Given this environment, this research aims to act as a catalyst for the development of the theoretical underpinnings of project finance in South Africa and to stimulate further research. The second phase produced a portrait of South African project finance in relation to theory with specific recommendations for further research on project finance in South Africa.
C HAPTER 1: I NTRODUCTION TO THE R ESEARCH P ROBLEM
- I NTRODUCTION
- G LOBAL I NFRASTRUCTURE S PEND
- S OUTH A FRICAN I NFRASTRUCTURE S PEND
- E SKOM
- T RANSNET
- SANRAL
- P ROJECT F INANCE AS A T OOL TO ASSIST S OUTH A FRICAN I NFRASTRUCTURE D EVELOPMENT
- A BRIEF H ISTORY OF P ROJECT F INANCE
- T HE C URRENT S TATE OF P ROJECT F INANCE : 2006 - 2008
- F UTURE O UTLOOK AND T RENDS
- D EFINING P ROJECT F INANCE
- T HE N EED FOR A T HEORETICAL F OUNDATION OF P ROJECT F INANCE
- R ESEARCH O BJECTIVES
- S COPE OF THE R ESEARCH
The need for more innovative financial structures will also contribute to the growth of project financing. As will be shown in the Literature Review in Chapter 2, the practice of project finance far exceeds the academic research in this field at the global level.
C HAPTER 2: L ITERATURE R EVIEW
- I NTRODUCTION
- S COPE OF THE L ITERATURE R EVIEW : P ART 1, P ROJECT F INANCE T HEORY
- D EFINING P ROJECT F INANCE
- S TRUCTURING P ROJECTS
- P ROJECT V ALUATION
- M ANAGING P ROJECT R ISK
- F INANCING P ROJECTS
- L ITERATURE R EVIEW P ART 2: P ROJECT F INANCE C ASE S TUDIES
- C ONCLUSION TO THE L ITERATURE R EVIEW
Review of default and loss characteristics of project finance loans (Esty and Sesia, 2003a) and in the case study notes (Esty and Sesia, 2003d). Much of the literature on Project Finance consists of case studies.
C HAPTER 3: R ESEARCH Q UESTIONS
I NTRODUCTION TO THE R ESEARCH Q UESTIONS
T HE R ESEARCH Q UESTIONS
Research Question 2: What is the current state of project finance in South Africa in terms of its focus areas, areas of expertise and potential development needs. Research Question 3: What specific areas of project finance require further research, particularly those specific to the South African Infrastructure Building Programme.
C HAPTER 4: R ESEARCH M ETHODOLOGY
I NTRODUCTION TO THE R ESEARCH M ETHODOLOGY
R ESEARCH P HILOSOPHY
The original question of hermeneutics was: how can one ever understand the meaning of the author's text. This emerged as the question of how one can truly understand the expression of the other.
R ESEARCH A PPROACH
The results of the research are therefore more likely to be convincing, as they are not simply facts and figures, but lessons learned from human experience (Gillham, 2005). Preconceived notions can jeopardize the integrity of the research because elements that are not expected to be seen can be missed (Gillham, 2000).
R ESEARCH D ESIGN
Based on the philosophy and approach outlined above, a qualitative approach was followed to allow the research to unfold in an open-ended process. This is because "the open-minded researcher cannot always be sure which direction the research will take" (Gillham, 2000, p. 2-3).
M ETHODOLOGY FOR P HASE 1
- R ATIONALE FOR THE M ETHOD OF P HASE 1: S ECONDARY R ESEARCH
- P OPULATION , S AMPLE S IZE AND U NIT OF A NALYSIS FOR P HASE 1
- D ATA C OLLECTION , D ATA A NALYSIS AND D ATA M ANAGEMENT FOR P HASE 1
The sample that was chosen consisted of the case studies contained in Esty's book Modern Project Finance: a Case Book (2006a). The pedagogical objectives contained in these notes were a key guide to the lessons learned from each of the case studies.
M ETHODOLOGY FOR P HASE 2
- R ATIONALE FOR THE P ROPOSED M ETHOD FOR P HASE 2
- P OPULATION FOR P HASE 2
- U NIT OF A NALYSIS FOR P HASE 2
- D ATA C OLLECTION , D ATA A NALYSIS AND D ATA M ANAGEMENT FOR P HASE 2
- D EVELOPING THE I NSTRUMENT
In Gillham's words, “Content analysis is about organizing the substantive content of the interview” (2000, p. 59). In order to gain a deeper understanding of the issues at hand, an iterative process of constant comparative analysis was used.
