MIT1_040s09_lec04

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Unformatted text preview: MIT OpenCourseWare http://ocw.mit.edu 1.040 Project Management Spring 2009 For information about citing these materials or our Terms of Use, visit: http://ocw.mit.edu/terms. 1.040/1.401 1.040/1.401 Project Management Spring 2009 Construction Finance Fred Moavenzadeh James Mason Crafts Professor Massachusetts Institute of Technology Institute (Edited by Kyle Frazier) Frazier) Capital Capital Generation Generation Distribution Distribution Recovery Recovery Current Approach Current Available budget drives policy Available This “supply constrained system” has created This Large Work Backlog Large No Evaluation Benefits No Budgets that do not respond to need Budgets Current Financing Mechanisms for Construction Projects Construction General Tax Revenues, Property Assessments General Dedicated Tax Revenues (Trust Funds, Enterprise Accounts) Dedicated Equity Investment Equity Debt Financing (Bonds, Notes, Other I.O.U.’s) Debt Tolls, Usage Fees Tolls, Traditional Sources of Project Finance in Developing Countries Developing 1. Development Assistance (AID) Multilateral OECD OPEC EU, NAFTA, Mercusor Bilateral 2. Development Banks World Bank European Investment Bank Asian Development Bank Etc. 3. Direct Foreign Investment MNC’s 4. International Capital Markets Commercial Banks Syndications Current Trends Current Turnkey Projects Turnkey Design-Construction Design Project Finance Integration Project Export Credits Export Materials and Equipment Materials Feasibility Studies Feasibility Project Finance Project Consumer Credits Consumer User Finance User Counter Trade (Barter) Counter Counter purchase (Buy Local Counter Products) Compensation Agreement Compensation (Cash and Goods) Buy-Back Transaction (Buy Buy Back Project Products) Project Equity Position Equity Build and Operate Build Joint Ventures Joint Economic Risks Economic New Financing Mechanisms and Ideas New Sale/Leaseback Arrangements Sale/Leaseback Linkage Payments, Development Linkage or impact fees New types of trust funds for public New construction (E.G., Public Assets Preservation Trust Fund) Infrastructure banks or revolving Infrastructure fund accounts Innovative Packaging of financing Innovative with design/construction services (e.g. B.O.T.) Broadening of scope for activities Broadening by public works authorities (e.g. involvement of transit agencies in real estate development; commercial development of air rights) Re-assertion of the private sector Re role in infrastructure construction and operation International Capital Markets International Risks for international lending institutions Risks World debt/creditworthiness World Country/Political Risks Country/Political Riskiness of Construction business Riskiness Developer if default (equity element) Developer Co-Financing Co With development banks With Commercial banks: short maturities Commercial Development banks: long maturities Development Lower Risks? Lower Risks? Syndications Syndications Risk Distribution Risk Areas of Comparative Advantages in International Competition International Finance Finance Export Credits and Insurance Export Financing facilities Financing USA: Eximbank, USAID USA: Insurance Facilities Insurance USA: Foreign Credit USA: Insurance Association Insurance Private Export Funding Private Corporation Overseas Private Overseas Investment Corporation Comparison of Country Comparison Systems Terms of credit extended Terms Volume of activities covered Volume Variety of instruments Variety available Government Government policies/constraints Mix of services Mix International Agreements International Areas of Comparative Advantages in Areas International Competition (2) Taxation Taxation Domestic neutrality Domestic Foreign neutrality Foreign Mixed policies Mixed Corporate income Corporate Personal income Personal Accounting methods Accounting Tax treaties Tax Private Industries’ Stats/Support Private Banking industry Banking Engineering/management Engineering/management capabilities Building materials industries Building Labor Labor Integration/turnkey Integration/turnkey Other Other State-owned companies State Complete government control Complete Indirect Government Indirect involvement Advantages (credit, taxes, Advantages financial constraints, information Consortia Consortia Promotion Programs Promotion Laws, Regulations, Government Laws, Requirements Environmental impact Environmental