CHAPTER 5
Project Finance Organizations
Built for Competitive Advantage

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).

5.1 THE NEED FOR PFOs

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:

  1. Inexperienced sponsors or developers partnering or wishing to participate in international infrastructure project financing but experience difficulties structuring profitable projects like experienced competitors. In this case, a small but experienced PFO is the best option with some functions performed by advisors and consultants.
  2. For equipment or technology suppliers, having their own PFO focusing in export credit agency financing and in project financing of ventures can be an effective approach to provide financing to customers to purchase their equipment or technology. These PFOs initially engage advisors to do financings that allow the group to develop needed expertise.
  3. In cases where the sponsors' projects come in spaced out, certain functions should be performed by advisors, but appropriate‐size PFOs can add value by ensuring best‐project terms are obtained and company interests are advanced at every project stage.
  4. For large sponsor companies, the likes of ABB, Raytheon, GE, Bechtel, etc., which have project critical mass, it is beneficial to have PFOs staffed with highly skilled and experienced project finance associates who perform the majority of required functions and provide a competitive advantage to those companies.
  5. Due to large infrastructure needs, some developing countries want to attract infrastructure funding but realize their inability to manage project financings. When countries determine a need to create a PFO, it should be a small group to outsource functions requiring highly skilled professionals but who retain control of the project and decision making until government employees develop sufficient skills and qualifications.

5.2 BUSINESS DEFINITION OF PFOs

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.

Flowchart illustration of elements of the PFO (project finance organization) business definition.

Figure 5.2.1.1 Elements of the PFO Business Definition

5.2.1 PFO Mission and Vision

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:

  1. Where are we today, how effective and credible and useful can be a PFO created on an ad‐hoc basis?
  2. What human and financial resources does the company have to work with?
  3. Does the project volume and complexity warrant a dedicated organization in this area?
  4. How willing is the company to establish and fund on an ongoing basis a dedicated, professionally staffed PFO?
  5. How does the company get to the desired state of a competent PFO and how would it know if it has achieved that?
  6. What characterizes a professional, effective PFO and what does it look like?
  7. What criteria does one use to make judgments about competent PFOs?

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.

Flowchart illustration of determinants of the PFO business definition.

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.

5.2.2 PFO Goals and Objectives

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:

  1. Forming lasting global relationships and occasional alliances and being a source of reliable and trusted advice on major project decisions
  2. Helping manage project risks and help management make better informed decisions
  3. Making the project financing process less stressful and the jobs of clients and senior managers easier
  4. Anticipating and meeting project, management, and customer needs and managing their expectations
  5. Making realistic commitments of contributions and support to the success of a project
  6. Reducing time to project financing and minimizing decision uncertainty
  7. Sharing knowledge and insights and providing professional quality support
  8. Making PFO associates business partners committed to the success of strategic investment decisions and winning project bids
  9. Displacing external experts as the source of analyses and evaluations for strategic project finance decisions
  10. Increasing customer satisfaction beyond expectations and ensuring resource availability and support to their decision makers throughout the project

The means used to achieve the stated PFO goals and objectives include several of the following common elements, such as:

  1. Creating a cohesive PFO team and governance structure founded on stated vision and mission statements and on shared corporate values and principles
  2. Establishing close business links with internal functional and external project stakeholder organizations and personal relationships with counterparts in funding sources
  3. Customizing approaches, methods, applications, techniques and tools used in each project to fit the particulars of the situation and current needs
  4. Benchmarking and adopting best‐project financing practices, and learning from the best in the business and from competitor PFOs
  5. Building effective processes and procedures to ensure consistency, discipline, and transparency and increase the productivity of PFO associates
  6. Providing training and learning for project team members and government agency associates when needed
  7. Ensuring that project financing solutions display consistency with financial principles and pass efficiency, balance, and fairness tests
  8. Creating practical project finance options to offset or reduce the impact of project risks and uncertainty and develop options to manage risks when they materialize
  9. Using all available internal and external expertise, insights, analyses, evaluations, and obtaining input from experts in scenario development and planning
  10. Living up to PFO values and principles at all times, in all cases, under any circumstances, with no exceptions.

