in emerging markets, especially in basic infrastructure, natural resources and the energy sector. Because of its cost and complexity, project finance is aimed at large-scale investments. The key is in the precise estimation of cash flows and risk analysis and allocation, which enables high leverage, and in ensuring that the project can be easily separated from the sponsors involved.

Project finance is more difficult in emerging countries, which tend to pose unpredictable risks with unfavorably biased results. This study investigates the role of project finance as a driver of economic growth. It is hypothesized that project finance is beneficial for the developing economies as it compensates for any lack of domestic financial development. The contractual structure unique to project finance should lead to better investment management and governance.

Introduction

Project financing involves non-recourse financing of the development and construction of a particular project in which the lender looks principally to the revenues expected to be generated by the project for the repayment of its loan and to the assets of the project as collateral for its loan rather than to the general credit of the project sponsor. Project financing is an innovative and timely financing technique that has been used on many high-profile corporate projects, including Euro Disneyland and the Eurotunnel.

Employing a carefully engineered financing mix, it has long been used to fund large-scale natural resource projects, from pipelines and refineries to electric-generating facilities and hydro-electric projects. Increasingly, project financing is emerging as the preferred alternative to conventional methods of financing infrastructure and other large-scale projects worldwide. Project Financing discipline includes understanding the rationale for project financing, how to prepare the financial plan, assess the risks, design the financing mix, and raise the funds.

In addition, one must understand the cogent analyses of why some project financing plans have succeeded while others have failed. A knowledge-base is required regarding the design of contractual arrangements to support project financing; issues for the host government legislative provisions, public/private infrastructure partnerships, public/private financing structures; credit requirements of lenders, and how to determine the project’s borrowing capacity; how to prepare cash flow projections and use them to measure expected rates of return; tax and accounting considerations; and analytical techniques to validate the project’s feasibility.

Characteristics of Project

FinanceInvestments that are liable to be financed through this method have the following main characteristics:

1. Projects evolve through two clearly differentiated stages: construction and operation.
2. As the financing is “made to measure”, its structuring tends to be costly, and therefore is only justifiable for large-scale projects.
3. The bulk of the investment is aimed at tangible assets
4. The totality of the project’s assets are pledged to financial creditors.
5. High leverage is usually employed.
6. Investments are usually long-term (e. g. , 20 years).
7. The only purpose of the financing is to complete the project, and as such it has a limited lifetime.

Principal Advantages and Objectives

Non-recourse. The typical project financing involves a loan to enable the sponsor to construct a project where the loan is completely “non-recourse” to the sponsor, i. e. the sponsor has no obligation to make payments on the project loan if revenues generated by the project are insufficient to cover the principal and interest payments on the loan. In order to minimize the risks associated with a non-recourse loan, a lender typically will require indirect credit supports in the form of guarantees, warranties and other covenants from the sponsor, its affiliates and other third parties involved with the project.

Maximize Leverage. In a project financing, the sponsor typically seeks o finance the costs of development and construction of the project on a highly leveraged basis. Frequently, such costs are financed using 80 to 100 percent debt. High leverage in a non-recourse project financing permits a sponsor to put less in funds at risk, permits a sponsor to finance the project without diluting its equity investment in the project and, in certain circumstances, also may permit reductions in the cost of capital by substituting lower-cost, tax-deductible interest for higher-cost, taxable returns on equity.

Off-Balance-Sheet Treatment. Depending upon the structure of a project financing, the project sponsor may not be required to report any of the project debt on its balance sheet because such debt is non-recourse or of limited recourse to the sponsor. Off-balance-sheet treatment can have the added practical benefit of helping the sponsor comply with covenants and restrictions relating to borrowing funds contained in other indentures and credit agreements to which the sponsor is a party.

Maximize Tax Benefits. Project financings should be structured to maximize tax benefits and to assure that all available tax benefits are used by the sponsor or transferred, to the extent permissible, to another party through a partnership, lease or other vehicle.

Project Financing Participants

Sponsor/Developer. The sponsor(s) or developer(s) of a project financing is the party that organizes all of the other parties and typically controls, and makes an equity investment in, the company or other entity that owns the project. If there is more than– one sponsor, the sponsors typically will form a corporation or enter into a partnership or other arrangement pursuant to which the sponsors will form a “project company” to own the project and establish their respective rights and responsibilities regarding the project.

