Condemned to co-finance

Co-financing is sometimes necessary – particularly if the partner is short of cash. It is often a pre-condition for winning a contract: “you help us with the cash, and we will keep you busy.” Without such agreements, both the contractor and the investor will lose out

Emil Górecki

Finding the finance for development projects is a hard task nowadays. Credit terms even for decent projects are curently too harsh for many developers. It is not uncommon for the banks to require a certain level of leased space or the reaching of a definite construction stage before they agree to open a credit line. How, therefore, can a developer find the funds if it does not have financial resources of its own up its sleeve? One way is to persuade the contractor to accept a suspension in its remuneration – in other words, to agree to co-finance the project.

How can we do it together?

There are a number of ways in which a construction company can participate in the financing of a project. The most popular form is to pay the contractor’s fees less frequently than every month while the project is underway – for example, paying every quarter of the year or after the completion of each stage. A lump sum payment, e.g. after the project is finished, is much more difficult for the contractor. There is also another possibility, usually employed in public projects, when the payment is made a few years after the completion of a project. In such a case, most often at the stage of the tender, it is necessary to find a financial partner and then finance such a project by means of factoring: the contractor identifies a bank which is prepared to buy invoices, and then the ordering party will pay off the debt created in this way in convenient instalments.

Participation in costs, 
participation in profits

Late last year, construction company Unibep bought a residential project for around PLN 53 mln on ul. Kwatery in Warsaw from Spółka Inwestycji Mieszkaniowych Ursynów. Now the first stage of the project has been sold and soon the apartments in the second stage are to be put on sale. “Analysts were initially unsure whether we would be able to take on this project. But it has turned out to be one of our successes. This has encouraged us to participate in other development projects, provided we consider them attractive,” explains Mariusz Sawoniewski, vice-president of the company’s management board and its financial director.

Unibep’s method of operating works in such a way that during negotiations with the investor it sometimes turns out that the company needs some additional capital in order to carry out the project. If the project is well designed and located, Unibep can suggest setting up an SPV company to carry out the project. “This provides more security for the bank, because in their assessment they also take into consideration the fact that Unibep is a stakeholder with considerable construction and development experience and a solid financial situation. The investor can start construction despite difficulties in obtaining bank finance. We, on the other hand, have a general construction contract, potential profits from the sale of the project that we are a stakeholder in, and the additional possibility of making money on extra services, such as the promotion and sale of the project through our subsidiary Unidevelopment,” explains Mariusz Sawoniewski. He also adds that Unibep is able get involved in this way with projects costing from a few to several million złoty.

The company can participate in the financing of development projects also by a deferment of the payment term until the investor is able to obtain financial resources. The investor must of course pay the cost of the deferment in the form of interest. This is, however, not as interesting an offer as entering an SPV. Unibep prefers to be the co-owner of a project. “The company is currently co-financing one project and has deferred the payment in another one. Three projects are in the preparation stage, all of them with a capital involvement,” relates Unibep’s board member.

The state of play

“The participation of a contractor in the financing of projects is a novelty on the Polish market, but we have Skanska Financial Services in our company structure, which has been dealing with this type of enterprise for nearly twenty years,” adds Maciej Müldner, treasurer of the Polish branch of the Swedish development company. Skanska participates financially in many projects and in many different ways: from the regular deferment of payment terms to financial participation in the PPP project for the construction of a 60 km section of the A1 motorway. This PLN 3 bln project is one of the biggest such investments in Europe. Although the PPP format continues to be regarded with a lot of reservations, the national treasury is more and more frequently the partner for co-financing contractors. “This is a great way of building infrastructure. The treasury wants to have a motorway or a hospital finished and so pays for this to happen. Moreover, they pay over a long period of time, which is much less of a burden, and the contractor takes over the majority of risks connected with the project. This is a very popular model, both in Europe and the USA,” explains Maciej Müldner.

Skanska also co-funds projects whose investors are private entities. The details of these transactions are covered by commercial secrecy to a greater extent. “I’ve noticed considerably more offers for participation in projects at the present moment. It is not always caused by a lack of funding. Some companies have the financial resources but lack the know-how. There are also foreign companies that need partners familiar with the reality of the Polish market. Private companies less often need capital participation in projects. They are much better prepared for obtaining finance. This is why they value the possibility of payment deferral and the rendering of complex construction, design and financing services much more,” says the treasurer of Skanska.

No risk, no gain

Participation in project financing means taking on a certain number of business risks connected with the projects. This is of course a natural feature of working in the construction sector. “We certainly do not run away from high-risk projects. Skanska can cope effectively even with a high risk. It is not so much the extent of the risk as the correct estimation of it that is important,” Maciej Müldner explains.

The head of Strabag, Alfred Watzl, has also noticed a greater demand for support as regards finance. He admits, however, that this is not everyday practice, so the company does not have procedures in place for dealing with such enquiries. Admittedly, Strabag has supported its key, regular clients in a few cases, but this is not connected with the company’s strategy in any way. