"width": "800"
"name": "Drawbacks of Using Project Finance Structure:",
The pipelines will be constructed underground, and in a sparsely populated area. Foreign trustee to keep the sales proceeds.
Government\u2019s compliance to RMP is a requirement for future WB loans, which extends the potential influence of the project-specific impositions and commitments to non-project specific areas, increasing Chad\u2019s exposure to risks. "@context": "http://schema.org", Involvement of multilateral/bilateral agencies, Unclear and/or inconsistent legal/regulatory framework for projects operations, Insufficient protection of private investment and private ownership/control of project, Changes in law, such as imposition of new environmental/health/safety requirements, price controls, import duties/controls, increase in taxes, royalties, deregulation, amendment or withdrawal of projects permits, changing the control of company, A general principle is that the party who is paying for the output under a project contract should pay for the losses incurred due to changes in law specific to the industry, because such change is reflected in the entire industry and any extra costs will normally be passed on to end users; therefore an offtaker who does not bear this risk would earn extra profits at the expense of the project company.
Petrozuata and Oil Field Development ProjectBackground Why use project finance? Agency costs, debt overhang, risk contamination, risk mitigation. ", Government policy. Involvement of multilateral/bilateral agencies: IFC: Almost totally reduces the risk of expropriation and default, Any expropriation would have impact on future flow of development funds, Foreign trustee to keep the sales proceeds, The Govt and Mozambique would benefit from the developmental impact of a successful project, Increasing GDP by 9%, exports by $430M, spurring local business, upgrading and expanding local infrastructure (i.e. "name": "Case examples to value creation", "width": "800" "@type": "ImageObject", Construction cost overruns: reduce equity returns, and DSCR. "@context": "http://schema.org", WB states in its web site that it remains in dialogue with the Chadian authorities, and is determined to safeguard the oil revenues intended for poverty reduction programs included in its original agreement with Chad, while recognizing the fiscal strains currently experienced by the government of Chad. "@context": "http://schema.org", How Does It Create Value?Drawbacks of using Project Finance Value creation by Project Finance Organizational structure Agency costs, debt overhang, risk contamination, risk mitigation Contractual structure Structuring the project contracts to allocate risk, return, and control Governance structure Benefits of debt-based governance Case examples to value creation }, 89 "contentUrl": "https://slideplayer.com/slide/5357710/17/images/17/Value+creation+by+organizational+structure%3A+Agency+Costs.jpg", "width": "800"
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WB considered these changes a breach of contract, and on January, 2006, it suspended new loans and grants to Chad, as well as disbursements under eight ongoing IDA operations in the country. "contentUrl": "https://slideplayer.com/slide/5357710/17/images/125/Recap+-+Type+of+assets%2Fprojects+and+appropriate+method+of+financing%3A.jpg", "@context": "http://schema.org", "@context": "http://schema.org", How experienced are the contractors to handle technological risks? The project is planned to be financed under project financing structure. The suspension automatically freezed the flow of part of Chads oil revenues within the offshore escrow account.
{
Allowances for service \/ upgrade built into equipment supply contracts. Engineering, Procurement, Construction (EPC) Contract) Operation and Maintenance Contracts: Ensures that the operating and maintenance costs stay within budget, and project operates as planned. "description": "How project structure may help: Using corporate finance as the financing method: Benefits: Financially strong enough to support a corporate funding strategy with favorable terms. The market prices had been declining for the last couple of years, and the trend was expected to continue due to the developing scrap market. Major characteristics:Historically formed to finance large-scale projects Industrial projects: mines, pipelines, oil fields Infrastructure projects: toll roads, power plants, telecommunications systems Significant financial, developmental, and social returns Examples of project-financed investments $4bn Chad-Cameroon pipeline project $6bn Iridium global satellite project $1.4bn aluminum smelter in Mozambique 900m A2 Road project in Poland "name": "Post-completion risks and mitigation", But losing the benefit of co-insurance which would come with corporate financing. Acts as a mediator between the governments and sponsors to ensure all issues are addressed and handled properly. "@context": "http://schema.org", "width": "800" "width": "800"
"@context": "http://schema.org", Value creation by contractual structure: Sovereign risks:Solution Political risks: Likelihood of occurrence of political events like wars, labor strikes, terrorism, etc. Project financing and corporate financing alternatives are considered.
