1 the cleaner production investment process day 1 for unep, division of technology, industry, and...
TRANSCRIPT
1
The Cleaner ProductionInvestment Process
Day 1
For UNEP,Division of Technology,
Industry, and Economics
Gloucestershire Business School,
University of Gloucester, UK
ROSCAMStrategic Development
Consultancy, Zimbabwe
Prepared by:
FINANZAS AMBIENTALES,Lima, Perú
ARMSA,Guatemala
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Introduction
3
Course Background
[15 min]
4
Development of the training materials
Content has been developed by:– Gloucestershire Business School, UK– Finanzas Ambientales, Lima, Peru– The Illinois EPA– The Philippine Institute of CPAs– The Asian Institute of Management– UNEP Cleaner Production Financing National
Project Coordinators in Guatemala and Zimbabwe
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UNEP: Financing Cleaner Production — Support
United Nations Environment Programme (UNEP); Division of Technology, Industry, and Economics
Course support is from the project:“Strategies and Mechanisms for Promoting Cleaner Production Investments in Developing Countries”
Funding provided by the Government of Norway
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Words of Welcome
[15 min]
Introduction of Instructors
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Participant Introductions
[30 min]
8
Who is here today? What type of organization do you
work for?– e.g., industry, government, other– If from industry, which sector and what size
What are your job responsibilities and areas of expertise?– e.g., management, accounting, finance,
engineering, production, environmental
What is your investment perspective?– e.g., developer of investment proposals, one who
funds investment proposals
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Why are you here?
What work issues or concerns motivated you to come?
What are your learning goals for this course?
What are your expectations of this course?
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Course Overview
[15 min]
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Focus of the course
Sustainable banking??? Project financing
Also to incorporate your experiences, questions, and goals into the presentations, exercises, & discussions
In the context of Cleaner Production
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Cleaner Production is ...
“The continuous application of an integrated preventive environmental strategy applied to processes, products, and services to increase overall efficiency and reduce risks to humans and the environment.”
— UNEP
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Cleaner Production is different
Much of current environmental protection focuses on what to do with wastes and emissions after they have been created, otherwise known as “end-of-pipe” disposal & treatment
The goal of Cleaner Production is to avoid generating pollution in the first place
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Environmental management hierarchy
Environmental management hierarchy
Disposal
Control/Treatment
CLEANER PRODUCTION Pollution Prevention On-site recycling/reuse
BEST
LEASTDesirable
Off-site recycling/reuse
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Cleaner Production benefits
Reduces costs (of raw materials, energy, waste, emissions)
Reduces risk (to employees, human health, and environment)
Identifies new opportunities for more efficient operations
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CP4: Course aims (1)Entrepreneur’s perspective: Prepare a ‘bankable
proposal’ to justify economic feasibility
Manage the relationship with banks and other potential sources of finance
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CP4: Course aims (2)
Banker’s perspective: Raise awareness on Cleaner
Production investment proposals
Raise awareness on sustainable banking trends
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CP4: Course content (1)
CP: a successful strategy towards sustainable banking
Introduction to project funding Participants’ experiences with raising
funds - problems and issues The banker’s perspective - what banks
look for from firms seeking finance1- Economic viability of the project
2- Financial and economic position of the firm3- General economic background
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CP4: Course content (2)
Group exercise– Developing a bankable proposal– The banker’s response
Other potential sources of finance
Group exercise – Alternative sources of finance
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CP4: Course content (3)
Eco-criteria for investment decision-making
Post-funding implementation and control: after the application has been accepted
Group Exercise– Implementation and management
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Conclusion
Where to go for more information
Brief review of what we learned
Final questions and comments; Any other issues?
Course evaluation
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Time for a break! [20 min]
Time for a break! [20 min]
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CP: a successful strategy towards sustainable
banking
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Economy is a sub-system of ecology
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Towards a Sustainable Economy
Growth Eco-efficiency Sustainability
Yesterday Today Tomorrow
$
Mining
Oil&Gas
Industry
Trade-Serv
Agriculture
cleanpolluting
Flora & fauna
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The tools for the sustainable banker of the 21st century
Economic: IRR, NPV, Ratio-Analysis, balance sheets, cash flows, guarantees, etc….
