Week 1

Q1- What are the key features of Project Finance that distinguishes it from other forms of Financing?

The key features of Project Finance that distinguishes it from other forms of Financing are:
 In Project Finance SPV is set up by Sponsors. Lenders provide loan to SPV (the borrower). While
in Corporate Finance Lenders provide loan directly to the borrower or company.
 In Project Finance lenders have full recourse to the cash flows of the SPV and there is no or
limited recourse to project sponsors, and the debt is not to the balance sheet of the sponsors.
While in Corporate Finance lenders have full recourse to the balance sheet of the
borrower/company.
 In Project Finance lenders will typically have security over the SPV assets whereas in Corporate
Finance lenders are typically unsecured.
 project debt and equity used to finance the project are paid back from the cash flows generated
by the project. the lender use project’s future cash flow as the source of repayment of their loans.

Q2 - Why would businesses consider the use of project finance in a proposed project? What are the
alternatives?

可以从 rationale of project finance 以及 advantage of project finance 来回答。

 eliminate or reduce the lender’s recourse to the sponsors
 permit an off-balance sheet treatment of the debt financing
 maximize the leverage of a project
 avoid negative impact of a project on the credit standing of the sponsors
 obtain better financial conditions when the credit risk of the project is better than the credit standing of
the sponsors
 allow lenders to appraise the project on a segregated and stand-alone basis
 obtain a better tax treatment for the project, the sponsors, or both balance sheet, business to get the
large project. no recourse.

The alternatives are using BANK FINANCE (borrow money from bank loan), IPO (issue stock on public
market to raise money), ISSUE BONDS (issue debts on public market). Equity Capital (the parent company
inject equity capital)

Q3 - Would a listed company’s share price go up, down, or stay the same if it announces it banks
decision will use project finance for a proposed new project?

可以结合以下答案以及 RATIONAL OF PROJECT FINANCE FOR SPONSOR 来回答

The price will go up since many investors will think it is good news. Once a company announces to use project
financing, the project always has positive NPV based on the feasibility analysis, business case, due diligence
and banks decision. And project finance would share risk with counterparties, and benefit for off-balance and
limited recourse, the parent company would bear commensurate risk. Since positive NPV and low risk and low
capital cost can bring profit to the company, investors will be happy, so the demand will increase so as the
price.
Q4 – Who is the main parties to a project financing?

Primary: SPV, Sponsor, lender, off taker; Contractor (EPC and O&M), feedstock supplier, government,
arranger/procurers, advisor

Q5 - What is the main rationale for using project finance, in the case of (i) Sponsors, (ii) Lenders, and
(iii) Governments?

回答用 Rational for project sponsor by different roles.

Exam questions
2015 Exam Question

In order to ensure a project is completed, banks require loans to be ‘recourse’ to the sponsors during
construction phase. Only once the project has reached a ‘certain point’ does it become ‘non-recourse’ to
the sponsors.

a) What is meant by ‘recourse’ and ‘non-recourse’ loans?

Recourse loans
A type of loan that allows a lender to seek financial damages if the borrower fails to pay the liability, and if the
value of the underlying asset is not enough to cover it. A recourse loan allows the lender to go after the debtor's
assets that were not used as loan collateral in case of default.

Non-recourse loans
A non-recourse debt is a type of loan secured by collateral, which is usually property. If the borrower defaults,
the issuer can seize the collateral but cannot seek out the borrower for any further compensation, even if the
collateral does not cover the full value of the defaulted amount. This is one instance where the borrower does
not have personal liability for the loan.

b) Why do banks initially require ‘recourse’ loans? Why do sponsors prefer ‘non-recourse’ loans?

Debt is repaid only from cash flows generated from the operations of the project, the lender only want to bear
operation risk, not construction risk. and debt is typically secured by the project’s assets (including revenue
producing contracts), in other word, is secured by SPV’s assets, but SPV does not have much assets, so the
banks initially require sponsors to bear risk in construction period.

Because when non-recourse, the sponsors do not need to repay the loan. Because non-recourse borrowing does
not in any way affect its credit standing or balance sheet and banks rely solely on cash flow of project and not
sponsors balance sheet reliable for repayment of debt. When incorporated, there will be noredress to sponsors.
Appear to be equity at risk, no impact on financial ratios of sponsors and totally off balance sheet for the
sponsors.
c) What is the ‘certain point’ at which the financing of a project becomes non-recourse? Provide and
explain two examples in relation to reaching this point.

