PROJECT BANKABILITY - FINANCIAL AND TECHNOECONOMIC IMPACTS

Added 09.06.2023 10:00:00 Views count 218

The implementation of a Project is always defined by the following main three important phases: 1) Bankable Development (BD), 2) Engineering, Procurement and Construction (EPC), and 3) Management (M) also known as Operations and Maintenance (O&M). The most important phase in the realisation of any is the Bankable Development Phase

PROJECT BANKABILITY - FINANCIAL AND TECHNOECONOMIC IMPACTS

PROJECT BANKABILITY DEVELOPMENT

I. INTRODUCTION

The implementation of a Project is always defined by the following main three important phases: 1) Bankable Development (BD), 2) Engineering, Procurement and Construction (EPC), and 3) Management (M) also known as Operations and Maintenance (O&M). The most important phase in the realisation of any is the Bankable Development Phase, because without it, it is absolutely not possible to engage any EPC or EPCM contractor, attract investors and invite Lenders or financiers, and other stakeholders such as including guaranting and insurance corporation companies, EPC or EPCM. In simple words, it is not possible to build and operate any project without a bankable development. A project with no bankable development is not a project and has no value even if you acquire land, and few licenses like in some countries in Africa. African Governments issue licenses and permits to African Project Companies based without a full Bankable Development as for instance in Nigeria, where many Project Companies, including State Governments have acquired licenses, permits and a piece of land to implement Free Trade Zones, Special Economic Zones, Electric Power Generation Stations, including residential properties without any bankable development or bankable documentation. Research has shown that no private project and public infrastructural projects such as Power Stations (generation, transmission and distrimission), water projects, road projects, agricultural projects, Oil and gas Projects, etc. have never been developed to bankability. More than 95% of the Project in Africa have been just erected and built since 1960 without standardised designs, technoeconomic studies, and business Plan, etc. Every project must always be developed to bankability in order to attract sponsors, investors, financiers and other stakeholders for the EPC or EPCM. During my stay in Nigeria, I have discovered that no Project in Nigeria has been developed to bankability since independence in 1960, including the Nigerian first Free Trade Zone, the Calabar Free Trade Zone Located in Cross River State.

Some of the benefits of Project Bankability is to optimize Investment Cost and maximize revenues and quality for a sustainable Operations Management of the Project. The projects built in Africa are three times more expensive than the real prices offered in the international market and moc of them due to the absence of Bankable Development. 

No investor, financier or lender, including of course banks will invest in a project, which is not fully developed to Bankability. Project financing due process must always demonstrate that the project quality standard is highly satisfactory to generate the necessary guaranteed incomes (shown in the projected income of the technoeconomic studies) for a sustainable operations management. 

In the case you do not have the seed capital for the Bankable Development of your project, then contact MDAICReal, your global industrial, commercial and industrial real estate developer, and get the right solutions for free.

II. PRELIMINARY CONDITIONS

Before commencing a project, the Project Company or Project Owner, must first and foremost acquire a land and the necessary title on the land (e.g. Certificate of Occupancy or Deed of Assignment), giving them the rights to access the land, develop the Project in accordance with the land use prolicy and regulation, and implement the project on the allotted or given land, using an eligible Developer who have access to the right EPC Contcators, Investors, Lenders or Financiers and Insurers or Guarantors. The acceptable land required for the development of a project to bankability is a land allotted with a Certificate of Occupancy (CofO) or with a Deed of Assignment (DofA) to the Project Company or Project Owner.

The Project Company or Project Owner can also be given a piece of land in an Industrial Zone, Special Economic Zone (SEZ) or Free Trade Zone (FTZ), or in another eligible specific area by a licensed private Company or government authority or agency.

Before commencing a project, the Project Company or Project Owner, must first and foremost acquire a land and the necessary title on the land (e.g. Certificate of Occupancy or Deed of Assignment), giving them the rights to access the land, develop the Project in accordance with the land use policy and regulation, and implement the project on the allotted or given land, using an eligible Developer who have access to the right EPC Contractors, Investors, Lenders or Financiers and Insurers or Guarantors. The acceptable land required for the development of a project to bankability is a land allotted with a Certificate of Occupancy (CofO) or with a Deed of Assignment (DofA) to the Project Company or Project Owner.

The Project Company or Project Owner can also be given a piece of land in an Industrial Zone, Special Economic Zone (SEZ) or Free Trade Zone (FTZ), or in another eligible specific area by a licensed private Company or government authority or agency.

The cost of the land you acquire for the development of the Project is not included in the Total Project Cost (TPC) or Total Investment Capital (TIC) because no financier will provide finance or loan to purchase a land for the implementation of the Project. This is obvious. Therefore, the land is never included in the reimbursable or pre operational expenses or costs. Every Project company or Project Owner must be aware that the land itself is not a bankable item. This is one of the biggest mistakes of some Project Companies or Project Owners in developing countries. The only reimbursables that are included in the TIC / TPC are the following preoperational expenses:

• the Bankable Development Fee,
• the Environmental Impact Assessment Fee, and
• the Cost of Licenses and Permits.

