SECTION 1 — INTRODUCTION TO PROJECT FINANCE
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Q: What is project finance?
A: Financing based on a project’s future cashflows, using a ring-fenced SPV. -
Q: Why do large infrastructure projects use project finance?
A: It allocates risk to parties best placed to manage it and enables off-balance sheet funding. -
Q: What is an SPV?
A: A Special Purpose Vehicle set up to develop, finance, own, and operate a project. -
Q: Key characteristic of project finance?
A: Non-recourse or limited-recourse debt. -
Q: What assets do lenders rely on?
A: Project cashflows and project contracts, not shareholder balance sheets. -
Q: What is non-recourse financing?
A: Lenders can only claim against the project assets, not the sponsor’s assets. -
Q: What is limited-recourse financing?
A: Lenders have some fallback rights to sponsors under defined conditions. -
Q: What is a concession?
A: Long-term right to build/operate an asset granted by a government authority. -
Q: What is “bankability”?
A: The likelihood that lenders will provide financing. -
Q: Why form an SPV instead of using a parent company?
A: To isolate risk and simplify contractual relationships.
SECTION 2 — PPP / PFI / CONCESSIONAL MODELS
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Q: What is PPP?
A: Public Private Partnership—collaboration between public and private sectors to deliver assets/services. -
Q: What is PFI?
A: Private Finance Initiative—private sector finances, builds, and operates public infrastructure. -
Q: Common PPP models?
A: Build-Operate-Transfer (BOT), BOOT, DBFO, Concession, O&M contracts. -
Q: Example DBFO meaning?
A: Design, Build, Finance & Operate. -
Q: What drives value for money in PPP?
A: Optimal risk transfer, lifecycle efficiencies, whole-life cost focus. -
Q: What is a shadow toll?
A: Government pays operator based on traffic volumes rather than end-users paying. -
Q: Why are PPPs attractive to governments?
A: Capex doesn’t hit public accounts immediately; risk transferred to private sector. -
Q: Typical PPP concession length?
A: 20–40 years depending on asset class. -
Q: What is availability-based payment?
A: Government pays operator based on asset availability & performance, not usage. -
Q: Why do PPP projects face criticism?
A: Long-term cost to public sector; contract inflexibility.
SECTION 3 — FUNDING STRUCTURES
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Q: What is equity in project finance?
A: Capital contributed by sponsors at risk of loss. -
Q: What is senior debt?
A: First to be repaid; lowest risk, lowest interest rate. -
Q: What is subordinated debt?
A: Higher-risk debt repaid after senior lenders. -
Q: What is mezzanine financing?
A: Hybrid debt with equity-like features, higher return. -
Q: Typical debt-to-equity ratio in PF?
A: 70:30 to 90:10 depending on project stability. -
Q: Advantages of high leverage?
A: Lower sponsor equity requirement; higher IRR. -
Q: Disadvantages of high leverage?
A: Higher repayment burden; increased default risk. -
Q: What is the cost of capital?
A: Weighted average cost of debt and equity (WACC). -
Q: What is refinancing?
A: Replacing debt with cheaper debt once project risk reduces. -
Q: Why do lenders require technical due diligence?
A: To confirm feasibility, cost accuracy, and programme risk.
SECTION 4 — FINANCIAL MODELLING (NPV / IRR / CASHFLOW)
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Q: What is NPV?
A: Net Present Value — discounted value of future cashflows. -
Q: What is a positive NPV?
A: Indicates a financially viable project. -
Q: What is IRR?
A: Internal Rate of Return — discount rate that makes NPV = 0. -
Q: What is the payback period?
A: Time required for cash inflows to recover initial investment. -
Q: What is discounted cash flow (DCF)?
A: Method of valuing based on time value of money. -
Q: Difference between nominal and real cashflows?
A: Nominal includes inflation; real excludes it. -
Q: What is a financial close?
A: Point when project contracts & funding agreements are signed. -
Q: What is a debt service coverage ratio (DSCR)?
A: Cashflow available for debt service ÷ debt service obligations. -
Q: Typical required DSCR?
A: 1.2–1.5 depending on project risk. -
Q: What is a lock-up covenant?
A: Restriction preventing dividend payments when DSCR too low.
SECTION 5 — COSTING, BUDGETING & FORECASTING
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Q: Role of QS in project finance?
A: Cost verification, lifecycle costing, CAPEX/OPEX modelling, value engineering. -
Q: What is CAPEX?
A: Capital expenditure for constructing the asset. -
Q: What is OPEX?
A: Operational expenditure during asset life. -
Q: What is lifecycle cost?
A: Total cost of ownership including maintenance and operations. -
Q: Why is cost accuracy critical at financial close?
A: Lenders rely on fixed price or near-fixed price CAPEX. -
Q: What is a base cost estimate?
A: Construction cost before risk, inflation, and financing. -
Q: What is owner's contingency?
A: Allowance for undefined risks retained by the sponsor. -
Q: What is lender’s technical advisor (LTA)?
A: Independent expert who validates cost and schedule on behalf of lenders. -
Q: Why fixed-price contracts favoured in PF?
