Financing And Stakeholders For Guri Dam Project – Case Study

Why Project Financing is Ideal for Guri Dam Project

The document contains the details about the structure of funding adopted for the Guri dam project and the reasons for chosing the designated type of funding over other available choices. The paper outlines the benefits of the financing structure for the project. It also outlines the parties whose stakes are involved in the project. Further questions elaborate on the options that are available within the purview of the funding chosen and the learning aspects that the country needs to take from the Guri Dam project.

1. The project to be financed in the given case is a hydropower generation damn that would be the first of its kind in Venezuela. Given the circumstances, it would be highly advisable to go for project financing rather than a debt funding. Generally, the term project financing is associated with the projects that are long term in nature or projects who end use is primarily for the benefit of the public at large. The method chosen to repay the debt and equity obligations is through the positive cash flows that are generated during the life of the project (Bena, Ferraira, Matos, & Pires, 2017). For security for the debt, the assets acquired for the project and the rights and interest over the project is a collateral. There are several advantages and reasons for choosing project financing for the project in question.

Firstly, project-financing factors in the uncertainty associated with a large-scale project. It considers the degree of success for the project having regard to the cost decisions and arrangements and the ready market for the output generated by the project. It times the increase in investment with the market capacity for the goods or services to be manufactured. In the given project if all the expansions occur happen at the inception stage of the project itself, it will require a lot of debt financing which could significantly increase the interest burden on the company. At the same time, the market may not be ready to absorb the large quantum of electricity produced, as the demand would not pick up at the initial stage itself. Hence, there would be significant losses that are likely to happen in such a circumstance. If the cash flows generated period by period are utilized to fund the investment, it will be make the project self-reliant and reduce the dependence on debt or equity (Bumgarner & Vasarhelyi, 2018).

Secondly, apart from the benefit mentioned above, there is also an upside from the lender’s point of view. The lenders need not worry about cash flows being diverted to other projects or areas of business, as they know the positive cash flows generated are used for paying off the dues and the balance if any is required to fund the expansion to meet the increased demands since there is no other external source of raising funds. Not only this, the attitude of lower reliance on external debts increases the credibility of the project and the company as well. As an outcome of the reduced risk perception, the company goes into a position in which it can demand lower interest rates (Alexander, 2016).

Key Stakeholders in Guri Dam Project

Thirdly, since equity is not floated on the higher side, it ensures that the interest of the existing shareholders is diluted and hence they can enjoy greater share of profits. This also gives the promoters a cushion in terms of borrowing for other projects (Choy, 2018).

In this kind of funding, though the expansion plans are kept in handy but as further investments are made as in a phased manner keeping under consideration the demand, it ensures that the level of uncertainty is controlled and the pressure on the management is reduced to a large extent which in turn enables them to have a clear line of thought related to progression.

2. According to my view, following people are the key stakeholders in this project:

• Venezuelan Government and its formed bodies like EDELCA and CVG – They have the highest stakes involved in this long-term project not just from a financial standpoint but this view also stems from the fact that it is a project that deals with the welfare of the public at large and will also have positive implication on preserving the country’s rich energy reserves if things go right. Among the many firsts for the project, one was the sheer size of the project as it could supply 70 percent of the electricity needs of the country(Mock, Ragothaman, & Srivastava, 2018). The other was the involvement of foreign companies, as the domestic ones did not have the technical expertise to pull off something of this nature and magnitude. Both these factors involved huge political risks on part of the government as both failure and success would affect the benchmarks on which the government would be evaluated.
• World Bank – Even though based on the project-financing model, the first phase of the hydropower project involved significant amount investment to be made. This was met by the World Bank who disbursed the amount required to the CVG created by the government of Venezuela. Therefore, the fate of the project would have majorly affected the World Bank(Bromwich & Scapens, 2016).
• International construction contractors and consulting firms: Since Venezuela lacked the technical expertise required for the project; all the initial requirements of guidance and the international companies handled consulting to the first phase of construction. The drafting of a national plan related to electric power required extensive research to be conducted by the consulting company. In addition, since the dam located on Venezuela’s second largest river was at an extremely remote location having no communication systems, the construction companies had to be very diligent and detailed in planning the initial phase of construction(Goldmann, 2016).
• Venezuelan contractors: Contrary to the first phase of the project, the subsequent phases saw a significant jump in the participation of domestic contractors. This was because there was a plan in motion to train local people which was to be done by the transnational companies in the construction work. This created a significant number of jobs as well. Since from a meagre 30 percent participation in the initial phase to 60 percent participation in the final phase, the stakes of domestic contractors were also significantly high in the critical success factors of the project(Kew & Stredwick, 2017).
• The local Venezuelan population living in and around the dam site: No development can take place without pondering over the impact of it on nature and local people. It was no different for the construction of Guri dam as well. The construction of the dam posed certain environmental risks to the hamlets located beside the river as well as to the natural habitat of the wildlife. The project had the potential to drastically affect the lives of the people living around in that area both in a positive and negative manner. If the people of that region felt left out or exploited it would have taken away the popular support of the project and would affect the credibility of the government.

