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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 How to Get Involved in Private Financing Lecture 9 Fred Moavenzadeh Department of Civil and Environmental Engineering Massachusetts Institute of Technology Project Development Project 1. 2. 3. 4. 5. 6. 7. 8. Finding Projects Project Structures Getting into the Business Organization & Staffing Finding Partners Financing and Development Issues Project Risks Merchant Bank/Fund Capability 2 1. Finding Projects Finding Network: Network: Infrastructure funds Infrastructure Published bid opportunities Published Federal and State government officials Federal Banks and international financial institutions Banks Specialized operating companies in chosen sectors (such as electric utilities, Specialized airports, toll roads, etc.) etc.) Infrastructure-related conferences Infrastructure EPC companies EPC Private sector development companies Private Individual project developers Individual Strategic and operational investors Strategic Research and intelligence resources Research Specialized Consultants Specialized 3 2. 2. Project Structures Typical structures: Typical Include many participants Include Various types of project owners/partners could include: Various Individual project developers Individual project Strategic and operational Investors Strategic and Governments Governments Passive Investors (e.g., funds and institutional investors) Passive Investors funds Service providers/project contractors, equipment manufacturers, feedstock suppliers, O&M Service feedstock providers, offtakers providers, Various forms of debt – some recourse and some totally non-recourse project risk Various Can be totally private sector or PPP Can The Developer is responsible for structuring these complex arrangements – The which requires creative, experienced individuals. Developers tend to be highly compensated with project profit participation, which Developers can create cultural issues in traditional company 4 PROJECT STRUCTURES PROJECT Illustrative US Cogeneration Project Coal Fired Power Plant Power Enterprises Capital Company SPC* Coal Company EPC Enterprises SPC* SPC* 48% GP Interest 12% GP Interest Fuel Supply Agreement Transportation Company Lime Company Illustrative Cogeneration Plant, Ltd. Lime Supply Agreement O&M Agreement U.S. Operating Services Company * A wholly-owned special purpose subsidiary was used to hold the partnership interests Management Service Agreement U.S. Generating Company Electric Utility 40% LP Interest Construction/Term Financing Power Purchase Agreement Steam Sales Agreement Food Processor Turnkey Construction Contract Lenders Bechtel Power Corporation Tax Exempt Debt Major Subcontracts 5 3. 3. Getting Into The Business (1) Steps for entering the Development business: Steps Identify target sectors, project prioritization and selection criteria, and strategic approach Identify prioritization and selection Form company Form Hire staff Hire Develop and nurture “project opportunity network” Develop Options for approaching projects: Options Develop relationships with project developers/companies in target sectors Develop developers/companies Create “greenfield” opportunity -- with or without Partner Create opportunity -- with Bid government-sponsored project on specific opportunity -- with or without partner Bid sponsored -- with Buy partial or total position of another developer Buy Buy an existing operating asset or business Buy Participate-in or develop ancillary business activities or expertise, which: Participate Increases the revenue/profit streams available Increases Increases sector expertise and enhances industry credibility and reputation Increases reputation Expands relationships and possibly improves “deal flow” Expands deal flow May ultimately evolve into independent businesses themselves. May independent businesses 6 Getting Into The Business (2) (2) Characteristics of infrastructure projects and the Characteristics development/finance process Very complex ownership and financial structures Very New players entering industry, bringing tremendous capital but limited New imited experience Keys to success: Keys Creative financing and access to funding Creative Understanding government regulations and managing government Understanding relationships Ability to evaluate specific industry potentials and trends Ability Ability to understand and weather long-term business-cycles Ability Ability to link together and mitigate the myriad of project risks, including the Ability mitigate s, risks involved in project construction, feedstock pricing, off-take pricing, risks take political risk, currency risk, etc, political A shortage of experienced professionals in the sectors – and good ones shortage sectors and are very expensive. are 7 4. 