(Doc) Assignment on Financial Management
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Added on 2021-04-16
(Doc) Assignment on Financial Management
Added on 2021-04-16
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Financial Management 1
IntroductionProject finance has come of age in Brunei. The industrialist or organizer of a company has awide choice of sources of funds out of which they can select. The selection is mainlydepending on cost of funds and financial risk associated with project. The project of acompany should be technologically sound, financially feasible and unique concept. Aunique or viable project would have no issue in searching a market because it is easilyacceptable in the competitive market. With a limited resources and government supportthe project company can finance their project. Brunei’s government supports the industriesin financing the projects because it help the country in growth and enhance the GDP orNational Income.Project finance offers long-term, non-recourse or limited recourse loans utilized tofinance large industrial, commercial, sovereign and infrastructure projects in emergingmarket nations worldwide. In other words, project finance is the long-term infrastructureand industrial project financing which are basically based on the projected project cashflow rather than the balance sheets of the project promoters. It is examination of thecomplete life-cycle of a project. Usually a cost- benefit analysis is utilized to decide if theeconomic benefits of a project are better than the economic expenses. Project finance loansare mostly prolonged on non-recourse or limited recourse basis and are protected by theproject assets and operations. Loans repayment occurs wholly from project cash flow andnot from the assets or borrower credit (Rarasati, et. al., 2019).2
Figure 1: Parties to a project financing These parties help to a company in financing their projects by providing funds or loans in a reasonable rate. They are mostly involved in the management of project and also in construction. One of the foremost benefits of project financing is that it offers for off-balance sheetfinancing of the project which will not influence the credit of the government contractingauthority, or shareholders. It also transfers certain risk of the project to investors inexchange for which the investors achieve a maximum margin than for corporate lending.In Brunei, the Multilateral Development Banks offers grants, loans, and investments forproject that support country’s economic development. The Multilateral Development Banks(MDBs) are global financial institutions that encourage economic and social growth in theirdeveloping countries. Every year MDBs extend a combined total of almost $50 billion ingrants, loans and investment to the private and public sectors for social and economicdevelopment in developing markets (Estache, et. al., 2015).3PartiesSuppliers and ContractorsLendersSponsors & InvestorsGovernmentCustomers
Project finance deal structureAs can be seen, there are a number of contracts and the arrangements which areprepared by the company with the outsider parties to generate funds for the project.The off take AgreementAn outline under which Project Company obtains returnsOffers the “off taker” or “Buyer” with a secure project output supply and theCompany with the capability to sell the output on a pre-agreed basis.Can take many methods, like as “PAY or TAKE” Contract: “POWER PURCHASEAgreement” (PPA)Construction AgreementAn Agreement defining the “TURNKEY” accountability to provide a whole projectprepared for operation (Engineering, Procurement, Construction [EPC] Agreement) Input Supply Agreement4Project Comapny Shareholders (Shareholder Agreement)Grantor (Concession Agreement)Input Supplier (Input Supply Agreement)Construction Contractor (Construction Agreement)Operator (Operating Agreement)Lender (Loan Agreement)Offtake Purchaser (Offtake Purchase Agreement)
It also offers a Project Company the safety in supplies input on a pre- agreed basis ofpricing.The conditions of Input Supply Agreement are generally created to equal those ofthe “off take Contract” such as length of contract, volume of input, etc.Operation and Maintenance AgreementIt basically ensures that the maintenance and operating expenses are within thebudgeted limit and project are operates as per prescribed planned.Government Support AgreementIn this agreement the government supports the Project Company by givingassurances on usage of public utilities, exemptions in tax, expropriationcompensation and disputes litigation in an agreed jurisdiction.Shareholders AgreementIn this Agreement, a Project Company borrows funds from the capital market orShareholders and in return the company provides dividend on monthly or yearlybasis.Lender AgreementIn this agreement, a Project Company takes a loan from the lender and pay principleamount and interest on the basis of agreement. Grantor Agreement A concession arrangement is a negotiated contract between a government and aProject Company that provides the Project Company the right to conduct a specificproject within the government jurisdiction, which is subject to specific conditions(Miglo, 2016). Project Appraisal5
Project Finance requires a project appraisal in which the “due diligence” conducted ontechnical, sponsors, legal, environmental, financial and risk aspects among others of theproposed project. The project appraisal is the valuation of the feasibility of projected long-term investments in terms of shareholder’s wealth. It is also focus on project efficiencywhich generates sufficient cash flow to repay its loan or debt and also provide asatisfactory rate of return to the company from its project (Shan, Hwang & Zhu, 2017).Main Features of Project FinanceProject Company is a SPV (Special Purpose Vehicle) with no previous record orbusiness.Capital intensive project on Greenfield siteHighly leveraged projectLenders mainly depend on economic and technical estimates of the project to makesure its capability to generate sufficient income.Higher margins and fees to reflect lenders risk.Project financing flowchart6
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