Table of Contents

Preface vi

Acknowledgements ix

About the Authors x

1 The Nature of Project Finance 1

1.1 The world of projects today 3

1.2 Corporations, finance and projects: important concepts 5

1.3 The project company business model 12

1.4 The project cycle 21

1.5 System concepts and the project company 29

1.6 Plan of the book 39

Key concepts 42

2 Complex Transactions 43

2.1 Transactions, the cost of transactions, transaction cost economics, and projects 44

2.2 A more formal approach to disaggregation of transactions 51

2.3 The influence of agency on transaction costs -- agency costs 58

2.4 Corporate finance context 64

2.5 Incentive conflicts in corporate finance 69

2.6 Transaction costs and agency -- theoretic logic of the project finance model 75

Key concepts 78

Appendix 2.1 Comparison of long-term debt instruments 79

A2.1.1 Syndicated loans 80

A2.1.2 International bonds 86

3 Financial Evaluation 93

3.1 Valuation and the project company 94

3.2 Valuation and the project company as a single-asset business 111

3.3 Capital budgeting decisions 135

Key concepts 149

4 Managing Risk in Project Finance Transactions 150

4.1 The project cycle revisited 152

4.2 Risk management approaches 155

4.3 The project company and risk identification 169

4.4 Risks in the construction phase 188

4.5 The institutional environment and risk 195

4.6 Risk management and project lenders 203

Key concepts 214

5 Continuing Evolution: from PF to PFI, PPP and beyond 216

5.1 Introduction 216

5.2 PFI origins 219

5.3 Types of PFI 221

5.4 PFI features 223

5.5 Procurement process principles 225

5.6 Contract and control structure 231

5.7 The special purpose or project vehicle and financing 232

5.8 PFI/PPP and rational privatisation 233

5.9 Risk management 234

5.10 Financial risk in PFI and PPPs 239

5.11 Challenges for PFI and PPP and the responses 239

5.12 The lessons 242

Key concepts 244

6 The Relevance of Sound Demand in Infrastructure Project Finance: the Sydney CrossCity Tunnel 245

6.1 Infrastructure fi nance: the Sydney CrossCity Tunnel 245

6.2 History of the CCT project 246

6.3 Cheung Kong Infrastructure Holdings Limited 252

6.4 The bidding process 256

6.5 Valuing the project 257

6.6 Assessing project risks 261

6.7 Capital structure 262

6.8 Completion of the deal 266

6.9 Project outcomes 278

7 Financial Structure and Infrastructure Project Finance: the Hong Kong Western Harbour Crossing 280

7.1 Refinancing the Western Harbour Crossing, Hong Kong 280

7.2 History of the Western Harbour Crossing 281

7.3 Valuation of the project 302

8 Institutional Risks and Infrastructure Project Finance: the Dabhol Power Project 308

8.1 Dabhol Power Project 309

8.2 Development of the Dabhol Power Project 312

8.3 Power purchase agreement 314

8.4 Epilogue 321

8.5 Analysis 321

9 Extreme Complexity in Transacting: public private partnerships at work in the London Underground 324

9.1 Public private partnership: London Underground 324

9.2 Two countries, two systems 325

9.3 Public private partnership 328

9.4 Endnote 346

References 348

Index 354

About the Author

Frederik Pretorius and Berry Hsu, Department of Real Estate and Construction, University of Hong Kong.

Paul Lejot and Douglas Arner, Faculty of Law, University of Hong Kong.

Arthur McInnis, Faculty of Law, City University of Hong Kong.

Reviews

"An interesting publication with many key aims, it looks to supply the concepts of project finance to academics and students by the utilisation of real projects." (Building Engineer)