Institute of Growth Economics named after. P. A. Stolypina proposed that the Bank of Russia refinance loans issued for project financing. Briefly, the scheme looks like this: a specialized project finance company (SOPF), created for a new business project, issues bonds and takes out a loan against them. According to Boris Titov, the Commissioner under the President of Russia for the protection of the rights of entrepreneurs and a member of the supervisory board of the institute, this scheme should solve the main problem of investment in Russia, namely attracting money with new projects that do not have a collateral base.
The problem of availability of long-term money has been a problem in Russia for many years. Here are the most striking figures: our share of bank credit in investments in fixed capital in 2021 did not exceed 9.5%, the share of loans issued to the private sector to GDP is 71%, while the same average worldwide is 132% . The Stolypin Institute states: existing channels for refinancing development institutions are not enough to increase investment in the economy, and existing development institutions are chronically underfunded.
Development institutions arise in the field of investment for the reason that they are responsible for long-term – over five years – investments, which are often required by new large industrial and infrastructure projects. “Often, with regard to affordability, the discussion is only about the cost of funds, but the interest rate is only one of the parameters that determines the availability of borrowing funds. Another important parameter is the duration of financing. And it is precisely long-term credit resources that we lack against the backdrop of underdeveloped institutions that provide long-term money,” notes Sergei Zaversky, head of the analytical research department at the Institute for Integrated Strategic Studies (ICSI).
However, it must be admitted that the government does not ignore this issue. There are some successes in the field of infrastructure projects (Yamal LNG, Amur Gas Processing Plant, Nord Stream 2, modernization of Pulkovo Airport, etc.), but for the economy as a whole, an effective solution to the problem has not yet been found. The latest government initiative in this area is the approval of a joint action plan (road map) of the Russian government and the Bank of Russia to create accessible finance for investment projects. Unfortunately, the text of this document is not published. The media only reports that this plan envisages the introduction of multi-vote preferred shares, an increase in the share of preferred shares in the authorized capital of joint-stock companies, the development of shareholder agreements and the special purpose acquisition company (SPAC) mechanism, and the development of SME financing, including through digital factoring. “SPAC is a mechanism for entering capital through special checks. The money from their sale is placed in escrow accounts. While Russia has not matured to this point, there is too little trust in the corporate securities market,” Anton Sviridenko, director of the Stolypin Institute, doubts the effectiveness of this mechanism.
As part of the roadmap, a special working group will also be created under the leadership of First Deputy Prime Minister of the Russian Federation Andrei Belousov and Chairman of the Bank of Russia Elvira Nabiullina.
Real alternative
A possible way out of the situation could be the use of project financing.
Due to its flexibility, this form is an effective tool for raising funds in an unstable economy. Today, project financing is becoming increasingly widespread in the domestic business environment, as it corresponds to modern Russian realities. A “project” is usually understood as a unique enterprise (event) that involves the coordinated actions of its participants. It is assumed that these actions are aimed at achieving certain goals of the participants under time and resource constraints. Thus, the term “project financing” implies a certain way, an organizational form of achieving business goals. And as you know, there are two main goals - earning profit as such and maximizing the value of the business.
According to the principles of project finance, the parties providing the necessary capital first evaluate the ability of the project to consistently generate cash flows. It is these flows that become the source of funds for servicing and repaying the debt and paying income on the capital invested in the project.
Thus, in project financing, the guarantee for the capital supplier is the economic effect of the project. Assets can also provide support, although their size is often not comparable in principle to the cost of the project.
The specifics of project financing assume that projects are implemented based on the following principles:
- strictly defined or isolated economic activities within the project;
- competent risk management and the presence of a system of functional guarantees for project participants;
- the presence of a well-developed financial model, which is the basis for investment and financing;
- professional project management.
Let us consider in more detail the components of each of these aspects.
Raising funds for a startup using other resources
You can also raise money for your project on a pro bono basis. Such resources exist. For example, Sbordeneg.com - there is no commission, restrictions on topics and terms. Material assistance is provided free of charge or with the possibility of a return on investment after the project is launched.
Another resource is “Ya.Soberu”. The Yandex project allows you to create pages to raise money for your startup. To create such a page, you only need Yandex.Wallet. You can also use the service to create a form for accepting donations, get its html code and add it to your website. Each site visitor will be able to transfer you a donation in a couple of clicks. The service can accept no more than 300 thousand rubles per month.
The likelihood of collecting such a large amount is minimal. The scheme is suitable for those who have already gathered an audience around them and are planning to open a small project.
A separate project and its participants
In the classical project financing scheme, as a rule, an economically and legally separate project company is created.
This approach has several advantages. Firstly, working “from scratch” avoids the risk of the project being influenced by circumstances related to the company’s “past”. For example, with tax claims based on the results of an audit of one of the past periods or with the invalidation of an important agreement concluded several years ago.
Secondly, the project becomes more transparent. There is less difficulty in determining and planning cash flows because there is no impact from non-project activities. Transparency helps to establish trust between partners and a higher estimate of the project's value.
In traditional investment financing there are only two main parties - the lender (investor) and the borrower. With project financing, the circle of people involved is noticeably wider. The list of possible participants and their role in the project is shown in the table.
Venture funding for startups
Venture capital funding for startups refers to the provision of funds to young companies that are at an early stage of development, in exchange for a stake in these companies. At its core, the scheme is very similar to the help of business angels, but there is an important difference. Venture funds finance the project's profitability prospects, and business angels, as a rule, invest in people and ideas. Therefore, business angels willingly enter a project at the initial stage, and venture funds consider projects at later stages - for example, when production has started, but work is underway to expand it.
