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PROJECT FINANCING OVERVIEW AND FUNDAMENTALS

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1 Role of public partnership projects……………………………………………
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1
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e
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These types of projects
are usually government regulated and monitored
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Once the objectives are achieved the project
is treated as completed example if the ministry of roads has a project to contract a road from
Johannesburg to polokwane once the road is complete then the objective is achieved
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The life cycle consists of five stages i
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conception stage,
definition stage, planning & organizing stage, implementation stage and commissioning
stage
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No two projects are similar
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Projects may
share the same goal but have different objectives, and methods of implementation eg a
project that may have a goal of having healthy nation may have different methods of
implementation and /or even have different objectives
...
while the first one its objective forced on
education while the next one the forces was on access
(4) Project is a team work and it normally consists of diverse areas
...
A project can only be successful if all members work as a team and are all willing to
work towards the set goals and objectives
(5) A project is a complex set of activities relating to diverse areas
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A
risk-free project( only means that the element is not apparently visible on the surface and it
will be hidden underneath)
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political instability/ interference, natural calamities, problems with suppliers ,fire, theft, poor
management etc
(7) A project is always customer specific
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Example the government is the one
that decides if an oil pipeline project is to be done in a specific place or not
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The changes may vary from minor changes, which may have very
little impact on the project, to major changes which may have a big impact or even may
change the very nature of the project
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At the final end the project aims to utilize the resources well for the benefit
of growing the country‘s economy
(10)Projects have the quality of Sub-contracting: A high level of work in a project is done
through contractors
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Example a project on building an oil company the company will have to sub
contract businesses that deal in excavation, tendering of cement electrical companies etc
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The
varieties are in terms of technology, equipment and materials, machinery and people, work,
culture and others
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It can be defined as a Loan arrangement in which the repayment is derived primarily from the
project's cash flow on completion, and where the project's assets, rights, and interests are
held as collateral
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Why is it important to understand project finance ?
We need to learn about project finance in order to manage project cash flow for ensuring
profits
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o Motorway and expressway
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( Railway network and service)
o Dams
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o Air and sea Port terminals
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o Large new industrial undertakings
o Large residential and commercial buildings
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Corporate finance is
primarily concerned with maximizing shareholder value through long-term and short-term
financial planning and the implementation of various strategies
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Among the financial activities with which a corporate finance department is involved are
capital investment decisions
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Short-term
issues include the management of current assets and current liabilities, inventory control,
investments and other short-term financial issues
...

In organization where corporate finance is practiced, the objective of practicing it is to
maximize the wealth of the shareholders
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Terms mostly used in corporate finance


Capital Structure: To understand corporate finance, you need to know capital
structure well
...
The source of funds can comprise of their own capital
funding or taking loan from creditors around in the market
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

Dividend Policy: Many firms source their major funds from equity shareholders
...

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the dividend policies for firms are often different
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There‘s an
argument with the dividend relevancy and irrelevancy on the market price of share
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

Working Capital Management: In simple terms, the firm needs money to run the
operation
...
In different
terms, working capital is the difference between current assets and current liabilities
on any given day
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If current assets are less than current liabilities, then the working
capital is negative
...
There are few things to consider while thinking
about working capital management – first of all, cash flow is most important in case
of working capital management, it‘s also termed as liquidity; another thing which
firm needs to consider is profitability or return on capital
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1 Project finance verse corporate finance
Conceptual Differences between Corporate Finance verse Project Finance
Project finance is the nonrecourse financing of long-term infrastructure, industrial projects
and public services based upon a complex financial structure where project debt and equity
used to finance the project are paid back from the cash flow generated by the project rather
than the general assets or creditworthiness of the project owners
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Generally, special
purpose corporations (SPCs) are created for each project
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The
primary goal of corporate finance is to enhance corporate value, without taking excessive
financial risks
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Corporate finance verse Project finance
No
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5

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Points of difference

Corporate Finance

Stage

In the early stage of the
company, corporate finance
is being introduced
...


Proof of concept

corporate finance, in the
,financier looks for
―commercial proof of
concept‖ and that is
revenue
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Usually, the risk is
much lower
...
But some investors
accept lower returns thinking
about the impact on society
and environments (if any)
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Collateral

Decisional basis

The financier usually gives
the loan on the assets of the
company
...
this is
meanly need
expansion
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ie money how it
comes in and how to
goes out

The financier looks at
the project assets as
collateral
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modeling
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Equity is the ownership of
the company with several
benefits
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Finite(predictable)

7

How equity is
defined

8

Type of capital

Permanent indefinite(not
predictable)

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Dividend policy

10

Capital investment
decisions
Financial structure

Makes decisions autonomous Fixed dividend policy
from investors
Opaque to creditor
Highly transparent to
creditor
Easily duplicated :common
Highly tailored
forms
structure and cannot
be reused
Low cost
Relatively high cost

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Transaction cost for
financing
Size of financing
Cost of capital
investor/tender base
Basis for credit
evaluation

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Dividend policy

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Capital investment
decisions

flexible

Huge to cover high
cost
Secondary markets

participation
Balance sheet and cash flow

Project assets cash
flow and contractual
agreement
Makes decisions autonomous Fixed dividend policy
from investors
Opaque to creditor
Highly transparent to
creditor

