The project team, the interweaving contract structure, and project and financing structures are key elements in project finance value creation. But, they do not happen in a vacuum instantaneously and do not come into existence on their own. They are developed over time in order to implement a project finance transaction successfully. Project finance organizations (PFOs) are part of the project team and are created to help the sponsor company's project manager manage information needs and flows, perform assessments and evaluate projects, and develop the right financing structures. Large firms in the infrastructure project business that specialize in project development, building, and financing have dedicated PFOs. Smaller companies usually assemble teams on an as‐needed basis by drawing from internal disciplines and external advisors, or they outsource project financing in its entirety.
A key objective of PFOs is to ensure that efficient and effective project finance solutions are developed for customers and expected project value materializes according to project objectives and plans. Another key objective is to protect and advance the company's interests and image and ensure a coordinated and efficient management of company resources. The difference between dedicated, fulltime PFOs and ad‐hoc PFOs is in the skills and qualifications, their commitment to project success, their standing with customers and funding entities, and the quality and results of solutions they develop.
Before discussing the PFOs business definition, let us see when PFOs are needed. This discussion takes place in Section 5.1, where instances of a need for PFOs are outlined.
Section 5.2 deals with the components of the PFO business definition: Mission and vision, goals and objectives, governance structure, and scope of activities. The necessary skills and qualifications in general management, analytical competencies, and financing sources, techniques, and instruments are addressed in Section 5.3. Various challenges facing PFOs are discussed in Section 5.4. Section 5.5 presents some PFO performance‐evaluation measures. Lastly, the attributes found to characterize successful PFOs are shown in Section 5.6.
Many of the PFO business definition parts apply to other functional groups and our arguments are extensive because they come from the idea that a good PFO definition and suitable skills and competencies are essential to obtain a competitive advantage. The discussion is based on the author's experiences, observations, and project notes, some of which are covered in Triantis (2013).
Sales teams bring in projects and make unsolicited proposals. Business development organizations assess project fit, screen and evaluate projects, and make recommendations. Sponsors want value creation. Engineering groups respond to RFPs. Lawyers create and negotiate contracts and agreements. The project company wants management support from the sponsor organization. Host country governments want value for the money. PFOs work with all these groups to develop and finance projects that meet stakeholder requirements and are needed in the following cases:
The business definition of an organization usually consists of the following parts: The mission and vision, strategy, goals and objectives, scope of activities, and governance structure. A more complete business definition also includes the organization's principles and values, which are included under required skills and qualifications. The elements of the PFO definition are shown in Figure 5.2.1.1.
Figure 5.2.1.1 Elements of the PFO Business Definition
The mission of dedicated PFOs is the reason for their existence; namely, to fill project finance needs and its purpose is to strive to achieve them with a competitive advantage. The reasons PFOs are established are to increase the success rates of infrastructure project financings through better project planning and preparation, screening and development, evaluation and execution. A PFO main objective is to identify and eliminate gaps and shortfalls, provide better financing solutions, and support management decision‐making needs. The mission of the PFO is one part of its business definition and to develop it, a company needs to answer the following questions:
To understand the underlying elements of how the PFO business definition is affected by various considerations that come together to produce project financing solutions, we draw attention to Figure 5.2.1.2. It shows what factors make that definition effective. Not surprisingly, the starting point is the corporate culture, followed by the company mindset, and then comes the PFO's reporting structure. Notice how corporate strategy and objectives drive the PFO objectives which, in turn, affect the shaping of project objectives.
Figure 5.2.1.2 Determinants of the PFO Business Definition
The vision of the PFO is an idealized statement that creates a clear picture of the desired state of this group. It is the first step in establishing its ultimate destination and determining ways by which the PFO team creates value and performs its functions successfully. The vision defines the purpose, often in terms of values, and communicates it to team members and clients. For team members, it provides a clear direction and inspiration to strive for competitive advantage; it also aids senior management and customer support, which helps to understand what the PFO function is all about and how they can benefit from it. The quality of the vision statement determines the innovation, creativity, and value of the team and it is most effective when it is consistent with senior management's views.
