To consider an application for financing, fill out the form and send it to us by e-mail along with the project brief, or contact our experts
Meanwhile, the history of PF goes back more than a hundred years.
This method of financing originated in England at the turn of the 19th and 20th centuries.
During 1970s and 1980s, a considerable part of projects implemented under this scheme were in the oil and gas sector.
The impetus for the rapid development of project finance was the oil crisis of 1973, when many governments and private companies were actively searching for oil in different parts of the world (North Sea, South America), faced with rising prices.
Subsequently, this financial concept spread to such areas as the construction of cement plants, power plants, water supply systems, desalination plants, toll roads, airports, and so on.
The idea of co-financing the construction of capital-intensive facilities against future financial flows has accelerated the development of strategic industries worldwide, from China to the United States.
Today, project finance is actively adopted by leading engineering companies, equipment and construction materials manufacturers, international financial institutions and the world's largest banks, such as Spain's BBVA or Santander. All these players are involved in the construction of large enterprises, the expansion of infrastructure and the emergence of new industries, such as the renewable energy sector.
Link Bridge Financial LTDA, a financial and engineering company, uses project finance schemes for the construction of cement plants.
We support investment projects from start to finish, including preparation of technical and financial documentation, creation of SPV, allocation of funds and monitoring of their use, negotiation with contractors, etc.
The role of project finance in cement plant construction
Project finance means allocation of financial resources for investment projects without recourse to the borrower.It is a method of financing based solely on the cash flows generated by the project itself. In other words, the cash flows and assets of the future plant are used as a guarantee of repayment of the loan.
This serves as a guarantee to compensate for losses in adverse technical or economic scenarios that may occur throughout the life cycle of the project.
In contrast to traditional lending, in this case the lenders assume most of the risk, being fully responsible for the success or failure of a particular project. PF can be used when a group of related assets is able to function effectively as an independent economic unit. Only a viable and potentially profitable project with promising market opportunities can be realized through project finance.
Since the cement industry is highly dependent on the state of the global economy and is subject to severe fluctuations, the demand for cement, reinforced concrete products and other construction materials is also volatile.
The recent economic turmoil has had a negative impact on the global cement market and has led to a situation where many cement plants in Europe and beyond have been forced to operate below full capacity.
Meanwhile, the cement industry is considered one of the most capital-intensive industries.
The cost of building a cement plant with a capacity of 500,000 tons per year is about €70-80 million, which is equivalent to the cost of cement produced in 2-3 years of operation at full capacity.
When developing the project, it is important to plan access to seaports and take into account that transportation of products by land is considered profitable only if the distance to the consumer is up to 300-400 km. Providing the plant with fuel and electricity also requires the attention of investors.
Main expenses for construction of a cement plant include purchase of land, obtaining of official permits, civil construction and installation of equipment, testing and commissioning of the facility, construction of electrical substations and power lines, new roads and access roads, implementation of environmental protection measures around the construction site, etc.
Below we have listed the plant components that require the highest investment costs:
• Quarry construction and purchase of quarry equipment.
• Crushing equipment for primary and secondary crushing of limestone.
• Equipment for mixing components and preparation of the so-called raw meal.
• Construction of plants for preheating and calcination of the raw mix.
• Rotary cement kiln for producing cement clinker at high temperature.
• Equipment for clinker cooling and finished cement grinding.
• Special cement silos for product storage.
• Substation and other auxiliary facilities.
Financing the construction of a cement plant requires a thorough analysis of the market situation and forecasting scenarios for its development in the coming years.
However, this is not the only factor that is important to consider.
The rapid development of technology, the emergence of innovative materials and production methods in the cement industry also has an impact on existing and planned projects. In recent years, technologies such as CO2 capture, the use of hydrogen and solar energy for clinker firing, etc., have been described.
Since 1 to 3 years can elapse between the investment idea and the commissioning of the plant, the initiators and other stakeholders must consider the many risks associated with changes in technology, demand, raw material and energy prices, etc.
Therefore, an important aspect of PF is the analysis and distribution of risks between project participants, which must be rational. The idea of risk allocation between the most competent parties with the resources and experience to manage these risks will be of paramount importance for successful implementation of investment projects on the basis of project finance.
Project finance is usually carried out through a specially created project company (Special Purpose Vehicle, SPV), which raises money and manages the implementation of the project.
A common problem of the latter is the desire of companies to gain direct control over the project, despite the lack of economic capacity to sustain it.
In contrast to PF, the so-called "corporate finance" is based on the full responsibility of the borrowing company for the results of the investment project, be they positive or negative. The borrower is liable for the debts with its own capital, which is shown in the balance sheet. This is one of the key differences.
