Build Operate Transfer (BOT) is a project financing and operating approach that has found an application in recent years primarily in the area of infrastructure privatization in the developing countries. It enables direct private sector investment in large scale infrastructure projects. In BOT the private contractor constructs and operates the facility for a specified period. The public agency pays the contractor a fee, which may be a fixed sum, linked to output or, more likely, a combination of the two. The fee will cover the operators fixed and variable costs, including recovery of the capital invested by the contractor. In this case, ownership of the facility rests with the public agency. The theory of Build Operate Transfer (BOT) is as follows: BUILD – A private company (or consortium) agrees with a government to invest in a public infrastructure project. The company then secures their own financing to construct the project. Continue reading
Project Finance
Introduction to Project Finance
Project finance is typically defined as limited or non-recourse financing of a new project through separate incorporation of vehicle or Project Company. Project financing involves non-recourse financing of the development and construction of a particular project in which the lender looks principally to the revenues expected to be generated by the project for the repayment of its loan and to the assets of the project as collateral for its loan rather than to the general credit of the project sponsor. Project Financing includes understanding the rationale for project financing, how to prepare the financial plan, assess the project risks, design the financing mix, and raise the funds. In addition, one must understand the cogent (intellectual, powerful) analyses of why some project financing plans have succeeded while others have failed. A knowledge-base is required regarding the design of contractual arrangements to support project financing; issues for the host government legislative provisions, Continue reading
Characteristics of Project Financing
Project financing involves non-recourse financing of the development and construction of a particular project in which the lender looks principally to the revenues expected to be generated by the project for the repayment of its loan and to the assets of the project as collateral for its loan rather than to the general credit of the project sponsor. Project financing is commonly used as a financing method in capital-intensive industries for projects requiring large investments of funds, such as the construction of power plants, pipelines, transportation systems, mining facilities, industrial facilities, and heavy manufacturing plants. The sponsors (the sponsor(s) or developer(s) of a project financing is the party that organizes all of the other parties and typically controls, and makes an equity investment in, the company or other entity that owns the project) of such projects frequently are not sufficiently creditworthy to obtain traditional financing or are unwilling to take Continue reading
Cash Flow Computations in Project Management
Financial appraisal or evaluation is a must for every project even though the outcome may not be the decision criteria for establishing the project. Financial appraisal of a project deals with cash flows. Cash, which goes out of the firm, is known as cash outflow. Typically an investment in a project is an out flow. The cash that is received in future from the project is an inflow. We should remember that cash is different from income. Cash flow and not income flow is central to project evaluation. The results of an evaluation of a project are only as good as the accuracy of our estimation of cash flows. The following illustrates computation of cash outflow. Cash outflow on installation of a machine includes; Cost of new equipment Labor and erection costs Maintenance cost While computing such outflows we should not include interest costs on debt employed. If the cost Continue reading
Build Own Operate Transfer (BOOT) Model
Build Own Operate Transfer (BOOT) funding model of project financing involves a single organization, or consortium (BOOT provider) who designs, builds, funds, owns and operates the project for a defined period of time and then transfers this projects ownership across to a agreed party. BOOT projects are a way for governments to bundle together the design and construction, finance, operations and maintenance and potentially marketing and customer interface aspects of a project and let these as a package to a single private sector service provider. The asset is transferred back to the government after the concession period at little or no cost. The Components of Build Own Operate Transfer (BOOT) Model: Build: The concession grants the promoter the right to design, construct, and finance the project. A construction contract will be required between the promoter and a contractor. The contract is often among the most difficult to negotiate in Continue reading
Basic Principles for Measuring Project Cash Flows
Estimating cash flows — the investment outlays and the cash inflows after the project is commissioned — is the most important, but also the most difficult step in capital budgeting. Estimating cash flows process involves many people and numerous variables. A project which involves cash outflows followed by cash inflows comprises of three basic components. They are, Initial investment: Initial investment is the after-tax cash outlay on capital expenditure and net working capital when the project is set up. Operating cash inflows: The operating cash inflows are the after-tax cash inflows resulting from the operations of the project during its economic life. Terminal cash inflow: The terminal cash inflow is the after-tax cash flow resulting from the liquidation of the project at the end of its economic life. For developing the stream of financial costs and benefits, the following principles must be kept in mind: 1. Principle of Incremental Cash Continue reading