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Running head: Assignment 5

Assignment 5

FERNANDO LUZERNO AUGUSTO CARLOS LICHUCHA

Distance Learning Doctorate of Finance


Program
This assignment is submitted in partial fulfilment of the
requirements for 5524S1861 DF Project Finance R2

School of Management
Professor Dr. Igor Gvozdanovic

July 31, 2016

Assignment 5

Contents
What are the roles of project financing in an economy?..................................3
What you understand by Project Finance Initiative?........................................4
Describe four major parties to a typical Private Finance Initiative...................6
References.......................................................................................................7

Assignment 5

What are the roles of project financing in an economy?


The growth of project finance has been driven mainly by the worldwide
process of deregulation of utilities and privatization of public sector capital
investment. Project finance is used as an appropriate method of long term
financing for capital-intensive industries where the investment financed has
a relatively predictable cash flow (Yescombe, 2002).
Project finance helps finance new investment by structuring the financing
around the project's own operating cash flow and assets, without additional
sponsor guarantees

and alleviate investment risk and raise finance at a

relatively low cost, to the benefit of sponsor and investor alike (Ahmed, Fang,
& Rahn, 1999).
(Fight, 2006) identifies two key factors that have fuelled the substantial
increase in the use of project financing techniques, namely (i) the developed
economies tremendous demand for cheap energy and mineral resources,
and the meeting of such demand by exploiting natural resources in poor
countries

with

weak

governments,

typically

in

diverse

and

remote

geographical areas, and (ii) the massive transfer of capital, predominantly


debt capital, to the poor countries (euphemistically known as emerging
markets).
As the consequence of market oriented economic policies project financing in
an economy has been assuming several roles including:

Assignment 5

Finance for natural resources projects (mining, oil, and gas) has
given a considerable boost by the oil price increases, and the
development of the North Sea oil fields in the 1970s, as well as gas
and

other

natural

resources

projects

in

Australia

and

various

developing countries (Yescombe, 2002).


Finance for independent power projects ("IPPs") in the electricity
sector (primarily for power generation) developed first after the Private
Utility Regulatory Policies Act ("PURPA") in the United States in 1978,
which encouraged the development of cogeneration plants, electricity
privatization in the United Kingdom in the early 1990s, and the
subsequent

worldwide

process

(Yescombe,

2002)of

electricity

privatization and deregulation (Yescombe, 2002).


Finance for public infrastructure (roads, transport, public buildings,
etc.) was especially developed through the United Kingdom's Private
Finance Initiative ("PFI") from the early 1990s; such projects are now
usually known as public-private partnerships ("PPPs") (Yescombe,

2002).
Finance

for

the

explosive

worldwide

growth

in

mobile

telephone networks developed in the late 1990s (Yescombe, 2002).

What you understand by Project Finance Initiative?


Private Finance Initiative (PFI) is the commoditisation

of public-private

partnerships (PPP) into a systematic programme (Gardner & Wright, n.d.).

Assignment 5

The PPP Knowledge Lab defines a PPP as "a long-term contract between a private
party and a government entity, for providing a public asset or service, in which the
private

party

bears

significant

risk

and

management

responsibility,

and

remuneration is linked to performance" (What are Public Private Partnerships?,


2015, p. 1).
PFI and PPP both have very similar characteristics, the key difference being the way
in which the relevant project is funded. Actually, PPP includes traditional forms
(conventional

procurement,

PFI,

partnerships

such

as

LIFTCos

and

LEPs,

concessions and Public Delivery Organizations) and newer/alternative forms (joint


ventures,

alliancing,

hybrid

PPPs

and

the

Wider

Markets

Initiative)

(BankingandFinance, n.d.)

PFI is designed to involve the private sector in the financing and the
management of infrastructure and other projects. It started in 1992 in the UK
when the government became directly involved in a growing number of
infrastructure projects (Brealey, Cooper, & Habib, 1998).
PFI involves an infrastructure project (e.g. a hospital, health centre, school, leisure
centre, social housing, street lighting, road or prison) being funded by private sector
equity and debt funding and then being paid for by the public sector 'customer'
through monthly payments over the life of the project. A PPP project would not
necessarily require or have such private sector funding (BankingandFinance, n.d.).

The initiative grew from the idea that private contractors should not only
build infrastructure but also be responsible for maintaining and servicing it
since governments are, in the PFI rhetoric it seems, ineffectively and
inefficiently staffed (Fight, 2006). The thinking was that the subsequent

Assignment 5

outsourcing of the responsibility to maintain public infrastructure to the


private sector would motivate the builder to build it as cheaply as possible,
charge the state the maximum for the service and expend the minimal
financial resources required to maintain the facility in an effort to maximize
profitability and garner favourable stockbroker share recommendations
(Fight, 2006).
However, (Fight, 2006) is sceptical about the pervasion off PFI initiatives in
every appendage of the state such as schools, hospitals and prisons because
private sector is no better equipped to run reliable mission-critical services
than the state, and indeed possibly worse. (Fight, 2006) gives the state of
the British railways and rail maintenance as bad examples of the PFI ubiquity.

Describe four major parties to a typical Private Finance


Initiative
The four major parties to a typical Private Finance Initiative transaction are:

Treasury - the Treasury funds PFI projects and its officials are

responsible for policy developments (Fight, 2006).


Private Finance Panel and 4Ps - Private Finance Panel (PFP)
promotes

central

government

PFI

projects,

and

Public

Private

Partnership Panel (the 4Ps) promotes local authorities PFI projects.


Project Company or contractor a number of private sector
companies will form a consortium and set up a project company or

Assignment 5

contractor, usually a special purpose vehicle, to tender for the PFI


transaction.

Funders - most of the funding in UK PFI transactions has come from banks
providing loan facilities.

Assignment 5

References
What are PPPs, do they work and when should governments use them. (2014).
Retrieved Junho 25, 2016, from PPP Knowledge Lab:
https://library.pppknowledgelab.org/Knowledge
%20Lab/documents/2480/download
What are Public Private Partnerships? (2015, Outubro 2). Retrieved Junho 15, 2016,
from World Bank: http://ppp.worldbank.org/public-privatepartnership/overview/what-are-public-private-partnerships
Ahmed, P. A., Fang, X., & Rahn, T. (1999). Project finance in developing countries :
IFC's lessons of experience. Retrieved July 20, 2016, from World Bank:
http://wwwwds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2002/01/25/
000094946_02011704024210/Rendered/PDF/multi0page.pdf
BankingandFinance. (n.d.). PFI (Private Finance Initiative)/PPP (Public Private
Partnerships) and procurement. Retrieved July 22, 2016, from LexisNexis:
https://www.lexisnexis.com/uk/lexispsl/bankingandfinance/document/391289/
5D5H-YTC1-F185-X42J-00000-00/PFI%20(Private%20Finance%20Initiative)/PPP
%20(Public%20Private%20Partnerships)%20projects%20and%20procurement
Brealey, R. A., Cooper, I. A., & Habib, a. M. (1998). Using Project Finance to Fund
Infrastructure Investments. Journal of Applied Corporate Finance, 9(3), 25-38.
Fight, A. (2006). Introduction to Project Finance. Great Britain: Elsevier.
Gardner, D., & Wright, J. (n.d.). HSBCnet. Retrieved June 28, 2016, from Chapter 12
Project Finance: https://www.hsbcnet.com/gbm/attachments/productsservices/financing/project-finance.pdf
Yescombe, E. R. (2002). Principles of Project Finance. Amsterdam: Academic Press.