The PFO team's vision statement needs to resonate with customers and once a PFO is established and begins getting acceptance, the vision statement is updated to aim for even higher levels of service to project teams. As an example, the vision statement of a PFO of a European firm states that its vision is to become a trusted project finance advisor and valued partner to customers, decision makers, and project team members with high professional standards in accordance with its principles. A North American PFO states that its vision is to build strong financial market networks and alliances to provide consistent, efficient, and reliable project finance services and be a viable alternative to external advisors and project finance outsourcing. The vision of an Asia‐based PFO is to help the company establish a competitive advantage and win project bids over competitors through project financing.
Goals are broad, general intentions that relate to purpose, vision, and aspirations while objectives are narrow, more specific attitudinal or behavioral propositions. Goals set direction for the organization; objectives are steps on the path to reaching the goals. To produce desired results, project objectives must be clear, challenging, and achievable and have PFO associate involvement in their creation. Client and senior management feedback to measure their effectiveness is also required.
Key goals and objectives that flow out of the PFO's core values and lead to sound project financing solutions are embraced by its associates, customers, and senior management and include:
The means used to achieve the stated PFO goals and objectives include several of the following common elements, such as:
The PFO governance structure deals with the organization and the system by which the team is managed. It is the relationships between the team members, the leader, and project stakeholders that define the way objectives are set and the means to reach them. A way of looking at the PFO's governance is the functions around customer relationships, knowledge, and project management; and the policies, contracts, financing techniques and instruments, and processes governing infrastructure project finance. Figure 5.2.3.1 shows one example of an effective PFO that has been in existence for several years and that provides a competitive advantage to its company.
Figure 5.2.3.1 Example of Effective PFO Governance Structure
The authority to establish and fund a centralized PFO team is derived from a clear need for competitive and reliable project financing to support successful project bids. The PFO's charter assigns responsibility for its activities to a supervisory body that sets the rules of engagement that include:
PFO governance requires incorporating performance measures for project finance solutions and defining functional boundaries, responsibilities, and tasks, including PFO associate and project‐team performance indicators. These elements require establishing specific PFO deliverables, educating customers about project finance, and building in checks and balances. Additional elements for effective PFO governance include stating clearly the activities that make the PFO accountable to organizations it supports, to customers, and to senior management, and being managed effectively. PFO accountability means:
Good governance processes are critical in successful project financing and a sound structure helps the PFO supervisor effectively guide work activities. However, corporate culture, structure, and PFO strategy are also determining factors, along with the maturity of the PFO, and how stakeholders communicate and coordinate activities. Effective PFO governance structures are purposely designed and are revisited as the organization matures. PFOs usually have a simple configuration that is easily understood and minimizes confusion as to who does what, why, how, and when. Hence, sound PFO‐governance structures produce clear, challenging, and achievable objectives, team‐member involvement in setting goals and objectives, and obtaining ongoing team member and customer input and feedback.
The project executive has oversight responsibility for the project whereas the project manager has hands‐on project responsibility. The project manager decides, with inputs from the PFO and functional groups, what needs to be done and provides direction and guidance to the project team. The project manager must be a highly motivated and effective manager with broad experience in the areas of 4Cs (unimpeded communication, coordination, cooperation, and collaboration) and relationship management, a team motivator, and uniquely qualified in project management, project finance, and project marketing. In some project teams, individual subteam members report to their functional area managers and to the PFO, who reports to the project manager on a dotted‐line basis. The coordination of activities and the integration of the work done by the subteams are crucial and are often shared between the PFO and the project manager.
