What is Project Finance?

port infra

The topic of private sector financing of infrastructure cannot run away from the concept of Project Finance, which is really a financial structure that enables a projects to be financed solely based upon the cashflow expected from itself. In its purest form, it is non-recourse to the equity owners of the project; so the lenders cannot go after the owners of the project should the project itself fail to make payments on the loan. Often, project finance also provide higher leverage for the project sponsors than they could do at corporate level, which might be attractive even if the cost of debt is higher.

Maybe this already sounds like it is too much to take in. So bear with me a little while and allow me to take you from my credit-card application analogy to something closer, say, a mortgage loan. When you buy a house, you’d have no money to pay for it, and the bank would lend out the money to you, and for security/collateral, the bank gets your house. And the amount they would lend to you is based on the income that you make. Consider for a moment if the house is not yet built. So you commit to a loan, and the funds you are going to pay to the developers of the house, will be paid for by the bank, and the bank will be repaid by you, the customer, as the monthly payments are made. So did the developer actually borrow the money or was it you?

The bank must have a degree of trust in the developer, the project itself, and all the other things surrounding it, including the homebuyers’ ability to repay the loans for financing their homes eventually. And with all that in place, the home-building project itself actually can be financed largely by the lender rather than the developer themselves. An infrastructure project behaves very much the same way where the pre-commitments of the customer to that piece of infrastructure – very often the government – allows the lenders to take comfort that the project will be able to pay for itself over time.

This creates a very attractive structure for financing projects because it is self-contained, and parcels out various different risk factors to specific parties involved. For example, the developer takes care of the process to put together the parties and documentation required, the builders/contractors focus on bringing in execution capabilities, while the lenders bring in the much-needed capital and the users get their goods/services at a pre-arranged pricing schedule. Infrastructure is generally built for the long-term and last long. The demand for its services and payments to it are likewise long-term and repetitive; often also backed by the government as infrastructure often serves as public goods or at least club/common goods that are covered all or in-part by taxpayers. Project finance takes these advantages and enables benefits such as long-tenure financing (usually 15-20 years long repayment tenure, depending on the length of the concession contract), fixed interest rates over the long term (in some sense similar to a long-term sovereign bond), sometimes with repayment schedule sized according to the expected cashflow of the project (often part of ‘financial structuring’ of the loan).

This is last point is vital as infrastructure projects may be designed to accommodate growth over the next decade and therefore may be ‘overcapacity’ relative to the demand at time of commissioning. By sizing the repayments and managing the terms of the loan such that the lenders can tolerate lower payments in the beginning in exchange for higher payments at the end, the debt doesn’t become too overwhelming for the project to handle.

One final point I want to make is that project finance deals are often so large that a single bank would not want to take all the risks of lending to the project and would ‘syndicate’ with other banks or at least sell down part of their loan to another bank who would take the stream of payments down the line. This is another important feature of project finance as it allows multiple banks to partake in the risks of financing a single large project and be somehow acting as though they are a single lender  as opposed to having multiple lenders facing off a single project and doing their own evaluations separately.

There are more nuanced technicalities involved and I didn’t set out to write something that would just copy-and-paste textbooks or content from other sites so there’s some recommended possible readings to get deeper. Though they can indeed go quite in-depth into those nuances:

The last link contains an article that is very involved; and the geeky me kind of like how they even talked about fenus nauticum (sea loan) during the Roman empire as a sort of ‘pre-cursor’ to project finance today (which really started in 1970s and took off 1980s). Dentons do update this guide every now and then so the link may not be the latest. Googling ‘Dentons Guide to Project Finance’ should help to point you to something more updated.

This article is part of a series I’m working on to make topics in infrastructure a little more accessible to students and people from outside the industry who might want to get involved.

Feasibility of an Infrastructure

train infra

A huge part of infrastructure development work upfront is the feasibility study. What exactly goes into a full feasibility study and why is it so important? This article aims to explain that simply and more accessibly to people outside the industry. We’ll focus on the feasibility study rather than any documentation on projects generated prior to that (sometimes called pre-Feasibility Study – which could be considered a ‘lite’ version).

