Fblt040 Project Management : Economics Assessment Answers

Answer:

Introduction:

The available funding for the infrastructure from all the traditional sources usually falls far for the short of the investment needs. The implementation of the project particularly under the conditions of the public private partnerships is essentially a promising mechanism for attracting the private funds (Akbiyikli, Eaton & Turner, 2006). The process of financing entails the sponsors in deciding on the capital structure of the project. This is on how much should be provided by the sponsor in form of the equity financing and how much should be provided by the sponsors in form of the equity financing and how much should be borrowed from the lender in form of the debt financing.

The special purpose vehicles has been a household word within the financial circles for decades. This entity has assumed the Centre stage in the wake of the financial crisis and it is continuing after effects. This vehicle if effectively managed it can be very beneficial for implementing of many large projects (Daube, Vollrath & Alfen, 2008). This vehicle has played an important role in the efficient operational of the financial markets. It has allowed the large corporation in meeting of the specific objective through obtaining finances, transferring of the risk as well as performing on the various investment activities (Akbiyikli, Eaton & Turner, 2006). In this research it will examine on the requirements for the special purpose vehicle project planning particularly for the large complex infrastructure. In the discussion it will specifically focus on the requirements for the robust business case, provide the reasons as well as the advantages for using the SPV for such project particularly the complex regulations (Daube, Vollrath & Alfen, 2008). Additionally, it will touch on the project financing process examining on the key aspects and the pitfalls in the process as well as the constraints.

Requirements for Special purpose vehicle

In the execution of large projects, especially those of infrastructure, one of the topics that has become very important is the search for financing mechanisms that allow the necessary capital to be built and executed when the economic sufficiency is lacking. For these reasons Project Finance has been used as a financing mechanism that seeks to obtain sufficient capital to carry out the projects (Fight & Fight, 2006).

Financing of infrastructure projects can be done through different financial instruments. However, one of the most commonly used is called Project Finance. This financing mechanism is usually used for the execution of large projects, where the multiplicity of entities and parties involved requires an operation that serves the interests of all of them

(Finnerty, 2013). In this regard, some sectors of the robust business have identified that Project Finance obeys a technique implemented to obtain the necessary capital for construction, execution and operation through different financing mechanisms, which will be paid during the development of the project itself With the cash flows it generates; Therefore, a robust business of this nature must adequately address the distribution of risks among project participants (Gatti, 2013).  The success will depend on, the risk forecast and its operation. For this reason, the financing is the product of an adequate distribution of risks according to its correct forecast.

Indebtedness is directly linked to the assets and cash flow potential of the company.

In the robust project financings a Special Purpose Vehicle (hereinafter SPVC) (special purpose vehicle corporation) is used, which may be a commercial company or a commercial trust according to the choice of the Parties involved in the project and in accordance with their interests, which is responsible for paying the creditors of the credits that finance the project such obligations with the cash flows that are obtained from the operation (Hall, 2017).

A legal vehicle or vessel called Special Purpose Unit (SVPC), such as a commercial company or a commercial trust agreement, is used whose special purpose is that the project financiers, called sponsors, obtain The service of the debt taking into account the future flows that the project generates when it ceases to be and becomes a work of infrastructure in operation,

In this context, taking into account the importance of the SPV in the development of a project, the payment of the credit that financed it, the interest involved in the financing and execution, and the types of vehicle are generally used for the execution, administration and operation, the present text tries to answer some of the questions.

One of the options available to the  business (SPVC), in accordance with the interests of the parties involved in the project and its financing, is the establishment of a commercial trust that serves as a vehicle for the execution, administration And operation of the project, which is also responsible.

Objective is to show the suitability of one of the options that have the parties involved in the project when choosing a SPV that best suits their interests, taking into account the constitution, capacity, legal representation, administration, responsibility, Decision-making, cash flow distribution and completion of the agreed figure to serve as the project's SPVP (SPVC). Now, for the development of this text, an analysis will first be made of the EPV to expose the Elements to take into account and choose the appropriate instrument according to the interests that are involved in the project and which Iven in the election of a legal entity or an autonomous patrimony, and secondly, the idea of ??choosing mercantile trust as a vehicle for the administration and operation of the project will be presented in order to establish the benefits that the fiduciary business would have in This scenario and make a comparative analysis of this with the mercantile companies as VPE (SPVC).

The (SPV) in Project Finance

One of the fundamental elements for Project Finance is the creation of a (SPV) that is responsible for developing, executing, managing and operating the project for which it was created. The entity that actually enters into the execution of the project is the so-called 'vehicle company', responsible for the conclusion of all contracts necessary for the construction, operation and maintenance of the object of the project financed.