Additional Equity Investors. In addition to the sponsor(s), there frequently are additional equity investors in the project company. These additional investors may include one or more of the other project participants.

Construction Contractor. The construction contractor enters into a contract with the project company for the design, engineering and construction of the project.

Operator. The project operator enters into a long-term agreement with the project company for the day-to-day operation and maintenance of the project.

Feedstock Supplier. The feedstock supplier(s) enters into a long-term agreement with the project company for the supply of feedstock (i. e. , energy, raw materials or other resources) to the project (e. g. for a power plant, the feedstock supplier will supply fuel; for a paper mill, the feedstock supplier will supply wood pulp).

Product Offtaker. The product offtaker(s) enters into a long-term agreement with the project company for the purchase of all of the energy, goods or other product produced at the project.

Lender. The lender in a project financing is a financial institution or group of financial institutions that provide a loan to the project company to develop and construct the project and that take a security interest in all of the project assets.

Project financing uses the project’s assets and/or future revenues as the basis for raising funds. Generally, the sponsors create a special purpose, legally independent company in which they are the principal shareholders. The newly created company usually has the minimum equity required to issue debt at a reasonable cost, with equity generally averaging between 10 and 30 per cent of the total capital required for the project.

Individual sponsors often hold a sufficiently small share of the new company’s equity, to ensure that it cannot be construed as a subsidiary for legal and accounting purposes. The final legal structure of each independent project is different. The following chart illustrates a simple project finance example. It shows that the legal vehicle (company) frequently has more than one sponsor, generally because:• the project exceeds the financial or technical capabilities of one sponsor.

• the risks associated with the project have to be shared. a larger project achieves economies of scale that several smaller projects will not achieve.
• the sponsors complement each other in terms of capability.
• the process requires or encourages a joint venture with certain interests (e. g. local participation or empowerment).
• the legal and accounting rules stipulate a maximum equity position by a sponsor, above which the project company will be considered a subsidiary.

In large projects, different legal vehicles may be established to perform specific functions (i. e. onstruction, maintenance and actual ownership). The structure is often dictated by tax and other legal conditions, as well as by the credit implications for each participant. In designing the structure of the project, stakeholders should maintain maximum flexibility. In other words,sponsors often have other interests in the project, including the design, construction or management of the project, for which they will establish independent legal entities. These relationships will be governed by additional contracts between the project company and the sponsors.

Sponsors are not precluded from being lenders; this overlap often occurs in practice.

Types of risks

In a no recourse or limited recourse project financing, the risks for a financier are great. Since the loan can only be repaid when the project is operational, if a major part of the project fails, the financiers are likely to lose a substantial amount of money. The assets that remain are usually highly specialised and possibly in a remote location. If saleable, they may have little value outside the project.

Therefore, it is not surprising that financiers, and their advisers, go to substantial efforts to ensure that the risks associated with the project are reduced or eliminated as far as possible. It is also not surprising that because of the risks involved, the cost of such finance is generally higher and it is more time consuming for such finance to be provided. Of course, every project is different and it is not possible to compile an exhaustive list of risks or to rank them in order of priority. What is a major risk for one project may be quite minor for another.

In a vacuum, one can just discuss the risks that are common to most projects and possible avenues for minimising them. However, it is helpful to categorise the risks according to the phases of the project within which they may arise: (1) the design and construction phase; (2) the operation phase; or (3) either phase. It is useful to divide the project in this way when looking at risks because the nature and the allocation of risks usually change between the construction phase and the operation phase.

Construction phase risk – Completion risk

Completion risk allocation is a vital part of the risk allocation of any project. This phase carries the greatest risk for the financier. Construction carries the danger that the project will not be completed on time, on budget or at all because of technical, labour, and other construction difficulties. Such delays or cost increases may delay loan repayments and cause interest and debt to accumulate. They may also jeopardise contracts for the sale of the project’s output and supply contacts for raw materials.

Commonly employed mechanisms for minimising completion risk before lending takes place include: (a) obtaining completion guarantees requiring the sponsors to pay all debts and liquidated damages if completion does not occur by the required date; (b) ensuring that sponsors have a significant financial interest in the success of the project so that they remain committed to it by insisting that sponsors inject equity into the project; (c) requiring the project to be developed under fixed-price, fixed-time turnkey contracts by reputable and financially sound contractors whose performance is secured by performance bonds or guaranteed by third parties; and (d) obtaining independent experts’ reports on the design and construction of the project. Completion risk is managed during the loan period by methods such as making pre-completion phase drawdowns of further funds conditional on certificates being issued by independent experts to confirm that the construction is progressing as planned.

