mp17a

1. Introduction
Project Finance is a case-based course which is designed for participants in the EuroMPM.

Project Finance is a well-established financing strategy to realize large-scale investments. Students will work during each part of the course with cases to connect the theoretical content immediately with the practical context.

The course will start with an introduction to the fields of Project Finance which will cover the difference between corporate finance and project finance and the economic motivations behind the different financing strategies. Also, students will be provided with the basic terminology in the field of Project Finance. By finalizing the first part, students will know why the combination of a firm plus a project (project finance) might be worth more than when financed jointly (corporate finance).

The second part of the course will cover the valuation of a project. Students will learn about the basic tools of valuations in Corporate Finance and their possible limits by using them for the measurement of a project’s returns. Based on that insight, new tools applicable to the field of Project Finance will be involved.

Furthermore, the correct application of discount rates in developed as well as in emerging countries will be covered. At the end of this part, the real option analysis and its use in the Project Finance context will be discussed. By then, students will be able to perform several cash flow estimations leading to a discounted-cash-flow analysis to evaluate a project.

In the third module, student will explore how Risk Management affects the value of a project. After defining the process of sustainable Risk Management, students will learn about the different possible risks in a project and how to identify and classify, assess, mitigate and allocate them.

The last part of this course will focus on the financing of the project. Students will learn how to evaluate the capital structure of a project and understand which benefits debt can provide to the project.

2. Course structure
Introduction
 * Differences between Corporate Finance and Project Finance
 * Economic motivations of different financing strategies
 * Basic terminology of Project Finance

Valuation of a project
 * Cash-flow estimation
 * Discounted-cash-flow-analysis
 * Different valuation methods of a project
 * Basic tools of valuation and their limits
 * New tools of valuation in Project Finance
 * Application of discount rates
 * Real option analysis in Project Finance

Risk management of a project
 * Different kinds of risk in a project
 * Identification of project risks
 * Classification of project risks
 * Assessment of project risks
 * Mitigation of project risks
 * Allocation of project risks

Financing & capital structure of a project
 * Evaluation of different kinds of capital structure
 * Role and benefits of debt & equity in Project Finance
 * Project Finance as an alternative to reduce the net financing costs

3. Case studies
Centre of the course is the work with Harvard Cases on Project Finance. The cases are international, integrative and managerial. Cases focus on developed countries as well as on developing regions. The cases reflect the industrial sectors and the geographical locations where Project Finance is used.

4. Parameters
ECTS: 3 Hours of study in total: 90 Weekly hours per semester: 2 Course characteristics: compulsory Course frequency: every year - summer semester Maximal capacity: 15 students Course admittance prerequisites: courses of the first semester MP01, MP02, MP03, MP10, Skills trained in this course: professional, methodological, and personal skills Prerequisite for the completion of the following courses: This course is important for all subsequent courses Assessment of the course **One exam for MP15a and MP16a** Teaching staff: Prof. Dr. Katrin Löhr, (Prof. Dr. Hermann Schulte-Mattler)
 * Contact hours: 30
 * Self study hours: 60
 * 75% contributions within the course (homework, group work, presentations, case studies)
 * 25% written or oral examination at the end of the course

5.Learning outcomes

 * 5.1 Knowledge**

The students are able to


 * define Project Finance and raise several examples to describe its use in the past years.
 * explain the difference between Corporate Finance and Project Finance.
 * describe the economic motivations of firms using Project Finance and explain why Project Companies represent optimal governance structures for certain kind of assets.
 * explain why the combination of a firm plus a project might be worth more when financed separately (Project Finance) than when financed jointly with corporate funds (Corporate Finance).
 * explain for which situations in general and in particular Project Finance might be an attractive mean of financing.
 * explain how to protect the corporate balance sheet from incremental distress costs by using Project Finance
 * explain the relationship between project structure and both managerial incentives and value creation.
 * explain basic valuation tools and new tools applicable to Project Finance.
 * explain how to identify, assess, mitigate and allocate risks of a project.
 * explain how Risk Management affects the value of a project.


 * 5,2 Skills**

The students are able to
 * choose the optimal capital structure
 * discover agency conflicts associated with a project
 * build an effective governance structure for a project
 * classify sponsor types, asset types, and country settings
 * classify project risks
 * model the forecasted cash flows of a Project as the basis of the economic analysis
 * compute a financial model in order to evaluate the economic value of a certain project
 * measure the returns of a project by using certain DCF and IRR methods
 * interpret the results in terms of the validity as a sound decision basis

in a given context.


