The Trouble with Mega Projects - Working in investments, every 1-3 months, an entrepreneur comes and tells me about a mega project ($100m+) that they are looking to develop. Based on my experience, 99% of them will fail and I’ve prepared this thread to explain why. @siphophiri 
Creating Value - Ideas 💡 are worthless, your ability to either implement them or get investment onboard generates value.
The four main steps to a mega project are:
Step 1 - the concept.
Step 2 - the study. EPC.
Step 3 - the off taker.
Step 4 - financing.
The four main steps to a mega project are:
Step 1 - the concept.
Step 2 - the study. EPC.
Step 3 - the off taker.
Step 4 - financing.
Step 1 - The Concept
At this stage the entrepreneur has a license to build a hydro power plant. Consulted hydro engineers, a financing partner and ZESCO, all positive. This is the part entrepreneurs do well.. but keep reading cos this is only the start.
At this stage the entrepreneur has a license to build a hydro power plant. Consulted hydro engineers, a financing partner and ZESCO, all positive. This is the part entrepreneurs do well.. but keep reading cos this is only the start.
The Study
The plan is technical and Financial. Technical study $1-3m. Financial, you have to pay either a boutique firm or a Big 4 firm, cost, $250k. NB, paying doesn’t guarantee success of the model. If it passes, you move onto the EPC. If it fails, it’s over.
The plan is technical and Financial. Technical study $1-3m. Financial, you have to pay either a boutique firm or a Big 4 firm, cost, $250k. NB, paying doesn’t guarantee success of the model. If it passes, you move onto the EPC. If it fails, it’s over.
Step 2 - The EPC
Mega projects are typically implemented by a contractor who designs and builds the plant at a fixed cost, called an EPC. They take on the risk of price changes so they want to do an extremely detailed study before building. The cost of that is $1-3m, cash.
Mega projects are typically implemented by a contractor who designs and builds the plant at a fixed cost, called an EPC. They take on the risk of price changes so they want to do an extremely detailed study before building. The cost of that is $1-3m, cash.
Step 2 - The EPC Continued
There is a very short list of contractors that can build a $100m+ project for a fixed cost. They are typically aligned to an Exim bank that promotes their National EPC. Eg Italian Exim —> Italian EPC. This is where the problems start
There is a very short list of contractors that can build a $100m+ project for a fixed cost. They are typically aligned to an Exim bank that promotes their National EPC. Eg Italian Exim —> Italian EPC. This is where the problems start
Step 2 - The EPC Challenge
Spending $2m on the EPC study doesn’t mean the loan will be approved. If you change financiers, they will bring their own EPC and you bear the cost, another $1-3m. Different contractors have different pricing so each one wants their own study.
Spending $2m on the EPC study doesn’t mean the loan will be approved. If you change financiers, they will bring their own EPC and you bear the cost, another $1-3m. Different contractors have different pricing so each one wants their own study.
Step 3 - the Offtaker
Tech and financial approved, EPC costing done. Who is the buyer of the product? What is their financial position? Do they earn in FX? If any of these are questionable, funding denied. If they are ok, financing.
Tech and financial approved, EPC costing done. Who is the buyer of the product? What is their financial position? Do they earn in FX? If any of these are questionable, funding denied. If they are ok, financing.
Financing
You have a lead arranger or lender, who then syndicates the borrowing. You go on a series of road shows to promote funding into the project. Any negative news about your country in the global press, the deal will fail.
You have a lead arranger or lender, who then syndicates the borrowing. You go on a series of road shows to promote funding into the project. Any negative news about your country in the global press, the deal will fail.
Timeline
You will have a timeline but all the steps will take however long they want. Average time 5-10yrs. Changes in govt, economic conditions etc can add another 5yrs.
I have a client who is 17yrs and $3m into a project!
You will have a timeline but all the steps will take however long they want. Average time 5-10yrs. Changes in govt, economic conditions etc can add another 5yrs.
I have a client who is 17yrs and $3m into a project!
Final funding
Financiers want to own 90% of the equity and control project. Many entrepreneurs back out at this stage because they feel the cost is too high. 10yrs of planning and $5m to own 10%.
Financiers want to own 90% of the equity and control project. Many entrepreneurs back out at this stage because they feel the cost is too high. 10yrs of planning and $5m to own 10%.
Financial close
The entrepreneur agrees, they are appointed Chairman and the project moves ahead, in 1% of the cases. Congratulations 🍾 you’re an equity millionaire with no dividends for 10yrs but the project is complete. You’re refunded development costs $6m.
The entrepreneur agrees, they are appointed Chairman and the project moves ahead, in 1% of the cases. Congratulations 🍾 you’re an equity millionaire with no dividends for 10yrs but the project is complete. You’re refunded development costs $6m.
The buyout
While the project is under construction, a pension fund appears to buy half your equity for $10m in cash. You have $16m plus 5% equity worth $5m. Total $21m.
While the project is under construction, a pension fund appears to buy half your equity for $10m in cash. You have $16m plus 5% equity worth $5m. Total $21m.