To arrange project financing, the company applies to banks with the results of a study and detailed project documentation to request funds against the future cash flows to be generated by the cement plant. Since the repayment of the debt would depend entirely on the income generated, the lenders would set the repayment schedule in such a way as to reduce the financial risk.
If a company promoting the construction of a cement plant wanted to undertake the project with corporate financing, in many cases this capital-intensive project would fail due to a lack of economic potential or excessive risk-taking by the company.
Financial experts highlight a number of common features of project finance in the cement industry:
• Applicability of PF only to viable investment projects with high chances of commercial success.
• Generation by the project of cash flows sufficient for the company to pay the main part of the debt and interest on the borrowed funds.
• Consistent implementation of the project, aimed at optimizing and streamlining the cash flows after the launch of the facility.
• Creation of a legally and economically independent company (SPV), be it a joint venture, a public company. This is an independent form established to manage the project, responsible for contracting, obtaining funds, controlling project development and repayment of debts. The shareholders fully control the SPV.
• SPV owns all project assets, manages their maintenance and proper use, and ensures that they retain their maximum value. SPV signs the entire chain of contracts required to build the facilities, purchase and supply materials and equipment, operate the facility, maintain and sell the cement products.
• In its purest form, project finance assumes that shareholders risk only their contribution, although most contracts contain collateral requirements for debt repayment (limited recourse to the borrower).
• PF requires an initial contribution from the initiator, which will depend on several factors, but above all on the requirements of the sponsors. For example, Link Bridge Financial LTDA can provide financing for up to 90% of the investment cost of a project, and in some cases we cover all of the initiator's costs.
• The high costs of analysis, preliminary research and consulting are fixed regardless of the scale of the investment project, which makes project finance relatively expensive for small local projects.
• The professional development of an information memorandum and a complete dossier describes the project in detail and makes it attractive to large investors and financial institutions, local and international.
The most important thing for the implementation of a project is to obtain financing.
It is important to do in-depth analysis and research so that all information is clear, accurate, and allows interested parties to confidently take the next step. Since most commercial banks will require all sorts of documents to verify the viability of the project, financing an investment project can be quite complicated and expensive.
Using project finance in the cement industry: advantages and disadvantages
As mentioned above, PF is quite expensive due to the high risk for investors and the need for numerous studies, expertise and consultations.Although not all projects can be financed through this mechanism, a number of advantages make project finance a very attractive option for the construction of large cement plants.
First, project finance makes it possible to distribute risks among several participants.
It is not one company that takes the risk of the project and is responsible to the lenders with all its assets.
SPV brings together all the stakeholders, including the project initiator, financial and strategic investors, investment funds, venture capital, banks, and construction companies. Without this distribution of risk, it is unlikely that a single company would have been able to implement such a project quickly, given the scale of the investment to be made.
Indeed, few companies would be able to build a large cement plant worth 200 million euros using only internal financial resources.
The creation of an SPV means that the financing is removed from the project initiator's balance sheet. The SPV as the "owner" of the project is a debtor, so the initiator does not worsen his balance sheet and can continue borrowing.
Secondly, long-term financing is impossible or difficult in many countries because of the immaturity of the local market. For this reason, large investment projects with a long payback period can be implemented only in the case of project finance. Where one company or country gets credit only for 5-10 years, some projects, if properly organized, can attract financing for 13-15 years under more favorable conditions.
Viable projects in many sectors, well structured within the PF and accompanied by an information memorandum, attract respected institutions (World Bank, OCD, IFC) that serve as a catalyst for full financing from the rest of the market.
These players would never have been attracted to the project otherwise.
For example, your company is planning to build a cement plant in a poor and unstable developing country. In this case, the economic, political and social situation in the country will be seen as a source of risk and uncertainty, and international financial institutions can greatly improve the overall picture and convince investors to participate in the project. At the same time, most transactions are insured by specialized insurance companies, sometimes even with the support of national governments.
It can be said that the opinion of these transnational organizations can stimulate and encourage potential investors to enter the project, although the opposite can also happen.
The results of debt ratings (e.g. Moody's) are now published almost daily. If a country's rating is downgraded, it becomes harder and more expensive to finance projects. The same is true for large companies.
All of these factors can affect the viability of a project on a speculative level.
There is a boom in project finance around the world, as many governments seek to reduce public spending and shift the implementation of major infrastructure, environmental, energy and many other projects onto the shoulders of private capital. Accordingly, foreign investors are becoming very sensitive to rating changes, reacting quickly to the situation of the host country.