This must also be in accordance with the interests of the parties involved: partners or financiers, since, according to the assignment of their functions, the development of the project can be properly addressed in order to obtain the cash flows of interest to their interveners (Nevitt & Fabozzi, 2005).

The choice of SPV

Given the importance of the SPVC, a correct choice must be made, according to the needs of the business to be developed, the interests involved and the assignment of risks in each of the legal instruments that are presented as a possibility to fulfil the vehicle role of the project.

Advantages Special Purpose Companies in Project financing

what advantages do these types of companies have in project financing?
First, the use of special purpose companies allows for the isolation of shareholder risks from the project. This allows shareholders not to affect aspects such as their financial capacity and liquidity as well as if they develop the project without the use of a vehicle of this.
How is project financing different from a special purpose company to a typical corporate financing granted to an already established company?
Special purpose companies are legal entities created exclusively for the development of the project. This implies that, in addition to the assets related to the project (if applicable), they do not carry out any other commercial activity (Nevitt & Fabozzi, 2005).
This aspect is relevant when financing a project, since in a typical corporate financing the lenders find support in a society in progress, which acts as debtor, with what this implies (important financial backing, solid corporate history, Etc.), in the financing of a project through a special purpose company this logic does not apply. In other words, in this last scenario the lenders have as counterpart a new legal entity that develops a project (which will serve as an exclusive source of repayment) and not to a company with a payment capacity that will repay the credit based on said capacity (Palhan, 2007).
Yes, there are some in cases where, despite being in the face of the financing of a project, the shareholders are obligated against the lenders to support the default on the payment of debt service by the principal debtor or to pay the costs derived from the construction of the project, among other examples (Thumann & Woodroof, 2009). It is at these events that the quality of the shareholders is decisive when considering the ability to pay the credit and, therefore, the change of control with respect to the shares of the special purpose company has important effects in the framework of the (May result in the configuration of non-compliance events).

Reasons for special purpose vehicles

looking for more effective forms of financing projects, businessmen have come to the figure of Project Finance in order to raise the sufficient capital to carry them out. In this stage, it is created a Special Purpose Vehicle Corporation -SPVC- which takes the form of the project and is responsible for its construction, development, operation and administration, also pays the financing with the project's cash flow and ensures compliance with this Obligation with their property. (Palhan, 2007)
In practice and according to the interests that are involved in each project, there are two options to serve the SPVC: one of them is to establish a corporation and the other one is to create a trust. Regarding the latter, this one provides benefits to economic activity development, to property and resources management, to procurement and distribution of cash flow, and to credit payment and its warranty, so their choice favors the project and its partners as well as their funders (Rajagopal, 2013).
 A Special Purpose Vehicle (hereinafter SPVC) is used in these project financings, which may be a commercial company or a fiduciary Mercantile according to the choice of the parties involved in the project and in accordance with their interests, which is responsible for paying the creditors of the credits that finance the project such obligations with the cash flows that are obtained from the operation. In this sense,: a vehicle or legal vessel called Special Purpose Vehicle (SVPC), such as a commercial company or a commercial trust agreement, is used whose special purpose is that the project financiers, called sponsors, obtain the service of the debt, taking into account the future flows generated by the project when it ceases to be and becomes an infrastructure work in operation (Tinsley, n.d.). Also, in relation to the form that can take the VPE, the author states that "the existence of a special purpose vehicle.

In order to evaluate this hypothesis, an analytical methodology will be assumed on the norms involved in the mentioned topics, as well as on the doctrinal postulates of each figure and their evolution in the academic activity reflected in different scientific articles that have been published in their respective subjects (Rajagopal, 2013). Objective is to show the suitability of one of the options that have the parties involved in the project when choosing a VPS (SPVC) that best suits their interests, taking into account the constitution, capacity, legal representation, administration, responsibility, decision-making, cash flow distribution and completion of the agreed figure to serve as the project's SPVP (Shajan, 2007).

Given the importance of the SPVC, a correct choice must be made, according to the needs of the business to be developed, the interests involved and the allocation of risks in each of the legal instruments that are presented as a possibility to fulfill the role of vehicle of the project.

