Project Finance of power plant ventures

Diplomarbeit von Manfred Elzlstorfer

Abstract Although measures are taken to ensure that the investment in a Project Finance venture will pay off, studies of the recent past have shown that the bigger the projects and the larger their monetary value, the more susceptible the project was to suffer distress and the higher the chances of incurring losses.

Another issue that has emerged during recent years is the topic of environmental and social sustainability in Project Finance. At the dawn of the new millennium, environmental and social sustainability of a project was no longer a by-product of sound project design, but a requirement for obtaining the necessary financing.

In order to address both issues, the thesis has the following structure: Besides a concise introduction into the nature of Project Finance, the thesis deals with financial success as well as with environmental and social sustainability of a selected group of Project Finance undertakings.

Concerning the issue of financial success, the paper identifies success criteria of Project Finance undertakings in general. From that basis, criteria which are of particular relevance to the financial success of power plant Project Finance ventures are determined.

Considering the issue of environmental and social sustainability, a concept is developed to facilitate the evaluation of environmental and social sustainability of a project in its entirety.

The results concerning financial success criteria of power plant Project Finance undertakings indicated that there is no clear distinction between general and financial success criteria. Yet, it strongly emerges that some criteria are of more relevance to financial success than others.

In terms of environmental and social sustainability, the result of the research is a concept to measure the impact of the project. The concept evaluates the data and information on a mostly qualitative basis and aggregates the results in order to obtain one final value reflecting the overall extent to which environmental and social guidelines as well as benchmarks were met.

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Chapter 8., Method how to identify financial success criteria:

In order to find criteria that influence financial success (no time delay, no cost overrun and the generation of sufficient cash flow) of power plant projects the author developed a questionnaire which was sent to experts in the field of PF. They should validate if the 35 success criteria are significant for increasing the financial success of power plant projects. In the end, the analysis of the questionnaire identified important financial success criteria for the specific PF industry sector.

Before the analysis, this section introduces the questionnaire which was sent out. This chapter is structured the following way:

- Reasons for an expert questionnaire.

- The structure of the questionnaire.

Reasons for an expert questionnaire:

After general success criteria have been identified, in a next effort the criteria had to be analyzed for their applicability. In order to evaluate the criteria, thorough knowledge in the field of PF was necessary. Significant information for this narrow topic could only be gained from a limited target group. Therefore, the sample of the questionnaire’s participants was small.

In order to tab the experts’ knowledge and expertise, the method had to fulfill various conditions: firstly, the method with which to extract information should not be too lengthy, as most of the experts work full time and could not be easily approached during this time; secondly, the experts were in different locations, therefore the method used had to be transferable; moreover, the cost for gathering the information should be reasonable; and the method should produce information that is easily comparable. Therefore, a questionnaire in a standardized format was chosen as the applied method, as it fulfilled all these requirements.

Structure of the questionnaire:

Five grade scale:

The questionnaire consists of 35 statements (=success criteria) which the experts were asked to rank according to their applicability of positively influencing the financial success of power plant projects. This they should express by ranking the respective criterion on a five grade scale. The scale ranged from „YES, extremely important for financial success”, over „Yes, moderately important for financial success”, and „YES, relevant for financial success” to „NO, not important for financial success”. In case the experts were unable to rank the criteria accordingly they could tick „Do not know” as a fifth alternative.

Since the author expected most of the statements to be of importance for the financial success of power plant projects, a mere YES/NO scale was not sufficient. Additionally, it should be examined if certain criteria are more important than others in achieving success. Also a scale with higher differentiation was considered inefficient as it would make the distinction between the different grades difficult and even more subjective. Consequently, a three-grade YES scale was seen as the optimal way to achieve the desired outcome.

Word- and symbol indicators instead of numeral indicators:

In addition to a simple scale model, the author used words supported by colors and symbols instead of numbers for the categories. The purpose was to clarify the difference between the categories. At the same time the usage of words improved user friendliness and made the grading more objective since words are more precise to differentiate categories than mere numbers.

Usage of color:

In order to increase differentiation between each indicator a color scheme was used. The most positive alternative, „YES, extremely important for financial success”, was assigned a luscious green color. The shade of the green color faded the less positive the alternative. The negative alternative, „NO, not important for success” was assigned a reddish color and the neutral alternative „Do not know” was left uncolored.

Including a „Do not know” column:

The „Do not know” column was included as a buffer which should prevent distortion of the results. In case an expert would be unable to rank a statement he could opt to tick „Do not know” before guessing the applicability of the individual criterion and thereby adulterate the result. However, since this additional column enables the expert not to think thoroughly about the ranking of a statement but finding the „easy way out” by ticking the box, the column was kept as neutral as possible (no coloring or symbols) and was smaller than the other four columns. This should keep the focus on the other four columns and the expert to make meaningful assumptions instead of rushing through the questionnaire by ticking the „Do not know” column.

Grouping of the 35 success criteria:

The penultimate point of this introduction deals with the grouping of the 35 success criteria. The criteria were grouped into four categories, general criteria, financial criteria, organizational criteria, and cultural criteria. The grouping was subject to the author’s disposal. It was administered due to the underlying belief that the attention can be better maintained if the reader is provided with smaller „chunks” of statements instead of having to go through a long list of 35 criteria; at whose end the quality of the answers could suffer due to a lack of motivation and increased fatigue of the respondent.

Optional space for comments:

Ultimately, at the end of the questionnaire space was provided so that the expert could optionally state any remarks he might have.

A copy of the questionnaire can be found in Appendix 3. The next chapter outlines the results of the questionnaire-process.