Lesson 9:

CONSTRUCTION MANAGEMENT Financing Of Projects

Learning Outcomes

 By the end of the lesson students

should be able to:
 Define Financing in projects.

 Understand project finance models

 Formulate financial analysis to support

construction management.
 Recognize the inherent ethical issues
surrounding construction cost accounting.
WHAT IS FINANCING OF A
PROJECTS?
Introduction
+ Project finance refers to the funding of projects, such as public infrastructure,
services, industrial projects, and others through a specific financial structure.
+ Finances can consist of a mix of debt and equity. The debt and equity used to
finance the project are paid back from the cash flow generated from the
project.
+ Project financing could be a loan structure that relies primarily on the project's
cash flow for repayment, within the project's assets, rights, and interests held
as secondary collateral.
+ Project finance is especially attractive to the private sector because companies
can fund major projects off-balance sheet.
Financing
Construction Projects
+ Share capital: Share capital is the
fund raised by issuing shares in return
for cash on other considerations. It is
also known as “equity financing”.
+ Term loan: It is a loan from a bank for
o specific amount that has a specified
repayment schedule and a floating
interest rate. Term loans almost always
mature between one and 10 years
+ Bond: A debt investment in which an
investor loans money to an entity
(corporate or governmental) that
borrows the funds for a defined period
of time at a fixed interest rate.
Financing
Construction Projects
+ Debenture capital: A type of debt instrument that
is not secured by physical assets or collateral
Debentures are backed only by the general
creditworthiness and reputation of the issuer.
+ Deferred credit: Income that is received by a
business but not immediately reported as income
is known as deferred credit. Typically, this is done
on income that is not fully earned and.,
consequently, has yet to be matched with a related
expense. Such items include consulting fees,
+ Other sources:
Personal loan,
Unsecured loan,
Public deposit,
Leasing, etc.
Financing
Construction Projects
+ Business Angels: These are wealthy individuals who
invest in high growth business in return for a share in
the business. Some Business Angels invest on their own
or as a team.
+ Venture Capital: This is also known as a private
equity finance. Venture capitalists look to invest large
sums of money than Business Angels in return for
equity.
+ Cross-funding: This is where several people each
invest land or contribute small amounts of money to
your business or idea.
+ Enterprise Investment Scheme (EIS): Some limited
companies can raise funds under the EIS. The scheme
applies to small companies carrying on a qualifying
trader.
Financing
Construction Projects
+ Alternative Platform Finance Scheme: If a small
business is struggling to access bank finance, there are
various SME platforms availing finances some backed
by government and development partners.
+ The Stock Market: Joining a public market or stock
market is another route through which equity finance can
be raised.
+ Leasing: Lease financing is one of the important sources
of medium- and long-term financing where the owner of
an asset gives another person, the right to use that asset
against periodical payments.
+ Other sources include:
+ Personal loan,
+ Unsecured loan,
+ Public deposit
Factors To Consider When Financing A
Project
+ Project attributes - Project attributes are the characteristics and
parameters of the project providing key project information.
+ Special Purpose Vehicle - Special Purpose Vehicle (SPV) attributes
refer to SPV qualities in managing the project. A strong financial
position with relevant management and technical expertise as well as
previous successful experience will contribute to the quality of
services and provide economic value to consumers. These include:
Factors To Consider When Financing A
Project
+ Government attributes - Government attributes refer to the government
characteristics including its role, power and management. Public sector
agencies play a role in ensuring successful development with updated
regulations, policies and guidelines.
+ Financing attributes - Financing attributes refer to the financing
conditions and financier qualities. The financing conditions are the
fundamental requirements in obtaining financing.
+ Political and economic environment - The political and economic
environment represent significant factors affecting the involvement of
financiers in any industry or business.
Project Financing Models
Three Statement Model
+ The 3-statement model is the most basic setup for financial modeling. As
the name implies, in this model the three statements (income statement,
balance sheet, and cash flow) are all dynamically linked with formulas in
Excel.
+ The objective is to set it up so all the accounts are connected, and a set of
assumptions can drive changes in the entire model.
+ It’s important to know how to link the 3 financial statements, which requires
a solid foundation of accounting, finance, and Excel skills.
Discounted Cash Flow (DCF) Model