"@context": "http://schema.org",
"description": "How project structure may help: Using project finance as the financing method: Benefits: Reducing project\u2019s potential negative impact on the balance sheet: The project was very large and posed too many risks which BP Amoco could not bear alone, meaning a potentially huge negative impact on the balance sheet if financed solely by internal funding. { { debt (Project Finance) SPONSOR + PROJECT Finance jointly with corporate funds (Corporate Finance)", "width": "800" {
Zero Sum (Competitive) versus Positive Sum (Integrative) perspectives. Government Support Agreements: Provisions may include guarantees on usage of public utilities, compensation for expropriation, tax exemptions, and litigation of disputes in an agreed jurisdiction. "description": "The lead sponsor, ExxonMobil had AAA debt rating, very strong balance sheet ($145M assets) and $16M cash flow \uf0e0 Could afford the field investment in a less costly way relative to project financing.
High leverage also reduces accounting profits thereby reducing the potential of local opposition to the company. The sponsors planned to purchase all of the output subject to long-term purchase agreements, but at market prices.
", Careful definition of completion in all the contracts (EPC contract, input supplier contracts, off-taker contract, etc) so that it is acceptable and manageable by all parties involved. Conflicts between sponsors and government: Expropriation through either asset seizure, diversion, or creeping. ", Corporate finance for the development of the field system and project finance for the pipelines, Debate on unstable political structure and how Chad would use its share of project revenues, WBs introduction of Revenue Management Plan to target Chad Governments returns from the project for developmental purposes, and debate on the likelihood of effectiveness of such a plan, The lead sponsor, ExxonMobil had AAA debt rating, very strong balance sheet ($145M assets) and $16M cash flow Could afford the field investment in a less costly way relative to project financing. Post-completion risks: Market risk, supply risk, operating cost risk, and force majeure. "contentUrl": "https://slideplayer.com/slide/5357710/17/images/21/Value+creation+by+organizational+structure%3A+Debt+Overhang.jpg", Involvement of multilateral agencies (WB\/IFC) (structuring legal\/financial documents, mediation in negotiations, sovereign deterrence, halo effect ) Bilateral agencies: Export credits from ECAs (who provide PRI) The private insurance market. Value creation by contractual structure: Contracting and Project Finance to reduce cost of riskGenerally well developed capital, financial, and futures markets may not always be available Special contractual arrangements are often required to manage risk to make projects viable The aim of extensive contracting is to reduce cash flow volatility, increase firm value and debt capacity in a cost-effective way Guarantees and insurance for those risks that cannot be handled through contracting Elements of contracting: General form: Exchange risk (x) for return (y) Additional considerations: Participation or partial transfer of ownership Timing of x and y Contingency of x and y (under what circumstances) Penalties on non-performance Bonus on performance It is very difficult to estimate Beta with the World portfolio. During construction, the supplies such as water, electricity, hydrogen supply and diluent supply will all be contracted to firms owned by the Venezuelan Govt, An independent consultant assessed the project and concluded that the cost estimates are reasonable considering industry standards, Exchange rate risk: Uncertainty regarding the changes in the exchange rate throughout the life of the project, Free floating of the Bolivar against $ may result in appreciation of the currency, leading to increased local costs and tax liabilities.
Major characteristics:Highly leveraged project company with concentrated equity ownership Partly due to firms need for flexibility and excess debt capacity to invest in attractive opportunities whenever they arise Syndicate of banks and/or financial institutions provide debt Typical D/V ratio as high as 70% and above Debt has higher spreads than corporate debt One to three equity sponsors Sponsors provide capital in the form of equity or quasi-equity (subordinated debt) Governing Board comprises of mainly affiliated directors from sponsors "@type": "ImageObject", }. { "@context": "http://schema.org", "contentUrl": "https://slideplayer.com/slide/5357710/17/images/100/Sovereign+risks+and+mitigation.jpg", In December 2005, the National Assembly of Chad amended the country\u2019s Petroleum Revenue Management Law in the following ways*: broadening the definition of priority sectors to include, among other areas, territorial administration and security; and by allowing that further changes in the definition of priority sectors can be made by decree ; eliminating the Future Generations Fund, thus allowing the transfer of more than US$36 million already accumulated there to the general budget increasing from 13.5 % to 30% the share of royalties and dividends that can be allocated to non-priority sectors that are not subject to oversight and control * Chad-Cameroon Pipeline Project, World Bank Web Site", "description": "Temporary stop option if oil price drops. "description": "Solution. The project may be dependent on completion of another project worst type of third party risk especially when the project financing is dependent on it. Recap. What Is Project Finance?Definition Major characteristics Schematic example of a project structure Major project contracts
"@context": "http://schema.org", "@context": "http://schema.org", { "name": "Post-completion risks and mitigation", Force Majeure risk: Likelihood of occurrence of political events like wars, labor strikes, terrorism, or nonpolitical events such as earthquakes, etc.
