Download - Lecture 01 (S1-2012)
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ENGG2850 Introduction to Project Finance
Week 1 An introduction to Introduction to Project Finance
Dr. Michael Harr
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Introduction to Project Finance
Course reading material:
Principles of Project Finance, E.R. Yescombe
Modern Project Finance: A Case Book, B.C. Esty
Course assessment: (you will need a calculator for all quizzes, tutorials and the exam)
Three quizzes 20% for the best 2 out of 3, held at the beginning of the lecture based on the previous lectures, only the previous untested material will be in each quiz.
Group Project 30%: 80% based on the presentation of group work, 20% based on written submission
Exam 50%
Contacting me
Room 338A, Building J05
Office hours 9:00am-10:00am Monday, Wednesday [email protected]
Tutorials: You will need to attend to pass the course, Microsoft Excel and theory based examples covered that will be a part of the final exam
I will ask questions during class!! Be ready to participate ....
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Project Finance and this course.
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Introduction to Project Finance
Course Outline, 13 weeks of lectures, Case Study based learning of principles:
1.Introduction to the course: Preliminary ideas and motivations (No tutorial)
2.Project Finance: The foundation principles of Project Finance and an overview (Tute 1: Aus Japan Cable)
3.Time-Money relationship: Why is money worth more now than in the future? (Tute 2: TV of M)
4.Case Study of the Time-Money relationship: A toy company example (Tute 3: HSR toy case study)
5.Structure Projects (1st Quiz) (Tute 4: Nam Theun 2)
6.Case Study for Structure Projects (Tute 5: BP Amoco [A])
7.Valuing Projects (guest speaker) (Tute 6: Connecting TV of M with Project Finance structure)
8.Case Study for Valuing Projects (2nd Quiz) (Tute 7: Bidding for Antamina)
9.Managing Risky Projects (guest speaker) (Tute 8: Simple Analysis of risk + risk matrix)
10.Case Study for Risky Projects (Tute 9: Polands A2 Motorway)
11.Legal Considerations of Contracts in Project Finance (3rd Quiz) (Tute 10: BP Amoco [B])
12.Bringing it all together: How do we conceptualise and understand Project Finance?
13.General discussion: Summary of material, open question time, exam preparation questions
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Project Finance and this course.
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Introduction to Project Finance
Project finance is a method for raising long-term debt financing for major projects through financial engineering, based on lending against the cashflow generated by the project alone.
Principles of Project Finance, E.R. Yescombe
The important ideas contained in this definition:
- Major Project
- Long term
- Debt financing
- Lending against future cashflow
The Big Goal of this course is to understand this definition and to gain a fundamental grasp of its application through case studies.
We will study Project Management through the use of the Project Finance framework, the understanding we gain will be useful in all areas of Project Management.
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Project Finance and this course.
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Introduction to Project Finance
Project finance is a method for raising long-term debt financing for major projects through financial engineering, based on lending against the cashflow generated by the project alone.
Principles of Project Finance, E.R. Yescombe
What background do each of us have?
- Me: Corporate risk and now complex systems research
- Anyone else?
- What level of mathematics knowledge do we have in this class?
- Anyone done very much financial modelling or analysis? Been involved in large projects?
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Project Finance and this course.
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Introduction to Project Finance
Project finance is a method for raising long-term debt financing for major projects through financial engineering, based on lending against the cashflow generated by the project alone.
Principles of Project Finance, E.R. Yescombe
What background do each of us have?
- Me: Corporate risk and now complex systems research
- Anyone else?
- What level of mathematics knowledge do we have in this class?
- Anyone done very much financial modelling or analysis? Been involved in large projects?
Who thinks they understand what the definition at the top of the page means?
My suggestions might include: Understanding debt and cashflow
It suggests the project is a separate entity
It suggests there is something unusual about the projects involved
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Project Finance and this course.
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Introduction to Project Finance
Project finance is a method for raising long-term debt financing for major projects through financial engineering, based on lending against the cashflow generated by the project alone.
Principles of Project Finance, E.R. Yescombe
This is a new Unit of Study being offered this year, so what do you expect to gain from it?
What would help you most in sitting this course?
This course will provide a financial, legal and organisational perspective on projects, as seen from the point of view of Project Finance
In the background are the technical and engineering innovations that make these projects feasible.
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Project Finance and this course.
www.picstopin.com environmentalengineeringjobs.org www.bikes.com.au
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Introduction to Project Finance
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Where do we use project finance?
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Introduction to Project Finance
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Where do we use project finance?
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Introduction to Project Finance
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Where do we use project finance?
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Introduction to Project Finance
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Where do we use project finance?
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Introduction to Project Finance
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Where do we use project finance?
