As a powerful stimulus for business, project finance and lease financing can help companies upgrade production assets, accelerate the introduction of new technologies, reduce the time it takes to launch new products, and simplify the supply of innovative equipment and its maintenance.

In addition, leasing schemes in project finance can reduce the risk of financial losses during the development of new projects and, to a certain extent, simplify the process of obtaining loans.

As a result, the business is expanding opportunities for its modernization and expansion in many areas.

In other words, Project finance and lease financing serves as an important tool for upgrading the industrial potential of enterprises and increasing the efficiency of investments and innovation.

According to the classical definition, “leasing” refers to the transfer by the lessor to the lessee for a certain period of time of assets that are the property of the lessor or were acquired by him on behalf and in agreement with the lessee from the relevant seller (manufacturer).

This mechanism involves the payment of transferred assets by the lessee in the form of periodic lease payments and often provides for the possibility of purchasing assets after the expiration of the agreement.

Although the object of lease can be almost any asset used in the production cycle, experts note some limitations, depending on the national legislation and other circumstances. In some countries, land plots and other natural objects cannot be leased. Depending on the type of asset, there are leasing of movable assets and leasing of real estate.

A special category in this context is finance lease, which is widely used in project finance (it will be described in detail below).

The following assets can be transferred under a lease agreement:

• Vehicles including trucks, ships and freight cars.
• Construction machinery including heavy equipment for drilling and other work.
• Agricultural machinery, tractors, combine harvesters and equipment of all types.
• Pipelines, roads, overpasses, substations and power lines.
• Digital communications and electronic equipment.
• Machine tools and other production equipment.
• Commercial and industrial buildings.

Given the legislative complexity and numerous market barriers, the organizers of project finance (PF) schemes have to make a lot of efforts to effectively organize lease financing of large projects.

The key to success should be a rational contractual structure of the lease agreement, which protects the interests of all project participants.

Lease participants and their interests

Among the classic participants in this type of relationship are the manufacturer / seller of equipment, lessor and lessee.

It should be understood that the lessor and the lessee are direct parties to the lease agreement. They may be represented by individuals, financial institutions (banks), manufacturers, suppliers, and organizations operating in the leasing field.

The lessor is a legal entity that acquires expensive assets from the manufacturer (seller) and transfers it to the lessee in accordance with the terms of the lease agreement.

The functions of a lessor are usually performed by specialized companies. Banks, other financial institutions and manufacturers (machine-building plants, construction firms, and others) can also be lessors.

The benefits of lease financing for the lessor are listed below:

• Acceleration of business development
• Promoting the marketing of innovative products.
• Simplify the sale of used equipment.
• Obtaining significant income after the sale of assets at a high salvage value using accelerated depreciation schemes.
• Promoting the maximum use of productive resources.
• Reducing the risk of customer insolvency.
• An additional source of profit for companies.
• Tax incentives and so on.

The lessee is a legal entity that receives assets for temporary use under a lease agreement.

From the point of view of the lessee, the economic benefits of leasing operations can be divided into four groups, which are listed below.

Project finance and lease financing provides the lessee with the following advantages:

• An available source of resources for the renewal of fixed assets.
• Reducing the company’s need for initial equity capital.
• Diversification of sources of financing for capital-intensive projects.
• Minimize the use of internal business resources.
• Flexible schedule for paying the cost of assets.

An important place in this list is given to tax incentives. In some countries, lessors may “pass on” depreciation tax credits to lessees.

In addition, lease payments are usually charged to the company’s gross expenses, which reduces the tax base.

A manufacturer or seller is a legal entity acting as the owner of the property selected by the lessee, which enters into an agreement for the sale of a specific asset. This function in the leasing market is most often performed by manufacturers, but this role can also be played by large firms engaged in wholesale trade in machinery and equipment (including international companies).

Any legal entity operating legally and whose activities do not contradict international and national standards, including the requirements of the UNDROIT Convention on International Financial Leasing (Ottawa), can act as a manufacturer or seller of leasing objects.

It may be one of the many international suppliers of industrial equipment, vehicles, agricultural machinery and technology.