"@type": "ImageObject", SESSION 19A: PRIVATE COMPANY VALUATION Aswath Damodaran 1. This potentially would have adverse consequences in case the project revenues were utilized to finance non-developmental purposes such as war. One to three equity sponsors. "@type": "ImageObject", "contentUrl": "https://slideplayer.com/slide/5357710/17/images/16/How+Does+It+Create+Value.jpg", "description": "WB involvement also ensured that sponsors did not abandon the project due to huge political risks and looked instead for safer opportunities in other countries, leading to a missed opportunity for Chad. Japanese Government seemed not likely to approve building of a new landing station. "@context": "http://schema.org", Published by
However, , Back-loaded cash flows to Govt may be perceived as unfair and may result in expropriation, Still chances are low, as Govt would not probably want to jeopardize future capital inflows by risking its relations with WB and the rest of the financial community. "width": "800" Financial risks: Leverage risk. "description": "Approaches to calculating the Cost of Capital in Emerging Markets. "contentUrl": "https://slideplayer.com/slide/5357710/17/images/22/Value+creation+by+organizational+structure%3A+Risk+Contamination.jpg", "name": "Case analyses Chad-Cameroon Petroleum Development and Pipeline Project", * Asymmetric information between parties involved. "description": "How project structure may help: A hybrid structure was crafted that combined elements of both project and corporate finance: Project Finance: Calpine project financed a portfolio of plants rather than a single plant. "@type": "ImageObject", Value creation by organizational structure: Agency CostsProblems Structural Solutions: Conflicts between sponsors and other parties (purchasers, suppliers, etc.) "description": "Highly leveraged project company with concentrated equity ownership.
powerpoint templates template professional ppt background mutual fund presentations point power firm formal slide investment agency simple presentation business backgrounds Corporate financing probably also helped save both the costly delays at the development stage of the project and the structuring costs, which would be incurred in project financing.
",
"contentUrl": "https://slideplayer.com/slide/5357710/17/images/94/Pre-completion+risks+and+mitigation.jpg", "@context": "http://schema.org", Venezuela\u2019s historic political and economic instability. "@type": "ImageObject", Gives the cost of capital of an average project in the country in $).
Sovereign risks Political events: Political instabilityRisk of war: not completely eliminated Legal instability Bureaucratic hurdles Underdeveloped infrastructure Unskilled / untrained labor Macroeconomic risks: Currency exposure: Not a major risk as the major inputs and all the output would be denominated in $.
Australia-Japan Cable Structuring a Project Company: The project included a 12,500 km submarine telecommunications system between Australia and Japan via Guam at a cost of $ 520M. Non-recourse debt in an independent entity allocates returns to capital providers without any claim on the sponsor\u2019s balance sheet. Governance structure. "@context": "http://schema.org",
", }, 50 Value creation by contractual structure: An Introduction to Risk ManagementWho bears risk? Financial risks and mitigationPolitical risk insurance: As much as IFC involvement was the critical issue, securing political risk insurance was important as well to provide comfort to potential lenders: Political risk insurance is an instrument to help shift (not mitigate) the political risks (like expropriation, war, breach of contract, or currency inconvertibility) to parties that are best able to bear it PRI providers generally have a more diversified portfolio than banks to absorb these risks PRI providers are more competent in analyzing sovereign risks, whereas commercial banks in analyzing commercial risks A French ECA supporting the use of the French technology was expected to provide 85% insurance for loans from French banks, and IDC was in advance discussions with the South African ECA for insurance for $400 M senior debt The French ECA may be more willing to bear the political risk than banks do because it attaches a higher value to the project in order to be able to export the technology Similarly, the South African ECA may be more willing to bear the political risk than banks do because it attaches a higher value to the project in order to be able to promote the south African exports If project too big for the contractor to handle alone, a joint venture approach with a larger contractor. 2022 SlidePlayer.com Inc. All rights reserved. Valuation of real options. High leverage leaves less on the table to be expropriated. 