Financial engineering for project finance

Abstract

The provision of public services and infrastructure has evolved over the years and currently, the ever-increasing demand for public services and the greater levels of required renewal and repair of infrastructure have created unsustainable strains on limited public sector resources, leading to a resurgence of private sector involvement in such projects, to a much larger degree than ever before. The key to the success of such privately financed projects is the structure of the financing package. This thesis traces the evolution of project financing, exploring the financial engineering of funding packages using debt and equity instruments by way of financial modelling. This research derives a generic health sector project for which a fmancial model is subsequently developed, based on actual project finance modelling practice and incorporating various financial instruments for funding and credit enhancement. Using this financial model, different permutations of financial structure are simulated and investigated; the use of bank loans versus fixed and index-linked bond issues, debt repayment profiles and blended equity structures, are some of the areas examined, as are gearing, credit enhancement, and the sensitivity of different financial structures to inflation. This thesis offers insightful knowledge on the process of financial engineering for project finance, and on the various instruments and mechanisms that can be employed for project profitability and financial robustness. The development and manipulation of a detailed financial model highlight the role and importance of optimisation of the financial package during modelling and overall, afford the reader a better understanding of the dynamic that exists between the components of a project's financial structure.