5.2.3 PFO Governance

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.

Flowchart illustration of example of effective PFO governance structure.

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:

  1. Specifying the distribution of roles and responsibilities among participants in project financing processes and laying down the rules and processes for decision making
  2. Specifying the reporting arrangements, practices, policies, and rules affecting the way the PFO team is managed, and its goals and strategies
  3. Providing a structure to set objectives consistent with corporate and business development strategy and focusing the group's efforts on major impact activities
  4. Enhancing the team's productivity on an ongoing basis and increasing the likelihood of accomplishing efficient and effective project financing in every transaction
  5. Reviewing, validating, and updating periodically the PFO team governance, policies, processes, rules, and relationships
  6. Monitoring performance, establishing performance measures, and influencing how team members perceive themselves and how they communicate across the entire project team
  7. Sharpening the skills and competencies of PFO members and focusing innovation efforts on developing a source of competitive advantage for the company through project finance
  8. Paying attention to structuring, operating, and managing the team to achieve its long‐term objectives
  9. Creating a culture of business ethics and professional conduct that supports the mission of the PFO and sets priorities aligned with team objectives
  10. Aligning functions with new business development strategy and ensuring responsible and best use of human resources and corporate investments

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:

  1. Providing a clear understanding of project objectives, expectations, priorities, and issues
  2. Assigning joint responsibility to project participants for executing parts of developing and implementing financing plans
  3. Helping in project and commercial risk management through project realization planning

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.

Flowchart illustration of PFO reports to the company CFO (Chief Financial Officer).

Figure 5.2.3.2 PFO Reports to the Company CFO

Flowchart illustration of PFO reports to the project manager.

Figure 5.2.3.3 PFO Reports to the Project Manager

Flowchart illustration of project subteams report 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:

  1. Project size and complexity. The higher the project complexity, the more the PFO is closely linked to the project manager
  2. Managerial skill requirements on the part of the project manager and control of the quality of analyses and evaluations
  3. Whether the flow of projects is slow or PFO skills are not fully developed and analyses and evaluations are outsourced in part or in their entirety
  4. Perceived political influence issues and financial costs and benefits determine how the required activities are distributed and directed by the project executive
  5. How easily a team structure can be established, altered to meet peak‐load project needs, and dissolved when the project comes to completion
  6. The degree of project team nimbleness and dexterity required for effective development of project financing solutions
  7. How well a project management and PFO structure meet customer needs and serve their interests

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.

Flowchart illustration of PFO resides in project management.

Figure 5.2.3.5 PFO Resides in Project Management

5.2.4 Scope of PFO Activities

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:

  1. Assessing internal human and financial resources available to undertake a project financing successfully
  2. Participating in and coordinating processes, analyses, and evaluations around project structuring and development, due diligence, financial model development, and creating optimized project financing solutions
  3. Determining and influencing the enabling factors to achieve project objectives, such as ensuring that realistic project objectives are adopted, participants' interests are harmonized, risk mitigation and the due diligence are thorough and complete, and the adequacy of project support and credit enhancements are beyond question
  4. Providing support to senior management, the CFO, the project manager, the project team, and other project stakeholders
  5. Dealing with funding sources, and working with host government agency personnel

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:

  1. Helping the project team define the project and its objectives, collaborate in strategic, technical, and operational‐fit assessments; and support the project development effort
  2. Providing data and information from current research and prior project experiences to help the project team avoid the problems and errors of past projects or competitors' mistakes
  3. Leading a broad assessment of the project's external environment, megatrends and subtrends, and validating the findings of those assessments
  4. Performing project risk analysis, assessment, and mitigation along with the project team and ensuring risk is fairly allocated to parties best able to handle
  5. Developing, obtaining, or collaborating in creating and screening assumptions used in cost and revenue forecasts, and baseline and alternative plausible scenarios
  6. Conducting independent, critical, and objective assessment of the project's economic viability through appropriate scrutiny and sanity checks of cost and revenue projections
  7. Maintaining a repository of data, information, insights, and experiences that serve as acknowledge center for future project finance teams

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:

  1. Helping create project evaluation tools, usually in the form of a dashboard, which relates information to team members to determine progress on the project
  2. Determining and defining what project parameters to include on the dashboard and the frequency of reporting
  3. Developing early warning systems of risks about to materialize and to estimate their impact and inform the project team
  4. Assisting the project team to develop a project value realization plan, adjustments to make, and actions to take to course correct, obtain additional support from the project parties, recreate the project company business plan, or restructure its operations
  5. Explaining variances of actuals from projected costs and revenues and determining what changes in underlying factors are causing observed deviations
  6. Performing a project post‐mortem analysis to determine what went well and what went wrong, what was done right, what was done poorly, and the lessons learned and recording that information for project evaluation purposes and as reference material to improve team performance in future projects
  7. Producing regular status reports for the project executive, the CFO, and the project team; discussing updates for issues that have come up, needed actions to address problems, and how problems have been solved

5.3 PFO SKILLS AND QUALIFICATIONS

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.

5.3.1 General Management Skills

The general management skills expected of PFO associates in order to be able to function in high visibility, intense activities include:

  1. Knowledge of company operations and functioning of the industry globally and especially in the host country
  2. Thorough understanding of corporate strategy, and business development and portfolio management objectives
  3. Astuteness in identifying the true senior management interests and objectives, risk tolerance, and support for the project and the PFO
  4. Strong internal functional links and personal relationships with CFO, strategic planning, and business development associates and ability to integrate their objectives in the project development stage
  5. Ability to work with the sponsor's decision makers to structure and develop projects and usher them to completion
  6. Thorough understanding of the procurement‐management processes, requirements, and politics; and preparation of responses to requests for proposals
  7. Adeptness in preparation of reports and senior management presentations with supporting documentation, data, and charts
  8. Good appreciation of and ability to work with participants from different cultures and ways of doing business, and the capability to partner and collaborate with host agency personnel who lack project finance experience
  9. Adeptness and appreciation of the project's physical and cybersecurity threats and issues to bring to discussions and address their resolution
  10. Experience in determining project participant motives, needs, interests, and objectives, as well as personal gains and costs and benefits
  11. Good understanding of Foreign Corruption Practices Act rules and the implications of their violation
  12. Strong skills in large project management processes, tools and techniques, and project‐team partnering and joint planning
  13. Experience in integrating and managing project initiation, planning, implementing, and controlling and expertise in defining and assigning roles and responsibilities to the project team and other participants through the project manager
  14. Effectiveness in ensuring the 4Cs within the project team and among other project participants, and an ability to implement projects successfully
  15. Competency in developing the project company's business plan and influencing decisions around its operations planning
  16. Skilled in knowledge gathering, evaluating, and disseminating and managing information in and out of the organization
  17. Ability to manage project processes, human resources assigned to it, and advisors and consultants engaged in the project and help the project manager with quality, time, and cost‐management issues
  18. Capability in developing early warning systems, monitoring project performance, and understanding and explaining variances convincingly
  19. Capability in relationship building and management along with persistence and experience to see the project to completion through a long and complex process
  20. Ability to work in complex matrix organizational structures involving company and external organizations
  21. Proficiency in educating host government agency personnel in the more significant aspects of project finance
  22. Experience in leading or supporting teams to effective project financing and project marketing capabilities

5.3.2 Analytical Competencies

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:

  1. Adept in situational analysis, industry structural analysis, and evaluations of project financeability and economic viability, especially in the presence of regulatory regime changes or changes in agreements
  2. Critical thinking, but positive and objective in analyses and evaluations beyond any doubt
  3. Thoroughly understanding of the project background, rationale, strategy, merits, and objectives as well as constraints present
  4. Probing to determine key project influencing factors and perform reasonableness checks on an ongoing basis
  5. Persistent in validating and verifying data, information, assumptions, and scenarios to ensure they pass sanity checks
  6. Exceptionally perceptive in the evaluation of company strengths and weaknesses and external environmental factors influencing the project
  7. Knowledgeable and experienced in assessing impacts of megatrends and sub‐trends on the industry and the project itself
  8. Astute in understanding basic concepts and premises of competitive analysis, market research, and forecasting techniques
  9. Clever in developing, gathering, validating, and testing assumptions that drive cost and revenue projections and the project financial model
  10. Adept in modeling project economics and assessing economic viability and able to evaluate critically, independently, and objectively project economics and develop effective reports
  11. Experienced in commercial issues, familiar with project finance contracts, and able to dissect and evaluate every aspect of a deal
  12. Skilled in supporting contract negotiations and evaluation of proposed terms and counterproposals
  13. Competent in leading a team of professional associates in concurrent projects when the need arises
  14. Proficient in project risk identification, evaluation, mitigation; and insurance contracts and programs, costs, and terms and conditions
  15. Thorough in evaluation of project development areas, objective in review of the due diligence report, and in critical assessment of financial model findings
  16. Adept in developing project feasibility studies, business cases, and project‐company business plans and targets
  17. Show penetrating thinking in the development of a baseline and alternative scenarios and the selection of the cost and revenue projections in simulation ranges
  18. Proficiency in assessing all infrastructure project opportunities in its industry, including privatizations of public sector assets

5.3.3 Knowledge of Institutions, Techniques, and Instruments

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:

  1. Expert assessment of the host government ceding agency capabilities in project finance and its ability to deliver on future contributions and obligations
  2. Recognized expertise, reputation, and acceptance internally and outside the company and proficiency in project finance practices and processes
  3. Skilled in creating the project financing plan, developing and modeling project financials, testing and evaluating financial model inputs and outputs, and defining drawing and repayment parameters
  4. Probing to understand global debt and equity market conditions and prevailing terms and conditions
  5. Deep knowledge of the domestic, host country, and global financial markets; sources of short and long term financing, and relationships and access to decision makers
  6. In‐depth understanding of multilateral and unilateral agencies' functioning, programs, requirements, and approval processes
  7. Knowledge of donor institutions' programs, requirements, criteria, and approval processes
  8. Extensive networks and relationships with debt and equity sources around the world and knowledge of their processes and their way of doing business, documentation requirements, and thorough understanding of term‐sheet terms and conditions
  9. Expert in sound financial engineering processes and instruments and competency in project and financing structuring and implementation mechanics
  10. Good understanding of the structure and content of project agreements and contracts and an ability to work closely with the legal team to develop the contractual framework and translate its structure into financial model inputs
  11. Expertise in project finance principles, processes, prerequisites, guidelines, and channels and facilities available and experienced with the workings of credit enhancements and project support and their applications
  12. Understanding of the implications of different structures and options for the SPC
  13. Understanding of differences with the host country's models concerning bidding terms, concession grants, and financing
  14. Structuring bids so they display transparency of the financing plan and influencing the negotiations framework and positions to ensure balance of participant interests and project sustainability
  15. Skillful in addressing sponsor and host government agency project support and security issues
  16. Expertise in managing project processes and coordinating other project participant contributions and deliverables in different stages and evaluating of financing structure implications
  17. Competency in financial model building and analysis and understanding of how to influence key drivers to optimize the project financing structure
  18. Knowing well the roles and responsibilities of financiers and getting their insights for successful financing
  19. Experienced in developing and using project financing models, knowing the rules of negotiating project financing deals, and incorporating properly negotiated terms in project models
  20. Ability to alter the project financing structure when condition warrant it and make changes to the project company business plan to achieve the desired state

5.4 PFO CHALLENGES

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.