Ordinarily the PFO resides in the corporate CFO and it is self‐contained, separate from but closely linked with subteams that provide support to it. Figure 5.2.3.2 shows the structure of the PFO reporting to the company CFO. There are other organizational structures that are well functioning and are shown in Figures 5.2.3.3, 5.2.3.4, and 5.2.3.5. In the first case, the PFO reports solid line to the CFO and dotted line to the project manager, and each subteam reports directly to their respective organizations and dotted line to the project manager. Here, the PFO has a central role and works closely with internal groups assigned to the project team. In its central position the PFO coordinates planning, external contacts, processes, analyses and evaluations with lender and equity investors, host government authorities involved in the project, unilateral and multilateral agencies, insurance agents, external advisors, and the project company.
Figure 5.2.3.2 PFO Reports to the Company CFO
Figure 5.2.3.3 PFO Reports to the Project Manager
Figure 5.2.3.4 Project Subteams Report to the Project Manager
Figure 5.2.3.3 shows a structure where the PFO and other subteams are assigned to the project manager for the duration of the project. Notice that in this project team structure, the PFO has all the important functions reporting to it on a dotted‐line basis for the duration of the project and focus is placed on project participants and corresponding relationships. While the PFO, the regional sales and marketing, procurement, engineering, and legal subteams report to the project manager, the strategic forecasting, competitive analysis, tax and accounting, and external advisors engaged in the project report to the PFO on a dotted line basis. One important difference in this organizational structure is that because some of the subteams report to the PFO, efficiencies are obtained in the analyses and evaluations performed. This structure shows that the project manager and its support structure serve the needs of the project via their relationships with both internal and external project participants.
A third project team organizational structure is one where the other subteams report to the project manager for the duration of the project on a dotted‐line basis as shown in Figure 5.2.3.4. Here, the PFO may report to the project manager on a solid‐line basis. This tends to be an effective structure in small size, less complex projects and works well under a strong project management leadership. It also works well in cases where the PFO lacks the required skills and competencies and some project financing functions are outsourced.
All project team structures have advantages and weaknesses and what structure fits best a particular situation and project depends on a number of factors such as:
A fifth PFO organizational structure is shown in Figure 5.2.3.5, where the PFO is part of the project management organization that reports to the project executive. This is an effective structure staffed with highly skilled and dedicated project finance and project management associates.
Figure 5.2.3.5 PFO Resides in Project Management
The scope of the PFO charter describes the functions it performs and the activities necessary in order to accomplish them. The range of PFO activities is determined by its mission and vision, goals and objectives, and senior management's assessment of the requirements that are crucial for developing efficient project financings. It is also determined by PFO‐associates' skills and competencies, the nature of internal alliances and external relations, and its financial market networks, contacts, and associations in the industry. It is also influenced and constrained by budgetary considerations and the size and composition of the organization.
Depending on the resources available, associates' qualifications, and project needs, the PFO's scope of activities include:
Project financings developed by the PFO are a confluence of diverse experiences that make it a valued internal advisor. The services ordinarily provided by PFOs are:
Sharing knowledge and insights is an important task of the PFO charter and providing guidance on analyses, evaluations, and other required functions. Supporting the development of contracts and agreements and their negotiations, assessing the impact of proposals and counter proposals, and providing guidance to the investor relations and public affairs groups are part of the PFO's territory. PFO leadership in identifying influencing factors and determining their impact on project financeability, in order to shape the project's future by creating the conditions to make it happen, is also within the scope of its activities. This, however, is conditioned by corporate risk appetite vis‐à‐vis a project's risk profile and mitigation, other project participant support, and competitor activities.
The PFO helps the project manager in ensuring all‐around communication, coordination, cooperation, and collaboration, as well as preparing project‐status reports, and monitoring project performance by activities, such as:
The many activities of PFOs require a multitude of high‐level skills and qualifications to reside in these groups. However, not all competencies are present in every PFO and that is another reason project advisors and consultants are engaged to supplement the existing capabilities of PFOs. There are three major categories of skills and competencies: general management skills, analytical competencies, and knowledge of financing institutions, techniques, and instruments.
