EUP 222 ENGINEER IN SOCIETY

PROJECT FINANCE
Understand the financial concepts to appraise a project effectively.
Dr. Sharifah Akmam Syed Zakaria, PPKA .

email: akmam@usm.my

EXPECTED OUTCOMES:
Able to demonstrate knowledge and understanding of engineering
and management principles and apply these to ones own work, as a
member and leader in a team, to manage projects in multidisciplinary environments.
Take charge and be accountable
You are today where your thoughts have brought you. You will be
tomorrow where your thoughts take you. (Forbes)

Aims
UNDERSTAND project appraisal rules and optimise your project designs financial
outcomes.
APPRECIATE the relevant factors that drive a projects commercial success.

RELATE to the different concepts and methodologies of financial evaluation.

TRANSFORM to a more desirable engineer.
GAIN the skills to advance in management project appraisal skills are essential
for career progress.

Green infrastructure and business financing

and advising
Providing sustainable products: According to
forecasts by leading energy experts, the trend
towards renewable energy will become even
stronger worldwide in the next few years.
More money is already being invested in the
generation of renewable energy than in fossilfuel and nuclear power plants combined.
Demographic change, increasing natural
resource demands, urbanization and the
growing significance of environmental aspects
are creating a growing need for investment in
all types of infrastructure.

Project Financing and Sustainable Development

Climate Resilience
Strategy
facilitates

transition to a path
of sustainable low
carbon
development

Collaboration,
Mobilisation of
financial resources

climate resilient
investment
regional
capacitybuilding

Project Financing and Sustainable Development

Strategy
facilitates

Energy
efficiency:

Increase in Competitiveness of private sector

reduction in cost of goods/services produced

price advantage

Global Funds

Whatever area your expertise, engineers are an important part in the

project and product
life cycle and have an invaluable role in delivering commercial
success.
Knowledge of financial concepts becomes increasingly a requirement
in the skill set of engineers.
In order to demonstrate confidently that technical solutions do not
only solve a problem, but can solve the problem at reasonable and
feasible cost in a competitive environment.

Engineering comes to life with projects that are implemented.

A considerable amount of projects, may therefore not perform as
expected.
The development of sound feasibility assessments is crucial to
ensure that all costs of the project are captured in the correct way
and that revenues can generate the required levels of margins.

Engineers must therefore understand the financial concepts to

appraise a project correctly
and to include concepts such as market and industry risk rates, the
time value of money and
the role of accounting concepts in modelling a project life financially.

Some of these sectors include:

Energy Project finance is used to build energy infrastructure in industrialized countries as well as in
emerging markets.
Oil Development of new pipelines and refineries are also successful uses of project finance have been
financed with this model. Before the use of project finance, such facilities were financed either by the
internal cash generation of oil companies, or by governments.
Mining Project finance is used to develop the exploitation of natural resources such as copper, iron ore, or
gold mining operations in countries.

Highways New roads are often financed with project finance techniques since they lend themselves to
the cash flow based model of repayment.
Telecommunications The burgeoning demand for telecommunications and data transfer via the Internet
in developed and developing countries necessitates the use of project finance techniques to fund this
infrastructure development.
Other Other sectors targeted for a private takeover of public utilities and services via project finance
mechanisms include pulp and paper projects, chemical facilities, manufacturing, hospitals, retirement care
facilities, prisons, schools, airports and ocean-going vessels.

Project Finance - Introduction

Project finance, also known as limited-recourse or non-recourse
finance.
It consists in financing very specific assets or projects, with the
repayment coming
ONLY from the cash-flow generated by that project or asset, without
any claims (with some very specific exceptions) on the companies
that develop these projects.

Investing funds
in assets

To determine:

Project size
Profits from project operation
Project risk

Project financing is
concerned with:

Project liquidity

Obtaining the
best mix of
financing

To determine:

Projects financial ability

Project value

Uncertain economy
RISK
Project
finance
involves

2R

Interest rate

Inflation
Fluctuation in:

Future demand
Prices
Costs

Balancing
decisionmaking in:

RETURN

Management of assets
Allocation of capital

Investment
Valuation of projects

Financing
To achieve
project goals:

Return

Infrastructure development

New
invention

Profit maximisation

Project finance, comes from a combination of both equity and debt.

The split between equity (investor funding) and debt (lender
funding) depends on the individual project and, most importantly, on
the risk profile of each project.
The higher the risk, the greater the share of equity will be required
by the lending banks.
The risk of an individual project is also decisive for the level of debt
which a project can take on.

