Lecture 01 (S1-2012)

ENGG2850 Introduction to Project Finance

Week 1 An introduction to Introduction to Project Finance

Dr. Michael Harr

Introduction to Project Finance

Course reading material:

Principles of Project Finance, E.R. Yescombe

Modern Project Finance: A Case Book, B.C. Esty

Course assessment: (you will need a calculator for all quizzes, tutorials and the exam)

Three quizzes 20% for the best 2 out of 3, held at the beginning of the lecture based on the previous lectures, only the previous untested material will be in each quiz.

Group Project 30%: 80% based on the presentation of group work, 20% based on written submission

Exam 50%

Contacting me

Room 338A, Building J05

Office hours 9:00am-10:00am Monday, Wednesday [email protected]

Tutorials: You will need to attend to pass the course, Microsoft Excel and theory based examples covered that will be a part of the final exam

I will ask questions during class!! Be ready to participate ....

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Project Finance and this course.


Course Outline, 13 weeks of lectures, Case Study based learning of principles:

1.Introduction to the course: Preliminary ideas and motivations (No tutorial)

2.Project Finance: The foundation principles of Project Finance and an overview (Tute 1: Aus Japan Cable)

3.Time-Money relationship: Why is money worth more now than in the future? (Tute 2: TV of M)

4.Case Study of the Time-Money relationship: A toy company example (Tute 3: HSR toy case study)

5.Structure Projects (1st Quiz) (Tute 4: Nam Theun 2)

6.Case Study for Structure Projects (Tute 5: BP Amoco [A])

7.Valuing Projects (guest speaker) (Tute 6: Connecting TV of M with Project Finance structure)

8.Case Study for Valuing Projects (2nd Quiz) (Tute 7: Bidding for Antamina)

9.Managing Risky Projects (guest speaker) (Tute 8: Simple Analysis of risk + risk matrix)

10.Case Study for Risky Projects (Tute 9: Polands A2 Motorway)

11.Legal Considerations of Contracts in Project Finance (3rd Quiz) (Tute 10: BP Amoco [B])

12.Bringing it all together: How do we conceptualise and understand Project Finance?

13.General discussion: Summary of material, open question time, exam preparation questions

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Project finance is a method for raising long-term debt financing for major projects through financial engineering, based on lending against the cashflow generated by the project alone.


The important ideas contained in this definition:

- Major Project

- Long term

- Debt financing

- Lending against future cashflow

The Big Goal of this course is to understand this definition and to gain a fundamental grasp of its application through case studies.

We will study Project Management through the use of the Project Finance framework, the understanding we gain will be useful in all areas of Project Management.

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What background do each of us have?

- Me: Corporate risk and now complex systems research

- Anyone else?

- What level of mathematics knowledge do we have in this class?

- Anyone done very much financial modelling or analysis? Been involved in large projects?

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What background do each of us have?

- Me: Corporate risk and now complex systems research

- Anyone else?

- What level of mathematics knowledge do we have in this class?

- Anyone done very much financial modelling or analysis? Been involved in large projects?

Who thinks they understand what the definition at the top of the page means?

My suggestions might include: Understanding debt and cashflow

It suggests the project is a separate entity

It suggests there is something unusual about the projects involved

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This is a new Unit of Study being offered this year, so what do you expect to gain from it?

What would help you most in sitting this course?

This course will provide a financial, legal and organisational perspective on projects, as seen from the point of view of Project Finance

In the background are the technical and engineering innovations that make these projects feasible.

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www.picstopin.com environmentalengineeringjobs.org www.bikes.com.au


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Where do we use project finance?


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Some facts and figures regarding Project Finance

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0.00

20,000.00

40,000.00

60,000.00

80,000.00

100,000.00

120,000.00

140,000.00

160,000.00

1996 1997 1998 1999 2000 2001

Mining

Industry

Petrochemicals

Real Estate and Leisure

Oil and Gas

Infrastructure

Telecoms

Power


Global Project Finance, $millions

E.R. Yescombe: Principles of Project Finance


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0.00

1,000.00

2,000.00

3,000.00

4,000.00

5,000.00

6,000.00

7,000.00

8,000.00

9,000.00

Top 10 Global Financing Projects League Table First half 2012 [$ value (mill)]