analysis Anti-boycott Anti Corrupt practices Corrupt Political constraints Political New Organizational and Institutional Approaches Approaches New organizational structures adapted to managing, operating, and preserving New existing infrastructure Legal, regulatory initiatives addressing Legal, Problems of liability associated with innovation Problems New approaches to financing and pricing New New organizational structures, relationships, and involvement in New infrastructure. New codes and standards to reflect New New construction technology New Long-term performance, maintenance, and rehabilitation Long Evolving patterns of usage Evolving Greater attention to environmental concerns, safety, protection of workers Greater and public Pricing Philosophy in Public Sector Pricing When iinfrastructure supported by broadly based taxes When nfrastructure Treat very large number of constituents as “investors” Treat Not all constituents are users of facility Not Financing is “pay as you go” Financing As a result As Taxpayers do not perceive immediately the benefits of their taxes Taxpayers Tax funds may be diverted to other purposes Tax No direct correlation between tax and benefit No Once facilities are completed, they are priced essentially as a free good Once free good (no capital recovery provision) Thus pricing fails to act as a controlling mechanism with respect to either Thus capacity or demand in public facilities (e.g., highways, transit, water) Pricing Philosophy in Private Sector Pricing Predicted upon balancing adequate rate of return with attraction Predicted and satisfaction of sufficient demand Market mechanisms regulate not only price but also available Market capacity and adequacy of services Users select desired services and quanities from set of already Users available options, with demonstrated track records and known prices. Users’ willingness to pay supported by readily perceived benefits, Users quality and reliability of service Examples; housing; airlines; freight carriers, utilities (telephone, Examples; electricity); toll roads - 10 Privatization 9 Dilemma of subsidy cuts, fee increases, and services 1 Initial provision of services by entrepreneurs 2 Consolidation of firms 8 Declining efficiency 3 Regulation of fee and franchises 7 Public subsidies 6 Public takeover 5 Withdrawal of capital and services 4 Decline in profitability Financing Aspect of Construction Financing Owner Financing Owner Financing Public Projects Financing Financing of Private Projects Financing Contractor Financing Contractor Financial Implications of Bidding and Contract Methods Financial Lump Sum or Fixed Price Contract Lump Unit Price Contract Unit Cost Plus Fee Contract Cost Target Price Plus Profit Contract Target Guaranteed Maximum Price Contract Guaranteed Financing Aspect of Construction (2) Financing Typical Cash Flows of a Construction Project Typical Pre-Bid Expenses Pre Bonds Bonds Types of Bonds Types Cost of Bonds Cost Benefits of Bonds Benefits Bond Underwriting Bond Mobilization Expenses and Advance Payments Mobilization Progress Payments and Expenditures Progress Final Account and Retention Payments Final Corporate Financing Requirements Corporate Working Capital Working Plant and Equipment Plant Financing Aspect of Construction (3) Role of Commercial Banks Role General Arrangements General Establishing Banking Relations Establishing Specifically Banks require: Specifically General information about the financial and other background of the company, General Specific ratios and figures illustrative the company’s financial position, and Specific company Specific information about the purpose of the under-extension financial services. Specific Financial Figures and Ratios of Interest to Commercial Banks Commercial Basic Figures or Ratios Explanation Current ratio Current assets/current liabilities Acid test ratio (Cash + accounts receivable)/current liabilities Working capital Current assets – current liabilities Working capital turnover Net sales/working capital Other ratios & relationships Net profits/net sales Total liabilities/net worth Net profit/working capital Accounts receivable/billings x 35 days Debt to equity ratio Average age of accounts receivable Cash conversion period Average age of accounts receivable + average age of inventory Cash demand period Cash conversion period – average age of accounts payable Adapted from: Financial Management for Contractors, The Fails Management