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Some facts and figures regarding Project Finance
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20,000.00
40,000.00
60,000.00
80,000.00
100,000.00
120,000.00
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160,000.00
1996 1997 1998 1999 2000 2001
Mining
Industry
Petrochemicals
Real Estate and Leisure
Oil and Gas
Infrastructure
Telecoms
Power
Introduction to Project Finance
Global Project Finance, $millions
E.R. Yescombe: Principles of Project Finance
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Some facts and figures regarding Project Finance
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Introduction to Project Finance
0.00
1,000.00
2,000.00
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8,000.00
9,000.00
Top 10 Global Financing Projects League Table First half 2012 [$ value (mill)]
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50.00
100.00
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350.00
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Average deal size First half 2012 [$ value (mill)]
http://www.projectfinancemagazine.com/Article/3123574/Type-League-Tables/Dealogic-Half-Year-League-Tables-2012-Tables.html
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Some facts and figures regarding Project Finance
http://www.eib.org/epec/resources/presentations/psf-06062012-presentationnotes-cdp.pdf
Introduction to Project Finance
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Some facts and figures regarding Project Finance
http://www.eib.org/epec/resources/presentations/psf-06062012-presentationnotes-cdp.pdf
Global Project Finance Debt Market
Introduction to Project Finance
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Some facts and figures regarding Project Finance
http://www.eib.org/epec/resources/presentations/psf-06062012-presentationnotes-cdp.pdf
Note: The 2008 - ongoing financial crisis has little impact
Introduction to Project Finance
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1. Euro-Disneyland: A European theme park and resort concept developed by Walt Disney Co. (1989, 14 billion French Francs)
2. The EuroTunnel: A tunnel beneath the English Channel connecting England and France (1989, 4.8 billion)
3. The Tribasa Toll Road Project: A toll road project in Mexico (1993, $110 million)
4. The Indiantown Cogeneration Project: A coal fired cogeneration facility in Florida, USA (1994, US$630 million)
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Some projects requiring Project Finance
Introduction to Project Finance
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Introduction to Project Finance
A concept drawing for a tunnel between England and France, 1856
http://en.wikipedia.org/wiki/Channel_Tunnel
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Introduction to Project Finance
The Euro-Tunnel between England and France, geological profile (Chalk marl is apparently the best tunnelling medium)
http://en.wikipedia.org/wiki/Channel_Tunnel
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Introduction to Project Finance
One of the Euro-Tunnel diggers used to excavate the tunnel (Diameter = 8.8m )
http://www.tunneltalk.com/First-use-in-tunnelling-of-a-vacuum-segment-erector.php
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A basic schematic for project financing
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Assets comprising the project
Sup
plie
rs
Equity funds
Equity investors
Returns to investors
Lenders
Loans Loan repayment interest + capital
Purchasers
Purchase contracts
Output Supply contracts
Raw materials
Introduction to Project Finance
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Contract awarded in June 2008, tunnel opened July 2012
Project: A tolled motorway link (M7) between the Brisbane Central Business District and the East-West arterial link that leads to Brisbane Airport
Run by: BrisConnections, a consortia of the Macquarie Group, Thiess and John Holland
Estimated Cost to build: $4.8 $5.6 billion
Revenue stream: Tolls from users, initially $2.00 to $2.50
but increasing to $4.90 over time
Major issue: How many cars are expected to use it?
First week average: 77,320 /day
Currently: approx. 53,000 /day
Original estimate (Arup): 135,000 /day and 291,000 /day by 2026
Alternative estimate (Veitch Lister Consulting): 60,000 /day as tolls increase
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An example: Airport Link in Brisbane
Introduction to Project Finance
http://www.theaustralian.com.au/business/companies/mac-takes-on-more-brisconnections-debt/story-fn91v9q3-1226530047063 http://www.brisbanetimes.com.au/queensland/toll-rises-will-halve-airport-link-tunnel-usage-20120720-22g1l.html http://www.brisbanetimes.com.au/business/airport-link-will-miss-forecasts-20120628-21594.html http://www.heraldsun.com.au/news/national/brisbanes-airport-link-reveals-patronage-figures-for-first-week/story-fndo45r1-1226441146765
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So what are the key aspects affecting investor value in this project?
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Introduction to Project Finance
An example: Airport Link in Brisbane
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So what are the key aspects affecting investor value in this project?
Large initial cost to build, four years to complete with no revenue coming in
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Introduction to Project Finance
An example: Airport Link in Brisbane
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So what are the key aspects affecting investor value in this project?
Large initial cost to build, four years to complete with no revenue coming in
Insufficient revenue coming in from tolls once the project was completed
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Introduction to Project Finance
An example: Airport Link in Brisbane
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So what are the key aspects affecting investor value in this project?
Large initial cost to build, four years to complete with no revenue coming in
Insufficient revenue coming in from tolls once the project was completed
Loss of value to investors in BrisConnections
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Introduction to Project Finance
An example: Airport Link in Brisbane
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So what are the key aspects affecting investor value in this project?
Large initial cost to build, four years to complete with no revenue coming in
Insufficient revenue coming in from tolls once the project was completed
Loss of value to investors in BrisConnections
$3.00 /share in 2008
$0.40 /share in 2013
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Introduction to Project Finance
An example: Airport Link in Brisbane
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These are the basic issues for all of Project Finance
Introduction to Project Finance
Costs tend to decrease over the life of the project:
Ann
ual C
osts
Time
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These are the basic issues for all of Project Finance
Introduction to Project Finance
Costs tend to decrease over the life of the project:
While revenue tends to increase over the life of the project:
Ann
ual C
osts
Time
Ann
ual I
ncom
e
Time
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These are the basic issues for all of Project Finance
Introduction to Project Finance
Net revenue tends to decrease (hopefully!) over the life of the project:
Ann
ual C
osts
/Rev
enue
Time
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These are the basic issues for all of Project Finance
Introduction to Project Finance
Net revenue tends to decrease (hopefully!) over the life of the project:
Ann
ual C
osts
/Rev
enue
Time
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These are the basic issues for all of Project Finance
Introduction to Project Finance
Net revenue tends to decrease (hopefully!) over the life of the project:
Ann
ual C
osts
/Rev
enue
Time
In the red (net loss)
In the black (net profit)
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In this course you will learn to model these financial situations in order to understand income from projects, risk, financial obligations and contracts, and many other aspects.
Good luck and dont forget to ask questions!!
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A basic schematic for project financing
Introduction to Project Finance