The principle is simple: a bank finances a specific asset, and

gets repaid only from the revenues generated by that asset,
without recourse to the investors that own the project.
It works well for project with well identified assets with high
initial investment costs, and strong cash flows after that, like
big infrastructure items (toll bridges, pipelines) and energy
assets (oil fields, power plants).

Project financing is an innovative and timely financing technique

that has been used on many high-profile corporate projects.
Employing a carefully engineered financing mix, it has long been
used to fund large-scale natural resource projects, from pipelines
and refineries to electric-generating facilities and hydro-electric
projects.
Increasingly, project financing is emerging as the preferred
alternative to conventional methods of financing infrastructure and
other large-scale projects worldwide.

Project Financing discipline includes understanding the rationale for

project financing, how to prepare the financial plan, assess the risks,
design the financing mix, and raise the funds.
In addition, one must understand the analyses of why some project
financing plans have succeeded while others have failed.

The Segway PT
The Segway PT is a two-wheeled, selfbalancing, battery-powered electric vehicle
invented by Dean Kamen.
It is produced by Segway Inc. of New
Hampshire.
The name Segway is derived from the word
segue, meaning smooth transition.
PT is an abbreviation for personal transporter.

New transport options aim to be 'unSegway'

At the Consumer Electronics Show in Las
Vegas, developers showed off several selfbalancing wheeled contraptions that aim to
provide environmentally friendly shortdistance transport, as well as a host of other
gadgets: skateboards, roller skates and a
variety of scooter-like vehicles.

"This is not a Segway," he said. "There are no

handlebars. You don't look weird. You can pick
this up and throw it in your car, take it to work,
take it on the train."

The Technical Requirement Study

For every proposed project, the study should:
i. enumerate the various items of the capital cost in both local currency and
foreign exchange requirements,
ii. report the requirements of the project with regard to the quantity, quality
and specification of each raw materials, labour, supplies, fuel, power, water,
transportation, and other inputs, and waste disposal,
iii. provide a comprehensive environmental impact assessment of the
production activity,

iv. report the estimated production and overhead costs for operating the
proposed plant in detail.

Project Performance Target:

Scope = required scope
Cost = Budget limit
Q&S
Time = due date and schedule
Q&S

= QUALITY and SUSTAINABILITY

The Technical Feasibility Study

The technical feasibility study aims at determining:
i. how well the technical requirements of the project can be met,
ii. which location would be most advantageous, and
iii. what would be optimum size of project.
iv. it therefore requires the study, item by item, of the availability, quality,
accessibility and cost of all the goods and services required for the project with
particular reference to (a) alternative location and (b) alternative project sizes.

Some of these sectors include:

Energy Project finance is used to build energy infrastructure in industrialized countries as well as in emerging markets.
Oil Development of new pipelines and refineries are also successful uses of project finance have been financed with this
model. Before the use of project finance, such facilities were financed either by the internal cash generation of oil
companies, or by governments.
Mining Project finance is used to develop the exploitation of natural resources such as copper, iron ore, or gold mining
operations in countries.
Highways New roads are often financed with project finance techniques since they lend themselves to the cash flow
based model of repayment.
Telecommunications The burgeoning demand for telecommunications and data transfer via the Internet in developed
and developing countries necessitates the use of project finance techniques to fund this infrastructure development.
Other Other sectors targeted for a private takeover of public utilities and services via project finance mechanisms
include pulp and paper projects, chemical facilities, manufacturing, hospitals, retirement care facilities, prisons, schools,
airports and ocean-going vessels.

PARTIES INVOLVED IN AN ENGINEERING PROJECT:

PUBLIC SECTOR

MANAGEMENT
CONSULTANT

PRIVATE SECTOR

PLANNER
FEDERAL

OWNER

ENGINEER

STATE

LOCAL

APPROVING
AUTHORITIES

CONSULTANTS
FINANCIER

BANK

NOMINATED
SUPPLIER

SUPPLIER

CREDIT
CORPORATION

FINANCE
COMPANY

DESIGNER

LEGAL

GOV.

LEASING
COMPANY

CONTRACTOR

MANUFACTURER
MAIN
CONTRACTOR

MANPOWER
DISTRIBUTOR

SUB-CONTRACTOR

TECHNOLOGIST

TECHNICIAN

SKILLED WORKER

SEMI-SKILLED
WORKER

UNSKILLED
WORKER