Operation phase risk – Resource / reserve risk

This is the risk that for a mining project, rail project, power station or toll road there are inadequate inputs that can be processed or serviced to produce an adequate return.

For example, this is the risk that there are insufficient reserves for a mine, passengers for a railway, fuel for a power station or vehicles for a toll road. Such resource risks are usually minimised by: (a) experts’ reports as to the existence of the inputs (e. g. detailed reservoir and engineering reports which classify and quantify the reserves for a mining project) or estimates of public users of the project based on surveys and other empirical evidence (e. g. the number of passengers who will use a railway); (b) requiring long term supply contracts for inputs to be entered into as protection against shortages or price fluctuations (e. g. uel supply agreements for a power station); (c) obtaining guarantees that there will be a minimum level of inputs (e. g. from a government that a certain number of vehicles will use a toll road); and (d) “take or pay” off-take contacts which require the purchaser to make minimum payments even if the product cannot be delivered. Operating risk These are general risks that may affect the cash-flow of the project by increasing the operating costs or affecting the project’s capacity to continue to generate the quantity and quality of the planned output over the life of the project. Operating risks include, for example, the level of experience and resources of the operator, inefficiencies in operations or shortages in the supply of skilled labour.

The usual way for minimising operating risks before lending takes place is to require the project to be operated by a reputable and financially sound operator whose performance is secured by performance bonds. Operating risks are managed during the loan period by requiring the provision of detailed reports on the operations of the project and by controlling cash-flows by requiring the proceeds of the sale of product to be paid into a tightly regulated proceeds account to ensure that funds are used for approved operating costs only.

Market / off-take risk

Obviously, the loan can only be repaid if the product that is generated can be turned into cash.

Market risk is the risk that a buyer cannot be found for the product at a price sufficient to provide adequate cash-flow to service the debt. The best mechanism for minimising market risk before lending takes place is an acceptable forward sales contact entered into with a financially sound purchaser. Risks common to both construction and operational phases

Participant / credit risk

These are the risks associated with the sponsors or the borrowers themselves. The question is whether they have sufficient resources to manage the construction and operation of the project and to efficiently resolve any problems which may arise. Of course, credit risk is also important for the sponsors’ completion guarantees.

To minimise these risks, the financiers need to satisfy themselves that the participants in the project have the necessary human resources, experience in past projects of this nature and are financially strong (e. g. so that they can inject funds into an ailing project to save it).

Technical risk

This is the risk of technical difficulties in the construction and operation of the project’s plant and equipment, including latent defects. Financiers usually minimise this risk by preferring tried and tested technologies to new unproven technologies. Technical risk is also minimised before lending takes place by obtaining experts reports as to the proposed technology.

Technical risks are managed during the loan period by requiring a maintenance retention account to be maintained to receive a proportion of cash-flows to cover future maintenance expenditure.

Currency risk

Currency risks include the risks that: (a) a depreciation in loan currencies may increase the costs of construction where significant construction items are sourced offshore; or (b) a depreciation in the revenue currencies may cause a cash-flow problem in the operating phase. Mechanisms for minimising resource include: (a) matching the currencies of the sales contracts with the currencies of supply contracts as far as possible; (b) denominating the loan in the most relevant foreign currency; and (c) requiring suitable foreign currency hedging contracts to be entered into.

Regulatory / approvals risk

These are risks that government licenses and approvals required to construct or operate the project will not be issued (or will only be issued subject to onerous conditions), or that the project will be subject to excessive taxation, royalty payments, or rigid requirements as to local supply or distribution. Such risks may be reduced by obtaining legal opinions confirming compliance with applicable laws and ensuring that any necessary approvals are a condition precedent to the drawdown of funds. Political risk This is the danger of political or financial instability in the host country caused by events such as insurrections, strikes, suspension of foreign exchange, creeping expropriation and outright nationalisation. It also includes the risk that a government may be able to avoid its contractual obligations through sovereign immunity doctrines.