回答应该更详细点，什么是 completion test，三个不同的 completion test，并付例子解释。

That point is called completion test.
1. continuous operations for “x” consecutive months
2. (90%) of designed production / throughput achieved / delivered

Week 2

1. Identify some of the main costs of a large-scale project. How are they estimated?

结合下面的答案以及 CASH COST 内容回答，NON-CASH 提一下就好

project costs will usually comprise some or all of the following items:

1. Land and site development

2. Production facility / factory building, etc.
3. Plant and machinery
4. Other fixed assets
5. Technical know-how, engineering and consulting fees
6. Provision for contingencies
7. Interest during construction
8. Preliminary / pre-operative expenses (e.g. permits)
9. Margin money for working capital

cash cost: identify cost categories; gather cost data; adjust costs to local condition.

non-cash: risk mitigation process.

Cost estimates may be derived through the following steps:

a. Identify Direct Cost Categories: the construction scenario is broken down into cost categories

b. Gather cost data: unit costs must be assessed for each of the cost category identified; a unit cost list can be
drawn from various data sources (market survey, statistical collection, etc.) or from direct consultation with
providers; cost studies conducted for similar projects can also be used
c. Adjust costs to local conditions: where applicable, cost data must be adjusted to take into account local
conditions, including timing (costs estimated in past years must be escalated to account for inflation), local
market conditions, etc.

d. estimation of financing costs and guarantees, etc. can be done with the assistance of the financiers and
advisers

feasibility, buildings and equipment. the tangible things.

2. Discuss the different forms of equity capital that can be used in project financing. Identify
circumstances to which these different forms of equity would be suited.

sponsor own funds, which is cash; Non-sponsor equity investment (IPO, placement…) the private
placement usually with associates. the IPO, where the SPV will become a listed entity, raising equity
from the public.

3. What is a Letter of Credit facility? In what circumstances would it be used in project financing?
What are its advantages and disadvantages?

it is a guarantee of payment issued by the bank on behalf of a client that is used to payment of last
resort should the client fail to fulfil a contractual commitment with a third party.

Letter of Credit is used in international dealings due to factors such as distance, different laws in each
country, and difficulty in knowing each party personally. trust issue/ the bank will have the specific
policy to say what they can do and what they can’t do.

Advantages of Letter of Credit are:

a- Ability to transact with unknown partners
b- Highly customisable
c- Safer for seller or exporter
d- Quick to execute
Disadvantages of Letter of Credit:
a- Adds cost of doing business. (1-8% of amount financed) expensive
b- Documentation and formalities are more in LC
c- LC carries forex risk
d- Expiration date and must be used before that
e- trust issue

4. Describe the roles of both financial advisers and lead managers in project financing.
Roles of Financial Advisers are:
a- Advising on the optimum financial structure for the project.
b- Assisting in the preparation of a financial plan
c- Advising on sources of debt and likely financing terms
d- Assisting in preparing a financial model for the project
e- Advising on the financing implications of project contracts and assisting in their negotiation
f- Preparing an information memorandum to present the project to the financial markets
g- Advising on assessing proposals for financing
h- Advising on selection of commercial bank lenders or placement of bonds
 i- Assisting in negotiation of financing documentation

Roles of Lead managers are:

underwrite the debt and place it in the market – i.e. organise syndication of the loan

5. Discuss the pros and cons of up-front project financing with bonds as opposed to bank syndicate
borrowing.
Pros:
a- Low pricing at fixed rates
b- Longer terms to maturity
c- Tapping new debt capacity
d- The rating process brings some measure of political protection and risk mitigation
e- can be a major public relations exercise for the sponsors and / or host country
eg, can open markets for other financings, improve corporate credit rating, etc

Cons:
a- Lump sum drawdown often creates negative carry on cash
b- Costs fees to get/maintain credit ratings
c- Extensive public disclosure of proprietary information
d- Not easy to prepay and refinance bonds
e- bond markets can shut with little / no notice

on the up-front PF, the bond has lower pricing at fixed rate, longer term to maturity, less pressure in
the FCF, bring some measure of political protection and risk migration. But, interest spread, extensive
public disclosure of proprietary infor….

But the bank syndicate borrowing is combined with many banks, which mainly has three
characteristics: the large size of project needs sufficient fund; in PF, the degree of complex securities
arrangement is sophistication; the difficulties and time delays involved in registering securities with
government.