The feasibility study is like a professional evaluation of a business plan. For any infrastructure project, this is a comprehensive look into all the practical, legal, technical and commercial aspects of the project. Often, it will include social and environmental dimensions of the project in order to ensure that the lenders (ie. financial institutions providing debt to the project) is satisfied. In markets where there is significant social and environmental activism, the lenders are also on the receiving end of hate-mail, harassment and boycotts. Major project finance lenders internationally have therefore got together to be involved in The Equator Principles – a risk management framework that banks sign up to abide in assessing the environment, social risks involved in projects.

What then constitutes environment and social risks?

Infrastructure projects are physical, and will almost always require clearing of a piece of land to allow construction to take place. This would mean either resettling villages, people, farms, or redeveloping urban spaces, or even clearing swathe of rainforest. In cases of large hydropower dams, it will involve spaces not only for construction of the dam but also planned floodplains which can include multiple villages, broad swathe of forests. All of these impacts on human lives, biodiversity, alters natural landscapes.

Of course, the banks, developers, and builders care about people and rainforests. But beyond that, they are concerned about being harassed, haunted by NGOs, activist organisations trying to run them down reputationally for having been involved in projects that destroyed natural habitats for endangered species, upsetting livelihoods. These forms the environment and social risks; and the feasibility study tend to cover aspects of the social and environmental impact assessment, as well as to propose means to mitigate. Through that, the developers of the project also forms an idea how much resources they might need to expend to support resettlement, to help rebuild livelihoods destroyed.

How about practical and technical risks?

The feasibility study also goes into the technical and practical aspects of the project, including studying the possible technologies to deploy, the actual site conditions: whether the land can accommodate the infrastructure, whether there is actually sufficient demand for that infrastructure, and if the infrastructure has everything needed to service that demand – this could take the form of water supply pipe network, or an inter-connector to the national grid for a power plant.

The study needs to ensure that the proposed technical solution is able to deal with the problem statement at hand. For example, if we are using incineration for the waste, then we have to ensure that the waste stream is not too moist. If the waste is wet, the incineration system may not perform properly, which leads to potential technical breakdowns or stoppage.

And not forgetting the legal and commercial risks?

At the end of the day, the project will have to comply with the law of the land, and often, there will be a lot of permitting, licensing, government approvals that are needed for various components of the project. The feasibility study will investigate all of these and the developers will also do their best to make sure the requisite approvals and permits are obtain in advanced even often in parallel with the feasibility study just to make sure that the project is progressing in a timely fashion. These documentation will often be studied alongside the feasibility studies by the lenders.

Lots of parameters, and results from various aspects of the feasibility study would be captured into the financial model that is used to work out whether the project is commercially viable – that is, the total revenues/payments expected for the lifetime of the project is able to pay for its total cost over its lifetime. Governments may also undertake an economic cost-benefit analysis, to see if the total economic benefit of the infrastructure project is able to cover the total cost to society (more on this from a previous article I’ve written).

At the end of the day, flagging out, assessing and then measuring these risks enables the developers, lenders, and the government to have a better picture of how viable the project really is, hence its feasibility – from the various risks perspective as well as the resourcing that can be availed to the project. Doing proper feasibility studies can also help government better plan areas surrounding infrastructure, whether it is to mitigate some of the impacts of the infrastructure, but also to see if developments around the infrastructure can help improve its feasibility (eg. a larger substation might have to be built in the area to be able to accommodate a large utility scale solar park which would not have been able to feed power into the national grid).

This article is part of a series I’m working on to make topics in infrastructure a little more accessible to students and people from outside the industry who might want to get involved.

What is Bankability?


I’m hoping to embark on a series of writing that will help the university students and young graduates appreciate the infrastructure industry better. I know this is likely the beginning but I’m not sure when it will end or how frequently I’ll be writing. For now, I thought I just want to get started and eventually when there is critical mass, I’ll be putting it up on a separate website.