Common mechanisms for minimising political risk include: (a) requiring host country agreements and assurances that project will not be interfered with; (b) obtaining legal opinions as to the applicable laws and the enforceability of contracts with government entities; (c) requiring political risk insurance to be obtained from bodies which provide such insurance (traditionally government agencies); (d) involving financiers from a number of different countries, national export credit agencies and multilateral lending institutions such as a development bank; and (e) establishing accounts in stable countries for the receipt of sale proceeds from purchasers. Force majeure risk This is the risk of events which render the construction or operation of the project impossible, either temporarily (e. g. minor floods) or permanently (e. g. complete destruction by fire). Mechanisms for minimising such risks include: (a) conducting due diligence as to the possibility of the relevant risks; (b) allocating such risks to other parties as far as possible (e. g. to the builder under the construction contract); and (c) requiring adequate insurances which note the financiers’ interests to be put in place.

Risk minimisation process

Financiers are concerned with minimising the dangers of any events which could have a negative impact on the financial performance of the project, in particular, events which could result in: (1) the project not being completed on time, on budget, or at all; (2) the project not operating at its full capacity; (3) the project failing to generate sufficient revenue to service the debt; or (4) the project prematurely coming to an end. The minimisation of such risks involves a three step process. The first step requires the identification and analysis of all the risks that may bear upon the project. The second step is the allocation of those risks among the parties. The last step involves the creation of mechanisms to manage the risks.

If a risk to the financiers cannot be minimised, the financiers will need to build it into the interest rate margin for the loan.

STEP 1 – Risk identification and analysis The project sponsors will usually prepare a feasibility study, e. g. as to the construction and operation of a mine or pipeline. The financiers will carefully review the study and may engage independent expert consultants to supplement it. The matters of particular focus will be whether the costs of the project have been properly assessed and whether the cash-flow streams from the project are properly calculated. Some risks are analysed using financial models to determine the project’s cash-flow and hence the ability of the project to meet repayment schedules.

Different scenarios will be examined by adjusting economic variables such as inflation, interest rates, exchange rates and prices for the inputs and output of the project.

STEP 2 – Risk allocation Once the risks are identified and analysed, they are allocated by the parties through negotiation of the contractual framework. Ideally a risk should be allocated to the party who is the most appropriate to bear it (i. e. who is in the best position to manage, control and insure against it) and who has the financial capacity to bear it. It has been observed that financiers attempt to allocate uncontrollable risks widely and to ensure that each party has an interest in fixing such risks.

Generally, commercial risks are sought to be allocated to the private sector and political risks to the state sector.

STEP 3 – Risk management Risks must be also managed in order to minimise the possibility of the risk event occurring and to minimise its consequences if it does occur. Financiers need to ensure that the greater the risks that they bear, the more informed they are and the greater their control over the project. Since they take security over the entire project and must be prepared to step in and take it over if the borrower defaults. This requires the financiers to be involved in and monitor the project closely. Such risk management is facilitated by imposing reporting obligations on the borrower and controls over project accounts.

Such measures may lead to tension between the flexibility desired by borrower and risk management mechanisms required by the financier.

Project finance is designed to reduce of transaction costs, in particular those arising from a lack of information on possible investments and capital allocation, insufficient monitoring and exertion of corporate governance, risk management, and the inability to mobilize and pool savings. Project finance should thus have a clear impact on economic growth, especially there where financial development is shallow. The empirical analysis of 90 countries from 1991 to 2008 confirms this hypothesis.

Project finance is found to be a strong driver of economic growth in developing countries where transaction costsare particularly high. Controlling for initial conditions and other economic factors, a move from the 25th to the 75th percentile in project finance will increase annual growth by 2. 0 percentage points.

In the classical literature the link between finance and growth is through capital accumulation or the quantity of capital: economic growth is the result of increases in innovation, human capital and physical capital. As finance develops, it increases the quantity of capital and thereby creates economic growth.

However, as Schumpeter (1911) pointed out, this view ignores a very important channel. In his perception, finance stimulates growth not by creating more savings and thus increasing the quantity of capital, but rather by allocation savings better and stimulating technological innovation: increasing total factor productivity (TFP), e. g. improving the quality of the capital. In theory, financial markets can stimulate the quality of capital in several ways (Levine).

Firstly, well-developed markets improve resource allocation and allow easier access to capital for entrepreneurs, thus lowering their financial constraints and financing costs (Tobin and Brainard,Boyd and Prescott). Secondly, financial markets play a vital role in corporate governance by dealing with agency costs and informational asymmetries (Bernanke and Gertler,).