3
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D
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The Italian bankers held
a one-year lease and mining concession, i
...
, they were entitled to as much silver as they
could mine during the year
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Another form of project finance was used to fund sailing ship voyages until the 17th century
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An individual investor then could decide whether or not to invest in the
sailing ship‘s next voyage, or to put the capital to other uses
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In corporate finance
terms, we can also think of this mandatory liquidation as a fixed dividend policy
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Project financing has evolved through the centuries into primarily a vehicle for assembling a
consortium of investors, lenders and other participants to undertake infrastructure projects
that would be too large for individual investors to underwrite
...
In the late
1990s, the technique has become rather prevalent and is frequently used to finance
independent power plants and other infrastructure projects around the world as governments
face budgetary constraints
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1 Focus of project financing
 Focusing on project financing it focuses on the process that takes form such as menu
of financing, SPV or the unstructured format A special purpose vehicle/entity
(SPV/SPE) is a subsidiary company with an asset/liability structure and legal status
that makes its obligations secure even if the parent company goes bankrupt
...
Although the SPVs/SPEs are
used to isolate financial risk, due to accounting loopholes, these vehicles may become
a financially devastating way for CFOs to hide debt, as with the Enron bankruptcy
...
An SPV/SPE may be designed for independent
ownership, management and funding of a company; as protection of a project from
operational or insolvency issues; or for creating a synthetic lease that is expensed on
the company‘s income statement rather than recorded as a liability on the balance
sheet
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 To focus on financial focus implies to focuses on the content of financing
 Financial focus involves Security in form of either contact as in SPV(non recourse)
or for full recourse assets are provide
 Financial focus also focuses on conditions setup of project financing

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1 Features of project financing

Key characteristics of Project Financing
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 Debt is typically repaid using cash flows generated from the operations of the
project
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 Debt is typically secured by project‘s assets, including revenue producing
contracts
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 Consent of the Lender is required to disburse any surplus cash flows to project
sponsors
 Higher risk projects may require the surety/guarantees of the project sponsors
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Capital-intensive
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Infrastructure projects tend to fill this category
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These transactions tend to be highly leveraged with debt accounting for usually 65% to 80%
of capital in relatively normal cases
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The tenor for project financings can easily reach 15 to 20 years
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Controlled dividend policy
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Many participants
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It is not rare to find over ten parties playing major roles in implementing the
project
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Raising capital through project finance is generally more costly than through typical
corporate finance avenues
...
The highly-specific nature of the financial
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Margins
for project financings also often include premiums for country and political risks since so
many of the projects are in relatively high risk countries
...

Generally when a corporation chooses to undertake an investment project, cash flows from
existing activities fund the newcomer; and management has the option to roll over the
project‘s capital into still newer ventures
Within the company later on eg a Kenya power cooperation may decide to add an investment
on providing solar panels and this investment is funded by the revenue generated --by
service fees paid from electricity
With project financing, by contrast, the assets and cash flows associated with each project are
accounted for separately
...
As the project
runs its course, furthermore, the capital is returned to the investors, and they decide how to
reinvest it
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Incase a new venture is created additional funds are sourced for other
sources
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Project financing helps eliminate or reduce the lender‘s recourse to the sponsors
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Project financing permit an off-balance sheet treatment of the debt financing
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Disadvantages of Project Financing
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0 The essential difference between a recourse and non-recourse loan
The essential difference between a recourse and non-recourse loan has to do with which
assets a lender can go after if a borrower fails to repay a loan
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In both types of loans, the lender is allowed to seize any assets that were used as collateral to
secure the loan
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For
example, in both recourse and non-recourse mortgages, the lender would be able to seize and
sell the house to pay off the loan if the borrower defaults
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0 Major players in project financing

Parties involved in project financing
There are many parties involved in project finance
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Lender: Financial institutions which lend money for project
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They can be in both sides – lenders or borrowers
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They act as technical advisors for the project
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Debt Financier: People who give secured loan for the project on the basis of project
assets
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Regulatory agencies: Generally, government authorities who take care of the
regulations in regard to the project intricacies
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Stakeholders of project finance
Financial managers
Sponsors
Lenders
Consultants and practitioners
Project managers
People in construction industry
Suppliers
Engineers
Researchers
Students doing research
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1 The roles of major participants in project financing
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Though local governments generally participate only indirectly in
projects, their role is often most influential
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Project sponsors or owners
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It is
possible for a single company or for a consortium to sponsor a project
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Project company
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Controlled by project sponsors, it is the center of the
project through its contractual arrangements with operators, contractors, suppliers and
customers
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The amount of the tariff or charge is generally
extensively detailed in the off-take agreement
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Often the project company is the project
sponsors‘ financing vehicle for the project, i
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, it is the borrower for the project
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Contractor
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These primary contractors will then subcontract with local firms for components of the construction
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Eg total may have a stake in a pertroleum processing industry
Operator
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at maximum efficiency
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hold an equity stake in a project
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Supplier
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For a power plant, the supplier
would be the fuel supplier
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In the case of a mine, the supplier might be the government
through a mining concession or provide technical skills
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Customer
...
) or a service(electrical
power transmission or pipeline distribution)
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Commercial banks
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In arranging these large loans, the banks often form syndicates to
sell-down their interests
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Even though commercial banks are not generally very
comfortable with taking long term project finance risk in emerging markets, they are
very comfortable with financing projects through the construction period
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In every case, there will always be an optimal position that is best for the
lenders
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Consents
The optimum position for the lenders in relation to the consents and authorizations required
before a project can be worked on or completed is as follows:
all consents should be issued for the duration of the project;
the terms of the consents should not be subject to much variation by regulators;
the consents should not be terminated if the lenders have to enforce their security, and can be
transferred to a purchaser from the lenders following any enforcement; and
the permits should be fully transferrable
...

