Analysis of a major project Analyze a mega project along the following framework

Question

Analysis of a major project Analyze a mega project along the following framework .You can choose one of the large projects implemented in GCC region or other geographical region 1) How the project is structured - What are the requirements in terms of security design agreements 2) Discuss the sources of financing for the project 3) How the valuation of the project was done -Analyze using cash flow and investment appraisal system 4) What are the major risks involved .Discuss both macro economic and commercial risks involved in proiect.

Explanation / Answer

The Design-Build Institute of America (DBIA) supports the use of P3s for projects that are able to capitalize on the strengths of a P3 and recognizes the importance of having P3 authorizing legislation, policies and best practices that promote efficient use of the delivery model and leverage existing design-build best practices.

DBIA has developed this primer to provide a general overview of common P3 terminology and the benefits and challenges of undertaking a P3. The information has been gathered from numerous sources and is meant to serve as a starting point for the user to further investigate and make inquiries regarding the delivery model. Since P3s are fairly new to the United States, some of the terminology and approaches may vary from jurisdiction to jurisdiction.

Public works projects such as toll roads that generate significant user fee revenues can be delivered with limited governmental contribution or borrowing when the Concessionaire retains the project revenue (and assumes the corresponding revenue risk) to raise private financing. In contrast, projects that do not generate sufficient revenue will need to be supported by government investment (whether up front or as minimum revenue guarantees), or the revenue risk can be fully retained by the public owner and payments made by the public owner to the Concessionaire over time (e.g., performance-based availability payments) can be leveraged by the Concessionaire to raise private financing

Lenders of debt capital have senior claim on income and assets of the project. Generally, debt finance makes up the major share of investment needs (usually about 70 to 90 per cent) in PPP projects. The common forms of debt are:

Commercial loans are funds lent by commercial banks and other financial institutions and are usually the main source of debt financing. Bridge financing is a short-term financing arrangement (e.g., for the construction period or for an initial period) which is generally used until a long-term financing arrangement can be implemented. Bonds are long-term interest bearing debt instruments purchased either through the capital markets or through private placement (which means direct sale to the purchaser, generally an institutional investor - see below). Subordinate loans are similar to commercial loans but they are secondary or subordinate to commercial loans in their claim on income and assets of the project.

The other sources of project finance include grants from various sources, supplier's credit, etc. Government grants can be made available to make PPP projects commercially viable, to reduce the financial risks of private investors, and to achieve socially desirable objectives such as to induce economic growth in lagging or disadvantaged areas. Many governments have established formal mechanisms for the award of grants to PPP projects. Where grants are available, depending on government policy they may cover 10 to 40 per cent of the total project investment.

There are specific risks for the type of concession agreement as well as for the terms governing the sharing of risks (considered later as a risk allocation matrix) between the concessionaire and the contracting authority. The objectives of the risk analysis for waste management concession services are (APM, 2007): improving the quality of concession through a better understanding and incorporating the risks and costs of contracting authorities and other contractual clauses that protect the contracting authority; avoiding costly concessions that can be provided more economically by contracting authority itself; avoid situations where public authorities award concession contracts that they cannot afford or exceed the maximum limits of government debt (currently set by law at 30% of the annual budget).

Financial risks related to the water sector are increased exposure regarding portfolios of financial institutions with which they are confruntedthrough businesses and industries they finance with increasing stress on water resources worldwide. In a first classification of financial and economic risks of the sector of water and sanitation, these risks are classified into two categories: business risks and institutional risks. Commercial risks are risks due to various market developments that may affect a project during operation, such as changes in commodity prices and producer prices, fluctuations in demand or technological failures and performance. Institutional risk can be defined as the risk of financial or personal loss, for a company due to nonmarket factors such as macroeconomic and social policies (fiscal, monetary, trade, investment, industry, income, employment and development) and their institutional-legal framework.

. Allocation and control instruments - risk allocation matrix

To illustrate the allocation and control instruments, it was used the risk allocation matrix, applied to waste management contracts. In general, it aims concession of two types of services, waste collection and disposal to landfill in line (Platon, 2007). The matrix takes into account general risks to begin with and than specific risks for each operating system and it includes: risk category, description of the consequences of risk occurrence and potential risk mitigation measures. There are general risks for both types of concessions and specific risks for each concession. From this first classification we extract

Three types of risks: General risks: economic and financial, legal, force majeure, legal and contractual. Risks related to the collection, transfer and sorting of waste: waste management specific operations, collection points, waste collection, storage for separate collection points separate collection, recycling and composting stations operation, the green dots. Risks related to waste disposal line: operation of landfills. For the sake of simplicity, all the risks in the tables were identical in shape. In the table below we present, for example, a general risk allocation matrix which may occur in waste management concessions

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