Project financing process

The project finance is the process of financing the long term infrastructure, industrial projects as well as the public services which are based upon the non-recourse or perhaps the limited recourse financial structure (Delmon, 2009). Additionally, the project finance has been a technique for financing any development idea to be able to gain the industrial development as well as improve on the infrastructural amenities (Delmon, 2009). The project finance is a complex process which involves parties, stages, process, legal as well as the financial implication that are involved in the process. The viability of the project are deliberated based on the pre-development stage that includes the concerns for example the title of the ownerships of the assets, revenue generation estimates, and generation of the profit and utility (Delmon, 2009). The concern of the project financing essentially starts with reconciling the interest of different parties that are involved in the financing. The parties of the project are essentially varied and independent having various interest in the project. When it comes to the pre-development phase the parties should evaluate on the financial viability as well as the technical feasibility (Palmer, 2000). It is important to understand each party objective before engaging into the financing which is pertinent to establish the prudent negotiations.

In managing as well as controlling the projects there are two basic features that go in hand that is the project management and the project finance (Palmer, 2000). Generally, most individuals particularly the engineers are much aware of the project management aspects while at the same time they do not pay much attention when it comes to the financing of the project (Engel, Fischer & Galetovic, 2010). Therefore, due to the project failure the project delays could arise due to the lack of the reliable financing that is the main stream when it comes to the infrastructure projects. The project planning is becoming popular and in some of the cases a mandatory investment technique (Tan, 2007) The project previously have relied on the project financing techniques with debt being made available to the commercial banks often from the financial institutions.

When it comes to the process of financing a project especially for a IPF the government or the public authority involved in the project as the sponsors sets up an SPC and they sign on the concession in order to authorize the project exclusive to the company (Engel, Fischer & Galetovic, 2010). The investment banks then come to help the company which is offering the IPF to the investors, signs the contracts among the multiple parties (Delmon, 2009). On the contracts it specifies on the impact factor of the target infrastructure project as well as benchmarks which is required by the public sector.  The SPV raises on the funding and they start on building or perhaps managing on the infrastructure, and reaching to the contractors. In the meantime they can still borrow money from the banks as usual if need arises (Engel, Fischer & Galetovic, 2010). Additionally, it is important to note that the investors are responsible for making the strategy of the project company, as well as voting on the directors of the SPV. In this way they could act like the equity holders in order to influence on the SPV to achieve on the impact requirement. The key to this is to separate on the interest into the two parts which is the basic yield and the impact yield.

Figure 1: The diagram shows the framework of the project finance

Pitfalls in the project finance process

When it comes to the special purpose vehicle (SPV) Project financing it has various constraints as the method for large infrastructure. Some of these constraints are; one is the issue of the fixed cost, there is a lot of cost that is involved in setting up of the SPV, such as the cost of the incorporation, the cost of the registration, as well as the stamp duty at the time of the transfer of the company (Palmer, 2000). There is also the issue of the continuous compliance. Incorporation of the SPV as the company it would require a continuous fulfilment when it comes to compliances. Additionally, there is the issue of no deduction which is available for the taxation purposes. The tax benefits are usually lost in off balance sheet SPVs (Ng & Loosemore, 2007).  The deductions of the tax which are provided for incurring various business expenses are usually not available to the sponsor, in the event that these transaction are carried out via the SPV (Grimsey & Lewis, 2007). The debt which is taken by the SPV would also not provide any tax benefit to the sponsor. Another disadvantage of the SPV is the lack of the funding options as well as the legal obligations for the limited company.

Benefits of using SPV

The SPV usually act as the bankruptcy remote. In case the sponsoring firm has the financial problems, it could escape easily their creditor because they cannot seize on the assets of the SPV. The SPV helps the investors as well as the organization as it isolates on the high risk projects when it comes to the parent organization as well as by providing to the new investors the opportunity in order to take a share of a specific risks in the organization with the simple as well as clear balance sheet (Grimsey & Lewis, 2007). The SPV has been the best suited for the project financing. The long term investment when it comes to the infrastructural as well as the industrial projects which are based on the projected cash flows of the projects when it comes to the project planning (Grimsey & Lewis, 2007).  The project financing structure usually involves a number of the equity investor as well as the syndicate of the banks which provide the loans to the operation. In the case study for Bauunternehmen GmbH has approach the Richmond Bank infrastructure to finance on the project of Stralsund Road Tunnel. The loan are usually secured by the project assets and they should be repaid entirely from the future cash flow which will be generated from the project.

 References:

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Daube, D., Vollrath, S., & Alfen, H. W. (2008). A comparison of Project Finance and the Forfeiting Model as financing forms for PPP projects in Germany. International Journal of Project Management, 26(4), 376-387.

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