D ATA V ALIDITY AND R ELIABILITY
The great virtue of rigorous content analysis is that it immerses you in the details of your essential findings” (Gillham, 2000, p. 73). As explained in the research philosophy above, this attitude towards the research of being an outsider while being immersed in it allowed the researcher to thoroughly and rigorously analyze the data collected.
P OTENTIAL R ESEARCH L IMITATIONS
C HAPTER S UMMARY
C HAPTER 5: P HASE 1 C ASE S TUDY A NALYSES
I NTRODUCTION TO C ASE S TUDY A NALYSIS
C ASE S TUDY S UMMARIES
- M ODULE 1: S TRUCTURING P ROJECTS
- T HE C HAD -C AMEROON P ETROLEUM D EVELOPMENT AND P IPELINE P ROJECT (A)
- A USTRALIA -J APAN C ABLE : S TRUCTURING THE P ROJECT C OMPANY
- C ALPINE C ORPORATION : T HE E VOLUTION FROM P ROJECT TO C ORPORATE F INANCE
- BP A MOCO (A): P OLICY S TATEMENT ON THE U SE OF P ROJECT F INANCE
- BP A MOCO (B): F INANCING D EVELOPMENT OF THE C ASPIAN O IL F IELDS
- M ODULE 2: V ALUING P ROJECTS
- A IRBUS A3XX: D EVELOPING THE W ORLD ' S L ARGEST C OMMERCIAL J ET (A)
- N GHE A N T ATE AND L YLE S UGAR C OMPANY (V IETNAM )
- A N E CONOMIC F RAMEWORK FOR A SSESSING D EVELOPMENT I MPACT
- T EXAS H IGH -S PEED R AIL C ORPORATION
- C ONTRACTUAL I NNOVATION IN THE UK E NERGY M ARKETS : E NRON E UROPE , T HE E ASTERN G ROUP , AND THE
- B IDDING FOR A NTAMINA
- M ODULE 3: M ANAGING R ISKY P ROJECTS
- P ETROLERA Z UATA , P ETROZUATA C.A
- P OLAND ' S A2 M OTORWAY
- R ESTRUCTURING B ULONG ' S P ROJECT D EBT
- M OBILE E NERGY S ERVICES C OMPANY
- F INANCING THE M OZAL P ROJECT
- M ODULE 4 F INANCING P ROJECTS
- C HASE ' S S TRATEGY FOR S YNDICATING THE H ONG K ONG D ISNEYLAND L OAN (A)
- T HE I NTERNATIONAL I NVESTOR : I SLAMIC F INANCE AND THE E QUATE P ROJECT
- I NTRODUCTION TO I SLAMIC F INANCE ( NOTE )
- F INANCING PPL C ORPORATION ' S G ROWTH S TRATEGY
- B ASEL II: A SSESSING THE D EFAULT AND L OSS C HARACTERISTICS OF P ROJECT F INANCE L OANS
- I RIDIUM LLC
Although Airbus did not use project funding, the case is still significant due to the size of the project. The LGD of project finance loans was 56%, similar to BBB+/BBB corporate loans. Motorola was the first sponsor and invested 100 million US dollars in the research of the first phase of the project.
C HAPTER S UMMARY
From a Project Finance point of view, the case illustrates on the one hand the benefits of using Project Finance for high risk projects and on the other hand the dangers of using Project Finance for retail or high technology projects. As a final point, the case also highlights issues of project management with specific focus on board size and composition (Esty, 2002b; . 2003d).
C HAPTER 6: A NALYSIS OF C ASE S TUDIES
C HAPTER I NTRODUCTION
S ECTION 1: D EFINING P ROJECT F INANCE
Many of the cases also deal with hybrid Project-Corporate Finance, such as PPL, which used synthetic leases (Esty and Ferman, 2003c; Esty and Sesia, 2003e), The Calpine Corporation which 'evolved' from Project to Corporate Finance (Esty and Kane, 2003d; 2003e) and even the Airbus A3XX which did not use Project Finance as such, but used many of the tools of Project Finance (Esty, 2001a; 2001b, 2003a). The definition of Project Finance is therefore critical when researching Project Finance because, depending on the definition chosen, the results can vary dramatically. In practice this issue may emerge as a debate between the Project and corporate finance departments of a bank as to which department a project belongs to, but in the research of Project Finance it must be distinguished from corporate lending which is a more extensively researched area of finance is (Esty, 2004).
