Stage 3 models – Project Economic Models

How a project is financed by investors can have a material impact on government revenues (debt interest is tax deductible) and on investor returns. It is critical that Governments do not forecast revenues from extractive industry projects without trying at least to reflect the potential impact of debt on income tax revenues. However, often complex debt and equity structuring arrangements that may not be readily publicly available can make unravelling and modeling financing very difficult.

It is only with Stage 3 models that we have a fully-­fledged tool that comprehensively evaluates the economics of a project the same way a potential investor would. To put this in context: anyone who can lead on producing a robust Stage 3 model can become a professional financial modeler.

To model the financing, we first need to decide: a) Which financing mechanisms are material to the analysis? b) The modeling approach for material financing mechanisms: loans, terms etc. One key question will be how to model any parent company debt, either as structured loans (with formal repayment schedules) or as generic “shareholder loans” repaid from free cashflow; and c) Sources for assumptions to fill gaps in data: interest rates, loan durations, etc. Expert judgment may be required.

For implementing the financing into the fiscal model we need to ensure its proper integration into fiscal calculations and investment metrics. This will be audited by other participants of this program and by the Open Oil team. We expect participants will be surprised as to how significantly the sharing of benefits between investors and government canl be affected project financing.

Note that progressing to this stage is optional and consists of including in the fiscal model the impact of project financing. There is no time planning for this stage, but Open Oil will provide as much support for this more specialized and challenging stage as possible.

Documentation of project economic models

Projects that progress to this stage will deliver:

  1. A document with reference to the financing structure, highlighting the assumptions made where data on financing structure does not exist. The main categories of finance are: i) Third party debt, ii) Parent company debt, and iii) Parent company equity.
  2. A one-­page summary of the financing structure for inclusion in a report and to facilitate review. This should include the interaction with the fiscal regime and rules, interest deductibility, thin capitalization limits, etc.
  3. A narrative report reflecting the full economic evaluation of the project, audited by the Open Oil team. This report includes key conclusions, key messages, controversies, which scenarios and sensitivities to include, etc. All numbers in this report are referenced back to the fiscal model.

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