6. How might sponsors maximise the debt financing outcome?

the refinanced is the replacement or renegotiation of the original long-term debt of the project
company on more favourable terms. it will reduce the debt interest, increase the debt amount to equity.
remove the negative covenants…
borrowing from the lender

7. Describe Export Credit Agencies and Multilateral Agencies and discuss their roles in project
financing.

Export Credit Agencies- ECAs exist to promote the export of equipment manufactured within the home
country and have been willing to be involved in project financing for this purpose.

Roles
a- Provide direct loans to a project b-Provide credit enhancement by way of loan guarantees

c- Provides insurance and related service d - Example- Exim Bank

Multilateral Agencies-

Multilateral agencies are aid agencies whose mandate is to provide regional and international development aid
or assistance, divided between national and international organisations.

Roles:

1- To promote institutional, legal and regulatory reform

2- To promote private sector development

3- To reduce political investment risk

Exam questions

You are about to commence work as a financial advisor on a wind power generation project and have
been told that the total project cost will be $1.5 billion. Identify and explain six major projects costs that
you would expect to find include in the budget.

Week 3

1. what is the role of Risk Assessment matrix in project financing?

it is a tool to identify the risk’s likelihood and seriousness. it will be clear to discuss between the SPV
and lender. it will help lender to focus on the different risk in the project.
Risk assessment sets out the degrees of likelihood of a risk occurring and an estimate of seriousness of
each risk. SPV will prepare the risk assessment and it will be prepared to and discussed with lenders.
This will help the project in transferring the risk and properly mitigating the risk by proper techniques.

2. What is the significance of completion in a project? What is the difference between completion,
completion risk and completion tests?
completion is the special point for stakeholders, the project will finish the construction. the project
goes no recourse. No recourse to sponsor, full resource to SPV. It includes three types: physical,
 mechanical, and financial. After this point, many risk or issues will change.

• Completion Risk (Sponsors/SPV):

Completion risk (Construction or development risk) is the risk that the project structure is not
completed.
• Completion risk factors:
a- Site acquisition and access
b- Permits
c- Risk relating to EPC contractors
d- Construction cost overrun
e- Delays in completion
f- Third-Party risks
• Completion types:
a- Physical completion: Project is physically completed according to technical design criteria
basic requirement
b- Mechanical completion: Project can sustain production at a specified capacity for a certain
period of time
c- Financial completion: Project can produce under a certain unit cost for a certain period of
time.

Completion is relating the end of construction, which has three types.

Completion risk called construction or cost-overrun risk. it is the risk in the first part. It is inherent in
the construction process. Completion risk will stop until the completion test.

Completion tests: Lenders seek to structure an objective completion test that when satisfied, provides
evidence that the project forecast is solid and can be met. At this point project commences its non-
recourse status.
Completion test is expensive and complex. there are many test matrix or performance in completion
test. Different project will have different completion test factors.

3. Identify and describe different types of completions tests, suggesting appropriate circumstances
in which specific tests would be used.
– continuous operations for “x” consecutive months
– (90%) of designed production / throughput achieved / delivered
– reserve life greater than “x” years (if a resources development)
– achieve a defined operating cost per unit
– on specified product(s) or output(s) – amount or type
– sales completion test (an agreed level of sales has been met)
– present values of cash flows greater than (e.g.) 150% of loan outstanding – financial covenants on
working capital, debt, equity, net worth, are satisfied
– minimum product quality/quantity outcomes/efficiencies
physical is the based, no test. how the customer be satisfied.

4. At what stage of project life cycle do: (1) operation risk (2) completion risk (3) engineering risk,
arise?
a-Operational risks – Third stage – Operations
b-Completion Risk- Second Stage – Construction
c-Engineering Risk- Second Stage- Construction

5. What possible types of exposures would be categorised as: (i) environment risk; and (ii) social
risk?
a- Environmental Risks: Pollution, deforestation, habitat destruction, GHG emission
 b- Social Risks: Social Risk arises when there is a real or perceived adverse impact of a project
on the local population or groups of people. Like Strikes, Sabotage, pressure on local
governments to act against the project