Most of the leasing companies at present are affiliated banking structures and companies actually created by industrial organizations to promote their products around the world. Commercial leasing companies created by banks, as well as specialized divisions of commercial banks, are the most powerful group of leasing companies active in developing countries.

They provide leasing services to a wide range of customers, but in some cases the bank prefers to serve a limited circle of regular customers. In the practice of many countries, it is accepted that commercial banks not only finance the activities of leasing companies, but also recommend their clients to be serviced by a certain leasing company.

Obviously, such companies, which are part of the structure of large commercial banks, have a high potential, a significant range of clients and a high position in the leasing market.

Indirect participants in project finance and lease financing of large projects include the following entities:

• Reputable insurance companies that protect the property and financial interests of lessors, lessees and manufacturers.

• Joint investment institutions that accumulate significant financial resources for the purpose of further investment in promising leasing projects.

• Investment banks lending to the lessor and acting as guarantors of the safe implementation of large leasing operations.

• Consulting companies that help the lessee to receive high-quality consulting services and learn more information about the leasing market.

In order to support financial and business activity at a certain level, government bodies are also actively involved in leasing, regulating the leasing business, creating conditions for increasing the interest and initiative of all subjects in organizing and implementing important projects.

Finance lease in project finance schemes

Although leasing has various features, below we will focus only on those that are related to the financing of large investment projects.

It is necessary to dwell in more detail on finance lease and leverage leasing. In the context of project finance, finance lease plays a vital role in financing investment projects, such as power plants, factories, infrastructure, etc.

Finance lease agreements are agreements that provide for the payment, within a clearly defined base period, of lease payments that are sufficient to fully reimburse the lessor’s costs associated with the acquisition of property, as well as to earn an adequate profit. 

Finance lease (capital lease) is the acquisition of assets for the purpose of their subsequent transfer for temporary use for a period approaching the period of its operation and depreciation of all or most of the value of these assets. During the term of the agreement, the lessor recovers the entire value of the assets through lease payments and receives an adequate profit, and the lessee acquires ownership rights at the end of the lease agreement.

The main features characterizing finance lease:

• The lessor initially acquires the asset not for its own use, but specifically for leasing it.

• The client has the full right to choose the leasing assets and the seller company.

• The seller of the assets knows that the asset (equipment) is being purchased for leasing.

• The asset is directly delivered to the customer and put into operation.

• The object of leasing is taken on the balance sheet of the company-lessee.

• Claims for the quality of assets and a request for the correction of defects during the warranty period, the lessee sends directly to the seller.

• The risk of loss and damage to the asset passes to the lessee after signing the Transfer-Acceptance Act of leasing assets.

It is an important mechanism within project finance schemes.

Large companies using finance lease can carry out large investment projects in order to expand existing production facilities by purchasing fixed assets. SMEs and young companies, including those at the development stage, can use leasing leverage to implement capital-intensive investment projects to acquire assets that are not available to them through bank loans or other sources of funds.

The large-scale modernization of companies and the development of large projects with a long payback period require businesses to look for new approaches to increase the scale and timing of financing and reduce the cost of attracted financial resources.

This can be achieved using leverage leasing, which is considered one of the most complex lease financing schemes.

This scheme best meets the needs of project finance.

For example, investment projects for the purchase of equipment for hydropower plants (turbines) or the construction of oil platforms in the ocean. It is clear that at the end of the term of the agreement, such assets cannot be dismantled by lessees and returned to the lessor, so clients will have to buy such assets from the owners.

Leverage leasing requires a clear coordination of the actions of a significant number of participants in the framework of large-scale investment projects with an implementation period of 20-25 years or more. The complexity of leverage leasing is explained by the fact that a significant number of participants participate in this operation, among which there may be several owners, shareholders, creditors and sellers.

The group of co-investors of the project on the part of the lessor may be the shareholders of a special company (lessor) that directly enters into a lease agreement.

Such participants finance a certain part of the funds necessary for the purchase of assets. They use a limited amount of their own funds, typically around 20% of the initial asset value. Funds are usually raised through the issuance and placement of securities. The main part of the funds (about 80%) for the acquisition of assets is attracted by a group of creditors, which usually consists of commercial banks. In the scheme above, the leverage ratio is 4.