3. The financing structuring to fund a long-term public service project requires meticulous and extensive planning to be done to ensure smooth flow of funds for the various phases of construction. This would avoid situations of liquidity crunch as well as circumstances of over borrowing. The possible hierarchy of steps to be followed is as under:

1. An assessment needs to be made by the initial amount required for the research activities to be conducted. A thorough research would give out the projected fund outflow to go ahead with the first phase of construction that is required to be carried out by international companies.  Once the initial projected expenditure is clear, World Bank can be approached with a detailed project plan to fund the initial phase(Linden & Freeman, 2017). If required the government of Venezuela could pitch in some of the funds to gain equity control over the project.
2. A careful analysis of the demand supply movement will give an idea of the revenue that would be generated. The government can plan according to the degree of recovery as to whether it would be sufficient to meet the debt obligations and at the same fund the growth and expansion of the project. According to the outcome of the analysis, it can decide whether additional borrowing is required to be raised or equity to be raised or if the cash flow generated would be sufficient(Heminway, 2017).
3. The end use of the required funds would be primarily of two types- one required for the project expansion and the other to meet the day-to-day working capital requirements. The readily realizable cash component needs to be ascertained accurately to understand whether it will be enough to meet the working capital needs. The repayment schedule for long term debt needs to be drafted keeping in mind the needs of both the lender and the borrower. From a lending perspective, it should generate ample income and the flow should not be hampered. In addition, from a borrower perspective it should be such that it does not put pressure on the growth and expansion agenda, which should ideally be in conjunction with the growth in hydropower(Jefferson, 2017).