Thirdly, markets facilitate the pooling and sharing of risks. Through financial markets, investors can diversify their portfolios and minimize idiosyncratic risk. In addition, markets allow not only for the insurance of liquidity risk through banks but even for intergenerational consumption smoothing through pension funds.

Fourthly, markets mobilize and pool savings and fifthly they ease the exchange of goods and services. Empirical evidence supports the view that financial markets stimulate economic growth.

When domestic financial markets are nascent and international capital flows are risky, Portfolio equity investments and foreign direct investment (FDI) are suitable for emerging economies. International equity inflows are known to reduce the cost of capital for domestic firms, increase risk sharing and stimulate the improvement of corporate governance (Claessens). However, a country can only receive equity inflows if the domestic stock market is well developed. Through FDI a firm exerts direct control over the operations, reduces informational asymmetries and can thus alleviate some of the problems associated with inadequate contract enforcement and poor protection of intellectual property rights. The growth-enhancing properties of project finance

Project finance can be defined as “the creation of a legally independent project company financed with equity from one or more sponsoring firms and non-recourse debt for the purpose of investing in a capital asset” (Esty). Project finance is generally used for new, stand-alone, complex projects with large risks and massive informational asymmetries. Nevertheless, sponsors’ equity contributions are small and the bulk of the financing is provided in form of non-recourse, syndicated loan tranches. The lead banks become project insiders through working with the project sponsors during the initial screening and structuring phase and are responsible for funding the loan in the global syndicated loan market by attracting other banks to become members of a loan syndicate (Gatti). As these loans are non-recourse – e. g. hey finance the project company with no or only limited support from the sponsors – the syndicate bears much of the project’s business risk. Given the project’s high leverage, business risk must be reduced to a feasible level. Here lies one of the key comparative advantages of project finance: It allows the allocation of specific project risks (i. e. , completion and operating risk, revenue and price risk, and the risk of political interference or expropriation) to those parties best able to manage them (Brealey). Thus, project finance comprises not only financial arrangements dominated by non-recourse debt funded in the global syndicated loan market but also a large set of contractual arrangements aimed at risk management.

The five main functions of a financial market are:

1. ex-ante information production and efficient allocation of capital,
2. ex-post monitoring of investments and exerting corporate governance,
3. facilitation of diversification and management of risk,
4. mobilization and pooling of savings and
5. facilitation of transactions (Levine).

If markets are underdeveloped and do not function well in these areas the transaction costs of capital increase. For each of the five functions, it will be shown how the structure of project finance allows it to substitute the domestic market and control transaction costs. First, consider transaction costs arising from a lack of information on possible investments and inefficient capital allocation. Ex-ante evaluation of investments is costly for individual investors.

Financial intermediaries reduce the costs of acquiring and processing information and thereby improve resource allocation (Boyd and Prescott). Project finance reduces these costs as a syndicate of banks provides the majority of the funds and delegates the major screening and arranging tasks to the syndicate’s lead banks. The project is separated from the sponsoring firm or firms and only a single investment rather than the overall sponsor(s) needs to be evaluated. Furthermore, project finance can improve the efficiency of capital allocation as it targets sectors that are bottlenecks in LDCs. Take the example of an infrastructure investment structured as build-operate-transfer project finance.

While most free cash flows are paid to the syndicate lenders and thus not reinvested locally during the operations phase of the project, the assets will ultimately be transferred to the government thereby putting technology and revenues into local hands. The newly acquired infrastructure itself can lead to improved economic growth (Sanchez-Robles). Generally, funds for large capital investments in developing countries are often only available from the public sector. While these institutions fund the initial investment, financing repair and maintenance during the project’s operation can be problematic leading to temporary or even permanent shutdown of the facility.

Project finance can overcome this problem by explicitly taking these financing needs into account and can thus lead to a more effective allocation of capital. Second, consider transaction costs arising from insufficient monitoring and exertion of corporate governance. Effective monitoring induces managers to maximize firm value which in turn improves the efficiency of the firm’s resource allocation (Levine, 2006). The explicit corporate governance and risk management structure of project finance is well suited to serve as a substitute for domestic structures and institutions Brealey et al. (1996), using the example of infrastructure projects, show that project finance has several characteristics specifically designed to deal with agency problems.

