Financing Projects/Project Finance

UNIVERSITY OF LUSAKA

FINANCING PROJECTS/PROJECT FINANCE

COURSE OUTLINE

Objectives:After successful completion of this course, the students should be able to:

• Demonstrate an understanding of the role of project finance in project management;
• Demonstrate the ability to differentiate between the main types of project financing;
• Demonstrate an understanding of modern project financing;
• Demonstrate an understanding of the roles and responsibilities of the role players in

project finance;

• Demonstrate an understanding how to analyse the framework for modern project

Finance;

• Demonstrate an understanding how to explain conventional project financing

Methods;

• Demonstrate an understanding of the relationship between project financing and risk

Management;

• Demonstrate an understanding how to identify and differentiate between the

methods of project finance; and

• Demonstrate an understanding of the different ways of managing project finance

effectively.

Contents:

Project Finance Background

a) Evolution of project finance

b) Project Types

c) Critical steps in a project

Project finance participants and their roles

a)Project Sponsor

b) Project Company

c) Borrowing Entity

d)Commercial Lender

[1] Arranging Bank

[2] Managing Bank

[3] Agent Bank

[4] Engineering Bank

[5] Security Agent

e)Bondholders

f)International (Multilateral) Agencies

g)Bilateral Agencies

h)Rating Agency

i)Supplier

j)Output Purchaser

k)Contractor

l)Operator

m)Financial Advisor

n)Technical Consultants

o)Project Finance Lawyers

p)Local Lawyers

q)Host Government

r)Insurers

Selecting the project finance ownership structure

Determining the Structure to Use

[I] Need for Leverage

[2] Grade of Investment

[3] Tax Laws and Treaties

[4] Project Management

[5] Accounting Treatment and Objectives

[6] Lender Preferences

[7] Transferability of Equity Interests

Estimating Cost of Project

a) Project specifications

b) Estimating Fixed Capital Investment in Project

c) Estimating working capital investment in the project

Project Feasibility Analysis

a) Background

b) Net Present Value (NPV)

c) Profit v/s Cash Flow

d) Discount Rate

e) Tax-Shield on Interest

f) Tax-Shield on depreciation

g) Internal Rate of Return (IRR)

j) Project IRR and Equity IRR

k) Payback Period

l) Discounted payback period

Financial Projections

a) Background

b) Assumptions

c) Cost of Project & Means of Financing

d) Projected Profit & Loss Account

e) Projected Balance Sheet

f) Projected Funds Flow

g) Project IRR

h) Equity IRR

i) Loan Servicing Capability: (i) Interest Coverage Ratio (ICR) (ii) Debt Service

Coverage Ratio (DSCR) (iii) Long Term Debt Service Coverage Ratio (LDR)

j) Sensitivity Analysis

Project Finance and their Sources

a) Prudence in Mix of Long Term and Short Term Finance

b) Forms of Long Term Project Finance

c) Forms of Short Term Project Finance

d) Lease

e) Role of Non-Banking Finance Companies (NBFC)

f) Loan Documentation

The Role of Advisors in a Project Finance Deal

a)The role of financial advisers

Project Risks and their mitigation

a) Background

b) Project Conceptualisation Risk

c) Financial Closure Risk

d) Project Construction Risk

e) Political Risk

f) Market Risk

g) Supply Chain Risk

h) Policy Risk

i) Exchange Risk

j) Environmental Risk

k) Force Majeure

Recommended reading:

1.0Project Finance in theory and practice, Stefan Gatti

Other Reference text:

(1)Yescombe, E. R., Principles of Project Finance, Academic Press, 2002

• Assessment Criteria:

Test and Assignments 40%

Final Examination 60%

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