0.00

50.00

100.00

150.00

200.00

250.00

300.00

350.00

400.00

Average deal size First half 2012 [$ value (mill)]

http://www.projectfinancemagazine.com/Article/3123574/Type-League-Tables/Dealogic-Half-Year-League-Tables-2012-Tables.html

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http://www.eib.org/epec/resources/presentations/psf-06062012-presentationnotes-cdp.pdf


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Global Project Finance Debt Market


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Note: The 2008 - ongoing financial crisis has little impact


1. Euro-Disneyland: A European theme park and resort concept developed by Walt Disney Co. (1989, 14 billion French Francs)

2. The EuroTunnel: A tunnel beneath the English Channel connecting England and France (1989, 4.8 billion)

3. The Tribasa Toll Road Project: A toll road project in Mexico (1993, $110 million)

4. The Indiantown Cogeneration Project: A coal fired cogeneration facility in Florida, USA (1994, US$630 million)

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Some projects requiring Project Finance


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A concept drawing for a tunnel between England and France, 1856

http://en.wikipedia.org/wiki/Channel_Tunnel

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The Euro-Tunnel between England and France, geological profile (Chalk marl is apparently the best tunnelling medium)

http://en.wikipedia.org/wiki/Channel_Tunnel

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One of the Euro-Tunnel diggers used to excavate the tunnel (Diameter = 8.8m )

http://www.tunneltalk.com/First-use-in-tunnelling-of-a-vacuum-segment-erector.php

A basic schematic for project financing

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Assets comprising the project

Sup

plie

rs

Equity funds

Equity investors

Returns to investors

Lenders

Loans Loan repayment interest + capital

Purchasers

Purchase contracts

Output Supply contracts

Raw materials


Contract awarded in June 2008, tunnel opened July 2012

Project: A tolled motorway link (M7) between the Brisbane Central Business District and the East-West arterial link that leads to Brisbane Airport

Run by: BrisConnections, a consortia of the Macquarie Group, Thiess and John Holland

Estimated Cost to build: $4.8 $5.6 billion

Revenue stream: Tolls from users, initially $2.00 to $2.50

but increasing to $4.90 over time

Major issue: How many cars are expected to use it?

First week average: 77,320 /day

Currently: approx. 53,000 /day

Original estimate (Arup): 135,000 /day and 291,000 /day by 2026

Alternative estimate (Veitch Lister Consulting): 60,000 /day as tolls increase

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An example: Airport Link in Brisbane


http://www.theaustralian.com.au/business/companies/mac-takes-on-more-brisconnections-debt/story-fn91v9q3-1226530047063 http://www.brisbanetimes.com.au/queensland/toll-rises-will-halve-airport-link-tunnel-usage-20120720-22g1l.html http://www.brisbanetimes.com.au/business/airport-link-will-miss-forecasts-20120628-21594.html http://www.heraldsun.com.au/news/national/brisbanes-airport-link-reveals-patronage-figures-for-first-week/story-fndo45r1-1226441146765

So what are the key aspects affecting investor value in this project?

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Large initial cost to build, four years to complete with no revenue coming in

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Insufficient revenue coming in from tolls once the project was completed

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Loss of value to investors in BrisConnections

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Loss of value to investors in BrisConnections

$3.00 /share in 2008

$0.40 /share in 2013

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These are the basic issues for all of Project Finance


Costs tend to decrease over the life of the project:

Ann

ual C

osts

Time

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Costs tend to decrease over the life of the project:

While revenue tends to increase over the life of the project:

Ann

ual C

osts

Time

Ann

ual I

ncom

e

Time

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Net revenue tends to decrease (hopefully!) over the life of the project:

Ann

ual C

osts

/Rev

enue

Time

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Ann

ual C

osts

/Rev

enue

Time

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Ann

ual C

osts

/Rev

enue

Time

In the red (net loss)

In the black (net profit)

In this course you will learn to model these financial situations in order to understand income from projects, risk, financial obligations and contracts, and many other aspects.

Good luck and dont forget to ask questions!!

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A basic schematic for project financing


Lecture 01 (S1-2012)

Documents

project finance structure

project finance week

project finance framework

project finance course

group project

areas of project management

structure projects tute

quiz tute