4. Organization Infrastructure projects are highly capital-iintensive ventures – so ntensive Infrastructure so normally you would design your business to maximize your ability to leverage your capital. Therefore, one approach is to: Therefore, Create multiple levels into which strategic or financial investors can be Create introduced, and Multiple levels at which value can be harvested. Multiple 8 4. 4. Organization Any particular block or level of the business can be added or Any built at any time bringing in strategic, financial or special purpose partners as desired. In one model, The company owns a Holding Company which in In turn owns x% of the Operating Company. At the Operating Company level, a strategic or financial investor might be At brought into the business to purchase part of the Company. This investment could be made at any time – either at the beginning or later This in the future -- as the value of the overall business becomes clearer, and the the as value of a particular partner easier to define. 9 4. 4. Organization Below the Operating Company level could be one or more Below Holding Companies. This approach allows The Company to maximize This opportunities for investment of capital from outside sources, while continuing to maintain its desired level of control through the various levels of the organization 10 4. 4. Organization Organization Also below the Operating Company, one could organize a series Also of Service companies. The Service Companies could include such things as: Operations and Maintenance Operations Management (accounting and other support to projects) Management Development Development Project Finance/Financial Advisory Services Project These entities grow expertise, provide differentiators in the These marketplace, provide career growth opportunities, and also provides the flexibility to capture associated revenue streams 11 5. 5. Finding Partners Important to Understand: Important The Company’s existing joint venture/partnership relationships The The Company’s criteria for selecting future partners, could include: The Recognized name Recognized Development experience in the sector being considered Development Operational experience in the sector being considered Operational Reputation for ethical conduct and best operating practices Reputation Strong financial position with robust balance sheet Strong Compatible with culture, modes of operation and business Compatible expectations Ability to help build the sector in which they will invest Ability Ability to relate-to and comply with the particular local laws and Ability to regulations, The partners would typically vary by sector, although there can be The some cross-over 12 6. 6. Financing Infrastructure project finance is a specialized skill-set. Infrastructure These are complex, often unique projects with multiple parties These Often Project/Limited Recourse Financing Often Recourse Financing Typically, there are diverse financing sources Typically, Export Credits Export Aid and concessionary finance Aid Bank consortia Bank Institutional Institutional Contractor and equipment supplier Contractor Mezzanine and other types of debt funds Mezzanine General purpose Funds General 13 6. Financing (2) (2) Financing often conducted in two phases Financing Short-term construction loans Short Longer term take-out financing Longer Some signs of secondary markets evolving Some Interest rates can be fixed or floating Interest Generally banks are floating Generally Institutional is fixed Institutional Funding can cover: Funding Development of greenfield facility with construction risk Development construction risk Construction period funding Construction Acquisition of existing project (s) Acquisition existing 14 6. 6. Financing (3) Financing (3) Special considerations that are changing the funding Special requirements of projects Increased liquidity available for projects globally Increased Proliferation of funds being formed to invest-in or finance projects Proliferation Examples of funds include: Goldman Sachs, Macquarie Infrastructure, Examples include: Sachs, re, GE Capital, Citi-IFDC ($5-b), Blackstone, Carlyle GE 15 7. Managing Project Risk 7. Projects have diverse risk Projects Front-end development exposure Front Pricing of bid/purchase Pricing Completion Completion Geopolitical or local/national political risk (change of regulatiions, tax policy, Geopolitical risk (change regulat ons, expropriation, etc.) expropriation, Labor (operational) Labor EPC Risks: EPC Engineering, construction, procurement, shipping/logistics, cost risks including Engineering, inflation Raw materials and feedstock (pricing and availability) Raw Technology (doesn’t work or