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Financial Engineering

Background

The demand for economic development, including increased energy efficiency, environmental improvements and utilisation of renewable energy, is well known and accepted in most countries. Financing has been, and still is, a problem in many countries. National and international financial institutions are showing an increasing interest for energy efficiency and renewable energy projects, leading to more funds gradually being available for investments. The financial institutions, however, are complaining about the lack of bankable projects. The local know-how and experience for development of acceptable Business Plans is often not in compliance with the demands from the Financial Institutions.


Due to this fact, ENSI has developed a programme on Financial Engineering, focusing on the development of complete Business Plans for real projects through the interactive “learning by doing” approach. A sustainable development is further secured by “training of trainers”, building local capacities and skills enabling the trainees to continue and further develop by themselves.

Goal

The goal of the Financial Engineering programme is to train project owners, project developers/consultants and others interested in Business Planning and Presentation skills, enabling them to:

  • Develop the first version of a Business Plan for environmental, energy efficiency and renewable energy projects.
  • Present their Business Plan to a Financial Institution.
  • Collaborate with the Financial Institution on further development resulting in a complete Business Plan in accordance with the Financial Institution’s specific requirements.

The programme will give the participants the required capacity to develop Business Plans for commercial energy efficiency, renewable energy and environmental projects, both through the interactive capacity building programme and for future new projects.


Based on the participant’s qualifications and experience and the geographical location of the programme, different topics in the programme are weighted. However, it is important to make sure that the participants understand:

  • why a Business Plan is necessary, when it should be developed, and understand that different Financial Institutions have different requirements for the detailed content.
  • the “message” to be presented in each chapter of the Business Plan.
  • profitability and financial calculations, the difference between the projects profitability and its cashflow.
  • how to evaluate the consequences when parts of the investment/loan are given in foreign currency and future savings/sales are in local currency.
  • the different models/mechanisms/schemes for project financing.
  • how to present your Business Plan in a good way; Presentation Techniques.

Business Plans

At the training programme the following “standard” content of a Business Plan is presented:

1. Executive Summary
2. Borrower
3. Project Information
4. Environment
5. Market
6. Financing Plan
7. Financial Projections (cashflow, sensitivity and risk analysis)
8. Project Implementation


1. Executive Summary

An appealing and convincing executive summary will catch the attention of the financial institution, encouraging them to read the whole Business Plan.


2. Borrower

As a lender (financial institution) commits funds over an extended period without always having the benefit of any security (such as a bank guarantees), it effectively becomes the business partner of the borrower. The lender must therefore clearly understand the strengths and risks, the current situation and future plans of the client's business.


3. Project Information

The project must be presented and described in a clear way, easy to understand for the financial institution. Provide key information, not too many details.

 

The following main information should be included:

  • Present situation;
  • Technical description of new installations (incl. evaluated alternatives);
  • Technological viability of the project;
  • Operation and maintenance, training of staff;
  • Benefits from the project;
  • Profitability (key figures);
  • Savings in energy, water, waste, environmental fees, labour, etc;
  • Non-quantifiable benefits;
  • Total implementation costs;
  • Investment time schedule (Progress time-cost-table).

4. Environmental benefits

There is a strong focus on climate change, environmental improvements and sustainable development. This is also reflected in the financial institutions. Some financial institutions have dedicated funds for environmental improvement projects, but none of them would risk being involved in projects having a bad environmental image. This is why they in the Business Plan want to see both the environmental impact and how the project adapts to relevant regulations and standards described.


5. Market

For energy efficiency and/or environmental improvements in an existing building, boiler plant or other type of facility with an ongoing operation, it is necessary to describe the borrower’s position and future prospects in the market. The financial institution wants to be convinced that there are good future prospects, at least for the repayment period of the loan.
If the project includes establishment of a new production facility (for instance new district heating plant based on renewables), or increasing the existing production capacity; the financial institution will require a well developed market study. It will also strengthen the Business Plan if strategies for marketing and sales could be presented.


6. Financing Plan

The financing plan should present the existing and required sources of financing, as in the following example:

 

Sources of financing  Amount (EUR) Interest rate (%)  Term (years) 
Requested loan form local bank  380 000  8,0  5
Requested grant from EE Fund  160 000    
Equity  325 000   
Total investment  865 000   

 

The financing plan must also describe the requested role of the bank (normally as a lender, providing loans). A local bank could also be a guarantor on behalf of the company if a loan is provided from an international financial institution.
A disbursement plan should also be included, showing when the project owner wants to draw portions (disbursements) of the loan during the construction period.


7. Financial Projections
The financial viability of the project is basically described through the cashflow.
In the example cashflow, the project owner will have his equity regained in the beginning of year 2011 (the accumulated cashflow is becoming positive).

 

 
 
Year
2009 2010 2011 2012 2013 2014
Invesment  865 000          
Financing:  380 000          
Loan  160 000          
Grant  325 000          
Equity capital    76 000  76 000  76 000  76 000  76 000
Debt service, instalment    28 800  22 800  16 720  10 640  4 560
Debt service, interest            
Savings:            
Total savings    378 000        
Operating costs    81 000        
Net savings    297 000  297 000  297 000  297 000  297 000
Depreciation    86 500  77 850  70 065  63 059  56 753
Pre-tax savings    181 620  196 350  210 215  223 302  235 687
Tax    45 405  49 088  52 554  55 825  58 922
Net savings after tax    251 595  247 913  244 446  241 175  238 078
Net Cashflow  (325 000)  146 715  149 113  151 726  154 535  157 518
Accumulated Cashflow  (325 000)  (178 285)  (29 173)  122 554  277 088  434 607
Real discount factor  1,0000  0,9524  0,9070  0,8638  0,8227  0,7835
Present Value (PV)  (325 000)  139 729  135 247  131 067  127 136  123 420
Accumulated PV  (325 000)  (185 271)  (50 022)  81 045  208 181  331 600

 

Cashflow plus risk- and sensitivity analyses are very important in the bank's assessment of a project.


8. Project Implementation
This chapter must describe how the organisation and major procedures for successful project implementation is planned. Due to the “completion risk,” the financial institution will carefully evaluate the proposed implementation model and unit. Without a completed project, there will in most cases be difficulty for the borrower to repay the loan.

 

ENSI Toolbox

The ENSI Toolbox provided on “Financial Engineering” consists of:

  • Detailed “Business Planning Manual”, describing how to prepare all the chapters of the Business Plan
  • Software for profitability calculations
  • Tools for calculation of cashflow, disbursement and repayment plan
  • Exercises
  • Business Plan Template

 

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