Shareholders' agreements and sponsors' equity contributions
The optimum position for the lenders is:
the sponsors should provide all of their equity contributions up front;
the sponsors should provide cover for the cost of the project overrunning;
the sponsors should provide cover for any gaps in insurance coverage
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It may be acceptable for the sponsors to pay in their equity contributions over time or even to
back-end those contributions, or pay them after the project is completed, as long as the
lenders are happy with the creditworthiness of those sponsors
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It is unlikely that the sponsors will be happy to cover any gaps in insurance coverage
...
It may also be possible
to structure the project finance document around any problems caused by insurance gaps
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It will be difficult for
the lenders to accept that Project company should carry this risk, and if this is the case
they should make enquiries into how any actual expenditure brought about by such a
change in the law is to be funded or reduced;
the concession period should be extended by any period of 'force majeure', or
burdensome events that occur outside of the control of the parties;
the concession should not be terminated simply because the lenders enforce their
security;
the arrangements for termination of the concession, where this is permitted, should
not be deprive Project copany of their rights and any compensation to which Project
company is entitled should always be sufficient to repay the lenders;
on an enforcement, the lenders should be able to freely transfer the concession to a
third party
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The deal struck on compensation for termination for reasons other than default by Project
company is usually that the compensation should be sufficient to repay debt and equity, and
ideally to provide some return to equity investors
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The Authority may seek to have deducted from the compensation it needs to pay Project
company on termination any amounts already credited to Project bank accounts and any
equity committed by the sponsors but not yet injected into Project
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It is sometimes possible to limit such a
person's control to their satisfaction with the technical and financial capability of the person
proposed
...
In
addition, completion under the construction contract can only occur when completion
also occurs under the concession agreement;
liquidated, financial damages should be payable if completion is not achieved by a
fixed date and those liquidated damages should be adequate and at least cover interest
payable on the loan for a reasonable period;
there should be no contract administrator or engineer, but rather an employer's agent
instead - this person would be an agent of Project companyand made subject to the
restrictions contained in the project credit agreement;
there should be no – or, at least, no large - limits on the contractor's liability;
the contractors should give extensive guarantees and, if the contractor is to be
released from liability for defects after a certain period has passed, that period should
be long and only begin running after a well-defined completion test has been passed
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The lenders may be satisfied with a project management approach to construction so long as
they receive technical advice on all aspects of the design and works covered by the individual
construction contracts, and are persuaded that the overall position with regard to limits on
liability, liquid damages and warranties is acceptable
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Lenders will normally accept the construction period being extended for force majeure, and
for certain other risks
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terms of something like industrial action affecting the works
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Lender's security concerns
The lenders' main legal concerns on the underlying contracts are likely to be:



ensuring that they can take effective security over the contracts; and
ensuring that all the key contracts remain in place in one form or another if and when
they enforce that security
...

The second point is usually dealt with by way of direct agreements
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Businesses have to consider
their finances for so many purposes, ranging from survival in bad times to bolstering the next
success in good ones
...
While finances are not necessarily as
important as vision and a great product, they are crucial to making the good stuff happen
...
Starting Capital
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Entrepreneurs only have dreams and ideas until they
have some capital to put their ideas in motion
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Most business owners face
the critical choice between debt and equity financing
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Equity gives you cash, but you have to share the success
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2
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While most businesses have some amount
of debt -- especially in the beginning stages -- too much debt compared with revenues and
assets can leave your with more problems than making your loan payments
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Debt ratios can affect your ability to attract investors including venture
capital firms and to acquire or lease commercial space
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Business Cycles
No matter how well your business is doing, you have to prepare for rainy days and even
storms
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That's why smart
businesses create financial plans for downturns
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Sometimes to take on more business
and attain greater success, a company needs significant financial investment to acquire new
capital, staff or inventory
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Every situation is different, but smart managers consider the cost of
success and their options for obtaining growth financing
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Payroll
Nothing spells imminent death like a company being unable to make payroll
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The larger an organization
gets, the larger the labor costs
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Financial
planning to ensure your payroll accounts are in strong shape are essential to the integrity and
longevity of your company
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Angel Investors: Individual investors who buy equity in small private firms
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Venture Capital Firms: A limited partnership that specializes in raising money to invest
in the private equity of young firms
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4
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Corporate investors
are also known as corporate partners, strategic partners, and strategic investors
...

4
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This is
the most basic source of funds for any company and hopefully the method that brings in the
most money
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Debt- Like individuals, companies can borrow money
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The drawback of borrowing
money is the interest that must be paid to the lender
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Equity funding-A company can generate money by selling part of itself in the form of
shares to investors
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The drawback is that further profits are divided among all shareholders
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1 Equity funds verse debt funds
The Definition:
An equity fund is a type of mutual fund or private investment fund, such as a hedge fund,
that buys ownership in businesses (hence the term "equity") most often in the form of
publicly traded common stock
...