Week 4
1. Discuss the key risk mitigation categories, providing an example of each.
The broad risk structuring categories are:
1- Contracts: Contracts are agreed rights and obligations between two or more parties. Example:
Bonus on performance
2- Trigger: Trigger events are mainly financial ratios. If a company does not meet up the
financial ratios then the funds will be locked up.
Example: Company should have current ratios of 2:1
3- Financed: Financing means that additional funds will be available if the need of them arises.
Example: Stand by equity.
4- Study: Study means that when market risk cannot be contracted readily the project have to
rely on studies and market projections
Example: Cross city tunnels estimated traffic was 90,000 vehicles per day; actual was 30,000 per day.
5- Avoided: It means when actions are taken place in order to avoid a risk.
Example: Project design modified for risk mitigation

2. What is a guarantee? Discuss the different types of guarantee used in Project Finance and
suggest reasons for their use.
A2- Guarantee are credit enhancement devices. A formal assurance (typically in writing) that certain
conditions will be fulfilled, especially that a product will be repaired or replaced if not of a specified
quality.
The different types of guarantee that are used in Project Finance are:
1- Large multilateral organisations and regional development banks provide guarantees for
projects.
2- ECAs and MLAs mitigate financial and political risk by issuing guarantees
3- Sponsor company is the guarantor is the early stages of construction
4- Contractors usually guarantee project completion either by performance bonds or payment
bonds

3. Describe different risk mitigation techniques that may be used in (i) a natural resource; (ii) a toll
road project; and (iii) a power plant project, in controlling (a) engineering risk; (b) completion
risk; and (c) market risk
offtaker,
(b) completion risk: overrun and enough money, guarantee this thing.

4. What are the Equator Principles ? Who do they apply to and what is their impact on Project
Financing?
Equator Principles is a risk management framework adopted by financial institutions for determining,
assessing and managing environmental and social risk in projects. They are primarily intended to
provide a minimum standard for due diligence to support responsible risk decision-making.

EP applies to all industry sectors and to four financial products:

1- Project Finance Advisory Services
2- Project Finance
3- Project-Related-Corporate Loans
4- Bridge Loans
 Impact on project financing
• EPFI’s commit to implementing the EP in their internal policies, procedures and standards for
financing projects
• They will not provide Project Finance or Project-Related Corporate Loans to projects where
the client will not, or is unable to, comply with the EP

standard to mitigate the environment risk. Apply in the project SPV.

Impact, meet the environment standard, (high standard).

5. How might market risk be mitigated if long-term offtake contracts cannot be obtained?
1- Advanced Sales
2- Deficiency Agreements
3- Buy-Back Clause
4- Merchant/Supplier financing
5- Throughput agreements

6. What is the best way to mitigate operating risk?

Technical- Technology Guarantee
Cost- Cost Curve
Management- Management Agreements

three element, 1- focus on the management, indicate some technical.

Week 5

1. in the Petrozuata case, identify and explain the key factor that enable the sponsor to obtain a
large portion of the project financing by way of publicly issued bonds.
Both US multinational, Conoco and Petroleos de Venezuela S.A. (PdVSA), the state-owned national
oil company invest a significant equity totally USD950m (of USD2.4b total project budget) which
leads to obtain an investment grade rating, which lowered the cost of funds significantly
Also cause of offtake contracts to mitigate quantity market risk, banks responded to project finance
offer with $5b in bids, i.e. indicative lending offers (total across lenders).
With this available bank debt, the sponsors were able to do a ‘road show’ for the purpose of raising
public debt.
Because of a favourable response in bond market, they raised more than expected from there and
needed less bank debt. SPV’s creating rating

2. what benefits apart from equity contribution were provided by Telstra’s partners in the AJC
project?
lending station, offtaker, experience, offtake is the solution to solve the sale problem.
• Telstra held 40% of SPV; other sponsors:– Japan Telecom and NTT Comm - industry leaders
in Japan – Teleglobe - Canadian carrier– AT&T - industry leaders in US
• reasons for choice of these ‘strategic’ partners
o compatibility both at company and ‘personal’ level
o gave credibility to project for raising bank debt
 fewer financial and operating covenants from banks
o financially strong investors as well as capacity buyers
o simplify management of the project (experienced)
o leveraging on existing assets of each sponsor (e.g. landing stations) to reduce project costs
and meet timelines
 3. why do toll road projects such as RiverCity Motorway rely on traffic studies? How might the
risk of these studies being wrong be mitigated?
effect the offtake contract. // haven’t touch the real, pull down the project in conserved reason,
the project will not be economic, it will not be done, government might think it is ridiculous.
push the number back out.
 Because the toll roll project is hard to have the offtake contract to mitigate the market risk. and
therefore, for ensuring the future cash flow can be generated to cover the debt, the traffic studies are
needed to do the financial feasibility study and to raise the debt.
 The road traffic doesn’t keep growing forever. these studies are complex and need assumption data to
support. key assumptions including the population growth, salary, human behaviours, competition,
future development around the area… and so on. and these are subject to the subjective judgement,
and therefore, it’s easy to forecast wrong.