Leveraged leasing transactions involving multiple parties typically involve two representatives. One of them coordinates actions and represents the interests of banks. In turn, the representative of the lessor manages the actions of another group of participants (the management company).

Such a company acts in the person of the lessor, concludes a lease agreement, signs agreements for the sale of assets for leasing, a loan agreement and an insurance contract. Also, this company distributes the profit from the leasing project among the shareholders.

Here the similarity between leveraged project finance and leasing becomes apparent.

The use of leasing to finance a complex investment project gives the lessor the right, with insignificant own participation, to use tax and other benefits or preferences that apply to participants in finance lease, for example, accelerated depreciation. These benefits can reduce the amount of lease payments and provide savings to project participants compared to investment loans.

A typical leverage leasing model looks like a combination of a number of elements:

• A contract for the sale and purchase of an asset at the expense of the lessor’s own capital or funds received as a result of syndicated lending with limited recourse to the borrower.

• A lease agreement drawn up and signed on the terms and conditions detailed above.

• Assignment of receivables for lease payments due to repayment of debt on principal and interest.

Thanks to leverage leasing, the number of investment financial products is growing, which contributes to competition between various sources of financing and the expansion of financial opportunities for the implementation of investment projects in the most beneficial mode for participants.

The similarity of leverage leasing with syndicated lending, as world experience shows, can become a powerful “long” investment resource, involving the use of a complex and flexible contractual structure between participants. This scheme also increases the lessor’s interest in the lessee’s business.

Choosing leasing to finance large projects

Due to the ongoing process of globalization and increased competition, companies have to work in an environment of risk and uncertainty, which requires better cash flow management and financial activities in general.

Recent events in the financial markets have shown that even the financial giants do not always meet the requirements of the economy of the 21st century.

Managing a business in an era of change is becoming increasingly difficult, especially in the context of large investment projects.

This requires high-quality operational information.

Until recently, managers and analysts relied on balance sheet and income statement data.

Today it is clear that the information needs of business are changing. As project financing become more complex, Cash flow management teams need to expand their sources of information accordingly and introduce new methods for analyzing them.

CP Finance UK Finance Limited is ready to offer your business comprehensive services in the field of financial modeling, project management, investment engineering, etc.

We provide long-term loans for large projects in the field of renewable energy, heavy industry, mining and processing of minerals, infrastructure, real estate, tourism and etc.

Contact our representatives to find out more.

Company’s business activity in a cash flow statement

The key source of information about the financial resources of a business is the cash flow statement, which is an underestimated element of financial reporting.

This document includes complete data about cash flows and cash equivalents, such as highly liquid assets that can be converted into cash within a short period of time.

It presents the amounts and sources of funds and shows the direction of their use in each segment of activity (operating, investing and financing).

Operational activity (production, trade, service) is the main activity of companies in the real sector of the economy. It includes any activities that are not classified as investment or financing activities. This segment includes all economic events related to the company’s core business that result in cash inflows or outflows. Investment activity refers to the purchase or sale of non-current assets, short-term financial assets and all related income and expenses.

Financial activity is the search / acquisition or loss of sources of financing, as well as all related income and expenses.

This applies to changes in the ratio of equity capital and external capital.

Information on cash flow management in different areas of activity is useful for a comprehensive financial assessment of the company in past and current periods, and therefore can be considered an ideal model of the overall financial health of the enterprise.

Each activity can have positive or negative cash flows, as shown in the table below. Surplus funds from operating activities means that the revenue from the sale of goods or services exceeds the cost of purchasing materials, paying wages and other expenses. This situation is certainly beneficial for the company and shows the possibility of obtaining cash from operating activities.

When operating expenses become higher than revenues, there is a cash deficit.

This may indicate problems with receivables, the accumulation of unnecessary stocks of goods or the repayment of debts formed as a result of the implementation of large investment projects.

Positive cash flows from investing activities may indicate the sale of assets, securities, or interest and dividends received.

In this case, it is difficult to say whether this situation is positive or negative for the company. Negative net cash flows from investing activities may indicate the active use of funds in the development of the company or investments in financial instruments, which is a positively sign. In financial management, a surplus of funds can indicate the attraction of sources of financing, while the opposite informs about the increased debt service costs.

