THE OPEN UNIVERSITY OF TANZANIA

FACULTY OF BUSINESS MANAGEMENT

DEPARTMENT OF ACCOUNTING AND FINANCE

OAF 624: Finance for Project Management

MODULE OUTLINE

1.0 COURSE DESCRIPTION

This is a level VI core course designed to provide learners with knowledge, skills and

competencies to appraise long term projects and determining appropriate finance sources and

arrangements, as well as financial resource control in a project environment. Learners are

expected to develop ability to cash flows, and various techniques to arrive at a decision as to

which project is to be implemented and how it can be financed. The course will introduce

students to project financial management issues including but not limited to the basic valuation

principles - time value of money, and risk and return relationship - projects and investment

decisions. Issues related to various project finance options and tools will be covered, as well as

those that are related to the key players in project financing and their roles, modern and

conventional project financing framework.

2.0 MODULE OUTCOMES

Knowledge and Understanding:

A1 Appreciate the fundamental concepts, principles and techniques needed for effective

project financing.

A2 Understand the relationship between project financing and successful project outcomes

A3 Knowledge of the basic concepts and analytical tools that underpin effective financial

and resource control decisions in project-based environments.

A4 Understanding of the issues and approaches to finance which will also serve as the

foundation for managing financial risks in the project management process

Intellectual Skills:

B1 Ability to evaluate appropriate projects and define their content and success criteria.

B2 Ability to evaluate various project financing instruments in relation to projects finance

Professional/Practical Skills C1 Graduates are able to carry out risk analysis and design a risk analysis ledger.

C2 Learners will be equipped with techniques for evaluating project financing options

available to project managers

Transferable Key/ Skills At the end of the programme learners would have acquired:

D1: Techniques of analysing project financing and designing mitigation measures.

D2: Skills of carrying out financial analysis in investments’ decision making process.

3.0 MODULE CONTENT

3.1 Lecture One: Project Finance Overview and Fundamentals

3.1.1 Introduction

This lecture introduces the subject of project finance by providing an overview of what project

finance is, its features and why it is used by firms and sponsor instead of the traditional

corporate finance

3.1.2 Topics

• Project and project finance defined

• Project finance versus corporate finance

• The rationale for project finance/ infrastructure investment

• Advantages of project financing and How widely is it used

• Aspects of project financing – why and how?

• What are the necessary perquisites to a Project Financing

• Project viability and security arrangements

• Structuring the project

• What is role of the financial projections

• The market for project finance

3.2 Lecture two: Project Finance Structure and Participants

3.2.1 Introduction

Project finance has many participants who participate at different stages of a project’s

development and operation. Because of the complex structure of project finance, not all

projects follow the same structure and not all of the participants described below participate in

all projects. This lecture will highlight the structure and main participants to project finance,

and the role played by each part.

3.2.2 Topics

• Parties to a Project Financing

• Necessary Contracts

• Environmental Consideration

• Political and Regulatory Background

3.3 Lecture Three: Principles of Valuation (Time value of Money)

3.3.1 Introduction

Projects involve cash flows occurring at different points of time. These cash flows have to be

brought to the same period of time for the purpose of comparison and aggregation. It is

therefore important to learn the tools of compounding and discounting which are then used for

valuing securities, analyzing projects, determining lease rentals, choosing the right financing

instruments, setting up loan amortization, valuing companies etc. This lecture introduces you to

the time value of money concept and the materials will form the foundation for learning how to

evaluate projects.

3.3.2 Topics

• Time lines and notation

• Future and present value of a single cash flow

• Future and present value of annuities

• Multiple compounding and its effect on future and present values

• Structuring loan recovery

3.4 Lecture Four: Investment Project Appraisal

3.4.1 Introduction

Determining whether a project is worthwhile or not involves a number of key steps which are

(i0 estimating the cost and benefits of the project; (ii) assessing the riskiness of the project; (iii)

calculating the cost of capital; and (iv) using a criteria of merit to judge whether the project is

worth undertaking. This lecture is designed to conveniently introduce you to the criteria of

merit – also known as investment projects appraisal or capital budgeting techniques. Both the

traditional (non-discounted) and discounted cash flow based techniques are covered.