+ The DCF model builds on the 3-statement model to value a company
based on the Net Present Value (NPV) of the business’ future cash
flow.
+ The DCF model takes the cash flows from the 3-statement model,
makes some adjustments where necessary, and then uses the XNPV
function in Excel to discount them back to today at the company’s
Weighted Average Cost of Capital (WACC).
 Merger Model (M&A)
+ The M&A model is a more advanced model used to evaluate the pro
forma accretion/dilution of a merger or acquisition.
+ It’s common to use a single tab model for each company, where the
consolidation of Company A + Company B = Merged Co.
+ The level of complexity can vary widely. This model is most
commonly used in investment banking and/or corporate development.
 Initial Public Offering (IPO) Model
+ Investment bankers and corporate development professionals also
build IPO models in Excel to value their business in advance of going
public.
+ These models involve looking at comparable company analysis in
conjunction with an assumption about how much investors would be
willing to pay for the company in question.
+ The valuation in an IPO model includes “an IPO discount” to ensure
the stock trades well in the secondary market.
Leveraged Buyout (LBO) Model
+ A leveraged buyout transaction typically requires modeling
complicated debt schedules and is an advanced form of financial
modeling.
+ An LBO is often one of the most detailed and challenging of all types
of financial models, as the many layers of financing create circular
references and require cash flow waterfalls.
+ These types of models are not very common outside of private equity
or investment banking.
Sum of the Parts Model
+ This type of model is built by taking several DCF models and adding
them together.
+ Next, any additional components of the business that might not be
suitable for a DCF analysis (e.g., marketable securities, which would
be valued based on the market) are added to that value of the business.
+ So, for example, you would sum up (hence “Sum of the Parts”) the
value of business unit A, business unit B, and investments C, minus
liabilities D to arrive at the Net Asset Value for the company.
Consolidation Model
+ This type of model includes multiple business units added into one
single model.
+ Typically, each business unit has its own tab, with a consolidation tab
that simply sums up the other business units.
+ This is similar to a Sum of the Parts exercise where Division A and
Division B are added together and a new, consolidated worksheet is
created. Check out CFI’s free consolidation model template.
 Budget Model
+ This is used to model finance for
professionals in financial
planning & analysis (FP&A) to
get the budget together for the
coming year(s).
+ Budget models are typically
designed to be based on monthly
or quarterly figures and focus
heavily on the income statement.
Forecasting Model
+ This type is also used in
financial planning and analysis
(FP&A) to build a forecast that
compares to the budget model.
+ Sometimes the budget and
forecast models are one
combined workbook and
sometimes they are totally
separate.
Option Pricing Model
+ The two main types of option pricing models are binomial tree and
Black-Scholes.
+ These models are based purely on mathematical formulas rather than
subjective criteria and, therefore, are more or less a straightforward
calculator built into Excel
Advantages
+ Allows the promoters to undertake projects without exhausting their ability to
borrow amount for traditional projects.
+ Limits financial risks to a project to the amount of equity invested.
+ Enables raising more debts as lenders are sure that cash flows from the project
will not be siphoned off for other corporate uses.
+ Provides stronger incentives for careful project evaluation and risk
assessment.
+ Facilitates the projects to undergo careful technical and economic review.
+ Eliminates the dependency on alternative nature of funding a project.
+ Facilitates the arrangement of liability financing and credit improvement,
accessible to the project but unavailable to the project sponsor.
Limitations
+ Complexity of the process due to the increase in the number of parties
and the transaction cost.
+ Litigious with regard to negotiations.
+ Complexity due to lengthy documentation.
+ Requires broad risk analysis and evaluation to be performed.
+ Requires qualified people for performing the complicated procedures of
project finance.
+ Obligations regarding the trust fund account need to clearly specify.
+ Higher level of control which might be exercised by the banks, which
might bring conflict with the businesses or contract.
Ethical Issues
+ Ethical issues occur when a given decision, scenario or activity creates
a conflict with the society’s morals and principles.
+ These conflicts are sometimes legally dangerous since some of their
alternatives to solve the issues might breach a particular law.
+ To ensure effectiveness in project financing it is critical that’s all the
information that is used for working out the project finances is correct
and factual and for all practical purposes one should avoid Providing
information just for sorely for the purpose of attaining required
finances.
Questions?