A mutual fund is a professionally-managed trust that pools the savings of many investors and
invests them in securities like stocks, bonds, short-term money market instruments and
commodities such as precious metals
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There are various types of Mutual Funds that exist
...

Types of Equity Funds


International Equity Funds are those that invest in stocks outside of the United
States
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

Global Equity Funds are those that invest in stocks around the world including those
in the United States but tend to favor foreign stocks by at least 80% of their overall
portfolio weighting
...

Domestic Equity Funds are those that invest in stocks solely in the home country of
the investor and issuer
...




Equity finance and debt finance
Equity financing is the method of raising capital by selling company stock to investors
...

In order to grow, a company will face the need for additional capital, which it may try to
obtain in one of two ways: debt or equity
...
The proportion of the company that will be sold in an equity financing
depends on how much the owner has invested in the company and what that investment is
worth at the time of the financing
...

As the company grows and requires further capital, the entrepreneur may seek an outside
investor, such as an angel investor or a venture capitalist, two main sources of early stage
equity financing
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In return for
lending the money, the individuals or institutions become creditors and receive a promise the
principal and interest on the debt will be repaid
...

When a company needs money, it can take three routes to obtain financing: cash, debt or
some hybrid of the two
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It gives the
shareholder a claim on future earnings, but it does not need to be paid back
...
The first investors in line
are the lenders
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The
amount of the investment loan, referred to as the principal, must be paid back
...


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Another perk to debt financing is the interest on debt is tax deductible
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Mutual funds
These are in two categories:
1: By Structure
(a)Open-ended
These can be purchased and redeemed anytime, hence ―open‖
...
Eg buying bond of kenya airways which are open for three months
and then closed
2: By investment Objective
With the type of investment objective and the underlying investments, is how typically
mutual funds are named
...
g if the fund invests predominantly in equity, then it's called an
equity fund
...
Equity funds
may be classified into further types of mutual funds, large cap funds , mid-cap funds, smallcap funds and sector/thematic Funds
...

1
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Large -cap funds invest in companies which have a large market
capitalization (hence the name large), usually, these are very large companies established
players, with a large workforce e
...
Mid-cap Funds
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Small-cap funds



Invest into small-sized companies
Highest risk within equity category

4
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Some of the mutual funds provide thematic funds, for e
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5
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These are equity funds with a 3 years lock-in,
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Debt Funds
Debt funds invests in fixed income instruments
...
Debt mutual funds mainly invest in a mix of debt or fixed income securities like
Government securities, Treasury bills, Corporate bonds, etc
...
There are various types
of debt funds :
a
...
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Gilt funds are mutual funds that invest in government securities
...
Long term Income funds



Invest in corporate bonds/long dated G-secs
Carry high risk within debt category

c
...
Dynamic Bond Funds



Invest in papers across maturities
Risk is relatively higher in debt category

Money Market Funds
While a subcategory of debt funds, these funds invest in instruments of very short
tenor/maturity, from a couple of months to less than 91 days
...

i
...

Lowest risk

Liquid funds invest in securities that have lower maturity period, usually less than 91 days
...

ii
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Gold Funds



Invest in Gold ETFs
Same risk as investing in gold
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These are for investors who want to take
exposure to gold via mutual funds
Difference between debt and equity funds
1
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Debt funds pool money raised from people and invest it in fixed income instruments like
government bonds, corporate bonds, non-convertible debentures and other highly-rated
instruments
...

2
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3
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Equity funds held longer for 12 months are considered ―long-term‖ and are
exempt from capital gains tax
...

4
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However, since equity funds are also volatile,
there is also a possibility of losses and negative returns
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16
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1 The process and means of raising equity capital
 Ordinary shares
Ordinary shares(common shares) represent the basic voting shares of a corporation
...
An ordinary share represents equity ownership in a
company proportionally with all other ordinary shareholders, according to their
percentage ownership in the company
...

All corporations must have ordinary shares as part of their stock, as defined in their articles
of association, and at least one ordinary share must be issued to a shareholder
...

Rights and Obligations of Ordinary Shareholders
Ordinary shareholders have the right to a corporation's residual profits
...
They are also entitled to their share of the residual economic value of the company
should the business unwind; however, they are last in line after bondholders and preferred
shareholders for receiving business proceeds
...

While they face greater economic risk than creditors and preferred shareholders of a
corporation, they can also reap greater rewards
...
The
same occurs when companies, such as start-ups, are sold to larger corporations
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The only obligation that an ordinary shareholder has is to pay the price of the share to the
company when it is issued
...

Value of Ordinary Shares

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In many jurisdictions, ordinary shares have a stated "par value," but
this value is more of a technicality, and is rarely more than a few pennies per share
...

 Preference share capital

Preference shares, more commonly referred to as preferred stock, are shares of a company‘s
stock with dividends that are paid out to shareholders before common stock dividends are
issued
...
Most preference shares have a fixed dividend, while
common stocks generally do not
...

There are four types of preference shares:
1
...