3.4.2 Topics

• Non-discounted techniques

o Payback period

o Accounting rate of return

• Discounted cash flow techniques

o Net present value

o Internal rate of return

o Profitability (benefit-cost) ratio

3.5 Lecture Five: Project Cash Flow Estimation

3.5.1 Introduction

In the preceding lecture we focused on the appraisal techniques assuming that both the cash

flows and cost of capital were readily available. This does not happen in the real world. This

lecture therefore introduces you to the ways of estimating the projects cash flow, the most

important but also most difficult task in project appraisal. The more gigantic and complex the

project is the higher is the error in forecasting the cash flows. It is important at this point to

note that the process involves several key people and several variables. For example, engineers

and product development (capital outlays), marketing group (projected revenues),

procurement, human resource management, cost accountants, tax consultants, etc (operating

costs). The role of the finance manager in this case is to provide coordination of these various

departments and ensure that the forecasts are arrived at with minimum errors by limiting them

to a set of consistent economic assumptions etc. This lecture therefore covers the ways to

accumulate the project’s cash flows which will then be used to appraise it

3.5.2 Topics

• Elements of a cash flow stream

• Principles of cash flow estimation

• Cash flow illustration

• Cash flows of a replacement project

3.6 Lecture Six: Estimating Project Cost of Capital

3.6.1 Introduction

In the preceding lecture you learned how to estimate cash flows expected from the project. In

this lecture you will learn how to deal with the second problem in investment appraisal which is

to estimate the project’s cost of capital. The appropriate cost of capital is dependent on how

you finance your projects and the cost you are charged on each source of capital. If you were

to draw up a statement of financial position from the project, the sources of capital would be on

its right hand side be it equity, debt or preferred shares. This cost of capital would not be a

problem if the project is financed by just one source as its cost of capital would be what the

provider of capital charges you. But since projects just like companies are financed by a

multitude of sources, you need to have a way to determine the aggregate cost of capital

representing each of the individual costs. Once this cost of capital is attained, its uses are

numerous be it to evaluate the investment itself, determining its capital structure, assessing

lease proposals, setting rates that regulated firms like electricity, water and telecommunication

utilities can charge to their customers etc.

3.6.2 Topics

• The basic principles

• Costs of individual sources of capital

• Determining the proportions

• Weighted average and marginal cost of capital

• Determining optimal capital budget

3.7 Lecture Seven: Risk and Return Analysis

3.7.1 Introduction

Risk is part of any business decision especially when the decision involves costs and benefits

extending over a long period of time. Within this future time many things can change in

unanticipated ways. In the lecture on appraisal techniques, we assumed that all investments in

the analysis had the same risk as those of the existing investments of the firm, and that is why

the weighted average cost of capital was used to evaluate the project’s cash flows. In reality

however, investment project proposals do have different risks. For example, a research and

development project may have a higher risk than an expansion or replacement project. Thus a

proper project evaluation requires you to evaluate these differing risks explicitly in project

appraisals. Many different techniques have been suggested but no single techniques can be

deemed as best in all situations. Two categories can be considered. Techniques that consider

the stand-alone risk of project; and techniques that consider the risk of a project in the context

of the market (portfolio). The lecture begins by providing some basics of risk management

followed by considering techniques that handle stand-alone risk before it tackles techniques

that handle firm and market risk.

3.7.2 Topics

• Sources, measures, and perspectives of risk

• Sensitivity analysis

• Scenario analysis

• Break-even analysis

• Decision tree analysis

3.8 Lecture Eight: Project Financing (Sources of Capital)

3.8.1 Introduction

After the cost of capital is ascertained, the alternative sources of finances available for meeting

the project cost are to be analyzed. This lecture deals with the different types of sources of

project finance and how a proper combination of the different sources can be chosen

3.8.2 Topics

• Senior Debt o Banks o Insurance Companies o Public Markets

• Mezzanine Debt • Equity

o Financial Equity o Strategic Equity

3.9 Lecture Nine: Project Loan Agreement

3.9.1 Introduction

This lecture highlights issues related to project loan agreement- a written document that specifies the terms, rights, and obligations that apply to a loan, parties to the loan-the "Lender" and the "Borrower", provisions regarding the amount of the loan, the interest rate, the date by which the loan must be repaid, and the amount of the payments. The lecture also includes other general provisions that are important in enforcing the payment of the loan.