S ECTION 2: S TRUCTURING P ROJECTS
- W HY USE P ROJECT F INANCE AS A F INANCING S TRUCTURE ?
- L OWERING N ET C OSTS
- L IMITING D OWNSIDE R ISK
- I NVOLVING M ULTILATERAL D EVELOPMENT A GENICES
- R EDUCING E XPECTED D ISTRESS C OSTS
- P REVENTING U NDERINVESTMENT
- I NCLUDING H OST G OVERNMENTS
- D ESIGNING U NIQUE G OVERNANCE S YSTEMS
- T HE U SE OF H IGH L EVERAGE
- M INIMISING M ARKET I MPERFECTIONS
- T HE D ISADVANTAGES OF P ROJECT F INANCE
- C OSTS
- R ESTRICTING M ANAGERIAL F LEXIBILITY
- G REATER D ISCLOSURE
- H IGH T ECHNOLOGY P ROJECTS
- C OMBINING P ROJECT AND C ORPORATE F INANCE
- P ROJECT F INANCE C APITAL S TRUCTURES
- S TATIC T RADE - OFF T HEORY
- A SYMMETRIC I NFORMATION T HEORIES
- I NVOLVING M ULTILATERAL D EVELOPMENT A GENCIES
- O THER I NSIGHTS INTO P ROJECT F INANCE S TRUCTURES
- S ECTION S UMMARY
However, within large risky projects, Project Finance lowers the net cost of the project. Furthermore, Project Finance is relatively more attractive than Corporate Finance when a Corporate Finance investment increases the total combined risk of the project and sponsor (Esty and Sesia, 2003c). In a Project Finance structure, it is very difficult to change direction once the project is underway.
S ECTION 3: V ALUING P ROJECTS
- T HE D ISADVANTAGES OF DCF
- U SING M ULTIPLE D ISCOUNT R ATES
- R EAL O PTIONS A NALYSIS
- E QUITY C ASH F LOWS (ECF)
- T HE E CONOMIC R ATE OF R ETURN (ERR)
The next section deals with this aspect of project finance. appropriate for the project, and more complex projects require more complex evaluation techniques. A single WACC cannot detect changes in the amount and type of leverage and changes in project risk. Significant changes in the risk profile and the type of leverage used would affect the valuation of the project, and the use of a single discount rate throughout the project's life cycle would inaccurately reflect the value of the project.
S ECTION 4: M ANAGING P ROJECT R ISK
- T YPES OF R ISK
- A B RIEF I NTRODUCTION TO R ISK MANAGEMENT
- I S P ROJECT F INANCE R ISKIER THAN C ORPORATE F INANCE ?
- R ISK M ANAGEMENT T OOLS AND S TRATEGIES
- M ITIGATING S OVEREIGN R ISK
- O THER G ENERAL R ISK M ANAGEMENT S TRATEGIES
- O RGANISATIONAL F ORM AS A R ISK M ANAGEMENT T OOL
- C ONTRACTING AS A R ISK M ANAGEMENT T OOL
- F INANCIAL S TRUCTURING AND R ISK M ANAGEMENT
- D IVERSIFICATION OF S UPPLIER AND C LIENT B ASE
- C ORPORATE G OVERNANCE AS A R ISK M ANAGEMENT T OOL
- F ACTORING IN C YCLICALITY
- O THER R ISK M ANAGEMENT T OOLS
- S ECTION S UMMARY
This was one of the major differences between Basel I and Basel II and resulted from the regulators' perception that Project Finance is inherently riskier than Corporate Finance. This does increase the risk of the project, but reduces the risk for each of the stakeholders. One of the advantages of Project Finance is that it is easier to write high power management contracts and manage performance due to the nature of the projects as highly focused and leveraged entities (Esty, 2001c).
S ECTION 5: F INANCING P ROJECTS
- B ANK D EBT V S . B ONDS
- S YNDICATED B ANK L OANS
- T HE S EQUENCE OF R AISING D EBT
- T HE B RIDGE L OAN THEN B OND S TRUCTURE
- R EVOLVING C REDIT F ACILITIES
- I SLAMIC F INANCE
- F INANCIAL P ROHIBITIONS IN S HARI ’ AH
It also takes place privately and there is no disclosure beyond the direct stakeholders of the project. This can also be a disadvantage if the project does not require such large amounts of money. This allows the project to match debt inflows with capital expenditures, as mentioned above in the benefits of bank debt.