Cash flow management in different areas of the company’s activities is a valuable tool for financial and investment decisions.

They allow the finance team to assess the structure and level of financing for each area, and also help assess the need to attract additional funds to finance large investment projects or maintain the balance.

The value of net cash flows in itself does not have sufficient information content. For management and analysts, the values of cash flows determined for certain operating areas are important. The life cycle phase is also of great importance in cash flow analysis. In the maturity phase of a company’s life cycle, operating activities generate positive cash flows sufficient to finance other activities.

The role of cash flow management in large investment projects

The cash flow statement provides information on the cash flow of the enterprise, which is an integral part of business management in general and individual projects in particular.

Today, project management is defined as a continuous process of making decision, the accuracy of which largely determines the effectiveness of investments. Cash flows clearly reflect the economic impact of each investment and can be used to compare alternative projects.

The most important advantage of the cash flow statement and the traditional income statement is the way they are compiled.

The income statement is compiled based on the results of a certain period, regardless of the moment of inflow or outflow of funds, which means that its role is limited.

The financial result achieved by the company informs about the effectiveness of management, which is expressed in an increase in equity capital. However, this indicator is not enough for decision making. To better understand the strengths and weaknesses of an investment project, it is necessary to refer to information on the actual inflows and outflows of funds in a given period.

Monitoring cash flows allows an enterprise to maintain an adequate amount of cash and cash equivalents to meet current liabilities.

Cash flow information complements the balance sheet and income statement, making it more useful for analysis. Cash flows are categories that are quite objective and resistant to the impact of accounting policies, which allows you to more effectively compare the effectiveness of investment projects / enterprises in different conditions. This information is often used as an indication of project reliability and future net cash flow projections.

The importance of the cash flow statement among business managers is increasing. In Europe and the US, many CFOs are turning to cash flow reports to make better investment decisions.

Cash flow management can be considered ex post (reporting aspect) and ex ante (decision making aspect).

The structure, principles and application of business strategies are based on reliable and complete information about the business situation and understanding of significant changes in this situation.

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Construction engineering and investment projects companies today provide a wide range of services related to engineering design, financing, construction and further operation of large facilities.

This innovative activity is widespread in such areas as energy and renewable energy, heavy industry, mining and processing of minerals, infrastructure, oil and gas sector, etc.

The growth of Construction engineering and investment projects began at the end of the twentieth century with the emergence of new requirements of customer companies for large projects.

Today, this activity should cover technical, financial, legal, environmental and many other aspects.

General contractors implementing large investment projects under an EPC contract must have qualified multidisciplinary teams and collaborate with experienced contractors from different fields.

The functions of engineering companies include, but are not limited to:

• Advisory functions. High-tech services for engineering design, investment planning, etc.

• Financial functions. Organization of project financing, as well as search for investors, SPV creation and other services for financial support of the project.

• Technical functions. Development, acquisition and provision of new technologies and ready-made solutions necessary for the project to the customer company.

• Construction functions. The responsibilities of the general contractor include the entire range of services for the construction, installation, testing and commissioning of facilities.

• Operational functions. If necessary, the contractor assumes any responsibilities for the operation, maintenance, repair and monitoring of facilities.

CP Finance UK Finance, an international investment consulting company, is engaged in the implementation of large investment projects in dozens of countries around the world.

We carry out investment planning, project analysis and appraisal, engineering design, construction and operation, and are also responsible for project financing.

Implementation of investment projects on a turnkey basis

According to the general definition, the subject of investment and construction engineering is the construction, expansion or modernization of engineering facilities limited by a certain place, time, artificial and natural environment.

This cycle of work is carried out in accordance with generally accepted models in order to meet the needs of all project participants.

Starting from the general idea of the future facility, the engineering team develops functional and structural concepts, drawings and detailed construction documentation, financial requirements and a strategy for attracting investments. This is a multi-stage process, which is based on consultations of the customer and investors with experts and the adjustment of project parameters, taking into account the requirements and real capabilities of the parties.

