EUP 222 ENGINEER IN SOCIETY PROJECT FINANCE

Understand the financial concepts to appraise a project effectively.

Dr. Sharifah Akmam Syed Zakaria, PPKA . email: akmam@usm.my

EXPECTED OUTCOMES:Able to demonstrate knowledge and understanding of engineering and management principles and apply these to ones own work, as a member and leader in a team, to manage projects in multi-disciplinary environments.

Take charge and be accountable

You are today where your thoughts have brought you. You will be tomorrow where your thoughts take you. (Forbes)

Aims

UNDERSTAND project appraisal rules and optimise your project designs financial outcomes.

APPRECIATE the relevant factors that drive a projects commercial success.

RELATE to the different concepts and methodologies of financial evaluation.

TRANSFORM to a more desirable engineer.

GAIN the skills to advance in management project appraisal skills are essential for career progress.

Green infrastructure and business financing and advising

Providing sustainable products: According to forecasts by leading energy experts, the trend towards renewable energy will become even stronger worldwide in the next few years.

More money is already being invested in the generation of renewable energy than in fossil-fuel and nuclear power plants combined.

Demographic change, increasing natural resource demands, urbanization and the growing significance of environmental aspects are creating a growing need for investment in all types of infrastructure.

Project Financing and Sustainable Development

Climate Resilience Strategy

facilitates

transition to a path of sustainable low

carbon development

Collaboration, Mobilisation of

financial resources

climate resilient investment

regional capacity-building

Project Financing and Sustainable Development

Strategy facilitates

Increase in Competitiveness of private sector

Energy efficiency:

reduction in cost of goods/services produced

price advantage

Global Funds

Whatever area your expertise, engineers are an important part in the project and product

life cycle and have an invaluable role in delivering commercial success.

Knowledge of financial concepts becomes increasingly a requirement in the skill set of engineers.

In order to demonstrate confidently that technical solutions do not only solve a problem, but can solve the problem at reasonable and feasible cost in a competitive environment.

Engineering comes to life with projects that are implemented.

A considerable amount of projects, may therefore not perform as expected.

The development of sound feasibility assessments is crucial to ensure that all costs of the project are captured in the correct way and that revenues can generate the required levels of margins.

Engineers must therefore understand the financial concepts to appraise a project correctly

and to include concepts such as market and industry risk rates, the time value of money and

the role of accounting concepts in modelling a project life financially.

Some of these sectors include: Energy Project finance is used to build energy infrastructure in industrialized countries as well as in emerging markets.

Oil Development of new pipelines and refineries are also successful uses of project finance have been financed with this model. Before the use of project finance, such facilities were financed either by the internal cash generation of oil companies, or by governments.

Mining Project finance is used to develop the exploitation of natural resources such as copper, iron ore, or gold mining operations in countries.

Highways New roads are often financed with project finance techniques since they lend themselves to the cash flow based model of repayment.

Telecommunications The burgeoning demand for telecommunications and data transfer via the Internet in developed and developing countries necessitates the use of project finance techniques to fund this infrastructure development.

Other Other sectors targeted for a private takeover of public utilities and services via project finance mechanisms include pulp and paper projects, chemical facilities, manufacturing, hospitals, retirement care facilities, prisons, schools, airports and ocean-going vessels.

Project Finance - IntroductionProject finance, also known as limited-recourse or non-recourse finance.

It consists in financing very specific assets or projects, with the repayment coming

ONLY from the cash-flow generated by that project or asset, without any claims (with some very specific exceptions) on the companies that develop these projects.

Project financing is concerned with:

Investing funds in assets

Project size

Profits from project operation

Project risk

Project liquidity

Obtaining the best mix of financing

To determine:

Project value

Projects financial ability

To determine:

Project finance involves

2R

RISK

RETURN

Uncertain economy Interest rate

Inflation

Fluctuation in: Future demand

Prices

Costs

Management of assets

Allocation of capital

Valuation of projects

Balancing decision-

making in:

Investment

Financing

Return To achieve project goals:

Infrastructure development New

invention Profit maximisation

Project finance, comes from a combination of both equity and debt.

The split between equity (investor funding) and debt (lender funding) depends on the individual project and, most importantly, on the risk profile of each project.

The higher the risk, the greater the share of equity will be required by the lending banks.

