Project Finance for Business Development

JOHN E. TRIANTIS is a retired business consulting economist and former Managing Director of Long Range Planning Associates. He has been a business strategist and strategic decision advisor with a track record of introducing effective processes and practices to strategic project decision making, as well as an experienced business development project leader and a trusted advisor in large investment, international infrastructure financing, and organizational restructuring projects.

Preface xiii

Acknowledgments xvii

About the Author xix

Chapter 1 Introduction: Why Project Finance for Business Development? 1

1.1 Origins of Project Finance 5

1.2 Project Finance Advantages and Disadvantages 6

1.3 Corporate and Structured Versus Project Finance 7

1.4 The Project Finance Market 8

1.5 Why a Business Development Approach to Project Finance? 10

1.6 Structure of the Book 13

1.7 Use of the Book to Maximize Benefit 16

Chapter 2 Overview of Project Finance: The Nature of the Beast 19

2.1 Project Taxonomy 22

2.2 Project Finance Phases 23

2.3 Key Elements of Project Finance 25

2.4 Ownership and Financing Structure Considerations 27

2.5 Primary Project Finance Activities 29

2.6 Common Misconceptions and Myths 32

Chapter 3 The Record of Project Finance: Lessons to Avoid Failures 35

3.1 The Record of Project Finance Deals 37

3.2 Reasons for Project Failures 40

3.3 Lessons Learned 56

Chapter 4 Project Financing Processes: Roadmaps for Successful Financing 61

4.1 Variants of Project Financing Processes 63

4.2 Nature of Project Financing Processes 66

4.3 Activities in Project Finance Processes 68

4.4 Milestones of Project Finance Processes 73

4.5 Successful Project Finance Process Characteristics 75

Chapter 5 Project Finance Organizations: Built for Competitive Advantage 79

5.1 The Need for PFOs 81

5.2 Business Definition of PFOs 82

5.3 PFO Skills and Qualifications 98

5.4 PFO Challenges 102

5.5 PFO Performance Evaluation Measures 107

5.6 Characteristics of Successful PFOs 108

Chapter 6 Project Development: Viability and Financeability Essentials 113

6.1 Project Development Prerequisites 116

6.2 Prefeasibility Assessment 117

6.3 Project Definition 118

6.4 Technical Design and Assessment 119

6.5 Feasibility Study 120

6.6 Due Diligence 122

6.7 Project and Financial Structures 124

6.8 Agreements and Negotiations 126

6.9 Project Marketing and Raising Financing 128

6.10 Development Costs and Success Factors 130

Chapter 7 Participants and Responsibilities: Activities and Deliverables 133

7.1 Roles of the Project Team 136

7.2 Roles of the Host Government 137

7.3 Roles of Project Sponsors 138

7.4 Roles of the Project Company 140

7.5 Roles of the Lenders 140

7.6 Roles of Advisors, Consultants, and Insurers 142

7.7 Roles of Multilateral and Unilateral Institutions 148

7.8 Roles of the EPC Contractor 150

7.9 Roles of Technology and Equipment Providers 151

7.10 Roles of Project Offtakers and Suppliers 152

7.11 Roles of the O&M Company 153

Chapter 8 Project Finance Forecasting: Ensuring Sound Decision Making 155

8.1 What Is a Good Forecast? 157

8.2 What to Forecast and Sources of Forecasts 159

8.3 Forecast Assumptions 161

8.4 Project Forecasting Process 163

8.5 Project Demand Analysis 170

8.6 Forecasting Methods and Techniques 172

8.7 Forecast Sanity Checks 179

8.8 Causes and Consequences of Forecast Failures 180

8.9 Forecast Monitoring and Realization Planning 182

Chapter 9 Project Contracts and Agreements: Critical to Project Finance 185

9.1 Structure, Prerequisites, and Costs of Contracts 188

9.2 Contract Development and Negotiation Process 189

9.3 Common Project Finance Contracts 191

9.4 Challenges of Project Finance Contracts 195

9.5 Project Contract Success Factors 197

Chapter 10 Project Risk Management: Crucial for Project Success 199

10.1 Objectives and Importance of Risk Management 200

10.2 Types of Project Risks 202

10.3 Sources of Project Risks 207

10.4 Risk Management Undertakings 209

10.5 Risk Management Process 210

10.6 Risk Management Instruments and Mitigants 214

10.7 Risk Management Benefits, Challenges and Success Factors 220

Chapter 11 Project Due Diligence: A Pillar of Viability and Financeability 225

11.1 Due Diligence Costs and Benefits 227

11.2 Host Country and Industry Due Diligence 230

11.3 Technical Due Diligence 231

11.4 Environmental Due Diligence 232

11.5 Commercial Due Diligence 233

11.6 Legal Due Diligence 234

11.7 Financial Due Diligence 235

11.8 Operational Due Diligence 237

11.9 Risk Management Due Diligence 239

11.10 General Areas of Due Diligence 240

11.11 Report, Assessment, and Quality Characteristics 241

Chapter 12 Funding Sources and Programs: Essential Knowledge and Alliances 245

12.1 Official Project Finance Sources 247

12.2 Private Sources and Instruments 255

12.3 Benefits of Official Funding Source Participation 260

Chapter 13 Structuring Project Finance: How Everything Comes Together 263

13.1 Elements of Project Financing Structuring 266

13.2 Equity and Debt Investor Requirements 268

13.3 Decisions from SPC Ownership to Financing Structure 270

13.4 Determinants of Project Financing 277

13.5 Amalgamation of Financing 279

Chapter 14 Project Financial Model: Assessing and Testing Financeability 283

14.1 Uses of the Financial Model 286

14.2 Financial Model Inputs 288

14.3 Financial Model Calculations and Outputs 290

14.4 Properties of Good Project Financial Models 294

Chapter 15 Trends Impacting Project Finance: Opportunities and Threats 299

15.1 Major Relevant Megatrends 302

15.2 Megatrend Sources and Characteristics 304

15.3 Demographic Trends 305

15.4 Technology and Industry Trends 307

15.5 Trends Impacting the Government Sector 308

15.6 Trends Impacting Sponsors and Investors 310

15.7 Trends Impacting Funding Sources and Financing 311

15.8 Analysis of Trends and Their Impact 313

Chapter 16 Project Finance: A Source of Competitive Advantage? 319

16.1 Sources of Competitive Advantage 322

16.2 Manifestations of Competitive Advantage 323

16.3 Creating Competitive Advantage 326

16.4 Competitive Advantage Reality Check 330

Appendix A Common Project Finance Abbreviations 339

Appendix B Commonly Used Project Finance Definitions 343

Bibliography 353

Index 359