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How to attract funding for a startup from business angels or venture funds? Make sure that the project meets the necessary parameters:
- Unique startup idea
- Clarity of entry into business
- Potential startup growth
- High potential business profitability.
Project risk management
The possibility of attracting financing to a project depends on how much its managers manage to convince investors that the project’s risks are reduced as much as possible.
It is also extremely important to increase the transparency of project management to a level acceptable to the investor. In this regard, it is important to clearly answer the question: “Have all risk factors that could affect the project’s cash flows been taken into account?” After all, we are talking about future cash flows, which are most affected by uncertainty.
The general principles of project risk management are as follows. First, a detailed risk analysis as part of the project analysis should be carried out at the pre-investment stage of the project. Second, each risk must be accepted by the party that is best able to manage and control it.
In conventional lending, all risks, as a rule, are fully borne by the borrower. When organizing project financing, risks are distributed between the borrower, the lender and, as a rule, another participant in the project. Thus, it is most advisable to entrust the management of political risk to government bodies, involving them in the project, for example, as its sponsor. Technology risks can be transferred to equipment suppliers, and market risks can be transferred to buyers or related parties through specialized contracts. Ideally, the project company should not take on any risks.
The use of functional guarantees for project participants allows us to ensure the stability of future cash flow. An example of such guarantees could be the conclusion of memorandums of understanding and the provision of “comfort letters” by partners. Contracts are concluded with buyers that “bind” them to the project company. It is also possible to obtain guarantees from the project sponsors or the state - about the creation for a certain period of special conditions that will facilitate the implementation of the project.
Startup financing from production
This method can be useful if you have a project related to the sale of products, and manufacturers are interested in entering new markets.
At first glance, the idea seems almost impossible to implement. What kind of production will be invested in someone else's project? But there are similar cases in business practice.
It is important to note that this method is more suitable for existing companies that are looking for funds for development. It’s unlikely that anyone will risk their money with a newbie.
Financial model forms
As already mentioned, the key factor in the success of project financing is cash flow.
Therefore, it is critical to build an appropriate financial model for the project. The financial model is a simulation of the activities of the project company through the preparation of pro forma financial statements. Thus, the financial model reflects the essence of the planned business in interrelated financial forms. These forms must be structured and integrated into the calculation of the project’s profit, its cash flows, and balance sheet.
The financial model is built on the basis of assumptions developed at the planning stage regarding key factors affecting the business. To draw up a financial model, it is necessary to understand in detail the relationships between these factors and the specifics of business processes. The reliability of estimates of future cash flow depends on the correct modeling of future activity.
When constructing financial models, it is advisable to focus on the International Financial Reporting Standards, which represent a unified international financial language for investors.
Management Requirements
The success of a project largely depends on having a strong management team with the will to succeed.
In other words, it depends on how professionally the project management and communications between its participants are organized. Therefore, the most stringent requirements are imposed on all functional systems of the company (logistics, finance, marketing, etc.). Since the range of project participants is quite wide, project managers should pay attention to relationships with partners and investors and coordination of their work. This will ensure transparency of information and financial flows and achieve the main goals of the project.
When implementing investment projects, the involvement of financial advisors is widespread in world practice. They can provide significant support in the field of legal, financial, analytical and organizational support of the project. This is especially true for the following questions.
At the project development stage:
- selection and selection of the optimal project structure;
- organization of engineering and technological expertise;
- development of a business plan, investment and information memoranda and sheets of investment conditions;
- "pre-sale preparation" of the enterprise.
At the project implementation stage:
- search for target shareholders and investors;
- organizing negotiations to achieve the best conditions for financing and project implementation;
- maximizing value and reducing costs.
At the post-investment stage:
- development of procedures for interaction with creditors and investors;
- ongoing support on legal and financial issues;
- preparation of regular reports on the status of the project;
- coordination with the investor of the system of financial and management accounting, controlling, marketing, and personnel management.
Business angels
A business angel is a private individual, an investor who invests his capital in promising startups at the initial stage of their development. A business angel in Russia is, first of all, an active entrepreneur. In addition to financial assistance, business angels help a start-up entrepreneur actively develop a project, transfer useful contacts and management skills. For the so-called “smart money” investors take a share from the project - from 10% to 30%.
As a rule, business angels are experienced entrepreneurs, top managers of large companies, and people who have built a successful career. You can find the largest of them on the Internet - there is a list of ratings of Russian business angels. There are collective organizations of business angels: the National Commonwealth of Business Angels and the National Association of Business Angels.
Another option is to look for them on specialized global platforms, for example, Angel List, Pitch Book, Startup Point. And if you want to meet business angels in reality, then you should visit startup exhibitions and competitions - WebReady, StartupVillage, etc.
The project lives for a long time
The implementation of project financing is usually carried out over a long period of time.
In my practice, there was a case when we acted as consultants on a project to create a regional plant for the production of asphalt-concrete mixtures. Only the pre-investment phase then lasted about a year and a half. This time was spent on elaborating and selecting the optimal project structure, building a financial model and developing documents, searching for partners, conducting negotiations, selecting suppliers and carrying out preliminary tenders. It took about four more months to directly finance the project - most of the payments were for equipment. The main difficulty was in resolving legal formalities to record agreements between the parties.
During the post-investment stage, our role as financial advisors continued for a further three years.
It was expressed in the ongoing support of the project, monitoring and control on behalf of the investor. Possible participants in project financing
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