TYPICAL STEPS IN PROJECT FINANCE
Step 1: Pre-bid stage
Bidding process. A host government will typically be legally required to initiate a formal tender process for private sector involvement in the proposed project. A company or consortium of companies will be invited to bid for the right to implement the project as the private sector Sponsor (shareholder) in the Project Company.
Alternatively, a private entity may, under its own initiative, submit an unsolicited proposal to a host government proposing a specific project. If the project is of interest, the two parties directly negotiate the terms of a license or concession without undergoing a formal tender. Chile's concession system allows the government to offer a bid premium to good ideas in unsolicited proposals.
Feasibility studies. The private sector Sponsor assesses project viability (technical, legal, environmental, etc.).
Step 2: The contract-negotiation stage
The project participants negotiate and formalize agreements defining the technical, economic, and commercial outlines of the project. The risk sharing provisions of the documents are usually structured in such a way as to remove risk from the project vehicle and allocate it to someone else in a better position to absorb it.
The sponsor is not able to approach the financial markets until the end of the contract negotiation stage of project development.
Project agreements. Engineering, procurement and construction (EPC) contract, Operations and maintenance (O&M) agreement, Input supply contract.
Securing revenue. If the project is completed on schedule and within budget, its economic and financial viability will depend primarily on the marketability of the project's output. In the absence of an Offtake agreement, the sponsor may commission a market study of projected demand over the expected life of the project. The study must confirm that, under a reasonable set of economic assumptions, demand will be sufficient to absorb the planned output of the project at a price sufficient to recover full cost of production, enable the project to service debt, and provide an acceptable rate of return to equity investors.
Financial model. A financial model will be produced that reflects the provisions made and reached at in the project agreements, which also contain reasonably accurate assumptions with regard to cost financing. The developer will focus on the level of projected distributions, their pace and timing, and the acceptability of the project's resulting internal rate of return (IRR). The financial model often considers, through sensitivity analyses, any weakness that may result from construction delays, cost overruns, adverse regulation, inefficiency of the facility relative to existing and projected competition, interest rate fluctuations, unavailability of extractive reserves or major project inputs, and major unanticipated inflation or volatility in foreign exchange rates.
Step 3: Money-raising stage
The money-raising stage begins once all project agreements are initialed and ends at the time the facility is build and commissioned. At this stage, the sponsor mobilizes the required financing and supervises the management organization, construction, and successful commissioning of the facility.
Until financial closing is reached, the sponsor is responsible for all development costs.
Sources of finance. All sources of private debt in the capital and credit markets are at least theoretically available to projects located in industrialized countries as well as developing countries that are rated investment grade. In contrast, only multilateral, bilateral and export credit agency debt are available to projects located in middle- and low-income developing countries that are not investment grade.
Finance-ability. The project must generate enough cash flow so as to give lenders a margin of safety with respect to its debt service obligations.
Debt-to-equity ratio. In general, the lowest cost of capital will be achieved when debt is maximized as a percentage of total capitalization and the amortization schedule for the project debt is matched, as closely as the financial markets will permit, to the cash flows of the project. The appropriate project debt-to-equity ratio depends very much on the strength of the off-take agreement. A strong off-take agreement will permit the sponsor to achieve a debt-equity ratio as high as 3. In contrast, the absence of an off-take could result in a ratio of 1.5 or lower.
Construction. Usually the sponsor does not begin construction until financing is secured. Once construction begins, draws from loan commitments usually match the schedule of construction expenditures. Matching minimizes warehousing of excess funds and/or short-term bridge financing.
Let's take a closer look now at the different risks involved in PPPs.
Follow this link : Key project risks.
Follow this link to Summary.
Follow this link : Key project risks.
Follow this link to Summary.
In case you need more information, or are eager to get into the details of Project Finance, I recommend the following reads , that I personally bought as to create the summarized information of this Project Finance website (Amazon links) :
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