4. How did the main lenders exit from the RiverCity Motor project?
they sold the debt// practice decision: cost more, push guys and get the money back, cut out lose and
get something back.

5. If you were preparing the feasibility study for the study for the Dahbol project, what would have
been the two most important risk that you would have identified up-front.
cost risk, cost cove…why we go this way// political risk (climate of the time of investment),
operation risk, revenue risk…
• Market risk(offtake)
Concern when do you be able to sell it all. Even you think you got a right off taker, it will still be a
risk.

• Political risk
You are operating in a foreign country; political risk is a big problem. Because India is a developing
country, and the laws or regulation rules are very likely to change in the near future with the
development of the country. It is probable that the project or the contracts might violate the new
regulations. The project may be cut off by the new government.

6. How did the sponsor deal with social risk in the Dabhol project?
they didn’t really.

Week 6

1. what are the different legal forms that a project SPV can take? Identify and discuss some of the
different factors to be considered in choosing the appropriate SPV form.
sole trader, incorporate, trust, and partnership JV. （for most time are companies and partnership）

Different factors to be considered in choosing the appropriate SPV form are:

1- Participants: Home location, Operating Experience and business objectives of each.
2- The projects capital cost and anticipated earnings, including timing of cash flows.
3- Specific requirements of relevant regulatory bodies
4- Any existing debt instruments and the tax positions of the participants
5- The location and political jurisdiction in which the project will operate
6- Tax benefit

2. Which of the consequences arising from using a partnership form of SPV is most likely to make
such structure (i) attractive; (ii) unattractive to sponsor?
 i- Attractive (Sponsors) – Tax benefit is passed to Sponsors; geography (euro tunnel)
ii- Unattractive (Sponsors) – Funding via sponsors’ balance sheet
potential tax, geography.

3. What are some possible tax and non-tax reasons for using a non-corporate SPV?
Tax: the tax benefit will be generally passed directly to sponsor
Other: equity return via cash in lieu of dividend; project still can move from recourse to non-recourse;
funding via sponsor’s balance sheet.

4. In what circumstances should a project obtain a crediting rating? When is the appropriate time
to obtain a credit rating?
1, they need fund by bond issue; 2, they need to refinance the syndicated or term loan.
1, for a bond issue, prior to commencing work on the issue; 2, for re-financing, when the project end
the construction period and enter the start-up stage; or the project meet the completion test and there is
non-recourse to sponsor as the construction risk is diminished.

5. what are the benefits to debt issuer of a credit rating? what are the disadvantage of seeking a
credit rating?
they will have the good credit on the company, it will attract more people to buy the bond.

If the credit rating is low, it is negative for the company and bond.
Cost of the crediting rating, need more information. Investment grade. Different investment.

6. What is the relevance of an ‘investment grade’ crediting rating?

It is divided into many levels, such as AAA, BB+, C….
Unable invest the issue, experts.

Week 7

1. what is the main focus of a marketing study? At what stage in a project’s life cycle is it typically
prepared?
The main focus of marketing study is to confirm that there will be sufficient demand to absorb
planned output of the project at a price that will:
1- Cover the full cost of production
2- Enable the project to service its debt
3- Provide an acceptable rate of return on equity
Assist the SPV about its robust numbers.
It is prepared in the 1st stage, pre-construction.

Q2- Identify and describe credit enhancements techniques. What role do they play in project
finance?

Credit enhancements refer to any actions that a company or project takes with the objective of
improving its creditworthiness.

Credit enhancement techniques

• sponsor or third-party guarantees
• additional collateral, e.g. non-project assets as security or pledges by creditworthy third
parties or parties related to sponsors involved in the project
• insurance.
• more equity.

It has a greater role in project financing. Through credit enhancement, the lender is provided with
reassurance that the borrower will honour its obligations.

Q3- What is the basis for the phased and iterative approach to feasibility studies in project
finance? Describe the broad phases and the main objective of each.