Advantages
Having listed the numerous reasons for using project finance in the construction of cement plants, we would like to take a closer look at the main advantages and disadvantages of this concept for each stakeholder.Table: Advantages of project finance for cement plants.
| Stakeholders | Advantages of the PF concept |
| Project initiators | Off-balance sheet financing of capital-intensive projects. The project initiator maintains high creditworthiness by avoiding taking on the multi-million dollar debt associated with the construction of a plant. Companies can make investments in one or more projects that they would not otherwise be able to afford. |
| Project finance allows large funds to be raised on better terms and for a longer period of time than bank loans obtained by the initiator against its assets. The initiator retains control of the project and continues to borrow funds to develop other activities. | |
| The investment risk is distributed among the stakeholders in the most rational way. The contract divides the responsibilities of the project participants so that each party controls aspects that it can influence more effectively than its partners. | |
| Project finance, in some cases, makes it possible to optimize taxation by achieving a significant reduction in the tax base compared to other schemes and sources of financing. | |
| Financial institutions | Improved risk management, as the risk of an investment project is shared among participants, rather than concentrated on the initiator (as in the case of bank loans). Careful analysis of all risks and effective risk management makes investments safer. |
| The return on investment achieved with PF instruments usually exceeds the return provided to investors in traditional financing schemes for similar projects. | |
| Innovative financing scheme empowers lenders. Significant volume of investments and high quality of analysis make syndication between financiers possible. | |
| State and society | The implementation of a strategic project no longer depends on the financial health of the country. Take, for example, the construction of a cement plant to provide the country with affordable building materials. The project company pays its partners from the cash flows of the project itself. |
| PF offers private financing of public goods, which are returned to the state after a period of time, without resorting to direct investment by the state. | |
| Project finance allows the government to monitor public projects and compare them with existing public projects in order to implement the best practices of private capital. | |
| PF is based on the use of private initiative and innovative management methods that complement the strengths of public management and produce an optimal end result. |
If you are interested in long-term project financing of a cement plant on flexible terms, contact Link Bridge Financial LTDA.
Our finance team is ready to offer unique options for large business financing anywhere in the world.
Disadvantages
Unfortunately, there is no one right way to finance projects that works for all industries and companies.Project finance also has a number of drawbacks that limit its use. In particular, it is far from being the best option for small businesses.
Disadvantages of project finance for cement plants include the following:
• High fixed costs. This makes it advisable to use PF only for large projects. However, it is a growing practice and more and more projects are being financed with PF, with the average investment amount becoming smaller. As financial institutions feel more comfortable with project finance, this trend will continue.
• High risk for investors. While project sponsors today bear high risk in arranging PF, growing experience in the field will help reduce risks and uncertainties as financial teams are trained and requirements for participants and the investment projects themselves are standardized. In the past, the list of these requirements was short and rather vague.
Strictly speaking, project finance begins the moment a bank provides funds for the construction of a facility.
Until that moment, the initiator has to go through a series of stages, which may include, for example, the signing of an EPC-contract with an engineering company.
This stage in itself can be a risk for the project.
To enter into an EPC contract, it is necessary to estimate the cost and timing of the work, as well as to work on the technical documentation of the project.
The average cost of a cement plant is approximately 120-160 thousand euros per 1000 tons per year, but the exact figures will depend on project requirements, geotechnical investigation, construction calculations, selection of main and auxiliary plant elements and other factors.
Engineering design, general construction works, procurement of equipment and materials, professional installation play a critical role in the successful implementation of an investment project.
Without thorough elaboration of all these aspects the initiating company can not get financing. At the same time engineering companies tend to compensate for the lack of project information with a higher price, which can be naturally explained by a high risk and technical uncertainties at the moment of signing a contract.
Financing the construction of cement plants: our services all over the world
Link Bridge Financial LTDA develops a worldwide network of business contacts, involving engineering companies, equipment manufacturers, financial institutions, scientific institutes and governmental agencies.We provide a full range of project finance, engineering and construction services.
Our services in financing investment projects include:
• Project finance against future cash flows.
• Long-term lending, including 90% credit for the full amount of expenses incurred.
• Professional financial modeling and financial consulting.
• Providing credit guarantees and more.
Financing of investment projects is at the heart of any business, that is why our team pays special attention to this stage.
We provide large funds (from 50 million euros and more) to implement your ideas, while continuing to advise and support your specialists throughout the life cycle of the project.
LBFL also negotiates with governmental bodies and other stakeholders, agreeing all aspects of the project.
Our company provides large business with the necessary financial, legal, engineering and construction solutions for the realization of the most ambitious investment ideas in the cement industry and other sectors.
Our scope of responsibility includes contractor sourcing and supervision, concession agreements, environmental permits, engineering design, long-term power purchase agreements, tax optimization and much more needed for your future enterprise.