1 Rudiments of Credit Analysis May 18, 2001 Credit for Bluffers Part I. "name": "Why does structure matter", "@type": "ImageObject", "name": "Value creation by contractual structure: An Introduction to Risk Management", More appropriate approaches to project valuation may include: Usage of non CAPM based discount rates especially for emerging markets investments. "@type": "ImageObject", "name": "Risk Management Identification and mitigation of:", Preserves corporate debt capacity. When creation of an independent entity allows project to obtain tax benefits not available to sponsors. "description": "*C. Harvey\u2019s International Cost of Capital Calculator. Arbitrary adjustments which either over or underestimate risk. "contentUrl": "https://slideplayer.com/slide/5357710/17/images/40/Value+creation+by+contractual+structure%3A+Sovereign+risks%3A.jpg", Some risks can be reduced by spreading the burden across many participants; some other risks cannot be spread, but can be shifted or reallocated Different stakeholders in a project may have different preferences, and hence different willingness and capacity to bear risks Cost of risk is lower to those with greater capacity and willingness to bear risk Risk-return trade-offs may enable integrative (not necessarily competitive) negotiations among different stakeholders and may create value in a project setting Gains in economic efficiency can be achieved if overall cost of risk declines through risk shifting and reallocating: The same risk will have a lower cost if born by parties better capable and willing to do so Revenues, costs, and debt in same currency (indexing if they are not in the same currency) Market-based hedging of currency risks (though not widely used) For protection from a sudden major devaluation, a revolving liquidity facility can be utilized to cover the time lapse between the devaluation and the subsequent increase in inflation that should compensate the project company for debt payments. Value creation by contractual structure: Sovereign risks:Solution Hyperinflation risk: Relative changes in the price of inputs and output may adversely affect the project Indexing the output price (in the long term sales contract) against the CPI and or industry price indices in the host country where the relevant costs are incurred (Indexing means increasing over time against agreed, published economic indices) Expropriation: Direct, diversion, creeping Governments breach of contract and court decisions Government guarantees or regulatory undertakings to cover taxes, royalites, prices, monopolies, etc. ", Project financing also created the opportunity for the pipeline companies (JV between Gov\u2019ts and the sponsors) to issue limited-recourse debt, guaranteed by the sponsors through completion.
"name": "Pre-completion risks and mitigation", { "contentUrl": "https://slideplayer.com/slide/5357710/17/images/44/Value+creation+by+governance+structure%3A.jpg", "@context": "http://schema.org", The Gov\u2019t and Mozambique would benefit from the developmental impact of a successful project.
Post-completion risks. Volume risk: cannot sell entire output. "contentUrl": "https://slideplayer.com/slide/5357710/17/images/55/Case+examples+to+value+creation.jpg", This way counterparty incentives are aligned. Conversely, a likely depreciation of the Bolivar would increase the revenues (in $) against the local operating expenses (in Bolivar) in relative terms. Confusing bond and equity risk premia. "name": "Recap - Type of assets\/projects and appropriate method of financing:", Any expororpiation would jeopardize as well the trade relationships with these countries as they were at the same time Mozambique\u2019s important trade partners. "width": "800" "description": "Background.
The Govt would not want to forego serious amount of revenues in the form of dividends, taxes, royalties. }, 71 "description": "Solution. Contracting and Project Finance Lecture Notes, Program on Project Appraisal and Risk Management, May 16-June , Duke Center for International Development. Also, opportunities for vertical integration may be absent. The Gov\u2019t owns a serious portion of the assets anyway (PDVSA and Maraven as sponsors) Any expropriation attempt may face a retaliation from US where PDVSA has assets (CITGO) Gov\u2019t interests aligned with the project\u2019s success, as Gov\u2019t receives tax and royalty payments, as well as benefits of employment opportunities created and access to the refining technology. If the third party is not otherwise involved in the project, incentive mechanisms to keep the timetable. "@context": "http://schema.org", ", No strong signal inferred from the case as to either of the directions. { Conversely, a failing sponsor can drag a healthy project along with itself. { "description": "Helps uncover the information about the project, as well as sponsors and governments involved, which may not be readily available to lenders. "description": "Supply risk: Uncertainty regarding the availability of the input supplies throughout the life of the project. ", Project financing enabled external monitoring from the lenders. "width": "800" "description": "World CAPM or Multifactor Model (Sharpe-Ross) Segmented\/Integrated (Bekaert-Harvey) Bayesian (Ibbotson Associates) CAPM with Skewness (Harvey-Siddique) Goldman-integrated sovereign yield spread model. Natural resource risk. "description": "Economically and legally independent project company.