These characteristics are largely independent of the legal framework and are thus likely to work when general corporate governance frameworks are not well developed:

1. Project finance lenders have a strong incentive to monitor due to high leverage and the non-recourse nature of their claim (Hainz and Kleimeier).
2. The separation of the project from the sponsoring firm improves corporate governance as management is decentralized and project specific incentives are created for managers (Laux)
3. Furthermore, the focus of the project company on a single investment reduces the risk of misallocation of funds regarding the initial investment (Brealey) while
4. the waste of free-cash flows during operation is reduced due to high leverage and the inclusion of a cash-waterfall as part of the contractual structure.
5. Finally, the extensive contractual structure increases transparency about the project, thereby improving governance.

The flexibility of project finance also allows the choice of a corporate structure which best suits the market conditions. The involved parties are to some extent free to choose the law that regulates the project (Harries; Ahmed). A logical choice is the law of the country where the major tangible assets are located. However, in the case of an emerging country it is possible to choose, for example, the US or UK to circumvent the problems association with a possibly not well developed local legal system. Third, consider transaction costs associated with cross-sectional risk diversification: when capital is scarce and investors are risk averse, investors will avoid risky high-return projects and seek out safe low-return projects.

Thus, if investors cannot diversify cross-sectional risk, then savings will not flow towards high-return investments which can boost growth (Acemoglu and Zilibotti). Project finance will not alter the risk appetite of the local investors, but as international capital it is not limited by the same constraints and therefore more likely than domestic capital to flow to the above mentioned growth-enhancing projects. Fourth and fifth, consider the transaction costs arising from the inability to mobilize and pool savings and to facilitate transactions. In many cases the required sums for an investment are larger than those offered by a single investor. The inability of the market to pool savings and link them to investments can lead to severe financing constraints.

Closely related is the function of the market to facilitate transactions by acting as a middle man between individual investors and potential borrowers, reducing searching and screening costs. The absence of this function hampers financing (Ang). Project finance is specifically designed to deal with large investments and the syndicates normally consist of large (international) banks. Therefore it should not be hindered much by the inability to pool savings, nor by the inability to facilitate transactions. However, it has to be noted that the savings pooled and the transactions facilitated are those of the lenders’ home countries, not those of the project’s host country.

Project finance can do very little to help improve the market’s ability to pool domestic savings and facilitate domestic transactions. It can only help in meeting the need for large sums of money for single investments which cannot be met by domestically pooled savings. Ex-Im Bank’s Approach to Project Finance Ex-Im Bank established the limited recourse project finance or “project finance” program as developing nations turned away from sovereign-guaranteed borrowing for large infrastructure projects. The program helps U. S. exporters compete in the development of private infrastructure and in the extraction of natural resources. Program Description

The term “project finance” refers to the financing of projects that are dependent on project cash flows for repayment, as defined by the contractual relationships within each project. By their very nature, these types of projects rely on a large number of integrated contractual arrangements for successful completion and operation. The contractual relationships must be balanced with risks distributed to those parties best able to undertake them, and should reflect a fair allocation of risk and reward. All project contracts must fit together seamlessly to allocate risks in a manner which ensures the financial viability and success of the project. Appropriate project finance candidates include greenfield projects and significant facility or production expansions.

These projects do not rely on the typical export finance security package, which provide lenders recourse to a foreign government, financial institution or an established corporation. While Ex-Im Bank’s analytical approach for project finance is different from the traditional export finance approach, many of Ex-Im Bank’s requirements remain the same. Ex-Im Bank’s project finance program has several financing options which project sponsors can utilize to develop an appropriate financing plan. During construction and operations, political only and comprehensive guarantees are available. Ex-Im Bank has no dollar limits based on project size, sector or country. While there is no minimum transaction size, the applicant should carefully consider the costs associated with a limited recourse project financing approach.

Generally, Ex-Im Bank utilizes financial, legal, and technical advisors for project finance transactions. However, for small project finance transactions, Ex-Im Bank may consider, on a case-by-case basis, not utilizing financial advisors, and relying instead upon internal due diligence as well as the due diligence of an arranging bank (or other major project lender).

Where appropriate, Ex-Im Bank offers the maximum support allowed under the rules of the OECD Arrangement, including:

• Financing of interest accrued during construction related to the Ex-Im Bank financing.
• Allowance of up to 15 percent eligible foreign content in the U. S. components.