Environmental: Cleaner Production,
Environmental Management Systems, Environmental Management Accounting,
Eco-labelling, environmental risks analysis and classification, Life-Cycle
Analysis, eco-balance, environmental reporting,etc….
Commercial
information,
public image,
etc
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A two-way bridge between two worlds
Financial world Environmental world
CP
Common language
Eco
-ri
sks
Eco
-di
vide
nds
businesses
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Current trends in commercial banking
Financial institutions are becoming increasingly similar Commercial banks’ activities are expanding in developing countries and countries with economies in transition Increasing interest in sustainable banking
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Types of financial institutions (FIs)
commercial banks savings and loan associations life insurance firms state and local government pension funds sales and consumer finance companies mutual funds insurance companies; credit unions
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Financial institutions - increasing similarity
Traditionally, different types of FI specialized narrowly in their own areas Still true to some extent, but less so Many FI’s are expanding their product-ranges into others’ areas
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Sustainable banking - (1)
banks and other FI’s are becoming more aware of their environmental responsibilities - both in banks’ own operations, and in lending
1992 Earth Summit: “UNEP Financial Initiative on the Environment and Sustainable Development”
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UNEP Finance Initiatives (UNEP FI)
Conceived at the 1992 Rio Earth Summit, UNEP FI has grown from from 6 banks to some 270 financial institutions by 2001.
– The UNEP FI is a voluntary pact between UNEP and some 270 financial institutions globally
– UNEP FI promotes sustainability excellence across the finance sector
– UNEP FI builds the business case for Financial Institutions and Insurers to become sustainability leaders
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Sustainable banking - (2)
Some banks are moving from a traditional defensive position:
- non-active - deny banks’ responsibilities for environmental impacts - resist environmental legislation
towards …..
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Sustainable Banking - (3)
…. Sustainable banking :
- Proactively seek environmental cost savings
- Recognize possible environmental effects on project’s and firm’s risks - Set up special environmental funds
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IMPACT ON FI
CP opportunitiesfor client
Business’ derivedenvironmentalliabilities and risks
Capital costs Operating
costs Market share
Reducedassets value
Potential legalliability
Damagedreputation
efficiency
costs
New marketopportunities
Betterreputation
Legal Liability
Financial
REPUTATION
Repayment Asset value New business
Fines Clean up
Opportunities for the clients and FI
Inherent preventiveapproach
Long term pollution liabilities
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Introduction to Project Funding
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The firm’s business environment - Relevant
factors Government policy Fiscal policy and legislation Financial sector Macro-economic developments Past and current practices in
project financing
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Options for project financing
Internal funds Private sector:
1. Commercial banks2. Development corporations3. Equipment vendors & subsidiary finance Companies4. Trade finance (suppliers and customers)5. Equity
Government sector
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Internal funds
Internal funds can be generated from:
– Capital introduced by the owner
– Profits & cash flows generated by the business and retained within it
40
Capital from the private sector
Long-term loans to purchase fixed assets: secured or unsecured
Short-term loans (including lines of credits without conditions on use)
Leasing
Equity (issue of shares/stock) ...
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Capital from the government sector
Grants
Subsidies
Government-managed development funds
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Firms’ criteria in raising finance
Profitability Risk of excessive debt (‘Leverage’, or ‘gearing’) Matching duration of finance to
duration of project Procedures for application
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Participants’ Experiencesof Financing Projects
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Project finance - Issues and questions (1)
What was the project? Which sources were considered? Which sources were then
approached? What information did they require? Could you provide this information? What were their criteria? (Were
these clear to the firm?)
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Project finance - Issues and questions (2)
Was the application successful? If not - why not?
Did any problems arise during the process of applying?
What requirements did the financier set concerning post-funding project management?
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Project finance - Issues and questions (3)
What do you consider the firm did well? … and not-so-well?
Would you do anything differently another time?
What advice can you offer to others from this experience?
Does this experience prompt any questions?