C HAPTER C ONCLUSION
Although this is a less common problem in Project Finance, it should still be taken into account. Each of these prohibitions is quite simple in concept, but can be extremely complex in practice and can lead to extensive debates to be resolved by Fiqh academies made up of Islamic legal and religious scholars (for more information on Islamic finance, see An Introduction to Islamic Finance which also describes the various equity and debt-like financial instruments developed based on the above principles (Esty, et al, 2000).
C HAPTER 7: P HASE 2, I NTERVIEW R ESULTS
I NTRODUCTION TO I NTERVIEW R ESULTS
Additionally, as the interviews progressed, the researcher focused on certain issues that appeared to be more important in earlier interviews. The use of a “snowball effect” meant that interviews were not evenly distributed across sectors. For example, there were a disproportionate number of interviews with individuals working in the banking sector, as they were the easiest to identify and access.
D EFINING P ROJECT F INANCE
- H OW DO YOU DEFINE P ROJECT F INANCE ? D O YOU HAVE A STANDARD DEFINITION AND IF NOT HOW DO YOU DECIDE
- W OULD YOU AGREE THAT THE DEFINING CHARACTERISTIC , THE SINE QUA NON , OF P ROJECT F INANCE , IS NON -
This question was asked second so as not to skew the answer to the first question towards non-recourse debt. For this reason, most large infrastructure projects have little limited debt and almost never non-recourse debt. The fact that South Africa is a developing country also makes it difficult to have pure non-recourse debt as you would in a developed country.
S TRUCTURING P ROJECTS
- W HAT ARE THE MAIN REASONS WHY YOU OR YOUR CLIENTS USE P ROJECT F INANCE ?
- W HAT DO YOU SEE AS THE DISADVANTAGES OF USING P ROJECT F INANCE ?
- D O YOU INVOLVE M ULTILATERAL D EVELOPMENT A GENCIES (MDA‟ S ) IN YOUR PROJECTS AND IF SO FOR WHAT
- PLEASE COMMENT ON THE FOLLOWING QUOTE : “U NECONOMIC DEALS ARE NOT SUSTAINABLE OVER THE LONG TERM
- W HAT DO YOU FIND ARE THE MOST IMPORTANT DETERMINANTS OF CAPITAL STRUCTURE IN P ROJECT F INANCE DEALS ?
- W OULD YOU AGREE THAT “ THE STARTING POINT OF ANY VALUATION IS THE ECONOMIC LOGIC OF THE PROJECT ” AND IF
- W OULD YOU AGREE THAT MORE COMPLEX PROJECTS REQUIRE MORE COMPLEX VALUATION TECHNIQUES ?
- D O YOU EVER USE / ASK FOR YOUR SERVICE PROVIDER TO USE MULTIPLE DISCOUNT RATES IN YOUR VALUATIONS ?- 141
The table below shows the disadvantages of Project Finance that were identified in the interviews, in order of how frequently they were mentioned. All the respondents who were asked this question agreed with it, as illustrated in the table below. As the table below illustrates, all respondents who were asked this question agreed that the economic logic of a project was the starting point for its valuation.
M ANAGING P ROJECT R ISK
- W HAT ARE THE MOST COMMON RISKS FACED IN S OUTH A FRICAN P ROJECT F INANCED PROJECTS ?
- P LEASE COMMENT ON THE FOLLOWING STATEMENT : “P ROJECT CONTRACTS ARE CONSTRUCTED TO ALLOCATE RISK
- R ISK MANAGEMENT CAN BE LOOKED AT IN THREE STAGES : I DENTIFICATION , A SSESSMENT AND M ITIGATION ” D O YOU
- H OW DO YOU DEFINE COMPLETION IN YOUR CONTRACTS WITH EPCM AND OTHER SERVICE PROVIDERS ?
All eleven interviewees who were asked this question agreed, as shown in the table below. 90% of the time spent negotiating is about events that will only happen 1% of the time. The best definition can be achieved when the lawyers and technical experts sit with the financiers to agree on a definition, rather than just one of the parties imposing a definition on the others.
F INANCING P ROJECTS
- W HAT DO YOU SEE AS THE MAIN ADVANTAGES AND DISADVANTAGES OF BANK DEBT AND BONDS ?