Financing of host country local costs of up to 30 percent of the U. S. contract value. The rules outlined by the OECD Arrangement allows Ex-Im Bank to provide flexible loan repayment terms to match a project’s revenue stream. Thus, project finance transactions can be structured with tailored repayment profiles, more flexible grace periods, and more flexibility on total repayment terms. Ex-Im Bank implements these flexibilities on a case-by-case basis for qualifying project finance transactions. Generally, extended grace periods or repayment terms must be justified by project cash flows or project considerations specific to certain industry sectors.

For example, extended grace periods and back-ended repayment profiles may be justified for telecommunications projects but are likely not appropriate for power plants. The new rules allow for the following:

• Full flexibility for setting a project’s grace period, repayment profile, and maximum repayment term, subject to a maximum average life of 5. 25 years; or
• The extension of a project’s average life up to 7. 25 years, subject to constraints for setting a maximum grace period of 2 years and a maximum repayment term of 14 years.

The new flexible terms are subject to the following additional constraints and/or considerations:

• If the project’s repayment term extends beyond 12 years, 20 basis points are added to the CIRR Rate for direct loans. Interest cannot be capitalized post-completion.
• The flexible terms are offered in High-Income OECD markets only with additional constraints.
• The average life allowed under the new flexible terms will be taken into consideration when meeting the Minimum Premium Benchmark fees required as of April 1, 1999.

Business Development

An introductory meeting with a Project Finance Business Development Officer is strongly recommended. The meeting should focus on Ex-Im Bank’s policies and procedures and include a thorough explanation of the application process and the requirements for Ex-Im Bank support. Project Finance Letter of Interest.

A Project Finance Letter of Interest (LI) is an indication of Ex-Im Bank’s willingness to consider financing a given export transaction. To apply, interested parties must complete the Ex-Im Bank LI application and clearly indicate Limited Recourse Project Finance. The non-refundable processing fee for an LI is $100. The applicant should attach an executive summary of the project which identifies the type of project, location of the project, parties to the transaction, status of the project, total project cost, U. S. cost and the anticipated project time frame. The Project Finance LI differs from Ex-Im Bank’s traditional LI. The LI application is available on Ex-Im Bank’s web page. Competitive Letter of Interest.

On a case-by-case basis, Ex-Im Bank is willing to consider providing evidence of support during the early stage of the project development by performing a more in-depth project analysis and issuing a Competitive Letter of Interest (CLI). Each CLI issued will provide an indicative exposure fee range and a list of preliminary issues identified by Ex-Im Bank. Applicants responding to an international invitation to bid for a project, or applicants pursuing projects in difficult markets are eligible to apply. The cost for a CLI analysis is $1000. In addition to the information required for an LI, applicants should submit any other available information such as project agreements, proposed financing plan, risk mitigation proposals, etc. Please refer to the Competitive Letter of Interest Fact Sheet on the web page.

Final Commitment Application Submission

The final commitment application submitted to Ex-Im Bank must include:

• the standard Ex-Im Bank Preliminary Commitment/Final Commitment Application Form, and
• five copies of the materials listed below under “Project Criteria and Application Information Requirements. “

Preliminary Review. The Project Finance Business Development staff will review the material submitted within five to ten business days from the date that the application is received to determine completeness. Incomplete Applications. If the application is incomplete, it will be returned to the applicant with an explanation of its deficiencies.

If the application is not determined to be suitable for limited recourse project financing but could still be considered for another form of Ex-Im Bank financing, it will be forwarded to the appropriate division and the applicant will be notified. Choice of Financial Advisor. For applications proceeding to a Phase I evaluation, a financial advisor will be selected by Ex-Im Bank. Determination of the specific financial advisor will depend on several factors including geographic and sector expertise and availability to meet project deadlines. Evaluation Fee. Before the financial advisor begins his review (Phase I of evaluation), the applicant will be required to pay an evaluation fee and execute a contract with the financial advisor. In addition, the applicant will need to execute an indemnity agreement with the financial advisor.