Different phases correspond with the degree of detail (design and cost) evaluated and confirmed.
The iterations are designed to confirm assumptions, add and modify details and reduce the uncertainty
associated with the development to an acceptable level

The phased and iterative study approach has evolved as a consequence of the fact that the feasibility
study process deals with uncertainty.

Three broad phases are:

1- The conceptual or scoping phase – What could the project be?
2- The preliminary or prefeasibility phase – What should the project be?
3- Final or definitive phase – What will the project be?

Q4- “The phased approach to feasibility studies in project finance enables optimal project value
to be extracted.” Discuss this statement critically.
A4-
regardless of where the study phases begin and end or how many phases are recognised, and even
regardless of whether a study recommends proceeding to the next stage of the development cycle or
not, each study phase can create value for the project owners.

this value can arise either:

• directly, by ensuring that viable opportunities are identified and developed, and by aiding in
the identification of the optimal configuration if a project is developed; or
• indirectly, by halting or redirecting further effort on a project that is either technically
infeasible or economically unviable in its proposed configuration

Q5- What are the key distinguishing features between technical and financial feasibility studies?
A5-
• technical feasibility requires demonstrating that construction can be completed on schedule
and within budget and that the project will be able to operate at its design capacity following
completion
• economic (financial) viability requires demonstrating that, given the technical aspects of the
project, it will be able to generate sufficient cash flow to cover its overall cost of capital

Q6 – Describe the Due Diligence process as it applies to Project Financing.

Project plan, on behalf the lender, it tests
• Due Diligence is the process of systematically researching and verifying the accuracy of a
statement.
• Given the diversity of the factors considered during the DD process, the analysis is usually
carried out separately by technical, financial and legal advisors, both local and overseas.
• involvement of Independent Engineers / experts (IE) is required to assist with structuring the
 deal
• the DD report that the IE will produce consists of a critical analysis of all technical aspects of
the deal, with reference to project, contractual, and financial matters that have been reviewed in detail

Week 8

1. what is the basic evaluation criterion that will determine whether or not a project financing
should proceed? what variables need to be quantified?
project contract, timing of payment, calculation of penalties
NPV, if the project has the positive NPV is basic.
free cash flows, and discount rate
NPV and IRR
• NPV is the difference between the present value of cash inflows and the present value of cash
out flows. If NPV > 0, then the project financing should proceed.
• IRR is the discount rate that makes NPV = 0. If IRR > cost of capital, the project financing
should proceed.
• To calculate NPV and IRR, we need to project how much CFs the project will generate in the
future, the total initial costs of the project and the discount rate (required return on the capital
invested).
• Discount rate can be estimated by CAPM or APT models.
• CFs can be estimated based on comparable projects.

2. identify and describe the five main categories of inputs into the project finance model.
1. Macroeconomic assumption (need to forecast the future cashflow)
2. project cost (investment), capital expenditure
3. operating revenue and cost (cash flows)
4. loan drawing and debt service
5. taxation and accounting

3. what is the objective of debt sizing in PF?

it will determine the maximum amount of project finance debt that the financial model could be
sustained.

4. what is DSCR? what is relevance in the context of debt sizing and debt sculpting?
DSCR is the debt service cover ratio. DSCR = CFADS(cash flow available from debt service)/debt
service
it is a minimum, and the average DSCR; and the higher the minimum DSCR required, the less debt
can be borrowed from the lender.
Debt sculpting is improving the debt carrying capacity in each period to match the cash flow available
for debt service.
When we sculpt debt, we are manipulating the principal repayments so that total debt service matches
CFADS and in turn, the DSCR will follow a target profile.

5. once the basic project financial model has been constructed, what sensitivity analysis should be
done?
the financial sensitivity analysis: test the project cash flow sensitivity to alternative plans; volumes,
forecast, and operation strategy.
revenue, operation expense, operation cost.
cost of capital. Labour cost, material sensitivity.
Week 9

1. what were the conditions existing in the Philippines in the 1980s and 1990s that made it
favourable for the Quezon Power project to proceed?
• Shortage of power and inability of the Philippines government to finance rapid expansion of
power sector made private investment extremely desirable to the country.
• Assisted. Boosted by the Electric Power Crisis Act passed in 1993, which authorised
negotiating IPP contracts on a fast track basis.

2. Was the Quezon project assisted or hindered by legislation introduced in the Philippines, in
relation to the national power sector? explain.
Assisted, the authorising private investment in generation sector for limited uptake. Most of the
generating capacity built are based on turbines and diesel system. This project is based on the coal.
fast tracking

3. How did the Quezon sponsors mitigate social risk?

Include the public in decision-making.