The risk of an individual project is also decisive for the level of debt which a project can take on.

The principle is simple: a bank finances a specific asset, and gets repaid only from the revenues generated by that asset, without recourse to the investors that own the project.

It works well for project with well identified assets with high initial investment costs, and strong cash flows after that, like big infrastructure items (toll bridges, pipelines) and energy assets (oil fields, power plants).

Project financing is an innovative and timely financing technique that has been used on many high-profile corporate projects.

Employing a carefully engineered financing mix, it has long been used to fund large-scale natural resource projects, from pipelines and refineries to electric-generating facilities and hydro-electric projects.

Increasingly, project financing is emerging as the preferred alternative to conventional methods of financing infrastructure and other large-scale projects worldwide.

Project Financing discipline includes understanding the rationale for project financing, how to prepare the financial plan, assess the risks, design the financing mix, and raise the funds.

In addition, one must understand the analyses of why some project financing plans have succeeded while others have failed.

The Segway PT The Segway PT is a two-wheeled, self-balancing, battery-powered electric vehicle invented by Dean Kamen.

It is produced by Segway Inc. of New Hampshire.

The name Segway is derived from the word segue, meaning smooth transition.

PT is an abbreviation for personal transporter.

New transport options aim to be 'un-Segway'

At the Consumer Electronics Show in Las Vegas, developers showed off several self-balancing wheeled contraptions that aim to provide environmentally friendly short-distance transport, as well as a host of other gadgets: skateboards, roller skates and a variety of scooter-like vehicles.

"This is not a Segway," he said. "There are no handlebars. You don't look weird. You can pick this up and throw it in your car, take it to work, take it on the train."

The Technical Requirement StudyFor every proposed project, the study should:

i. enumerate the various items of the capital cost in both local currency and foreign exchange requirements,

ii. report the requirements of the project with regard to the quantity, quality and specification of each raw materials, labour, supplies, fuel, power, water, transportation, and other inputs, and waste disposal,

iii. provide a comprehensive environmental impact assessment of the production activity,

iv. report the estimated production and overhead costs for operating the proposed plant in detail.

Project Performance Target:

Scope = required scope

Cost = Budget limit

Time = due date and schedule

= QUALITY and SUSTAINABILITY

Q & S

Q & S

The Technical Feasibility StudyThe technical feasibility study aims at determining:

i. how well the technical requirements of the project can be met,

ii. which location would be most advantageous, and

iii. what would be optimum size of project.

iv. it therefore requires the study, item by item, of the availability, quality, accessibility and cost of all the goods and services required for the project with particular reference to (a) alternative location and (b) alternative project sizes.

Some of these sectors include: Energy Project finance is used to build energy infrastructure in industrialized countries as well as in emerging markets.

Oil Development of new pipelines and refineries are also successful uses of project finance have been financed with this model. Before the use of project finance, such facilities were financed either by the internal cash generation of oil companies, or by governments.

Mining Project finance is used to develop the exploitation of natural resources such as copper, iron ore, or gold mining operations in countries.

Highways New roads are often financed with project finance techniques since they lend themselves to the cash flow based model of repayment.

Telecommunications The burgeoning demand for telecommunications and data transfer via the Internet in developed and developing countries necessitates the use of project finance techniques to fund this infrastructure development.

Other Other sectors targeted for a private takeover of public utilities and services via project finance mechanisms include pulp and paper projects, chemical facilities, manufacturing, hospitals, retirement care facilities, prisons, schools, airports and ocean-going vessels.

FINANCIER

OWNER

PARTIES INVOLVED IN AN ENGINEERING PROJECT:

CONSULTANTS

CONTRACTOR

MANPOWER

SUPPLIER

APPROVING AUTHORITIES

PRIVATE SECTORPUBLIC SECTOR

MANAGEMENT CONSULTANT

PLANNER

ENGINEER

LEGAL

DESIGNER

MAIN CONTRACTOR

SUB-CONTRACTOR

TECHNOLOGIST TECHNICIAN SKILLED WORKERSEMI-SKILLED

WORKERUNSKILLED WORKER

NOMINATED SUPPLIER

MANUFACTURER

DISTRIBUTOR

FEDERAL

STATE

LOCAL

BANKCREDIT

CORPORATION

LEASING COMPANY

FINANCECOMPANY

GOV.