  1. Project Sponsor Internal 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:

    1. Poor PFO business definition, a scope of activities beyond its ability to handle, and limited resources to carry out its activities as needed
    2. Unclear PFO charter of responsibilities and an overlap of responsibilities among internal project participants
    3. Inexperienced PFO associate performance, light project team preparation, and inadequate project planning
    4. Inadequate internal SWOT analysis to determine the availability of skills and competencies to execute projects successfully
    5. Organizational politics and competition for human and financial resources that contaminate projects and lead to inadequate communication and cooperation
    6. Weak executive commitment and project support and misreading of the corporate risk appetite against project risk
    7. Divergence of project objectives from corporate strategic objectives and deviation from project definition and project development planning
    8. Inadequate project preparation and planning the entire project process execution, few evaluations and validations in each decision stage, and operating under tight schedules
    9. Undue reliance on external advisors and leaks of proprietary material and valuable contract information to competitors
    10. Long project duration using up a lot of resources and PFO and project team time, which causes fatigue and project budget overruns
    11. The high cost of skilled internal resources to bring to the project and expensive project assessments and structuring by external consultants
  2. Project Analytics and Evaluations

    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:

    1. Project complexity and no standardized templates to use for project evaluation require the creation of project‐specific processes
    2. An inconsistent project with stakeholder objectives and diffused focus that lead to inadequate planning and incomplete project plans
    3. Convoluted processes due to ignorance of the right approach and means to perform the needed analyses and evaluations
    4. Incomplete or faulty due diligence due to lack of data, erroneous information, untested knowledge, and conventions
    5. Reliance on deterministic models and static scenarios to forecast project costs and revenues with erroneous, incomplete, baseless, and untested assumptions
    6. Inability to define a realistic baseline scenario due to uncertainty not treated as project risk because it was considered controllable
    7. Failure to accurately assess project‐stakeholder expectations and manage overly optimistic cost projections and revenue forecasts
    8. Concealed motives that cause overstating project benefits and understating project costs for internal and external project approval reasons
    9. Lack of sanity checks of project model inputs and outputs due to project changes overload of rework, new analyses, more evaluations, additional negotiations, and contract changes
    10. Failure to identify, assess, and allocate risks on a cost‐benefit and balanced approach
    11. Inability to integrate different project participant processes and deliverables with the main project team processes
  3. Host Government Agencies
    1. Poor assessment of the host country's challenging economic, social, and financial market conditions
    2. Shifting emphasis from infrastructure to social projects and changing government positions on the project being considered
    3. Multiple layers of decision making, absence of a single source of accountability, and unpredictability as to which agency approves what
    4. Lack of knowledge and experience with project finance, the rules of international investments, and lender and investor expectations
    5. Weak investment environment, unexpected changes to legal and regulatory frameworks, and an inability to enforce complete contract compliance
    6. Lack of host government‐decision criteria, evaluation process transparency, and rigged bidding and poor procurement practices mixed with corruption and fraud issues
    7. Changing political conditions that contaminate and alter the bid selection criteria, as well as politically motivated interference in the project approval process
    8. Inability of host government agencies to deliver on future obligations due to changes in government budgetary constraints and priorities
    9. Long, convoluted, and intricate negotiations of project agreements, review processes, final approval, and changing expectations and objectives
  4. Other Project Participants
    1. Sponsor or developer short‐term focus and unrealistic project expectations due to lack of clear project understanding and objectives dovetailing with corporate strategic objectives
    2. Differing views and confusion about the common set of project objectives and assumptions, as well as each participant's roles and responsibilities
    3. Multitude of project participants with not only diverse, but at times conflicting and shifting, interests and objectives
    4. Unrealistic customer demands and failure to overcome dilution about the state of affairs in order to get a better deal than the particulars of the project dictate
    5. Unforeseen or unexpected construction delays due to material and qualified labor shortages and technical design flaws and failures
    6. Excessive cost overruns due to equipment delivery delays and underperformance large enough to warrant revisiting the construction contract
    7. Ignorance or limited understanding of project finance processes and instruments and need for instruction and education by the PFO
    8. Long project review and approval processes of funding sources, ECAs, and multilateral agencies
    9. Stringent lender covenants and government restrictions requiring more difficult restructuring of project company operations
  5. Project Financing Structure
    1. Poor local financial market conditions and lack of local sources of funding other than the central host government agencies' budgets
    2. Wrong assessment of the ceding agency's and the third‐parties' ability to deliver on current and future obligations
    3. Unreasonable host government expectations of high‐level upfront sponsor equity contributions and future equity infusions, and low debt funding that leads to delays and increased costs
    4. Multitude of project participants and agreements requiring lengthy contract negotiations and PFO support that may not always be timely and adequate
    5. Incomplete accounts of negotiation implications included in the project financial model and their impact improperly evaluated
    6. Need for refinancing if changing commercial conditions or regulatory interference require such intervention
    7. Inability to maintain the negotiated project risk profile due to poor hedging arrangements and inadequate project‐company operating performance
    8. Faulty security packages, unexpected inadequacy of guarantees, and inability to control project risks
    9. Poorly structured financing plan leading to inefficient project financing proposals
    10. Surprise competitive actions or host government regulations requiring additional capital expenditures and project company operations
    11. Exclusion of the PFO from active participation to ensure a thorough and complete project due diligence commonly conducted by advisors of funding sources
    12. Misrepresentations leading to erroneous assessments of every project participant's ability to deliver on current and future commitments
    13. Failure to balance project stakeholder interests that usually undermine project sustainability
  6. Project Company Operations