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Some typical project finance issues and
problems ... The project is not considered to be
economically feasible (i.e. profitable) The firm is unable or unwilling to issue
more shares or to raise debt The firm does not yet have contacts
with commercial banks The firm is in public ownership and
private sources of finance are not accessible
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…and some possible solutions (1)
Problem: the project is not considered to be economically feasible
Solution: Total Cost Assessment of project
Problem: the firm is unable or unwilling to issue more shares or to raise debt
Solution: Leasing
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…and some possible solutions (2)
Problem: the firm does not yet have contacts with commercial banks
Solution: contact chamber of commerce, local accountants, NGOs funds managers, for assistance
Problem: the firm is in public ownership and private sources of finance are not accessible
Solution: contact local national CP centre for institutional assistance
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A few general points of advice...
consider the effect of the current business environment
search widely for possible alternative sources of finance
seek advice from experts and from contacts in other firms
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Time for lunch! [60 min]
Time for lunch! [60 min]
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The Bank’s Perspective
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Commercial banks: Purposes and profile (1)
Transfer funds from ultimate lenders to ultimate borrowers Acquire funds by receiving money from savers: savings accounts, deposit accounts, etc. Provide funds to borrowers through term loans, lines of credit, bonds, etc.
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Commercial banks: Purposes and profile (2)
Commercial banks aim to:– Maximize their returns– Minimize the risks they accept
Expertise in evaluating borrower credit-worthiness Competition between commercial banks helps to keep down lending rates
55
Project finance from banks: the main options
Term loans:– Related to specific projects– Specific amount and term– Rate will reflect risk– Rate may be fixed over time or variable
Lines of credit:– Limited amounts– Flexible in use– Higher interest rates– Interest charged only on finance actually
used
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Loan application and approval procedure (1)
1. Research and review potential sources2. Initial informal discussions with bank loan officer3. Fill out bank’s loan application form; obtain all necessary data4. Submit to bank the loan application and supporting documents
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Loan application and approval procedure (2)
5. Review of application by bank6. Negotiate specific terms of loan7. Bank sends commitment letter8. Bank sends a “term sheet” which defines the specific lending terms9. Sign the loan agreement10. Receive the funds11. Proceed to implement project
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Bank will usually require...
Procedural completed loan application forms additional documentation as required, e.g. the firm’s accounts
Financial acceptable repayment plan proven economic viability (of both project and firm) collateral (i.e. security such as mortgage)
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Banks’ information needs
To assess loan applications, banks need information on :
1- Economic viability of the specific
project
2- The firm’s overall financial and
economic situation
3- The general economic and political background of the country and sector
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1- Economic viability of the specific
project
2- The firm’s overall financial and economic situation
3- The general economic and political background of the country and sector
Banks’ information needs
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Information on the project
Purpose of the loan Expected cash flows from project Expected profitability of project (NPV, IRR...) Assessment of risks of project How project relates to the firm’s business generally
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Purpose of the loan: to demonstrate:
cost reductions and increase in revenue?
sales and production levels increase?
reduced risks?
• Reduce energy use• Reduce material input costs• Reduce penalty fees
• Increase in sales and production and establish increase in demand• Improve product quality
• Environmental compliance and regulation costs
How will the CP Investment produce the perceived...
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Cash flow forecast/projection
• Look at the likely future cash position of the company.
• Examine the possible effects of changes in the cash flow components.
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Profitability analysis:Profitability indicators
A profitability indicator, or “financial indicator”, is: “a single number that is calculated for characterisation of project profitability in a concise, understandable form.”Common examples are:
• Simple payback period
• Return on investment (ROI)
• Net present value (NPV)
• Internal rate of return (IRR)
65
Assessment of risks: Sensitivity analysis
– What could go wrong with the plans for the project?– What will be the effect on NPV if different assumptions are made re sales demand, costs, length of project life, etc.?
