7. Financing of Constructed Facilities
7.1 The Financing Problem
Investment in a constructed facility represents a cost in the short term that returns benefitsonly over the long term use of the facility. Thus, costs occur earlier than the benefits, andowners of facilities must obtain the capital resources to finance the costs of construction. Aproject cannot proceed without adequate financing, and the cost of providing adequatefinancing can be quite large. For these reasons, attention to project finance is an importantaspect of project management. Finance is also a concern to the other organizations involvedin a project such as the general contractor and material suppliers. Unless an ownerimmediately and completely covers the costs incurred by each participant, theseorganizations face financing problems of their own.At a more general level, project finance is only one aspect of the general problem of corporate finance. If numerous projects are considered and financed together, then the netcash flow requirements constitutes the corporate financing problem for capital investment.Whether project finance is performed at the project or at the corporate level does not alterthe basic financing problem.In essence, the project finance problem is to obtain funds to bridge the time betweenmaking expenditures and obtaining revenues. Based on the conceptual plan, the costestimate and the construction plan, the cash flow of costs and receipts for a project can beestimated. Normally, this cash flow will involve expenditures in early periods. Coveringthis negative cash balance in the most beneficial or cost effective fashion is the projectfinance problem. During planning and design, expenditures of the owner are modest,whereas substantial costs are incurred during construction. Only after the facility iscomplete do revenues begin. In contrast, a contractor would receive periodic paymentsfrom the owner as construction proceeds. However, a contractor also may have a negativecash balance due to delays in payment and
of profits or cost reimbursements onthe part of the owner.Plans considered by owners for facility financing typically have both long and short termaspects. In the long term, sources of revenue include sales, grants, and tax revenues.Borrowed funds must be eventually paid back from these other sources. In the short term, awider variety of financing options exist, including borrowing, grants, corporate investmentfunds, payment delays and others. Many of these financing options involve theparticipation of third parties such as banks or bond underwriters. For private facilities suchas office buildings, it is customary to have completely different financing arrangementsduring the construction period and during the period of facility use. During the latterperiod, mortgage or loan funds can be secured by the value of the facility itself. Thus,different arrangements of financing options and participants are possible at different stagesof a project, so the practice of financial planning is often complicated.On the other hand, the options for borrowing by contractors to bridge their expendituresand receipts during construction are relatively limited. For small or medium size projects,overdrafts from bank accounts are the most common form of construction financing.