"name": "Major project contracts:", Besides, the project structure was designed in such a way to allow for higher interest payments when sales increase, minimizing the cash balances.
The terms of the Input Supply Contract are usually crafted to match those of the Offtake Contract (such as input volume, length of contract, force majeure, etc. Besides, the vertically integrated business model made it a naturally cost-efficient choice for ExxonMobil to hold the assets collectively with corporate financing rather than individually with project financing Corporate financing probably also enabled managerial flexibility and discretion over the use of oil wells, drilling equipment, etc.
{ "contentUrl": "https://slideplayer.com/slide/5357710/17/images/45/2.+How+Does+It+Create+Value.jpg", During construction, the supplies such as water, electricity, hydrogen supply and diluent supply will all be contracted to firms owned by the Venezuelan Govt "@context": "http://schema.org", }, 81 "width": "800" Value creation by contractual structure: Contracting and Project Finance to reduce cost of riskContracting criteria: Contract with lowest cost not necessarily best contract Effective contracts may provide: Better risk shifting: better distributions of cost Better incentives: higher project returns or lower total project risk as a result of incentives Change the incentive structure to change the probabilities of different outcomes stakeholders have incentives to increase probability of success and reduce probability of failure in project Zero Sum (Competitive) versus Positive Sum (Integrative) perspectives Cost focus is implicitly a zero sum perspective: one stakeholder gains and the other stakeholder loses Integrative focus is explicitly a positive sum perspective: By crafting the right contract, one stakeholder can gain without necessarily costing to the other one (due to differences between perceived values, preferences, and risk bearing capacity) contracts that create increased value through risk sharing and /or improved incentives TOPICS 1. "description": "Australia-Japan Cable \u2013 Structuring a Project Company: Background: The project included a 12,500 km submarine telecommunications system between Australia and Japan via Guam at a cost of $ 520M. Partial Risk Guarantees (PRGs), also known as political risk guarantees, cover private lenders and investors against. "contentUrl": "https://slideplayer.com/slide/5357710/17/images/127/Recap+-+Type+of+assets%2Fprojects+and+appropriate+method+of+financing%3A.jpg", The stronger partner is better equipped to negotiate terms with banks than the weaker partner and hence participates in project finance even if it can finance its share via corporate financing Debt may be the only option and project finance the optimal structure. }, 46
Insurance for natural disasters Field development was the less risky part of the entire project for the sponsors, because upstream operations including field development and production was one of the core business areas where they were very strong at. If there is an off-take contract, linking the terms of the output contract with input supply contracts such as the length of contract, volume, or force majeure. Major project contracts. Not a major risk as the major inputs and all the output would be denominated in $. Risk spreading \/ pooling. "description": "Historically formed to finance large-scale projects.
"width": "800" Chad might not gain on an incremental basis due to displacement of existing aid, and yet lose control on its single natural resource, Environmental and social risks mostly remain with Chad, Some adverse impacts are either irreversible or extremely hard to fix, Despite contingency plans, there may be leakages in the pipeline that would go unnoticed for long time, due to limitations of even the most advanced technologies, Less share of the gains in the upside (though balanced with the highest protection from downside risks), Although expected to be a highest priority issue from Chads perspective, the timing of cash flows were not negotiated to the advantage of Chad, Considering the urgent need for funds, the allocation of cash flows should have favored Chad more in the initial years, Compared to the timing of cash allocations for other sponsors, the late allocation might be perceived as unfair and might increase the chances of expropriation, The presence of WB/ECA/IFC along with participation on governments in equity financing significantly reduced political risk exposure, Project might have helped portfolio diversification, Low construction risks (sponsors expertise and reputation in the industry), Low operating risks (positive NPV under most scenarios in Exhibit 5 with different price and reserve levels), Low financial risks, considering the DSCR (as high as 2:1) and low breakeven finding and development costs compared to price, The presence of WB/ECA/IFC in the deal, alignment of Govt interests via equity ownership through project finance structure, the linking of installment of future development funds to Governments compliance to the RMP significantly reduced political risk exposure. 