4. There could varied methods of financing that could be used. Some of them are mentioned as under:

1. Share capital funding: Both equity shares and preferences could be issued to raise financing. Nowadays equity financing is preferred more over preference shares as investors are not too keen on fixed returns and, they prefer exercising control on the way affairs of the business are being conducted.
2. Secured debentures: Long term secured debentures can help fund projects and meet the working capital needs of the organization. From a promoter standpoint, this does not dilute the equity holding percentage of the promoters. From the perspective of debenture holders, since they hold a secured instrument, they are assured of getting a fixed percentage of return on their lent amount(Trieu, 2017).
3. Secured Term loans (Both medium and long term): Varied forms of term loan both in local currency as well as foreign currency can be taken to meet the needs. These long-term loans are scheduled specifically for capital expansion and have interest rates that may be fixed or floating depending upon the terms of sanction. In cases of project financing, the collaterals for these loans is restricted only to the assets created out of the project if the loans are non-recourse. In case of limited recourse loans, the collaterals might extend to some other assets or interest/rights as well(Werner, 2017).
4. Unsecured loans and deposits: The government can pitch in certain funds along with the external debt that is being raised if there is any shortfall of funds. These loans might not have the security provided by the collaterals, as the first charge over the collaterals will be of the secured lenders. Even the interest that is payable to them would be made after meeting the repayment requirements of the external debts that the project has incurred. The other alternative to raise money is by accepting deposits by the public. Since it would be project, which would be directly under the government control, public debt can be raised with less complexity(Lavassani & Movahedi, 2017).
5. Deferred payments: Deferred payment guarantee is another source of meeting the requirements for the project. Under this scheme of lending, the lenders grant guarantees to creditors or suppliers of heavy equipment to make the deal with the project or the company by assuring them of payment of their dues. This creates a sense of security for the suppliers and is easy on the lenders as well as there is no immediate fund outflow. The process is fast and can save critical amount of time in procuring material or equipment at a short notice(Dichev, 2017).
6. Capital Subsidy: The project can be granted capital subsidy by the federal and the state governments. The subsidy can be awarded in various forms. There could be tax holidays or a rate cut in taxes payable by the project can be put forward in the initial or subsequent phases as per the discretion of the government. Deductions on income can be provided by allowances on specified capital investments made by the project. Since the project will have a positive impact in terms of savings in energy consumptions (which could be exported instead of domestic consumption) and it will also create a good number of jobs and over and above it is going to instil technical knowledge among the Venezuelan workforce, the government will always find it lucrative to offer some subsidies to make life a bit easy for the project(Gooley, 2016). Any duty of customs that might be required to be paid for import of goods, machinery or services required might be reduced or waived to make the production more competitive and cheaper.

Over and above the above means of fund raising, there could be several other means of credit that can be availed occasionally such as supplier’s credit, buyer’s credit etc. Leasing is another form of equipment financing that can be used.

1. Phased construction can replace full construction at a time when the goods or services produced by the project does not have a ready market available and the demand is not known in the initial phase.
2. Transfer of technical knowledge is more critical rather than simply outsourcing the work or importing services. Domestic participation has the potential to boost the economy to a considerable extent. Not just, it creates jobs but also it is an investment in people’s technical skills(Sirois, Bédard, & Bera, 2018).
3. Identification of alternate sources of energy and tapping into it in the correct time is very much critical for the sustained growth of any country. Mere dependence on fossil fuels will not serve the purpose in the end.
4. Impact on nature and the people needs to be taken into consideration while going through with any project. Any negligence on this aspect could not cause hazards on the country but would take away the support of the public(Dumay & Baard, 2017).
5. If more resources and person-hours are devoted on the proper planning in in the initial phase of the project in a right manner, the outcome could be better than what is anticipated Like in this project, the project was completed couple of weeks ahead of the schedule and within the budget.
6. Meticulous planning and not execution is just one part. Constant monitoring of the qualitative aspects over a prolonged period is very much necessary to avoid failure during the execution or production phase. Since CVG and EDELCA devoted good chunk of time to work on the selection of appropriate contractors and subsequently the work performed by them, there was just a minor system failure once in the project since its inception, which was also resolved within a span of three hours(Chron, 2017).
7. Lower input costs for a project makes the output cheaper and more affordable as it gives enough room for pricing the product considering the profitability. This attractive pricing would attract prospective end users and the demand picks up in comparatively lesser time like the way it did in this case by attracting the heavy industries engaged in aluminium and iron ore(Raiborn, Butler, & Martin, 2016).
8. In a giant project, there would be certain peculiar challenges specific to the project. Like in this project, it was at a remote location where there was a lack of communication system. What this shows is that the requirement of technical expertise is not just restricted to the core competent areas of the project but also in other ancillary areas. EDELCA had to come up with integrated communication system so that co-ordination could be established among the various groups such as operations, construction, security, hydrology etc.  

Conclusion:

It is clear from the above findings that without the methods chosen for this type of project, the outcome of the project could have been way different than what we are seeing today. May be the project could have survived the test of time for some period, but the sheer perfection of its execution has to be attributed to the planning that has been made for this. The selection of phased manner of construction and the project financing model to fund the project has been instrumental in the performance of this project and can be termed as the crtical success factors for the project. However, the lessens learnt from the project are beyond the financial standpoint.

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