    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:

    1. Lack of experience in host government, partnership, and customer relationship management
    2. Inaccuracies in the assessment of the project company's industry and its operating environment, labor market conditions, and standard of living for expatriate managers
    3. Inadequately prepared and evaluated project company business plan and lack of or optimistic performance targets
    4. Poorly planned and executed project implementation, startup of operations problems, and lack of experienced and committed O&M team
    5. Newly installed, inexperienced management team and inadequately trained labor force beyond initial expectations
    6. Undue burden of cultural differences and business practices affecting the project company's operations and management performance
    7. Inability to enforce full compliance of offtake and supply agreements and obtain regulatory relief
    8. Inadequate long‐term monitoring of operational performance and inability to restructure its operations in order to obtain additional financing
    9. Resource shortages impacting the project company's ability to honor and deliver on its production commitments
    10. Inability to mitigate unexpected commercial risks due to lack of early warning systems and business plan realization planning

5.5 PFO PERFORMANCE EVALUATION MEASURES

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:

  1. Under what constraints were the financing plan developed and how cooperative were PFO associates and other project participants?
  2. How well was the project development phase managed in terms of validating project objectives, planning, and assigning responsibilities to associates?
  3. How thorough were the analyses and evaluations leading to the definition of the baseline scenario and to cost and revenue projections?
  4. How thorough and complete was the validation and testing of assumptions, analyses, and scenario evaluations?
  5. How sound was the financial model created by the PFO, assessment of its inputs and outputs, and how effectively were they used to optimize project financing?
  6. Were all the financial structuring options explored to the satisfaction of all project participants and justification provided for the one selected as most efficient?
  7. How effectively were project stakeholder participation and expectations managed and their diverse interests and objectives harmonized?
  8. How adequate was PFO monitoring of progress in all stages of the project to ensure due processes were followed, and how did PFO‐relationship management contribute to it?
  9. What type of support level and quality was provided to senior management, the CFO, the project manager, and foreign government officials?
  10. How well did the PFO educate host government authorities and customers on project finance processes and requirements?

5.6 CHARACTERISTICS OF SUCCESSFUL PFOs

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:

  1. Listening attentively to understand the customer's situation, true needs, project objectives, and requirements
  2. Knowing the criteria the customer will use to assess the quality of financing brought to the project
  3. Showing sensitivity to the political and financial realities the ceding authority is facing and understanding that realities are always changing and require management
  4. Focusing on providing excellent service to customers, seeking their input and feedback, and managing their expectations to reasonable levels
  5. Demonstrating responsiveness to customer concerns and that their interests and objectives are considered and fairly balanced with those of other project participants
  6. Being respectful, honest, and candid in all stakeholder communications when dealing with assessment of project viability and bankability
  7. Offering willingly to educate customers on project finance and to make them more effective in conducting business and more cooperative and collaborative
  8. Convincing customers of the PFO's ability to best handle project risk with fairness and balance is required to make projects financeable and viable most effectively