Each investment project that receives funds through bank loans, grants or project finance instruments must be implemented in strict accordance with applicable contractual provisions and standards.

A poorly thought-out and unrealistic project can result in financial and reputational losses for all stakeholders, so engineering teams strictly adhere to established standards.

Before embarking on the implementation of the project, the initiators must clearly understand the current framework and limitations of the contracts.

What changes in the schedule, quality, volume and cost of work can be made?

What changes will investors not allow?

Clear answers to these questions are critical to the future of the project and business.

Investors generally prioritize the selection of reliable contractors, acceptable investment costs and the initiator’s own financial contribution, and a professional and realistic project plan and goals.

The stages of project implementation can be as follows:

• Selection, appointment and preparation of the project team.

• Selection of contractors, which in practice comes down to the implementation of standard procedures, culminating in the signing of contracts.

• Implementation of the main part of the project, which consists in the implementation of a complex of construction and installation works, modernization, equipment repair, etc.

• Reporting, monitoring of compliance with the schedule and project management.

• Financing and material support of the project.

• Commissioning.

The above stages of the investment project implementation do not necessarily follow each other in the specified order. More often than not, they overlap each other to create a holistic process.

Financing of construction engineering and investment projects

Financing large investment projects is a global problem in any business related to the issue of the cost of capital.

This refers to the average rate of return that prompts potential investors to provide the company with the necessary long-term financing.

Before starting any project for a company, it is important to clearly define the start-up and operating costs that correspond to the resources that a business can allocate.

In Construction engineering and investment projects, among other things, it is important to match future financial flows with the necessary start-up and operating costs that the company will incur in the process of making the investment.

The initiator of construction engineering and investment projects must secure external funding for successful implementation of the projects.

Sources of financing for large projects

Project financing can be carried out using various sources, including self-financing from the company’s internal resources, large bank loans, share issues, leasing, budget subsidies, as well as complex project finance (PF) instruments.

Internal financing of projects is carried out using the company’s own funds, including share capital, profits and depreciation charges.

As a rule, this only applies to small investment projects, while large capital-intensive projects require the use of various combined schemes with the attraction of debt financing.

External financing of an investment project is based on the use of borrowed funds from banks and other financial institutions, subsidies and other sources. Each source of funding gives the business certain advantages, so the choice is determined by the specific business strategy, risks and scale of the project.

Project finance is one of the most affordable models for financing and implementation of  construction engineering and investment projects.

PF is characterized by the transfer of responsibility and financial risk of the project to a separate legal entity (special purpose vehicle, SPV), which is created by interested parties.

Debt financing is attracted by SPV and is secured by the future cash flows of construction engineering and investment projects, but not by the assets of the initiators.

In a “pure” project finance model, sponsors contribute certain funds to the SPV, but they are not liable for the SPV’s debts, and the debt is repaid from the project’s cash flows. Payments do not start until the project is completed and operational.

The project finance instrument is widely used, in particular, in wind energy, solar energy and infrastructure projects.

Funding for many public-private partnership projects is based on the PF model.

Construction engineering and investment projects provides, among other things, the selection of an acceptable financing scheme, which must ensure sufficient investment for each stage of the project, minimize risks and capital costs, and optimize the financial structure of the investment project.

Financing an investment project is part of the company’s overall financial plan, which includes not only new projects, but all the financial needs of the business.

In general, the problems of investment and financing are closely related.

Every company must maintain a debt ceiling that, if exceeded, would entail excessive financial risk. Investment projects must yield higher returns than the value of the money used to finance them.

Any financial decisions made by a company affect the price of its shares, the degree of risk and the cash flow. The company’s actions are limited by such aspects as applicable laws (including antitrust law), the scope of contracts and financial agreements, market factors and much more.

The most important decision in the context of the implementation of large investment projects is the correct choice of the source of financing.

CP Finance UK Finance is ready to provide your business with long-term project financing and large investment loans for the implementation of projects in the fields of energy and industry, agriculture and infrastructure, mineral processing, etc.

Construction engineering and investment projects: our core services

The peculiarity of modern investment and construction engineering is that a diversified company offers a full range of services necessary for the project implementation.