- W HAT ARE THE MOST IMPORTANT CONSIDERATIONS IN A SYNDICATION STRATEGY ?
- I S THERE A NEED FOR I SLAMIC F INANCE IN S OUTH A FRICA ?
- A RE S OUTH A FRICANS INVOLVED IN I SLAMIC FINANCE GLOBALLY AND IF SO DO THEY HAVE THE KNOWLEDGE AND
- I S P ROJECT F INANCE RISKIER THAN C ORPORATE F INANCE ? W HY OR WHY NOT ?
- W HAT SEQUENCE DO YOU USE WHEN RAISING DEBT ?
This question was addressed in only seven of the interviews and is illustrated in the table below. All seven of the interview respondents who were asked this question disagreed, as illustrated in the table below. All five of the interview respondents who were asked this question said that South Africans are involved in Islamic finance and have the necessary expertise to deal with it, as illustrated in the table below.
C ONCLUSION ON THE I NTERVIEW RESULTS
C HAPTER 8: R ESULTS D ISCUSSION
- I NTRODUCTION TO THE R ESULTS D ISCUSSION
- D EFINING P ROJECT F INANCE
- T HE C URRENT S TATE OF THE D EFINITION OF P ROJECT F INANCE IN S OUTH A FRICA AND L ESSONS FOR S OUTH A FRICA
- S TRUCTURING P ROJECTS
- T HE C URRENT S TATE OF S TRUCTURING P ROJECT F INANCE IN S OUTH A FRICA
- V ALUING P ROJECTS
- T HE C URRENT S TATE OF P ROJECT F INANCE IN S OUTH A FRICA
- M ANAGING P ROJECT R ISK
- T HE C URRENT S TATE OF M ANAGING P ROJECT F INANCE R ISK IN S OUTH A FRICA
- F INANCING P ROJECTS
- T HE C URRENT S TATE OF P ROJECT F INANCE IN S OUTH A FRICA
- S UGGESTIONS FOR F URTHER R ESEARCH INTO P ROJECT F INANCE
- V OLATILITY IN P ROJECT F INANCE I NVESTMENT
- B LACK E CONOMIC E MPOWERMENT AND P ROJECT F INANCE IN S OUTH A FRICA
- I S P ROJECT F INANCE R ISKIER THAN C ORPORATE F INANCE ?
- A S OUTH A FRICAN P ROJECT F INANCE C ASE S TUDY
- I NDEPENDENT ADVISORS IN P ROJECT F INANCE
- C ONCLUSION ON THE R ESULTS A NALYSIS
There seems to be a lack of depth in understanding the potential benefits of Project Finance. One of the interviewees commented that the view of the South African Reserve Bank is that Project Finance is riskier than. But the key point that emerges is the dichotomy between the skills available in the Project Finance sector in South Africa and the small nature of the South African market.
C HAPTER 9: C ONCLUSION
- I NTRODUCTION
- T HE C ENTRAL R ESEARCH P ROBLEM
- T HE R ESEARCH O BJECTIVES
- R ECOMMENDATIONS TO STAKEHOLDERS
- C HAPTER C ONCLUSION
The first recommendation to industry stakeholders would be to encourage and engage in further project finance research. The result of this would be to encourage more professionals with higher skills to get involved in project finance. In summary, the main point is to encourage further research into project finance in South Africa.
R EFERENCE L IST
2003k) Teaching Note, The Chad-Cameroon Petroleum Development and Pipeline Project (A) Harvard Business School, Boston, January l) The Economic Motivations for Using Project Finance, Harvard Business School, Boston, April m) The International Investor: Islamic Finance and the Equate Project, Harvard Business School, Boston, April 14, 2003. Islamic Finance and the Equate Project, Harvard Business School, Boston, March Introduction to Islamic Finance, Harvard Business School, Boston, February 16, 2000. 2003d) Teaching Note, Basel II : Assessing the Default and Loss Characteristics of Project Finance Loans, Harvard Business School, Boston, 16 June 2003.
A PPENDIX 1: L IST OF I NTERVIEW R ESPONDENTS
A PPENDIX 2: Q UESTIONNAIRE
D EFINING P ROJECT F INANCE
S TRUCTURING P ROJECTS
V ALUING P ROJECTS
M ANAGING P ROJECT R ISK
F INANCING P ROJECTS