For consumers, when we apply for credit cards, the bank taking in the application wants to know our income, our employer, age, and will probably scrub our current track records for payment on our other cards, as well as any outstanding debt we have. For businesses, the process involved in loan applications is somewhat similar. Banks look at the years it has been established, the revenue/sales track records, the profitability of the firm and or sometimes they are financing based on the invoices – payments that the firm will be receiving from its customer for goods sold.

And then there’s infrastructure projects; they are not yet built, there’s no cashflow or payments made to the infrastructure, sometimes the land is not even acquired yet (there’s no one providing funds to acquire the land!). The willingness of a well-established financial institution to lend money to the project at reasonable interest rates (ie. ‘bankability’) will depend a lot on factors that surround the projects which gives good indication of the ability of the project to repay its debt. Like consumer credit, the more data the banks have, about both projects of the type in general, and also specific data about the project to be financed, would help give them a better sense to assess if they should lend to the project.

So what kind of data? I’ll distinguish between the availability of data, and the outcome of the assessment on the data available. The banks need data on the reliability of the sponsors/developers (essentially the equity owners of the project), the engineering-procurement-construction (EPC) firms involved, the government or customer of the project (ie. the one who will be paying for the services the infrastructure provides), as well as the underlying project involved. For each of the entities involved:

  • Previous payment/financial performance – in the form of financial statements, records, etc.
  • For government, often some kind of sovereign rating
  • Track records in project execution (especially in terms of the construction in the case of EPC firms, and operating experience for the developer or whoever they might be appointing to operate the project)

Then for the underlying project, the sources of data that will allow the banks to make the assessment would be:

  • All the contracts involved in the project
  • Feasibility studies involving site survey results, data – independent studies verifying that the proposal is feasible, technical solutions can deliver expected results, etc.
  • Any documentary evidence of support by governments or other development financial institutions towards the project.

In essence, these things are basically like the payslip or appointment letter from your employer which you submit for your credit card application. They give proof that the project is able to be put together and generate the kind of cashflow worthy of the loan that it will be taking out. There will also be sophisticated financial models that are shared across the developers and the banks in order to work out transparently what is the cashflow expected from the project across its lifetime and how these cashflows will be divided amongst the various stakeholders.

Through the information, the bank determines how stable the cashflow is, the level of comfort they have with the creditworthiness of the various parties, and then work out the pricing (ie. interest rates) on the loan, which helps to update the financial models, and provide more clarity to all the parties involved on how the returns from the project are shared. The assessment of risks by the bank (which impacts on pricing and whether they would be interested to finance the project at all) will be based upon their internal due diligence on the various parties involved in the project, as well as the feasibility study, and the set of contracts underlying the project. It often depend critically on the government involvement in the project and how they are involved. Major project finance deals are often achieved with government providing a guarantee on the income stream of the project conditional on the performance of the project based on pre-agreed indicators. Once the bank is satisfied that the operators and developer is able to perform in accordance to the contract, they shift their attention towards the creditworthiness of the government who have promised to pay.

As a result of these complexities, infrastructure transactions themselves are not only big in terms of the investment but they do require big teams to put the transactions together whether it is on the developer side, the financial institutions or the consultancy teams. These teams are all combining various disciplines including accounting, finance, engineering, general management, project management, legal, etc. To that extent, we do think that the industry is a good generator of job opportunities. The challenge is that these projects are typically have activities in starts and stops (extreme busyness in one camp or another in different points of time). The skills required across the sector is quite wide-ranging though the topic tend to be more narrow and focused.

This article is part of a series I’m working on to make topics in infrastructure a little more accessible to students and people from outside the industry who might want to get involved.

Infrastructure Economics vs Business


I was recently invited to speak to students on careers in Infrastructure in a panel organised by Advisory Singapore. I must really applaud the efforts of this student-led initiative to help others know more about careers, jobs and life in the working world. There’s a fair bit of demystification necessary when it comes to what real work (or real world, for that matter) really involves.