2
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If the
company chooses not to pay dividends in any given year, the shareholders of the noncumulative preferred stock have no right or power to claim such forgone dividends at any
time in the future
...
Participating preferred stock provides its shareholders with the right to be paid dividends in
an amount equal to the generally specified rate of preferred dividends plus an additional
dividend based on a predetermined condition
...
If the company is liquidated, participating preferred
shareholders may also have the right to be paid back the purchasing price of the stock as well
as a pro-rata share of remaining proceeds received by common shareholders
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Convertible preferred stock includes an option that allows shareholders to convert their
preferred shares into a set number of common shares, generally any time after a preestablished date
...
However, a company may have a provision on such
shares that allows the shareholders or the issuer to force the issue
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The retained earnings of a corporation is the accumulated net income of the corporation that
is retained by the corporation at a particular point of time, such as at the end of the reporting
period
...
If the balance of the retained
earnings account is negative it may be called accumulated losses, retained losses or
accumulated deficit
...
It may need working capital to pay
suppliers, wages or bills; funds for a particular project or transaction, or a one-off sum of
money to solve a financial crisis
...
This note looks at debt finance
...
Term loans are generally provided as working capital
for acquiring income producing assets (machinery, equipment, inventory) that generate the
cash flows for repayment of the loan i
...

Term loans: Pros and cons
Pros:






You can borrow large amounts of money to finance expansion or growth
Long repayment terms can make big investments more affordable
Repaying term loans on time may help you build business credit
Loans at online lenders can be approved and funded quickly, usually within a few
days to a week
Qualification requirements for online lenders may be looser than those for traditional
banks

Cons:




Less flexibility than lines of credit, as payments begin immediately after funding
Shorter term loans may carry high costs and frequent repayments, although this
depends on the lender
Collateral may be required — this would be an asset, such as equipment or real estate,
that the lender can sell if you can‘t make payments

What are the additional covenants in term loan agreement to protect lenders?
The additional covenants in term loan agreement to protect lenders are:

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2) The assets purchased will be properly maintained and insured by the borrowing
company
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4) To ensure the liquidity position of the borrowing company, the agreement may
stipulate the following:
a
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b
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c
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d
...

Main Clauses in term loan agreement
Following are the main clauses in term loan agreement:
1) Amount of loan
2) Period of payment
3) Rate of Interest
4) Method of payment of interest
5) Nature of security offered
 features and procedures
Following are the features of term loans:
1) Banks or Financial institutions granting term loans are creditors and not the owners of the
company
...

2) They are required to be repaid during the life time of the company at a pre decided
interval
...

4) Return on term loans is paid in the form of interest
...

5) This source of raising funds is very risky from company‘s point of view
...

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...
For example, a transportation project, such as a high speed rail, may involve a group
of investors and lenders, each specializing in a portion of the project, such as rail lines, cars,
bridges and tunnels, and signal and control technologies
...
Not only do the various lenders or investors bring their own expertise to the
project, but they also spread the risk among themselves without joint liability, especially
among very large, complicated projects
...

The importance of syndicated loan is it usually put together by a lead lender or agent who
pulls the other lenders together and handles the loan management and servicing
...
Short term corporate debt is issued as commercial
paper whereas long-term debt is issued as bonds
...
It is the highest-risk form of debt, but it offers some of the highest returns -- a typical
rate is in the range of 12%-20% per year
...

Mezzanine debt takes up some of the financing that an equity investor would otherwise chip
in
...
A senior lender may
only want to lend as high as 75% of the value of the firm, or $75 million
...

With $85 million in combined debt financing, the sponsor now only needs to contribute $15
million of its own money toward the buyout
...


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...

Development finance institutions (DFIs) finance and promote private investment with the
purpose of fostering economic growth and sustainable development while at the same time
remaining financially viable in the long term
...

Some of the multilateral DFIs are International Finance Corporation (IFC), the European
Bank for Reconstruction and Development (EBRD) and the European Investment Bank
(EIB)
...
They operate in a wide variety of countries:
IFC invests in several developing countries and emerging markets all over the world,
whereas a large majority of EIB‘s activities are within the European Union (EU)
...

While there is a rapidly growing literature assessing the effects of DFIs at the micro level,
there are gaps in the evidence on the macro impact of DFIs‘ investments
...
It appears that lower-income
countries benefit mainly from investments directed to the agriculture and infrastructure
sectors, whereas in higher-income countries investments by DFIs in the infrastructure and
industry sector play the predominant role in fostering economic growth
In many parts of the world, international financial institutions (IFIs) play a major role in the
social and economic development programs of nations with developing or transitional
economies
...

Goals and objectives of multilateral financial institutions:




to reduce global poverty and improve people's living conditions and standards;
to support sustainable economic, social and institutional development
to promote regional cooperation and integration
...
Such
funding is usually tied to specific projects that focus on economic and socially sustainable
development
...
In
addition to these public procurement opportunities, in which multilateral financing is
delivered to a national government for the implementation of a project or program, IFIs are
rlusweti@gmail
...
These include subnational government entities, as well as the private sector
...
1 Contract structuring, documentation and risk sharing
Project agreement
A Project Agreement is an agreement between the owner/developer of a construction
project and the construction trade unions that will perform that construction work
...
Without
exception, Project Agreements provide that there will be no strikes or lockouts on the
covered construction project or projects, thereby removing a significant source of risk to the
owner/developers of these projects
...
When a company uses debt financing, its creditors are repaid before its
shareholders if the company becomes insolvent
...
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19
...
An organization may use risk assumption, risk avoidance, risk
retention, risk transfer, or any other strategy (or combination of strategies) in proper
management of future events
...
Any
action or activity that leads to loss of any type can be termed as risk
...
Widely, risks
can be classified into three types: Business Risk, Non-Business Risk and Financial Risk
...
Business Risk: These types of risks are taken by business enterprises themselves in
order to maximize shareholder value and profits
...