From project financing to professional operation and facility maintenance.

Management of construction engineering and investment projects is a responsible and complex process.

The CP Finance UK Finance underwritten team conducts detailed research and prepares a report, on the basis of which the project participants can make the right decision in accordance with their investment intention and, if necessary, make adjustments.

Our responsibilities in the field of construction engineering and investment projects include:

• Project planning, feasibility study and marketing research.
• Provision of project financing on mutually beneficial terms.
• Organization and direct control of project implementation.
• Risk management and quality control at all stages.
• Effective resource management.
• Environmental assessment, etc.

Each customer strives to achieve maximum efficiency and safety of investments, high reliability and optimization of the operating costs of the facility.

We help achieve these goals by providing an experienced multidisciplinary team of engineering professionals who are ready to provide the investor with an informed opinion on the advantages and disadvantages of each solution.

Our specialists, together with representatives of the investor, develop a complete package of technical and financial documentation for the project.

Using rich international experience and advanced technologies, we help our clients to avoid risky or questionable decisions.

Contact us to learn more about the services of CP Finance UK Finance.

CP Finance UK FINANCE LIMITED
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Investment engineering and project financing, now considered one of the key areas that drive business development and global economic growth.

Services in this area are provided by specialized companies and specialists with extensive experience in the implementation of various projects.

The rapidly changing economic landscape and technological advances require engineering companies to improve the management of clients’ financial resources in order to optimize the cost and schedule of certain tasks. Investment engineering tools successfully cope with these tasks.

Investment engineering and project financing services includes:

• Project management.
• Financing up to 90% of the total project cost.
• Estimation of the scope of work and investment costs for the project.
• Full cycle of construction and installation works.
• Assistance in developing a business plan.

We begin to cooperate with clients at any stage of construction.

However, we are ready to act as a general contractor, implementing turnkey projects under an EPC contract.

CPUK  provides a comprehensive approach to engineering, addressing the full range of problems associated with the construction and operation of large facilities.

We operate in renewable energy, industry, mining, recycling, agriculture, real estate and tourism.

Contact our consultants at any time to find out more.

Investment engineering and project financing: our core services

Preparation and implementation of large investment projects requires comprehensive knowledge of technical, legal and financial issues, being a complex organizational task.

CP Finance UK offers investment engineering and project financing services in the energy, heavy industry, transport and other sectors.

Our highly qualified specialists have many years of experience in organizing construction, investment processes and project management.

We can develop, plan and control your project at all stages of the investment process.

Investment engineering and project financing is associated with the provision of engineering, financial or general consulting services to a business at all stages of the implementation of an investment project.

Investment engineering today goes beyond research and consulting.

It is an advanced concept that provides effective management of the entire investment project, covering technical, financial, legal and other aspects.

In particular, our company offers flexible project financing instruments with an initiator’s contribution of 10%.

Thanks to close partnerships with renowned banks in Spain and other European countries, we will find the optimal solution for any project.

Contact our consultants to learn about CP Finance UK business offerings.

Sources of project financing

Investment engineering professionals identify several forms of investment, including cash or cash equivalents, land and real estate, macinery and equipment, property rights and intangible assets.

Any investment in the project is used for the following purposes:

• Carrying out research and development work.
• Purchase, transportation and storage of necessary equipment.
• Construction of utilities and buildings.
• Unforeseen expenses.

Sources of investment can be own and borrowed funds, which largely determine the format of the project and the procedure for its implementation.

These funds are provided free of charge or used in the framework of equity participation.

The last category of financial sources is debt capital. The company must return these funds on the terms agreed in the contract.

As a rule, banks and private investors do not directly participate in the implementation of an investment project, limiting themselves to providing funds.

The use of ready-made standard forms for investment projects from UNIDO can significantly simplify the preparation of an investment proposal. The initiator must understand that any change in the project parameters requires a subsequent re-evaluation of the entire project.

Modern investment engineering is based on various indicators that characterize the efficiency and feasibility of implementing each project.

These are important indicators that are assessed by investors before entering a large project.

The CPUK financial team will help you prepare documents for attracting large investments, taking into account the standard requirements of international financial institutions.

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