4. Why did the world bank WB and other multilateral agencies agree to participate in the Chad-
Cameroon Pipeline project? What were the main arguments used by NGO’s to oppose WB
participation in this project?

Chad government agree to follow the Revenue Management Plan. It will mitigate the political risk.
Or only way to help these countries to get rid of poverty

Main arguments

• Destroy the environment

• Corruption in government, they think is unlikely to help their poor.
• The local residents can’t benefit from the project if the government put nothing to the
development. the community could be affected by the project construction.

5. What potential environmental risk were associated with the Chad-Cameroon Pipeline project?
suggest appropriate mitigation methods.

- The noise pollution in the construction. Use the low noise machine to conduct the construction.
- Deforestation in the construction. Keep away the forest area and avoid cut down the trees.
- Air pollution in construction. Decrease the heavy gas emission machine, or decrease the working
time.
• Destroy the forest, plant
• Destroy the habitats
• Adverse impact on the community
• Oil leak may cause the soil pollution, water pollution etc.

Method to mitigate
• Environmental insurance
• Rehabilitation guarantee
• Environmental warranty
 • Pollution control bonds
• Environmental remediation plan for destroy of forest

Week10

1. If you were preparing the feasibility study for the Eurotunnel project, what would have been the three
most important risks that you would have identified.
1.country risk;
2. Cost overrun
3. market

2. What recommendation would you have made for mitigating each of these risk?

3. What ended up being the most significant risk of the project during construction phase? How did the sponsor
seek to mitigate this risk up front? What were the deficiencies of the mitigation?

4. What parties, other than the sponsors, should have been involved in the mitigation of the risk?

5. What ended up being the most significant risk of the project after construction was completed? How did the
sponsor seek to mitigate this risk up front? Was that mitigation effective?

Past exam questions

1. What is PPA? What risk does it mitigate?

Power purchase agreements refers to a contract between two parties, one which generates electricity (the
seller) and one which is looking to purchase electricity (the buyer). The PPA defines all of the commercial
terms for the sale of electricity between the two parties, including when the project will begin commercial
operation, schedule for delivery of electricity, penalties for under delivery, payment terms, and
termination. It mitigates market risk.

2. Who are the parties to a Concession Deed? What rights and obligations does it provide?

3. Explain the purpose of both: (i) O&M agreements, and (ii) Offtake agreements. What are the key
“bankability” issue associated with each?

4. Explain two different types of guarantees that might be used in project finance, in each case specifying both
the party that typically provides the guarantee and the risk that is being mitigated by provision of the
guarantee.

5. In what circumstances would a project company consider obtaining a credit rating? What are the advantages
 and disadvantages of obtaining a credit rating?
6. Identify and explain different feasibility study phases. What is the rationale underlying a phased approach to
feasibility studies? How can value be added to the project during these phases.

7. What does empirical evidence indicate in relation to the accuracy of final feasibility studies in project
finance?

8. Evaluate the exit strategy of the sponsors in the quezon power project.

9. In the RiverCity Motorway case, how did the original financiers exit from the project? Given the equity and
original debtholders in Rivercity Motorway all lost significant amounts of money, suggest reasons as to
why the purchaser acquired the motorway from the liquidators.

10. In the Eurotunnel project, identify the key risk that arose in both (i) construction phase, and (ii) operations.
Explain why these risks arose and why they weren’t effectively mitigated. In your option, what mitigation
techniques should have been implemented?

11. What are the main agreements in project finance? What are the main project agreements in project
finance? What different roles do each fulfil?

12.“Security in a project finance context is both a shield and a sword.” Explain this statement.

Shield: For senior banks, if they are registered first as the senior secure debt provider, they get the significant
advantage in insolvent situation. The key advantage is the ability to appoint your receiver, if a project is
insolvent and there is no security, board of directors of the SPV cannot pay, they will in a Ministrator to
realize assets for the benefits for all the creditors. If you have security over all assets, you can appoint your
receiver, goes from the top, benefits go to the secured creditors not all creditors.

Sword: the consequence of the event of default, if the borrower does breach, the lender can take the project out
from them, you can enforce your security and sell it to other owners.

13. Identify and explain two key ‘bankability’ issues associated with an EPC Agreement. In your answer,
explain the concept ‘bankability’.