In any case, I was asked a very simple question which I think most of us will fail to be able to answer; what is the difference between the economics and business? Of course, having been invited to be talking about infrastructure sector, I used a context-specific example to answer the question.

In the context of Infrastructure, the evaluation of whether to proceed with a project would be based on whether the social benefit exceeds the social costs. At a society level, as long as the benefits, from the economic growth, the job creation, the uplift of people above poverty lines, the improved standards of living (all of which, economists would need to somehow put a dollar figure to quantify), exceeds the costs, which in the case of social costs, would include not just the monetary costs of construction but the inconvenience it brings to people during the time of construction, the recurring costs in terms of operations, and the pollution it might potentially create (say, in the case of a coal-fired power plant), then the project should go ahead. That is the economics of infrastructure, pure and simple, aggregated and unencumbered by issues of distribution.

Business case, however, is a relatively new issue that is brought out by the existence of Public-Private Partnerships and trying to account for government budget constraints. It is one thing that the social benefits exceeds the social costs; but it is another issue for the benefits to an investor to exceed his costs (including the construction, cost of capital, risk compensation, etc.). This investment would be from the public sector or private sector but the idea remains the same; and it relates to a big topic of value-capture, or in essence, distribution of value created:

  • If the infrastructure is invested by the government, it must make sure that it is able to recover from the social benefits an amount of tax revenue (or whatever other forms of revenue from government services) that is able to cover the capital expenditure and operating expenses of the infrastructure.
  • If the infrastructure is invested by the private sector, it must be given concessions, or guarantees from the government that allows it to ensure it is able to recover from the beneficiaries of the infrastructure, an amount in revenue that is able to cover the capital expenditure, cost of capital and operating expenses of the infrastructure.

Notice that if the government is technically as efficient as the private sector and have lower cost of capital (due to its ability to generate tax revenue de jure), then it is actually more effective for the government to undertake all manner of infrastructure investments. It is when the innovation, technical efficiency and capital discipline brought about by the private sector exceeds the reduced cost of capital of the government, that the infrastructure should be passed on to the private sector.

Therefore, the business case goes down one level from the economic case for infrastructure, focusing instead on the distribution of value in order to enable the infrastructure. This is assuming that the economic case has been established – too often, due to vested interests and private benefits exceeding private costs (despite social benefits being less than social costs), infrastructure projects are conceived, even executed, only to become white elephants.

Of course, in the real world, we are confronted with limited and imperfect information; that is where we must be able to learn to work within the confines of what we can know, and proceed with a decision. Added to that, something we often miss out in Economics, is the need to also uphold a degree of morality and integrity in the environment so that vested interests do not creep into the picture. Alignment of incentives can only go so far and no more if economic players are morally corrupt. That is when EQ and adult sensibilities matter much more than IQ and pure intellectual prowess.

Developing Human Capital


The human resource infrastructure in Singapore is creaking. And it’s because we have not institutionalise or captured the genius of our great founding fathers. Kishore Mahbubani’s recent column article about them really intends for readers to strike a comparison – but going beyond that, I want to think we have not missed the opportunity. But huge overhauls will be required. It is often harder to overturn legacy than to start afresh – we risk being trapped that way as a nation. Being small and nimble, I hope we’ll be able to.

Some of the qualities of our people really defines the trajectory of the nation; and these qualities are nurtured through education, corporate life, society. Are we then shaping our next generation to have the same kind of qualities as those needed? Time and again I see in education that cradling of fixed mindsets; I see in corporate life the resistance towards building up capabilities – choosing to dwell on opportunistic means of making profit and survive rather than thrive. I wonder how Kishore Mahbubani’s listing of the 3 attributes that our founding fathers – Incessant curiosity, ruthless realism and pragmatism – holds up with our current generation against the backdrop of institutions and structures well established.