2
...
Risks
that arise out of political and economic imbalances can be termed as non-business
risk
...
Financial Risk: Financial Risk as the term suggests is the risk that involves financial
loss to firms
...


Risk identification and now to minimize
Project Risk
Project incompletion risk

Price risk
Resource risks
Operating risk
Environmental risks
Technology risks

Mitigation
Contractual agreements with
contracts and key
stakeholders
hedging
Keeping adequate cushion on
resource assessment
Keeping provisions and
insurance
Insurance
Have expert evaluation of
technology and staff training
to upgrade to latest
technology
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...
Financial risk is
caused due to market movements this can include host of factors
...

Market Risk:This type of risk arises due to movement in prices of financial instrument
...
Directional
risk is caused due to movement in stock price, interest rates and more
...

Credit Risk:
This type of risk arises when one fails to fulfill their obligations towards their counter parties
...
Sovereign risk
usually arises due to difficult foreign exchange policies
...

Liquidity Risk:
This type of risk arises out of inability to execute transactions
...
Asset Liquidity risk
arises either due to insufficient buyers or insufficient sellers against sell orders and buy
orders respectively
...
Operational risk can be classified into Fraud Risk and Model Risk
...

Legal Risk:
This type of financial risk arises out of legal constraints such as lawsuits
...


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2
...

4
...

6
...

8
...
e the earlier you identify the risk the better
...
Track Risks and Associated Tasks

How to Identify project risks
This can be done by





Documentation reviews
Interviewing
Preparing cause and effect diagrams
Using risk identification checklists
...
But
eventually, some of the risks that you plan for do happen, and that‘s when you have to deal
with them
...

1
...
If you can prevent it from
happening, it definitely won‘t hurt your project
...
Mitigate: If you can‘t avoid the risk, you can mitigate it
...

3
...
The most common way to do this is to buy insurance
...
Accept: When you can‘t avoid, mitigate, or transfer a risk, then you have to accept it
...
If you can‘t avoid the risk, and there‘s nothing
you can do to reduce its impact, then accepting it is your only choice
...
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1
...
This is because, as the name implies, you‘re
avoiding the risk completely
...

This is why avoidance is generally the first of the risk control techniques that‘s considered
...

2
...
Instead of avoiding a
risk completely, this technique accepts a risk but attempts to minimize the loss as a result of
it
...

However, since there really is no way to avoid it, a loss prevention program is put in place to
minimize the loss
...

3
...
This technique will seek to minimize the loss in the event of
some type of threat
...
Company management realizes that this is a necessary risk and decides to install
state-of-the-art water sprinklers in the warehouse
...

4
...
This ensures that if
something catastrophic occurs at one location, the impact to the business is limited to the
assets only at that location
...
An example of this is when a company
utilizes a geographically diversified workforce
...
Duplication
Duplication is a risk control technique that essentially involves the creation of a backup plan
...
A failure with an information systems server
shouldn‘t bring the whole business to a halt
...
Another example of
duplication as a risk control technique is when a company makes use of a disaster recovery
service
...
Diversification
Diversification is a risk control technique that allocates business resources to create multiple
lines of business that offer a variety of products and/or services in different industries
...
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diversification, a significant revenue loss from one line of business will not cause irreparable
harm to the company‘s bottom line
...
It‘s necessary to ensure
long-term organization sustainability and profitability
...
Risk assessment includes both the identification of potential risk and
the evaluation of the potential impact of the risk
...
Identifying risk is both a creative and a disciplined process
...
All ideas are welcome at this stage with the evaluation of the ideas
coming later
...
Some companies and industries
develop risk checklists based on experience from past projects
...
The past experience of the project team,
project experience within the company, and experts in the industry can be valuable resources
for identifying potential risk on a project
...

Risk Evaluation
After the potential risks have been identified, the project team then evaluates the risk based
on the probability that the risk event will occur and the potential loss associated with the
event
...
Some risk events are more likely to happen than others, and the
cost of a risk event can vary greatly
...

Risk Mitigation
After the risk has been identified and evaluated, the project team develops a risk mitigation
plan, which is a plan to reduce the impact of an unexpected event
...
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Each of these mitigation techniques can be an effective tool in reducing individual risks and
the risk profile of the project
...

Risk avoidance usually involves developing an alternative strategy that has a higher
probability of success but usually at a higher cost associated with accomplishing a project
task
...
A project team may choose a vendor with a proven track record
over a new vendor that is providing significant price incentives to avoid the risk of working
with a new vendor
...

Risk sharing involves partnering with others to share responsibility for the risk activities
...
Partnering with another company to share the risk
associated with a portion of the project is advantageous when the other company has
expertise and experience the project team does not have
...
The company
will also derive some of the profit or benefit gained by a successful project
...
On international
projects, companies will often purchase the guarantee of a currency rate to reduce the risk
associated with fluctuations in the currency exchange rate
...
Assigning highly skilled project personnel
to manage the high-risk activities is another risk reduction method
...
Some companies reduce risk by forbidding key
executives or technology experts to ride on the same airplane
...