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:

  1. PFO associates knowledgeable about the programs, processes, and requirements of the financial institutions involved in the project
  2. Having extensive networks, contacts, and relations with financial institutions to leverage in order to get expedited, efficient responses from them
  3. PFO offers to educate personnel of financial institutions on the particulars of the project's industry, selling the project to them effectively, and obtaining their support down the evaluation and approval processes
  4. Leveraging expertise residing in financial institutions in the areas of risk identification and allocation, credit enhancements, and other types of support to structure financing efficiently
  5. Introducing competition among funding sources to get better financing packages for the benefit of sponsors and customers
  6. Agility, nimbleness, effectiveness in the 4Cs, and being knowledgeable so that customers feel that the PFO is easy to do business with
  7. Collaboration with financial institution experts to conduct a thorough due diligence and leverage their expertise and influence to communicate to customers the fairness and balance of project risk allocation
  8. Obtaining the best and timely debt and equity investor commitments with clearly spelled out terms and conditions to minimize time and the negotiations effort to closure
  9. No gaps and issues in financing packages developed for the project, no surprises, and smooth closing and project completion
  10. Effective long‐term monitoring of the quality of the project company's business plan and operational performance and intervention when warranted

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:

  1. Guiding the project team through the entire project finance process and providing excellent support to the project team, the project manager, and senior executives
  2. Demonstrating understanding of the sponsor(s) situation, needs, objectives, risk tolerance, and level of forthcoming support
  3. Being mindful of sponsor‐group dynamics and politics and remaining as neutral as situations and project interests require
  4. Sharing knowledge, information, data, evidence, evaluations, and earlier project experiences to increase project‐team understanding of current project issues
  5. Validating and adopting reasonable sponsor objectives as project objectives that are consistent with corporate and new business‐development strategy
  6. Seeking and incorporating project‐team inputs and providing feedback and direct and honest assessments and evaluations
  7. Maintaining close functional links and relations with all internal and external project participants
  8. Supporting the project manager in all aspects that touch the financing phases and determining the best project and financing structures
  9. Supporting project negotiations using a detailed and sound financial model to assess in real time the impacts of proposals and counter‐proposals on project value
  10. Creating optimized financing structures and raising required funding efficiently with full support from key project stakeholders
  11. Monitoring the long‐term project‐company performance, understanding and explaining deviations from projections, and providing feedback for performance improvements
  12. Conducting, documenting, and sharing the results of a project post mortem showing the lessons learned to help future project teams avoid the mistakes made in the current project

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:

  1. Fully trained PFO associates in project finance, with knowledge of global financial markets, and experienced in the use of project finance techniques and instruments
  2. Successful raising of financing in earlier projects of different types, having learned from those experiences, and capable of applying that learning to new projects
  3. Ability to understand behaviors of people from different cultures and backgrounds and work well toward achieving common objectives
  4. Competency in assessing impacts of megatrends and subtrends on the industry, project performance, and ability to take advantage of them and create synergies
  5. Aptitude in monitoring market research and evaluating results, leading the project development effort, and validating analyses and project evaluations
  6. Experienced in selecting advisors and managing their roles and responsibilities, and their interactions with the project team and their activities
  7. Ability to work in fluid environments to shape objectives, set targets, and achieve them in an efficient and timely manner
  8. Expertise in translating qualitative information into testable hypotheses, assumptions, and alternative project scenarios
  9. Experience in delegating less essential activities to subordinates, other project team members, and supporting organizations
  10. Effective project management of process and activities and support of the project manager's responsibilities and superior customer relationship management
  11. Continuous search for project finance innovations, improvement of PFO productivity, and knowledge management and sharing
  12. Excellence in project marketing presentation skills, salesmanship, and ability to close a deal under pressures from different sources
  13. Experience working with legal teams and external advisors to prepare and support the presentation of the information memorandum
  14. Effectiveness in expectations, relationship, and conflict management within the project team and with other participants
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