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1- Economic viability of the specific project
2- The firm’s overall financial and
economic situation
3- The general economic and political background of the country and sector
Banks’ information needs
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Concern about the financial facts of a business includes:
Organization's ability to meet current obligations
The nature of liabilities
The company’s ability to stand pressure
from both internal and external sources
The true worth of the various assets of the business (accurate picture)
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The bank’s information needs
To demonstrate a company’s credit-worthiness, bank will require: past financial statements (balance sheets, income statements, etc.) forecast future financial statements past credit history and references information on the firm’s management
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Business plan: Objectives
To show to outsiders to help to raise money
To use within the business– As a guide to future action– To control the firm by using the
business plan as a benchmark against which to compare performance
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Business plan: content past and forecast future financial statements brief overview of business markets, customers and competitors products and services distribution management sales forecasts how the firm is to be financed
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Information: what makes it useful
relevance reliability consistency completeness comparability timeliness understandability materiality feasibility and cost-effectiveness
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Interpretation of financial statements
RATIO ANALYSIS
•Is useful to virtually all readers of financial accounting statements.
•Ratios are like a thermometer which takes the actual temperature of a business in relation to some standard measure.
Ratio analysis can help to identify problem areas but in itself cannot offer solutions: these must be provided by the businessman.
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For financial analysis purposes, it is useful to classify ratios under five headings:
Profitability ratios which measure the overall effectiveness of managers as shown by the returns generated on sales and investments.
Liquidity ratios which judge whether a business is likely to run out of cash in the short term.
Ratio analysis
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• Solvency ratios which measure the extent to which a business is financed by borrowed money and the risk involved.
•Activity ratios which measure how effectively the business is using its resources.
•Growth ratios which measures the business’s past rate of growth and assess the potential for future growth.
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Profitability ratios key question: at what rate does the business generate profit from its activities?
Test 1: What is the proportion of direct trading profit contributed by every dollar worth of sales?
Test 2: What is the amount of profit generated out of every dollar invested in the company?
76
Profitability ratios:Examples
Test 1: Gross profit percentage on sales :
=
Test 2: Return on capital employed :
= Profit before interest & taxCapital employed
Gross profitGross sales
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Liquidity ratios definition: ability to meet short- term operating liabilities
key question: how much is the total of the firm’s short-term liabilities?
Test 1: are the liquid (short-term) assets sufficient to cover adequately these short-term liabilities?
Test 2: are the regular operating cash inflows adequate to cover short-term
liabilities, as they fall due for payment?
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Liquidity ratios:Examples
Test 1: Current ratio :
=
Test 2: Acid test quick ratio :
=
Current assets Current liabilities
Current assets - stockCurrent liabilities
The acceptable ratios depend upon the type of industry in which a company operates.
79
Solvency ratios definition: ability to meet long-term liabilities such as debt
key question: how much is the total of the firm’s indebtedness?
Test 1: what are the relative proportions of (1) equity, and (2) debt?
[“gearing”, or “leverage”]
Test 2: are operating profits adequate
to cover the interest that has to be paid regularly on the debt?
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Solvency ratios:Examples
Test 1: Debt ratio :
=
Test 2: Times interest earned :
=Interest charges
Earnings before interest & taxes
Total debtTotal assets
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Activity ratios
Key question: How effectively does the firm use its resources?
Test 1: What is the turnover of stocks?
Test 2: What is the quality of debtors and credit policies of the business? How many day’s sales represented by debtors?
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Activity ratios:Examples
Test 1: Stock turnover ratio :
=
Test 2: Debtors turnover ratio :
=
Sales revenueStocks (at period end)
Debtors (Balance sheet)Average daily sales
Average daily sales =
Sales as per income statementDays (365)
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Limitation of ratios
(A) differences found among the accounting methods used by various companies, which make comparisons difficult even when talking about the same industry
(B) financial statements are based upon past performance and past events, we must project our evaluation from this basis
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• Though with limitations, ratios still provide guides and clues in spotting trends towards better or poor performance and in finding significant deviations from average or an acceptable standard, if any is available.
• It is in the interpretation of such trends and deviations that the analyst will use his skills and experience to determine what is likely to happen in the organization.