The general management skills expected of PFO associates in order to be able to function in high visibility, intense activities include:
The analytical skills and competencies required of the PFO are an essential part for effective functioning and the other being experience in financing structuring and closing. The analytical skills and competencies cover a wide territory and require PFO associates to be:
Exceptional skills and competencies, knowledge, and networks and strong relationships with financial institutions, multilateral agencies, development banks, export credit agencies, and other financial intermediaries are a must. A deep understanding of customer financing needs as well as experience with project finance processes and rules, and ability to pick the right instruments must be part of the qualifications PFO associates bring to the table. The list of common PFO skills and competencies in this area includes:
Each project has its own peculiarities and challenges and in every case the PFO's challenges are the project's challenges and vice versa, and those challenges often become the root causes of project failures. The reasons that projects fail to achieve initial objectives was the subject of Chapter 3. Here, the challenges PFOs commonly face are separated into six categories: internal project sponsor company, analytics and evaluations, host government agency, project stakeholder, project financing, and project company operational challenges.
Challenges to the PFO's ability to structure optimal project financing solutions and attain a competitive advantage have their origin in the following internal factors:
Several PFO challenges are present in project analytics and evaluations. Gaps, weaknesses, inaccuracies, and errors in project analyses and assessments are major challenges to the PFO and include:
Challenges originating with project company may not present problems to the PFO's ability to structure efficient project financing and bring the project to completion. They do however, impact the project's ability to achieve the projections that financing was based on. Hence, they may require revisiting the financing and make changes in the project company's operations. Some of the operational challenges are:
Assessment of PFO performance is undertaken to determine how well it met the objectives stated at the project development stage and assess whether benefits obtained from having a dedicated PFO justify costs of creating and maintaining that organization. However, PFO performance is closely linked with the overall project management performance evaluation. To assess the PFO performance in a project, one has to examine how well it performed its functions in terms of quality of analyses and evaluations, timeliness of the required tasks and activities, and effective cost management and controls. The reception of the project financing package by the customer, the strength of the financial ratios and related information evaluation, and the assistance the PFO provided to team members and project participants should also be assessed.
Some organizations want to see quantitative measures of performance, such as percent deviations of actual revenues from projected values, ratings of PFO performance by the project manager and the CFO, and efficiency of the financing raised in the project. Because driving a project from its inception to financing to completion involves the work of several different organizations and project participants, it is difficult to isolate exactly how and what the PFO should be measured on. Judging if the right financing plan was created depends on the individual project participant's perspective and because assessments are time consuming and difficult to do objectively, they are given a light treatment. Nevertheless, in the case of well‐established PFOs, they are given proper attention in the post‐mortem analysis.
A qualitative assessment of the PFO's performance entails obtaining survey responses from project participants to, at least, the following questions:
Characteristics of successful PFOs are a variant of the required skills and qualifications discussed in Section 5.3 or best practices observed in the project finance industry. PFO skills and qualifications affect project success to a significant extent, but how customers view and value the effectiveness of that group and the efficiency of the financing brought to the project are also important. Additionally, how well the dealings with sponsors went and how they valued the PFO's contributions to the project help define a PFO's success characteristics. Equally important are the factors that make its transactions with financial institutions smooth, efficient, and effective.
Objectivity in identifying successful PFO characteristics that lead to competitive advantage necessitates a long term, external advisor or consultant and customer perspective. The characteristics of importance to customers are listed below:
PFO dealings with financial institutions also determine project finance success. That is, how these dealings were conducted and what results they produced reveal the successful characteristics of PFOs. Some of the factors that come up repeatedly include:
The third part that defines characteristics of successful PFOs is interaction with the sponsor group and the project manager. The characteristics that make a PFO successful are better described by the project managers' perspective as:
One cannot omit the required PFO skills and qualifications from the characteristics of successful PFOs. Without them, there would be no basis for competitive advantage or project success. The required PFO skills and competencies were discussed earlier in Section 5.3, but here we look at some telling factors underlying PFO success, which are:
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