Risk of completing the project: Construction of the project is not completed, costs exceed what was budgeted, or planned technical standards are not met and technically complete and financially complete.
evaluation-of-projects-financing-and-risksProject evaluation modules
- Private (financial) evaluation Economic evaluation Distributive evaluation Risk evaluation
Objectives of the Integral Analysis of Projects
- Ensure that the project is financially and economically sustainable Make sure that the project has a high probability of having a positive economic impact Identify sources, magnitudes of risk and strategies to manage it Design appropriate contracts, collection structures and commitments Identify stakeholders that may affect the investment decision or project performance
Reasons why financing projects is different
- Project financing exceeds the financial capacity of the project developer Conventional financing is not available or there are difficult to overcome restrictions
General sources of financing
• Debt
• Contribution of partners
• Mixed
- Preferential shares
- Convertible bonds
Types of financing
Different types of financing are used for different stages of a project
- Contribution of partners: it is usually used for feasibility studies and project design
- Revolving lines of short term: they are usually used for the construction phase of the project
- Leasing: for the acquisition of equipment or lines of development banks: for long-term financing
The objective is to achieve the most economical combination for the
Commercial Banking project
• It is usually 5 or 10 years old and at a floating interest rate
• The most common is syndicated credit, with a leading bank and many other partner banks
• Advantages:
- Faster availability
- Greater decision-making power on the part of the user
- It has no commercial ties
• Disadvantages:
- Interest rates are usually higher and floating
- The term tends to be shorter
- Administrative costs can be high Stock
market
• Bond issue
- Can be achieved over long terms and interest rates more advantageous than commercial banking
- Available only to well-rated issuers and must be for large amounts
• Private placements
- Lower administrative expenses and less disclosure of information
- Infrequent use and investors often have restrictions on their ability to invest
Official aid
• Advantages:
- It usually occurs in very concessional terms: terms, interest rates, few collaterals
• Disadvantages:
- Slow administrative procedure
- It is usually accompanied by commercial ties
- They usually have predefined objectives
Main sources of financing
• Contribution from partners:
- Establishes control over the project
- It is the riskiest participation in the project because the partners are the last to claim the rights to it
- To reduce this risk, it is common for the contribution is carried out in equipment, technology, patents or know how.
Importance of a strategic partner
• You can get funds for your creditworthiness
• You can offer a direct guarantee to the providers of project funds
• You can offer an indirect guarantee through contracts to purchase the production or supply of inputs
Main risks of a project
• Project participants
• Market
• Failure to complete the project
• Force majeure
• Supply of
• Exchange rate inputs
• Political
• Production process
• Abandonment
of Project Risks
• By project participants
- It originates from the financial weakness of any of the project participants
• Ways to control it:
- Incorporate the project as its own entity
- Create co-responsibility clauses among the managers participating in the project
- Make each participant only respond for their contribution in the project
Risks of a Project
Risk of completing the project:
• Construction project is not completed, costs exceed what was budgeted, or planned technical standards are not met
• Technically complete and financially complete
• Ways to control it: partner contribution, fixed contribution from lenders, bridging lines of credit, financing of product buyers, government financing; repayment clauses even if the project is not completed, transfer the responsibility to the managers while the project is not completed
Risks of a Project
• Market risk:
- The demand for the product may not be maintained in the adequate quantity and prices
- Ways of control it: review of market projections, request for feasibility studies by third parties, review project costs
- Subscription of advance sales contracts
Risks of a Project
Risk in the supply of inputs
• It usually occurs in natural resource exploitation or energy supply projects
• Ways to control it: require the project to consider alternative sources to the one expected to provide the resources, agreements with the producer to supply the resource, capacity assessment of the resource provider.
Risks of a Project
Productive risk,
• That the project encounters operational difficulties that prevent it from generating the planned cash flow
• Ways to control it: with the use of proven technologies and reliable technical personnel
Risks of a Project
• Force majeure
- They are out of control from managers or lenders. They are generally natural disasters.
- It is common for it to be part of the risk to be assumed by the lender.
Risks of a Project
Risks for the pertinent regulation
• Regulation can affect the project's cash flow. Changes in accounting and tax treatment; rate regulation.
• Ways to control it: through advanced contracts or commitments.
Project
Risks Political risk
• The most important risks are war, revolution, terrorism, nationalizations, exchange controls, import licenses, job stability, mandatory participation of national inputs.