The purchase of insurance on certain items is a risk transfer method
...
A construction project in the Caribbean may
purchase hurricane insurance that would cover the cost of a hurricane damaging the
construction site
...
Weather, political unrest, and labor strikes are examples of events that can
significantly impact the project and that are outside the control of the project team
...
The project team often develops an alternative method for accomplishing a project
goal when a risk event has been identified that may frustrate the accomplishment of that goal
...

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...
1 Documentation the key project agreement
Contract Agreements Sections
A contract agreement should have the following sections:
1
...
The most important idea or description of the problem
being addressed
...

2
...
It will also set possible additions or
deductions to the contract and how they are going to be released
...

3
...
Either on a
monthly basis or whatever payment method is preferred, it should also specify what
percentage of money should be retained on every application for payment
...

4
...
It should describe either calendar days or business days and can be
presented either through a CPM, Gantt Chart, or just a bar chart
...
Contract Document List – A list of all contract documents that form part of the
contract agreement
...
Construction Scope - Description of all construction activities including some
descriptions of things that will form part of the project
...

7
...
It contains
specific terms for liens, penalties, withholding, arbitration rules and specific instructions
on how to process claims and proceed with disputes
...
Contract Laws- Governing laws, liens requirements, claims procedures, arbitration
procedures, insurance, substantial completion requirements, final completion, and
liquidated damages
...

Why A Contract Agreement Is Important?
A contract agreement is a really important document that will define your scope of work and
that will bind the owner to your services, including the payment terms
...

rlusweti@gmail
...
For example:






Express - This type of agreement defines real well the purpose and scope of the
agreement
...

Executed - An executed contract agreement provides a warranty period or
malfunction
...

Conditional - A conditional contract agreement is an agreement used when services
could not be provided at the time the contract was signed
...


Pricing
Fixed price contract
Contract that provides for a price which normally is not subject to any adjustment unless
certain provisions (such as contract change, economic pricing, or defective pricing) are
included in the agreement
...
A fixed
price contract places minimum administrative burden on the contracting parties, but subjects
the contractor to the maximum risk arising from full responsibility for all cost escalations
...

Completion cost over run and performance guarantees
A CO guarantee is usually a three-party agreement between the financing bank as an indirect
beneficiary, the project company as a direct beneficiary, and the project sponsor acting as a
guarantor
...
The upshot is that the bank can require the
sponsor to give the project company funds to cover extra costs
...
com Page 38 of 48

abandoning a difficult project to the detriment of the bank
...
Since cost overruns are not usually a bank risk, they are
passed on to project sponsors (direct or indirect owners of the project company) which,
acting as "guarantors," undertake to cover costs that were unforeseen at the original budget
planning stage
...

As CO guarantees are not regulated directly by law and their content largely depends on the
particular business deal, there is no standard document as such to work on
...

Typically, a CO guarantee states that the payment shall be made unconditionally on the first
demand of the beneficiary
...
Actual cost overruns have to arise and
be proved
...
Typically, they are
defined as additional project costs which, at any one time, are in excess of the original costs
budgeted for that stage
...


Long term maintance and warranties


Materials and Workmanship Warranties
Materials and workmanship type warranties require the contractor to correct defects
in the project caused by elements within their control and assume no contractor
responsibility for the design
...
Acceptance of
these warranted projects is in accordance with an agency's normal practices
...




Short-Term and Long-Term Performance Warranties
The development of specifications for short-term and long-term performance
warranties is dependent on the agency's contracting procedures with the differences
being primarily in length of warranty, bonding/guarantees, roadway design
requirements, magnitude of the project, risk, and acceptance criteria
...
Description
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Warranty Bond/Guarantee Requirements
3
...
Permit Requirements
5
...
Elective/Preventive Actions
7
...
Method of Measurement
9
...
Quality Control Plans
11
...
Final Warranty Acceptance
21
...
In
business practice the resolution seeks to achieve fairness for all participants, and is
often moderated by a third party
...


Mediation
The goal of mediation is for a neutral third party to help disputants come to consensus on
their own
...

Mediation can be effective at allowing parties to vent their feelings and fully explore their
grievances
...

Arbitration
In arbitration, a neutral third party serves as a judge who is responsible for resolving the
dispute
...

The disputants can negotiate virtually any aspect of the arbitration process, including whether
lawyers will be present and which standards of evidence will be used
...

Like mediation, arbitration tends to be much less expensive than litigation
...
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Litigation
The most familiar type of dispute resolution, civil litigation typically involves a defendant
facing off against a plaintiff before either a judge or a judge and jury
...
Information conveyed in
hearings and trials usually enters the public record
...

How to manage disputes
o
o
o
o
o
o
o
o

Understand the situation
...

Avoid using coercion and intimidation
...

Establish guidelines
...

Act decisively i
...


Commercial risk verse political risk

Political risk is the risk an investment's returns could suffer as a result of political changes or
instability in a country
...
Political risk
is also known as "geopolitical risk," and becomes more of a factor as the time horizon of an
investment gets longer
...
The laws, even if just proposed, can have
an impact
...