 * 5.3 Competence - attitude**

The students are able to


 * select the optimal capital and governance structure of a project
 * discover agency conflicts associated with a project
 * build an effective governance structure for a project
 * classify sponsor types, asset types, and country settings
 * classify project risks
 * model the forecasted cash flows of a Project as the basis of the economic analysis
 * compute a financial model in order to evaluate the economic value
 * measure the returns of a project by using certain DCF and IRR methods
 * interpret the results in terms of the validity as a sound decision basis
 * support the use of high leverage or high equity depending on what is more beneficial
 * manage various kinds of project risks by mitigating them with certain measures
 * allocate the risks as well as the control to the different parties/sponsors

in a new context / project.


 * 5.4 On scaling outcomes**

The assessment of learning outcomes is based upon the following core perspectives:


 * Completeness – regarding the different impact factors on Project Finance in a case study
 * Complexity – regarding the analysis of the case study work
 * Analysis - impact of the capital structure of the project to affect asset values
 * Problem solving – case study work
 * Tools - Equity Cash flow (ECF) versus Free Cash flow (FCF) calculation
 * Tools – NPV valuation
 * Tools – IRR calculation

6. Teaching and training methods:

 * Lectures introducing concepts, methods and tools
 * Group work to practice concepts and methods, to develop skills and to work on case studies
 * Home work to add individual contributions
 * Presentations to communicate results

7. Course mapping
This course is linked to other courses of the study program in the following way:

Project planning gives the main input on financial needs in a project derived from cost planning.
 * MP03a: Project Planning**

Risk management and project finance are strongly linked. Project finance includes the aspects financial risks. Risk management includes aspects of financial risks embedded in further perspectives (risk register, risk assessment, risk avoidance, risk evaluation, etc.).
 * MP04a: Managing Risk**

Project economics is a predecessor of project finance with a core focus on costs. MP10 and MP17 are strongly linked and harmonized.
 * MP05a: Project Economics**

Project control includes aspects of financial control.
 * MP06a: Project Control**

Human resources in projects must be funded.
 * MP07a: Human Resource Management in Projects** - including Competences, Team Building and Leadership

The development of a project organization includes roles for project finance.
 * MP08a: Project Organization**

MP09a explains the role of standards in project management. Project finance is discussed as a knowledge area according to the PMI Guide on Program Management. MP15a goes deaper here.
 * MP09a: Standards and Mainstreams**

Quality management principles and processes shape contracting and procurement.
 * MP10a: Managing Quality**

This course supports communication, negotiations and conflict management within a project and with stakeholders - stakeholders with respect to project finance are included.
 * MP11a: Communications, Negotiation and Conflict**

The global work force diversity with intercultural communications support project organization in a multicultural project.
 * MP12a: Intercultural Communications**

Information and communication are the backbone for project organization and Human Resources are the important players.
 * MP14a: Information and Knowledge Management**


 * MP16a: Legal Aspects in Project Management:** Contracts, Procurement, and further Issues

Change management is a core competence of project human resource.
 * MP17a: Managing Change**

Social competencies are the backbone for project organization. Integration and recognition of stakeholders is based on social competencies.
 * MP19a: Social Competencies**

The development of a project organization must follow the principles of social responsibility and must take care of safety and health. Competencies on social responsibility are core competencies in projects.
 * MP20a: Safety, Health and the Environment**


 * 8. References**


 * Esty, B.C. (2004): Modern Project Finance: A Casebook, Hoboken (Wiley & Sons).
 * Finnerty, John D. (2007), Project Financing: Asset Based Financial Engineering, 2. ed., Hoboken (Wiley & Sons), ISBN 978-0470086247.
 * Khan, F.; Parra, R. (2007), Financing Large Projects: Using Project Finance Techniques and Practices, New York (Prentice Hall), ISBN 0131016342.
 * Yescombe, E. (2002), Principles of Project Finance, Academic Press, ISBN 978-0127708515.
 * PMI: A Guide to the Project Management Body of Knowledge - PMBOK® - 4th edition 2008, ISBN 1933890665.
 * PMI: The Standard for Program Management, 2nd edition 2008, ISBN1933890524.

__Weblinks:__ HBS Project Finance Portal: http://www.people.hbs.edu/besty/projfinportal Project Finance Magazine: http://www.projectfinancemagazine.com International Project Finance Association: http://www.ipfa.org Risk in Project Finance: http://riskybusiness.wordpress.com Projects Monitor: http://www.projectsmonitor.com Equator Principles: http://www.equator-principles.com