Incessant curiosity. Do we encourage people to ask questions? Before that, we have to ask ourselves do we like questions? Do we care more about getting the right answers or getting the right questions? I had a new colleague recently and was called upon to mentor her. One of the first things I told her was that in order to pick things up really quick, you have to be able to work out what to pick up first. And you do so by training your mind to seek out right questions to ask. Never mind about the answers yet; you worry about whether answers are right or wrong only after you gain mastery of what to look out for. And that’s precisely a challenge for our education system. Throughout our traditional Primary and Secondary education, students are given a syllabus and just loads of content. To an ordinary Singaporean student, a subject is defined more by the content of its syllabus than the questions it poses to the world.

Ruthless realism. How realistic are we? We tell our children to go and study law, medicine, accountancy and engineering because those provides them with secure and stable jobs? Whilst that may sound realistic to you, it’s not at all. If money, security are the only attributes that you care about in the world then it distorts your reality. Ruthless realism is about focusing on attributes of reality that matters and identifying what are the trade-offs involved. Knowing these ‘hard truths’ prepares us to take on the real world much better. Do our children know the kind of work involved in the disciplines they undertake? How are we preparing them for disruption and new frontiers?

Pragmatism. I’m actually not sure how many people know the difference between pragmatism and realism. Pragmatism, in the Singaporean sense refers more to the notion that we are not rooted to any particular ideology; practical application of ideologies and whatever suits us best is adopted. However, that description is more of an outcome than the spirit of pragmatism. The spirit behind pragmatism is actually the methodology of refining ideologies and theories based on what we expect or experience in practice. In dwelling on the outcome of our founding fathers’ pragmatism, we overlook the sort of process and methodology that underlies those decisions and lend weight to the mistaken notion that pragmatism is the same as ‘whatever works for you/us’ kind of laissez faire approach.

Building up our infrastructure to nurture human capital and capture the gains we’ve lost through the last decade or so will require a mix of radicalism and incrementalism. And I propose the following moves in response to the comment above:

  1. Clarify ‘pragmatism’ and teach the practise of it
  2. Stop insulating our people from ‘hard truths’
  3. Encourage asking of the right questions rather than seeking ‘right answers’

Starting from our education system, this 3 moves can be practised most immediately by encouraging behavioural changes by teachers in class. This can only be carried out through content reduction, and shifting more discretion to teachers in terms of evaluating students’ abilities based on wholistic assessment (rather than just exams). Next, at government level, communications with citizens, treatment of all public service clientele needs to drive that 3 thrust. The thinking process which leads to pragmatic outcomes needs to be properly crafted and communicated – however politically incorrect they may be. Finally, I think corporates can start looking at the 3 thrust as tools for employee development and engagement to raise the standards of the way the deal with people. This will help them to nurture the next generation to be better managers and decision-makers.

Solar as Future of Energy

The Economist ran a couple of stories about Solar Energy in the latest issue (16 April 2016); mainly touting the trends the industry has been facing in the recent years:

  1. Falling cost of panels
  2. Increasing interest, attention and commitment (in the form of Feed-in Tariffs)
  3. Falling levels of subsidy support and FiTs
  4. Increased avenues of financing and ambitious solar farm projects

Quite a couple of bottlenecks to the growth of solar still awaits solutions; and in the recent years, competition in this industry will be shifting into solving some of these problems holding back the development of solar energy.

  1. Land intensity of PV solar farms (need to improve efficiency and quality of PV cells) – land is an issue because of potential competition with arable land (plants need sunshine too) in certain places
  2. Intermittency of Solar power (a large dark cloud moving over a PV farm by can reduce generation significantly and abruptly – need for energy storage and some sort of balancing mechanism)
  3. Grid curtailment issues; inability of the grid to take in the power generated when at the peak generation capacity (especially with wind power thrown into the vicinity).

As a result, I believe these issues are going to drive the growth of this few industries/businesses:

  1. Data analytics combining weather/cloud forecasting with energy storage smart systems to optimise the operations of large scale solar farms
  2. Market platforms that helps with cost-balancing and electricity trading in order to smoothen demand and supply fluctuations from solar/wind power
  3. Improvements in both energy storage technologies as well as PV cell technologies.
  4. Further financial innovation in financing solar power deployments – including leasing of panels, leasing of rooftop space, usage-fee-purchase model, etc.