Insuring Against Political Risks
Companies that operate internationally, known as multinational businesses, can purchase
political risk insurance to remove or mitigate certain political risks
...
Typical actions covered include war and terrorism
...
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Political risk guarantee
This is the coverage that provides financial protection to investors, financial institutions and
businesses that face the possibility of losing money because of political events
...
Political risk insurance can cover many
possibilities, such as expropriation (e
...
, government confiscation of property), political
violence (e
...
, acts of civil unrest or insurrection), the inability to convert local currency and
repatriate it, sovereign debt default, and even acts of terrorism and war
...
Risk of expropriation: Government holding particular assets or goods for the company
2
...
Risk of war and terrorism:
4
...
Currency risk:
6
...
Risk of ‗crossfire‘ sanctions:
8
...

2
...

4
...

6
...
if the political risk seems to be materializing
...
Avoiding long-term commitments: of resources including labour, capital, physical
assets etc
...

5
...
Such monitoring allows
enough opportunity to respond to brewing political risks
...
Lobbying: Influencing host government through informal negotiations, industry
associations, business goodwill, personal contacts, advice from ambassadors of
domestic country, etc
...

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...
Local Stakeholders: It is empirically proven that if there are local stakeholders [like,
sponsors/investors, market shareholders, creditors, debtors, etc
...
A joint business venture is preferable with a domestic company which
understands the political risk environment in host country, or which is in favor or
position to lobby the host government
...
Negotiations with host government: to secure preferential arrangements from host
government for instance, concession in taxation, licensing, etc
...
Indispensability to host government: Such indispensability allows bargaining
leverage to the corporation for, any adverse impact on its operations would result in
increased economic, social or political loss
...
; making scarce and significant
resources available to the economy through technical expertise, managerial skills,
product or capital access to export market, etc
10
...
in PPP), exploitation of consumers, adopting anti-competitive policies, etc
...
Such face
high political risks of expropriation, regulatory changes, losing social license to
operate, etc
...

7
...
Political Risk Insurance (PRI)
Insurance and finance

22
...

A sophisticated infrastructure may also cover:



provision of subject matter expertise to ensure that there is access to all necessary
tools and techniques;
training, coaching and mentoring for the project, programme or portfolio
management team;
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...


The P3(public- private partnership) management infrastructure may range from a single
person to a large team containing many different roles and specialists including, among
others:






planners and schedulers;
cost engineers;
subject matter experts;
assurance staff;
configuration managers
...
For example, a support office might provide administrative support to a specific
project or programme
...
In contrast, a
community of practice, or centre of excellence, has a permanent support role independent of
the creation and completion of any individual piece of work
...
The roles and levels of authority of these
groups must be communicated to the delivery team(s) and reinforced periodically
...
The public partner is represented
by the government at a local, state and/or national level
...

PPP is a broad term that can be applied to anything from a simple, short term management
contract (with or without investment requirements) to a long-term contract that includes
funding, planning, building, operation, maintenance and divestiture
...
They are also useful in countries that require the state to legally own any
infrastructure that serves the public
...
com Page 44 of 48

The principles of sustainable PPPs
How to maintain PPP:
1) Public sector champion:
recognized public figures should serve as the spokespersons and advocates for the project
and the use of a p3
...

2) Statutory environment:
there should be a statutory foundation for the implementation of each partnership
...

however, unsolicited proposals can be a positive catalyst for initiating creative, innovative
approaches to addressing specific public sector needs
...
this unit should
be involved from conceptualization to negotiation, through final monitoring of the execution
of the partnership
...
consideration of proposals should be based on
best value, not lowest prices
...

4) detailed contract (business plan):
a p3 is a contractual relationship between the public and private sectors for the execution of a
project or service
...
such an agreement will increase the
probability of success of the partnership
...

5) clearly defined revenue stream:
while the private partner may provide a portion or all of the funding for capital
improvements, there must be an identifiable revenue stream sufficient to retire this
investment and provide an acceptable rate of return over the term of the partnership
...

6) stakeholder support:
more people will be affected by a partnership than just the public officials and the private
sector partner
...
it is important to
communicate openly and candidly with these stakeholders to minimize potential resistance to
establishing a partnership
...
a candidate‘s experience in the
specific area of partnerships being considered is an important factor in identifying the right
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...
equally, the financial capacity of the private partner should be considered in the final
selection process
...
0 Principles of the PPPs:
1
...

2
...
PPPs are output oriented
...
The private partner bears a significant number of risks

Reasons to consider PPPs
 They provide value for money ie the delivering of a project with the same qualities as
under conventional procurement for less money
...
Examples of PPP models
include:


Design-Build (DB): The private-sector partner designs and builds the infrastructure to
meet the public-sector partner's specifications, often for a fixed price
...


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...
The public
partner retains ownership of the assets
...
The private-sector partner transfers the infrastructure component to
the public-sector partner when the lease is up
...
The public-sector partner's
constraints are stated in the original agreement and through on-going regulatory
authority
...




Buy-Build-Operate (BBO): This publicly-owned asset is legally transferred to a
private-sector partner for a designated period of time
...
The private-sector partner operates the facility
for the duration of the land lease
...




Operation License: The private-sector partner is granted a license or other expression
of legal permission to operate a public service, usually for a specified term
...
)



Finance Only: The private-sector partner, usually a financial services company, funds
the infrastructure component and charges the public-sector partner interest for use of
the funds
...
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