7PJMN004W:

Project Finance &

Procurement
Your Module Team
Module Leader: Walaa Bakry
w.bakry@westminster.ac.uk
Academic Support: Tuesday 14:00-
14:00; Office: M135

Dr Dania Issa
d.issa@westminster.ac.uk
Academic Support: Thursday 12:00-
14:00; Office: M103

Dr Hassan Amar
H.Amar1@westminster.ac.uk
Academic Support: Monday 10:00-
1200; Office: M147

2
What is Project Finance?
“The project’s ability to re-pay the debt contracted
and capital invested at a rate consistent with the
degree of risk inherent in the venture concerned.”

• Credit worthiness of Sponsor may not count for much.

• Assets put up as collateral may not be considered.

7PJMN004W: Project Finance and Procurement 3

Lecture 1: Introduction to Project Finance
What is Project Finance? Cont.
• “… the financing of projects that are dependent on project
cash flow for repayment as defined in the contractual
relationship with each project.” Export-import Bank of
the US

• “… non-recourse financing of a single asset or portfolio

of assets where the lenders can look only to those specific
assets to generate the flow needed to service its fixed
obligations, chief of which are interest payments and
repayment of principal.” Standard & Poor

7PJMN004W: Project Finance and Procurement 4

Lecture 1: Introduction to Project Finance
Features of Project Finance
• The debtor is a project set up for the purpose of the
project and separate from the sponsor
• Lenders have limited recourse to the sponsor
• Risks are allocated to all parties involved but assigned
to the party that can best manage them
• Cash flow generated must be sufficient to cover
payments for operating costs and debt service
• Collateral may be given by sponsors to lenders and
assets tied up to the project
7PJMN004W: Project Finance and Procurement 5
Lecture 1: Introduction to Project Finance
Benefits of Project Finance
• Risks allocated to participants which may have an impact
on the Internal Rate of Return (IRR). (How?)
• Contracts between the SPV and the Sponsors don’t always
appear on the balance sheet even that they are guarantees
• Project Finance relies mainly on projects assets (not
personal assets)
• Creating a project company (SPV) isolates the sponsors
from risks associated with the project (How?)

7PJMN004W: Project Finance and Procurement 6

Lecture 1: Introduction to Project Finance
Dis-benefits of Project Finance
• More expensive than Corporate Finance (Why?)

• Requires more time, detailed legal and technical

expertise

• Cost of monitoring is high (Why?)

• Cost for lenders is high as they take on higher

risk

7PJMN004W: Project Finance and Procurement 7

Lecture 1: Introduction to Project Finance
Types of Sponsors of Project Finance
•Industrial Sponsors

•Public Sponsors

•Contractor Sponsors

•Financial Investors
(See Gatti (2018), Chapter 1)

7PJMN004W: Project Finance and Procurement 8

Lecture 1: Introduction to Project Finance
Public Sponsors and public service
• Public Private Partnership (PPP)
• Realising big projects with private investment for social
good

• Government offers concession to private sectors to build

projects that will be used by:

• The government (e.g. Hospitals where government is

paying on behalf of the patients)

• The public where the private party is collecting the

revenues from the public
7PJMN004W: Project Finance and Procurement 9
Lecture 1: Introduction to Project Finance
Financial Investors
• Greenfield fund
• New Project
• High Risk – High Return
• Typical IRR 15%
• Brownfield funds
• Projects that have already been built
• Risk limited to the operational side
• More involved in privatization
• Risk is lower
• IRR is lower
7PJMN004W: Project Finance and Procurement 10
Lecture 1: Introduction to Project Finance
Types of Funds?
• Private Funds
• Private Infrastructure Funds

• Sovereign Wealth Funds (SWF)

• Big Players in infrastructure projects

• Elements of Project-Finance Structure

• Equity, provided by investors in the project
• Project finance-based debt, provided by lenders

7PJMN004W: Project Finance and Procurement 11

Lecture 1: Introduction to Project Finance
STRUCTURE
OF PROJECT
FINACE

Network of
contracts around
the project (SPV)
Government
Lending
Bank
Supplier
Operator
Plant
Source Gatti (2018); Figure 1.8. Typical contract structure
Constructors of a project finance deal. (1) Fuel supply agreement; (2)
Sponsors raw material supply agreement; (3) operating and
. maintenance agreement; and (4) turnkey construction
12 contract.
When is corporate finance not the best option?

• New Project very large or larger than the existing

company size

• The degree of risk is high

• The project is linked to the company’s core business

7PJMN004W: Project Finance and Procurement 13

Lecture 1: Introduction to Project Finance
Conflict of interest between Sponsors and Lenders
Company focuses on paying dividends to shareholders
from cash flow
Lenders focus on re-paying the debt from cash flow
Company’s avoids risk contamination to their core
business
Lenders prefer to link high risk with low risk projects
(how?)

7PJMN004W: Project Finance and Procurement 14

Lecture 1: Introduction to Project Finance
Project Finance Terms

 Syndicated debt market

 SPV
Project assets are single purpose
Project assets value are limited
Why do lenders agree to it?
More focus on cash flow
 Debt Covenant
 Sponsors use project finance to exploit leverage

7PJMN004W: Project Finance and Procurement 15

Lecture 1: Introduction to Project Finance
THANK YOU & ANY QUESTIONS

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