Conclusion
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1- Economic viability of the specific project
2- The firm’s overall financial and
economic situation
3- The general economic and political background of the country and sector
Banks’ information needs
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General economic background
National and world economy: - forecasts of economic growth - forecasts of inflation - political or economic instability
Sector-specific background: - developing new technologies - changes in product markets - new legislation and regulation - level of competition in the sector
87
Conclusions (1)
Banks have specific demands for information due to their loan application/approval procedures Most information should be provided by applicants Banks will maintain some data themselves (e.g. general economic data)
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Conclusions (2) banks obtain information on firms through:
– the application forms and supporting documents submitted by the firms– face-to-face contacts and visits to the firm– the history of the bank’s relationship with the customer
post-funding control enhances the relationship and facilitates future borrowing
89
Conclusions (3)
Firms should set up and maintain adequate information systems:
Before
They are needed !
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Group exercise - Acme: Part 1
Preparing a ‘Bankable’ Proposal Read the Acme case, it is detailed in
your handout You will be working in a small group
with others The task is to develop a proposal to
a bank for finance for acme’s project
Your group will present this to the banker
Plan ahead - what points to include?
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Time for a break! [15 min]
Time for a break! [15 min]
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Developing a Bankable Proposal:Acme Electroplaters
Part 1
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Group exercise - Acme: Part 1
The task1. Prepare presentation to a bank making the case for finance for Acme’s project
2. Complete the standard application bank loan application form, located in your handout
3. Anticipate possible questions from the banker
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firm’s current financial position
history of firm
the project’s expected returns and risks
availability of relevant information
firm’s ability to implement the project
Group exercise - Acme: Part 1
Criteria for success
95
Checklist:
“Funding Application Format Checklist”
Checklist:
“Funding Application Format Checklist”
Refers to the checklist document
96
Review of what we have covered today
97
Final questions or comments?
98
The Cleaner ProductionInvestment Process
Day 2
For UNEP,Division of Technology,
Industry, and Economics
Gloucestershire Business School,
University of Gloucester, UK
ROSCAMStrategic Development
Consultancy, Zimbabwe
Prepared by:
FINANZAS AMBIENTALES,Lima, Perú
ARMSA,Guatemala
99
Any questions?
Arising from day 1 ?
Looking ahead to day 2 ?
100
Developing a bankable proposal:
Group presentations
101
Time for a break! [15 min]
Time for a break! [15 min]
102
Developing a bankable proposal:
the banker’s response
103
Time for lunch! [60 min]
Time for lunch! [60 min]
104
Other Potential Sources for Project Financing
105
Checklist:
“Funding Options”
Checklist:
“Funding Options”
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Further potential sources Internal funds
Equity (owners’ capital) Leasing / equipment vendors and
subsidiary finance companies Trade credit (suppliers, customers)
Micro-credits
Development bank loans
Government finance
107
Internal funds (1)
Internal funds = retained profits (‘reserves’)
Size of reserves depends on:-– Past profitability of business– Minimizing tax liabilities– Proportion of profits retained
vs. Paid out to owners in dividends
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avoids having to approach external sources (and transaction costs)
preserve borrowing power for future projects
have an indirect opportunity cost not available to new firms must be built up over time
Internal funds (2)
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Equity capital
Equity = ordinary shares, i.e. owners’ capital
Potential sources of new equity:-– more capital from the current owners
(shareholders)– new shareholders, by private
approaches– venture capital– a public share offering
110
Equipment vendors and subsidiary finance
companies Leasing has become a major source of
financing that is provided by some equipment vendors and subsidiary finance companies (‘lease-providers’).