A: They limit CAPEX risk and protect lenders. -
Q: What is a whole-life cost approach?
A: Evaluating CAPEX + OPEX to optimise long-term value.
SECTION 6 — COMMERCIAL CONTRACTS IN PROJECT FINANCE
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Q: What is an EPC contract?
A: Engineering, Procurement & Construction — lump-sum turnkey contract for construction. -
Q: Why is EPC preferred in PF?
A: Single point of responsibility and fixed cost/time. -
Q: What is O&M contract?
A: Contract for long-term operation and maintenance. -
Q: What is a long-term offtake agreement?
A: Buyer commits to purchase output (e.g., power purchase agreement). -
Q: What is a supply agreement?
A: Contract securing inputs (e.g., fuel, raw materials). -
Q: What is a tripartite agreement?
A: Links lender, SPV, and contractor to protect lender interests. -
Q: What is a direct agreement?
A: Gives lenders rights to step-in if SPV defaults. -
Q: What is force majeure?
A: Unforeseeable events beyond control of parties. -
Q: What is a completion guarantee?
A: Sponsor guarantee ensuring project completion. -
Q: What is risk sharing?
A: Allocating risks to parties best able to mitigate them.
SECTION 7 — RISK ANALYSIS & MITIGATION
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Q: Key risks in project finance?
A: Construction risk, cost overrun risk, demand risk, O&M risk, political risk. -
Q: What is construction risk?
A: Risk that project may be delayed, over-budget or technically deficient. -
Q: How is construction risk mitigated?
A: EPC contract, performance bonds, guarantees. -
Q: What is demand risk?
A: Risk that the asset will not generate expected revenue. -
Q: How is demand risk mitigated?
A: Offtake agreements, minimum revenue guarantees. -
Q: What is political risk?
A: Government actions impacting project (e.g., expropriation). -
Q: What is inflation risk?
A: Increase in costs or decrease in real value of payments. -
Q: How do lenders manage FX risk?
A: Hedging, matching currency of debt with revenue. -
Q: What is termination risk?
A: Risk of project ending early due to breach or political factors. -
Q: What is insurance used for in PF?
A: Transfer financial impact of events (accidents, natural disasters).
SECTION 8 — PUBLIC SECTOR & ECONOMIC APPRAISAL
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Q: What is the public sector comparator (PSC)?
A: Benchmark comparing PPP cost vs public delivery. -
Q: What is value for money (VfM)?
A: Optimal balance of cost, quality, and risk transfer. -
Q: What is economic appraisal?
A: Assessment using social and economic benefits (not just financial). -
Q: What is social cost-benefit analysis?
A: Evaluating wider economic impacts of a project. -
Q: Example of economic multiplier effect?
A: Jobs created leading to increased local spending. -
Q: What is optimism bias?
A: Tendency to underestimate costs and overestimate benefits. -
Q: Why do governments use discount rates?
A: To reflect opportunity cost of capital and compare future benefits. -
Q: What is the HM Treasury Green Book?
A: UK guidance on project appraisal and evaluation. -
Q: What is affordability analysis?
A: Whether future payments are within government budget. -
Q: Why perform sensitivity analysis?
A: To test how results change with uncertainties in assumptions.
SECTION 9 — EQUITY, RETURNS & INVESTOR PERSPECTIVE
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Q: What returns do equity investors expect?
A: Higher than lenders due to higher risk—typically IRR 10–20%. -
Q: What is equity IRR?
A: Return to shareholders after debt servicing. -
Q: What is project IRR?
A: Return on total project cashflow before financing. -
Q: What increases equity returns?
A: Higher leverage, refinancing, CAPEX savings. -
Q: Why do investors monitor DSCR?
A: Indicates ability to service debt; impacts dividend payments. -
Q: What is a waterfall structure?
A: Order in which project revenues are distributed. -
Q: What is cash sweep?
A: Using excess cash to repay debt early. -
Q: What is hurdle rate?
A: Minimum acceptable return to investors. -
Q: Why do investors favour stable revenue assets?
A: Lower risk, predictable returns. -
Q: What is exit value?
A: Value realised when selling equity stake.
SECTION 10 — LENDERS, DUE DILIGENCE & FINANCIAL CLOSE
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Q: Why is lender due diligence extensive?
A: To protect investment and ensure project viability. -
Q: What is a term sheet?
A: Outline of loan terms prior to full loan agreement. -
Q: What is covenant testing?
A: Monitoring compliance with loan conditions (e.g., DSCR). -
Q: What is a step-in right?
A: Allowing lender to replace SPV operator if project underperforms. -
Q: When is final investment decision made?
A: Once financial modelling, due diligence, contracts, and funding are confirmed. -
Q: What is lender’s monitor?
A: Independent party overseeing construction for lenders. -
Q: What is drawdown schedule?
A: Timing and amount of each loan disbursement. -
Q: What is completion test?
A: Required performance and reliability thresholds before full operation. -
Q: What is a subordinated sponsor loan?
A: Equity-like debt provided by sponsors, repaid after senior lenders. -
Q: What causes project finance deals to fail?
A: Poor risk allocation, weak contracts, unviable cashflows, political instability.
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