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
|