With ‘financial leases’ (or ‘capital leases’):– Title to the equipment is held by the firm which
operates it (the ‘lease-holder’)– The lease-provider retains a first security
interest in the equipment– The lease-holder faces the risks and receives
the rewards of ownership
111
Trade finance potential sources
– suppliers of raw materials– suppliers of other goods and services– key customers
their motive: to secure a key customer or source of supply
risk: being tied to a particular supplier or customer and unable to develop business freely
112
Micro-Credits (MC) aim: ‘to match appropriate technologies and financing, through the development of packages that build on community values’ local initiatives, depending on MC managers’ knowledge of their own localities and markets an expanding source for socially desirable projects - but little-known
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Grameen Bank (1) Grameen Bank,Bangladesh: the
pioneer (founder: Mohammed Yunus)
core belief: the credit-worthiness of the poorest members of a community
aim: to break out of the poverty cycle, using innovative technologies
a model for many similar banks operating across the world
Micro Credit example
114
finance derived from international sources (e.g. development banks) Grameen uses this to make ‘soft’ loans to local borrowers several projects in renewable energy and other environmental investments website: www.Grameen-info.org
Grameen Bank (2)Micro Credit example
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Grameen’s lending policy no requirement for security repayable in weekly instalments eligibility for subsequent loans depends on full repayment of any earlier loans transparency in bank transactions helps to encourage repayments by borrowers, through social pressure
Micro Credit example
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Grameen - the results
2.34 million borrowers in Bangladesh
94% are women loans for projects in 39,000 of
86,000 villages in Bangladesh 1977-1997, total lending - US$2
billion now, 223 Grameen-type
programmes in 58 countries
Micro Credit example
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Development banks (1)
examples:– World Bank– International Finance Corporation– Inter-American Development Bank– Asian Development Bank
wide and diverse range of programmes and projects
118
Development banks (2)development banks aim:
– to lend large amounts…– … but at lower transaction costs
therefore, traditionally, mainly large projects in the public sector stringent guidelines on project characteristics and lending criteria (e.g. to be environmental, social,
developmental, technically innovative)
119
Development banks (3)
Benefits of development bank finance:
can help with technological and managerial advice on the project
project packaging
liaison with other potential sources of finance
120
Raising finance from government schemes
identify the available schemes find out:
– the criteria and conditions of the scheme– the procedures for application
develop the firm’s application:– to match the scheme’s criteria – to identify how the project supports public policy objectives
121
Grants low or zero cost of capital may be available for only part of a
project, or on restrictive terms preserves borrowing power for other
purposes accessible via local brokers and/or
international development agencies BUT:
– can conceal true long-term costs– misses opportunity to build long-term
relationship with financiers
122
Past funding experience successful past experiences with
financing projects?
how might CP projects be different? Why might they be ...
– more difficult to finance?– easier to finance?
could these further sources be relevant? If so - when and how?
123
Summary a wide range of potential sources means:
– more likely to be able to raise finance...– … and on better terms
the range varies between countries
and over time an early search for a wide range of sources can be very worthwhile each source will have its own criteria and procedures
124
Acme Electroplaters:Part 2
125
Time for a break! [15 min]
Time for a break! [15 min]
126
Eco-criteria for investment decision-
making
127
Criteria (+): activities to encourage
Bio-pesticides Bio-control
Bio-fertilisers Renewable energies
Efficient energy Clean fuel
Aquaculture Organic agriculture
Health & safety Environmental
management
Pollution control Pollution prevention
Recycling Waste management
Reforestation Eco-tourism
Eco-data access Corporate eco-
donations
Eco-education Nomad forest products
128
Sectors of major concern:
Energy and Mines Petroleum and Chemicals Agribusiness Transportation Recycling Eco-Tourism
Where CP can highly contribute to reduce risk and increase efficiency and profitability
129
Energy
Risks– Atmospheric emissions– Water contamination– Acoustic pollution– Safety
Opportunities– Alternative energies– Cost reduction
130
Mining
Risks– Environmental: air and water
pollution– Occupational: health and safety
Opportunities– Genuine wealth creation– Production of quality durable goods
131
Agribusiness
Risks– Solid waste – Water and ground contamination– Public health
Opportunities– Organic Brands and distribution
channels– Exportation opportunities through
international standards
132
Banks’ requirements to obtain services in
Environmental risk assessment of business activities
Environmental footprint of investments, guaranties, leasing
Training for local bank staff
Development of new eco-products (capital risk investment fund, forest funds)
Identification of new business opportunities within client database
133
Competitive banking
“In today's hyper-competitive financial services environment, incremental improvement is no longer enough.
To be successful, firms need to undertake massive change - a fundamental reinvention of their strategies and operations that will allow them to delight customers, exceed investor expectations, and attract and retain the best and the brightest professionals.”