becomes obsolete) Technology Market disruptions Market Reliability of off-taker Reliability Market for product or market pricing Market Force majeure Force 16 7. Managing Project Risk (2) (2) Risk mitigation techniques Risk Evaluation: Experience and expertise which understands, can Evaluation: evaluate and mitigate risks Risk sharing arrangements amongst parties to the project Risk Insurance (completion, bonding, technology, all-risk, business Insurance risk, interruption, political) interruption, 17 8. Merchant Bank/Fund Capability Example: Concept: Create a funding mechanism to support projects being Concept: developed Start initially at $300-million Start Take 25% ($75-million) as lead investor? Take Remaining funds raised from institutional investors around the world Remaining Retain core team:– complete by month 3 Retain Develop a Fund prospectus: complete by month 3 Develop Fund raising and commitment: complete by month 15 Fund Closing of Fund: complete by month 17 Closing 18 8. Merchant Bank/Fund Capability (2) 8. If a 15% interest in taken in projects, the $300-million If million investment will support about $8-billion of projects financed investment billion 25% equity and 75% debt 25% Fund/merchant bank also to have an international debt Fund/merchant raising capability and capability to locate other partners for projects. 19 Investment Appetite Investment What is the breadth of the Company’s interest in development? What Company The total package of these activities could include: The Development from an owner's perspective Development Project development and costing from an EPC perspective Project Broad project participant (which could iinclude: owning and running a development ng Broad could nclude: company) company) Does this vary by sector? Does sector? Are HCC funds available for development and equity investment in Are development projects? What is the level of potential participation by the Company in a development company and What in various projects? Will the Company be willing to partner with others in a development company? Will developm What degree of control would the Company require/desired in the development company What etc.? 20 Suggested Enterprise Structure Suggested Group A – Executive Management CEO Operating Business (1) Existing Construction Business Enterprise Businesses EPC Businesses (new and expanding) Construction Equipment Transportation Hydro Real Estate Capital Infrastructure Development (3) Fund (a) Financing Services Hydro Highways Airports Others Group C – Enterprise Businesses. These businesses should be managed separately from the EPC business with separate skills, compensation, etc. (3) Different specialty JV partners needed for each of these, which can evolve in accordance with opportunity and need. Thermal and Nuclear Others Group B – Operating Businesses Group D – Shared Services Matrix to the Operating Businesses. all functionalities will have to be included. Marketing BD Support Tendering Procurement Project Operations (and Project Management) Monitoring CTO Design, ISG Engineering, Field Engineering R&D and IMS 21 Organization (2) Organization -Strategic Partners Illustrative Development Company Business Structure Partner 3 -Utilities / Developers / Plant & Mine Operators / Middle East Investors Partner 2 -Financial Partners -Funds / Institutional Investors / Multilaterals / Middle East Investors Partner 1 Holding Company -Special Purpose Partners -Equipment Suppliers / Construction Cos. / Plant & Mine Operators / Fuel Suppliers / Lessors x% collective X% Operating Company Partner 3 Partner 3 Partner 2 Partner 1 Partner 2 Management x% collective Partner 3 Partner2 Partner 1 Insurance O&M Development / Project Finance x% x% Infrastructure Holding Company A (IHC-A) [e.g. Toll Road Company] Company’s FUND x% collective Infrastructure Holding Company B (IHC-B) [e.g. Airport Company] Banks: Company’s FUND Partner 1 x% collective Partner 3 Partner 2 Partner 1 x% collective -International /Local Bonds -Public Local Market / Public International Market Project 3 Project 2 Project 2 -IFC / ADB / Export Credits / Multilateral / Government Subsidized/ Concessionary Project 1 Issues: • Type of Partners • Timing to let them enter • Level at which they would enter • Investment appetite of HCC • Raising a Fund(s) Project 3 Government & Multilateral Project 1 Other: Debt -Securitized Paper / Private Debt Market / Mezzanine Debt / Infrastructure Funds / Equipment Finance & Leasing Debt 22 Summary: Analysis for Business Development Summary: What we need for this business What Personnel Personnel Partners Partners Resources Resources Commitments Commitments What we have What What is missing What 23 ...
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