• It is almost impossible to protect the project against these risks. The most used are usually government commitments.
Risks of a Project
• Abandonment risk
- Occurs when managers abandon the project before lenders are paid
- Clauses are issued for managers to continue operating while updated income exceeds updated costs
- It can be very limiting for managers
Project
Risks • Risks financial
- Risks of not obtaining credit in the expected conditions
- Inappropriate payment term
- Dissociation between operating conditions and loan payment scheme
- Very sensitive conditions of non-compliance
General ways of reducing risks
• Decrease it, through agreements or contracts
• Derive it, through agreements or contracts with suppliers or clients.
• Diversify them, through strategies
Critical factors of a financing
• Interest rate: level, fixed or floating
• Commissions and other expenses
• Payment periods and terms
• Payment currency
• Availability of funds
• Commercial collaterals and “covenants”
Contributors of resources
World Bank
• Payment terms tend to be longer
• Interest rate tends to be lower
• Strengthens the possibility of leverage
- It usually has an extensive approval process
- Loans are usually in foreign currency that makes the cost of credit more expensive
Resource Contributors
Central Government
• Direct actions, can guarantee the project, grant credits at low rates or grant tax exemptions, subsidize energy costs, transportation
• Indirect actions, can improve or lower the standard of living, build infrastructure, provide services
Contributors of resources
Contractors
• Their greatest contribution is usually to prefix the construction costs of the project
• Sometimes their fees can become a contribution to the project, usually a small proportion
• They can give advice on financing methods, dealing with suppliers, etc.
Resource
providers Equipment providers
• They usually give credits to facilitate the acquisition of their equipment.
• Other criteria to take into account are the reliability of the equipment and its technical support.
Contributors of resources.
Clients who need the product of the project.
• These entities may be very interested in supporting the project. especially through purchase commitments that usually help with indebtedness
• They could also give direct financing with a commitment to pay it with production
Contributors of resources
Suppliers of project inputs
• Their interest is in developing a market for their product
• Their help usually gives direct help for the construction of the project or indirect, guaranteeing the indebtedness of the project
Resource Contributors
Government agencies
• Their support is usually in direct loans or guaranteeing project debt
• Obtaining is usually cumbersome
• Credits are usually commercially tied and equipment is not the most appropriate
• Equipment maintenance can be expensive and be tied to only one supplier
Need for operational financing
• It is common to acquire inventories before they can be sold
• It is necessary to have inventories to better serve customers
• It is common to grant loans to customers
• Growing companies tend to increase their inventories and accounts receivable
Estimate of
Social Prices
Objectives of the Comprehensive
Project Analysis
• To ensure that the project is financially and economically sustainable
• To ensure that the project has a high probability of having a positive economic impact
• Identify sources, magnitudes of risk and strategies to manage it
• Design contracts, collection structures and Adequate commitments
• Identify stakeholders that may affect the investment decision or the performance of the project.
Objectives of the distributive analysis
• The calculation of the financial or economic net present value is not complete
• It defines the “personality” of the project
• It identifies the beneficiaries and affected by the project
• Identify the tax effects
• It allows perceiving the risks associated with the net benefits received by the interested groups.
General lines of the
Distributive Analysis
• Use the same number in the economic and social analysis
• The differences between the economic and social analysis identify the distributive effect
• Remember: Social Value = Economic Value + Sum of Distributive Effects
VANECOeco = VANFINeco + VANEXTeco
Classification of the Products and Inputs of a Project
Tradable Goods
A good is tradable when an increase in the demand (offer) caused by a project does not affect the quantity demanded by domestic consumers.
An increase in the demand for an IMPORTABLE good results in an increase in the demand for imports
An increase in the demand for an EXPORTABLE good results in a reduction in exports
When a project produces a tradable good, the result is a reduction in imports or an increase in imports
An IMPORTABLE good includes both imports and domestically produced goods that are close substitutes for imported goods.
AN EXPORTABLE good includes exports as well as close substitutes for exported goods.
Non-Tradable Good
A good or service is not tradable when its internal price is determined by internal demand and supply. In this case, an increase in demand (or supply) for a project can affect the quantities demanded by local consumers and produced by other bidders.
Foreign Exchange Market Derivation - Demand
Economic Cost of Foreign Currency if there are import tariffs and Export Subsidies.