Institute, McGraw-Hill, 1981 Financial and Management Issues of Interest to Commercial Banks Interest Financial Issues Financial Growth record Growth Trends in profits Trends Credit rating Credit rating Fixed payments Fixed Bonding capacity Bonding Other bank references Other Purpose of credit Purpose Source of repayment Source Timing of repayment Timing Cash flow projections Cash Business exposure Business Political exposure Political exposure Management Issues Management structure Management structure Management capabilities Management Management information systems Management practices Equipment policies Equipment Types of projects Countries working Outlook of operations Reputation among clients Reputation among clients Reputation among subcontractors Sources: 1. The Fails Management Institute, Financial Management for Contractors, McGrawHill, 1981; Journal of Commercial Bank Lending, various issues. World Bank Project Cycle World Identification Identification Preparation Preparation Appraisal Appraisal Negotiations Negotiations Implementation & Supervision Implementation Evaluation Evaluation IBRD Loan to Project Company with Country Guarantee with IBRD Guarantee of Loan Repayment Loan Country Loan Repayment Project Revenues Project Company Equity Investment Share Holders Output Purchaser IBRD Loan to Country with On-lending to Project Company On IBRD Loan Repayment Project Agreement Loa n Country Sub-Loan Sub-Loan Repayment Project Revenues Project Company Equity Investment Share Holders Output Purchaser IBRD Loan for “Enclave” Project Guarantee of Loan Repayment IBRD Country Loan Repayment Loan Guarantee Loan (and Security) Agreement Off-Shore Trust Account Return to Project Company Project Company Equity Investment Share Holders Output Project Revenues Purchaser World Bank Financial Debt Refinancing World Loan World Bank Country Loan Repayment Project Agreement Commercial Lenders Commercial Loan Commercial Loan Repayment Project Revenues Project Company Equity Investment Share Holders Output Purchaser World Bank Financial Investment Facility World Loan World Bank Country Loan Repayment Loan Proceeds Project Agreement Loan Repayment Investment Facility (Development Finance Company) Loan/Investments Repayments/Returns Project Company A Loan/Investments Project Company B World Bank-Financed Equity World World Bank Loan Repayment Loan Project Agreement Country Equity Investment (Goods and Services) Return on Equity Project Revenues Project Company Output Purchaser World Bank-Financed “Take-or-Pay” World Financed and Other Contracts World Bank Loan Repayment Loan Country Project Agreement Loan Proceeds Government Purchaser Output Payment under “Take-or-Pay”/ “Take-and-Pay” Contract Project Company Equity Investment Shareholders World Bank-Financed Put Option World World Bank Contingent Loan Repayment Contingent Loan Country Loan Proceeds Project Agreement Repayment Government Agency Put Option Project Financier Financing Repayment/Returns Project Revenues Project Company Purchaser Output World Bank-Financed Third-Party Guarantee World World Bank Contingent Loan Repayment Contingent Loan Country Loan Proceeds Project Agreement Funding Agreement Third-Party Guarantor Guarantee Project Financier Financing Repayment/Returns Project Revenues Project Company Purchaser Output World Bank-Financed Country Guarantee World World Bank Contingent Loan Repayment Contingent Loan Country Loan Proceeds Guarantee Project Financier Financing Repayment/Returns Project Revenues Project Company Purchaser Output IBRD “Partial Credit” Guarantee Guarantee Through a Put Option Through Indemnity IBRD Loan Country Put Options Commercial Lenders Loan Loan Repayment Project Revenues Project Company Output Equity Investment Share Holders Purchaser IBRD “Partial Credit” Guarantee Indemnity IBRD Loan (or Counter-Guarantee) Country Guarantee Commercial Lenders Loan Loan Repayment Project Revenues Project Company Output Equity Investment Share Holders Purchaser IBRD “Partial Risk” Guarantee Indemnity IBRD Loan (or Counter-Guarantee) Guarantee Country Undertakings to Project Company for Commercial Lenders Commercial Lenders Loan Loan Repayment Project Revenues Project Company Output Equity Investment Share Holders Purchaser IDA Credit IDA IBRD Credit Repayment Credit Country Project Agreement Sub-Loan Sub-Loan Repayment Project Revenues Project Company Output Equity Investment Share Holders Purchaser ...
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