III. HOW TO FINANCE THE DEVELOPMENT PHASE

The Bankable Development Fee generally varies from represents 5% to 25% of the predicted Total Investment Capital (TIC)  or Total Project Cost (TPC), depending on the complexity of the Project. The Bankable Development Fee of a Project can be raised through Angel Investors, Venture Capitalists or using your own financial resources. In the case you do not have a seed capital for the Bankable Development and preparational expenses of the Project, you should engage a qualified Developer to prepare the necessary preliminary documentation, including required to reach and appeal to Angel Investors and Venture Capitalists.

3.1 Angel Investors

Angel investors are wealthy private investors focused on financing small business ventures, startups, etc. in exchange for equity. Compared to venture capitalists, angel investors or simply angels may also be more patient with entrepreneurs and open to providing smaller dollar amounts for a longer period of time. But they usually do want to see an exit strategy at some point where they can pocket their profits, typically through a public offering or an acquisition.
Angel investors fund businesses in a wide range of business industries. For instance, in the United Kingdom, according to the Center for Venture Research at the University of New Hampshire, the total investments of the angel-funded businesses in 2020 were $25.3 billion, a 6% increase over the year 2019.

3.2 Venture capitalists

Unlike angel investors, who use their own net worth, venture capitalists or venture capital firms use an investment fund to finance the Bankable Development of projects, startups and small business ventures in exchange for equity and at their own risks. As in the case of angel investors, Project Companies or Projects Owners, do not have to repay the funds provided by venture capitalists because they're ceding to them ownership shares in exchange for money. This is why, it is first important to acquire the land and necessary approvals or permits to implement the project on that land, motivating the angels and venture capitalists to provide funding for the Bankable Development at the kick-off stage of the project.

3.3 What equity share or percentage do angel investors or venture capitalists want?

Angel investors typically want 10% to 50% of the Project Company (Special Purpose Vehicle) or the Project itself in exchange for funding. At this stage, the Project Company or Project Owner must be very tactical and strategic in its decisions that could lead to the lost of control of its business or project if the angel investors determine they're keeping the company from succeeding. It's important to think about how much equity the Project Company or Project Owner want to give away to an investor for funding its project because if it cedes too many shares, it may not own the major shares of its company or its project anymore if things don't go well and the angel investor has more ownership than the Project Company or Project Owner.

The more money an angel investor invests in a business, the more they want a bigger Return on Investment (ROI). Of course, the ROI varies, depending on the specific investing opportunity and trends, and the types of projects. Generally, angel investors expect a 30% return on their investment capital as part of their exit strategy. This is the point in time, when they sell their equity in the company (SPV) or the project to make up their initial investment and necessary profits. As, the angel investor and/or venture capitalists focus on making some profits on their exit with high expectation for ROI, the Project Company or Project Owner shall assure the number of ceded shares shall satisfactorily meet its financial requirements for the BD, EPC and OM of the Project or successful operations of its company (SPV). Therefore, the Project Company or the Project Owner shall, at its request, preliminarily receive from the Project Development Company / Project Developer, MDA CAPITAL INVEST, a.s. (MDACI), a Full Corporate Offer (FCO) for the bankable development of the project, indicating the cost of the bankable development, the cost of the share it wants to cede to angel investors and venture capitalists.

Angels and venture capitalists always have a higher expectation for ROI, because their strategic investment risk is to invest significantly more money to acquire a larger percentage of profit. The Project Company or Project Owner must be aware that land and related permits and licenses of the Project or the SPV are included in the value of the equity shared ceded to the angel investors and venture capitalists. This is one of the main reasons why the value of the project lands (i.e. construction site of the project) are not included in the Total Investment Capital of the Project and therefore cannot be considered as reimbursable.

IV. BENEFITS OF THE PROJECT BANKABILITY

The bankable development makes the project to be financeable, attracting the necessary required funding for the successful execution of the EPC (phase 2) and OM (phase 3). MDACI's prime European banks (EU export, commercial and investment banks and financiers) are always ready, willing and able to finance any project satisfactorily demonstrated bankable and financeable by MDACI / MDACI Consortium.

V. RAISING FUNDING FOR THE EPCM

After the successful bankable development of the project, the fundraising for the Engineering, Procurement and Construction (EPC) and Operations management (OM) is easy at MDACI. Whether your company or corporate business is a special purpose vehicle, startup, new business or established business beyond the startup phase or others, MDACI /MDACI Consortium always arrange the necessary funds you need from its investors and financiers to successfully execute the EPCM.

Dipl. Engr. Marcel DIONE, MSc.
Chairman of the Board of Director / CEO, MDA CAPITAL INVEST, a.s.

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