No evaluation by Ex-Im Bank and the financial advisor will commence without payment of the financial advisor evaluation fee, execution of the contract and the indemnity agreement. If Ex-Im Bank agrees to proceed with the project after completion of the Phase I evaluation, the applicant will be required to pay additional related fees for the Phase II due diligence. The application will be returned to the applicant if the arrangements for the financial advisor are not completed within thirty days. Other Fees. For all projects Ex-Im Bank will require, either in conjunction with other lenders or for its own use, the advice of independent outside legal counsel, independent engineers, and insurance advisors. In addition, there may be other fees associated with conducting proper due diligence.

Payment for these and any other fees will be the responsibility of the project sponsors or the applicant. Preliminary Project Letter (Phase I). Upon satisfactory completion of the phase I evaluation process, the Structured Finance Division will issue a Preliminary Project Letter within 45 days from the date evaluation begins by the financial advisor. The PPL will indicate if Ex-Im Bank is prepared to move forward on a financing offer and the corresponding general terms and conditions based upon the information available at the time of application. Evaluation Post-PPL (Phase II). After issuance of the PPL, Ex-Im Bank will work with the applicant to proceed to a Final Commitment.

Please note that Ex-Im Bank does not issue Preliminary Commitments for project finance transactions. Ex-Im Bank will continue to utilize the financial advisor for Phase II of the due diligence process. Engineering Consulting Business Plan StructureAll Ltd. StructureAll Ltd. will be formed as a consulting firm specializing in structural engineering services. A home office in Yellowknife, NT will be established the first year of operations to reduce start up costs. The founder of the firm is a professional engineer with eighteen years of progressive and responsible experience. The founder, Philip Nolan, provided an initial investment towards start-up costs.

Of this, more than half is required for start-up expenses while the balance is to to be placed in the company accounts as working capital. The firm will specialize in providing three dimensional modeling and visualization to our clients. State-of-the-art analysis and design tools will be an integral part of the business plan. Implementation of a quality control and assurance program will provide a focus for production work.

Objectives

1. Modest revenues the first year, with slow by steady growth over the next two years.
2. Achieve 20% of market value at the end of the third year of operation.
3. Increase gross margin significantly by the third year of operations.

Mission Our mission is to provide clients across Canada’s North with structural ngineering services for all types of buildings, from concept planning through to completion, with a highly skilled professional team working together, using common sense and practical experience. Financial Plan The financial plan which follows summarizes information regarding the following items:

• Important Assumptions.
• Key Financial Indicators.
• Break-Even Analysis.
• Projected Profit and Loss.
• Projected Cash Flow.
• Projected Balance Sheet.
• Business Ratios.

Important Assumptions

The financial plan depends on important assumptions, most of which are shown in the following table as annual assumptions. The monthly assumptions are included in the appendix.

Some of the more important underlying assumptions are:

• We assume a strong economy, without major recession.
• We assume the creation of Nunavut will not dramatically change the delivery of engineering services.
• Interest rates, tax rates, and personnel burdens are based on conservative assumptions.

Key Financial Indicators

The following benchmark chart indicates our key financial indicators for the first three years. We foresee modest growth in sales and a marginal reduction in operating expenses for the years presented. Break-even Analysis The following table and chart summarize our break-even analysis.

With our estimated monthly fixed costs, the table and chart below show the number of billing targets per month we will need to cover our costs. We don’t really expect to reach break-even until a few months into the business operation. The break-even assumes unit variable costs at 30 percent of unit revenue. The unit revenue value of $60/hour is an aggregate measure for all the types of services which will be offered.

Conclucion

India is entering a new era in project financing and infrastructure project development. Many lessons have been learned from the unfortunate errors of the mid-1990’s, India-infrastructure “gold-rush” that never materialized into a significant number of completed and fully operating projects throwing off substantial rates of returns to the investors.

Hopefully, India is finally positioning itself for the dawn of a true infrastructure growth. Its recent tremendous economic growth is the result of an economic engine running on a mere half of its capacity through technology services export revenues. The use of the remaining capacity in India’s economic engine not only will safeguard India’s current brightening economy, but will fuel an economic growth never before seen in India. Hopefully, such additional use will power it for the years to come. In sum we conclude that project finance is very flexible and can easily be adapted to different economic and political environments. This flexibility allows project finance to substitute for underdeveloped financial markets.

Its structure enhances ex-ante screening and ex-post corporate governance. Moreover, project finance is well suited to deal with political risk and suffers only minimally from the market’s inability to manage risk, pool savings or facilitate transactions.