Reinventing FINANCIAL SERVICES
Succeeding With Corporate Transformation
Deloitte Consulting and Deloitte & Touche
2001
134
Sustainable banking: trends
Avoid eco-risks, identify eco-business opportunities;
Internalise environmental costs & debts in company’s decision-making;
Total environmental accounting;
Capital markets increasingly value “green” capital;
Use of eco-criteria in decision-making;
New financial eco-products (eco-funds, eco-mortgage, renewable energy credits);
CP: prevention is better than end-of-pipe solutions
Efficient use of resources (water, energy);
Fewer, bigger banks.
135
Dow Jones Sustainability World Index
Dow Jones Sustainability World Index
Dow Jones Global Index (USD, Price Index)
330.00
280.00
230.00
180.00
130.00
80.00
12/93 6/94 12/94 6/95 12/95 6/96 12/96 6/97 12/97 6/98 12/98 6/99 12/99 6/00 12/00 6/01
136
Financial eco-innovations
Personal banking Corporate banking
Eco-mortgage Eco-shares
Eco-autos Eco-financial derivatives
Home-office: 2x1 ESCO, Energy Service Co
Eco-savings Build, Operate, Transfer
Eco-leasing Eco-loans
Swap for debt Eco-credit cards
Eco-investment funds
137
Post-funding management and control
138
Aims ensure repayments are made in
full and on time avoid foreclosure / calling in
security comply with all loan contract
conditions build strong credit history and
relationship for the future
139
Post-funding management and control: issues
1-implementation phase2-security for loans (collateral)3-other loan contract conditions4-regular financial information5-evidence of strong internal
management 6-keeping the lender informed
140
1-Implementation
need to synchronize:– receiving the finance– acquiring the new asset(s)– starting the new business activities
project management techniques and skills, e.g. ‘critical path’ analysis
clear organizational responsibilities
141
2-Security for loans usually requested by banks,
though less crucial than the firm’s ability to repay
can include owner’s personal assets as well as the firm’s assets
need to protect assets used as security
Third-party guarantee
142
3-Loan contract conditions (‘covenants’)
Examples: - adequate liquidity - adequate solvency (gearing / leverage) - no significant changes in:
- nature of business - ownership
- no sales of major assets without the prior agreement of the lender
143
4-Regular financial information Financial Reports
(FR’s): rules based on legal rules and
accounting standards (‘Generally Accepted Accounting
Practice’) required annually by law lenders may require more
frequently– and promptly– with supporting analyses
144
Analyzing FR’s
FR’s can be analysed by readers to evaluate the firm’s likely return and risk position, as reflected in:
liquidity solvency profitability operating efficiency
145
Analyzing FRs: comparators
over time– ‘vertical’, or ‘trend’, analysis
against other (comparable) firms– ‘horizontal analysis’, or
‘benchmarking‘
against other standards
146
Preparing FR’s: guidelines for management
disclose accounting policies, especially if different from normal
be open where estimates and approximations have been necessary
indicate if any amounts in the FR’s are no longer realistic
ensure reliability of the accounting systems which collect the data
thoroughly review FR’s before sending outside the firm
147
5-Evidence of good internal management
performance indicators
budgeting
costing and cost control
ex-post audit of projects
148
6-Keeping the lender informed
Keep lenders informed about any significant changes in:
trading the firm’s risk factors key personnel nature of the business any other factors relevant to risk and
return
149
Post-funding experiences
any experience during this phase?
what terms did lenders impose?
were any difficulties met, in complying with these terms?
how did the firm deal with them?
150
Acme Electroplaters:Part 3
151
Conclusion
152
Review ofwhat we have covered
in this course
153
The CP investment process (1)
introduction to the course CP: a successful strategy towards
sustainable banking introduction to project funding and
participants’ experiences banker’s perspective and
information needs
154
The CP investment process (2)
developing a bankable proposal other potential sources of finance eco-criteria for investment decision
making post-funding management and
control conclusion
155
Final questions and comments?
156
Course evaluation
157
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