3.9.2 Topics

• Term

• Pricing • Covenants • Representation and Warranties • Events of Default

3.10 Lecture Ten: Effective Project Finance Management

3.10.1 Introduction

Effective project finance management is imperative to a successful company or corporation. To

be effective as a project manager, one must be skilled in several different project finance

management aspects

3.10.2 Topics

• Follow-up

• Post Evaluation

• Control

Module Assessment:

The module will be assessed by main timed test (MTT) carrying 30% and final examinations

(FE) carrying 70% to make a total of 100%. Pass mark shall be a score of at least 50% (B). In

addition, students learning through the open and distance learning mode will have their

progress monitored through assessment of their records in the student progressive portfolio

(SPP) while for those whole will follow the module through either evening or executive modes,

the module facilitator will administer formative activities during delivery as appropriate.

The course will be assessed in two parts: the main timed test which will account for 30 marks

and final examination which will account for the remaining 70 marks, making a total of 100.

The pass mark shall be 50%. A student failing to gain the pass mark shall be allowed to write a

supplementary examination. If the student fails after supplementing he/she will be required to

repeat the entire course. A candidate who fails in a repeated subject shall be requested to pay

an appropriate fee and repeat the subject. Students must attempt the main timed test first

before attempting the final examination. If this order is not followed, the SARIS will

automatically award a zero for the activity.

References

Akintoye, A., Beck, M., Hardcastle, C., Chinyio, E., and Asenova, D. (2001). The Financial

Structure of Private Finance

Chandra, P. (2006). Projects planning, analysis, selection, financing, implementation and

review. 6th edition. New Delhi: Tata McGraw hill Publishing Company Limited.

Dailami, M. and Leipziger, D. (1998). Infrastructure Project Finance and Capital Flows: A New

Perspective. World Development. 26 (7), pp. 1283-1298.

Esty, B.C. (2004). Why Study Large Projects? An Introduction to Research on Project Finance.

European Financial Management. 10 (2), 213–224

Farrell, L.M. (2003). Principal-agency risk in project finance. International Journal of Project

Management 21, 547–561

Fight, A. (Ed.) (2006). Introduction to Project Finance. Amsterdam: Butterworth-Heinmann

Elsevier

Finnerty,J.D. (1996) Project financing: Asset-Based Financial Engineering. New York: John

Willey & sons, Inc.

Gatti, S. (2009). Project Finance in Theory and Practice: Designing, Structuring, and Financing

Private and Public Projects. Academic Press Inc; 2nd revised edition

Kerzner, H. (2009) .Project management: A systems approach to planning, scheduling and

controlling. John Wiley

Khatua, S. (2011). Project management and appraisal. New York: Oxford University Press.

Nokes, S. & Kelly, S. (2007). The definitive guide to project management: The fast track to

getting the job done on time and on budget. 2nd edition. Palgrave

Pandey, I. M. (2006). Financial management. 9th edition. New Delhi: Vikas Publishing House Pvt

Ltd.

Sorge, M. (2004). The nature of credit risk in project finance. BIS Quarterly Review pp 91 –

101.

Yescombe, E. R. (2002).Principles of Project Finance. Academic Press Inc.

Many of these books are available at OUT HQ library, its regional centres, or appropriate

sections in the Tanzania Library Services (TLS) branches. Some of them are available at

bargain prices in bookshops, bookstalls in the city and other towns (shop around). Other

institutional libraries should have some of them (take the initiative). The list above is also not

exhaustive. Many other books in finance cover the intended materials. Be curious but guided

by this outline and explore them wherever you find them. You may also try your luck by visiting

the following websites where you may find and download some of these or other equally

relevant text books, including those of other subjects: www.4shared.com, www.bookboon.com,

and www.scholar.google.com.

Other Web resources

Biz/ed: business and economics subject launch pad available at Herriot-Watt University, UK at

www.hw.ac.uk/libwww/irn/pinakes/pinakes.html or simply go to http://www.bized.co.uk/.

You can also search for learning resources such as podcast and video lecture clips on

www.youtube.com. For the journal articles, the Open University of Tanzania subscribes to a

number of online databases from where some of the articles referenced in these outline were

downloaded. Contact the library with identification for authorized access codes and orientation

on how to use them. Some of such databases include www.emeraldinsight.com and

www.jstor.org.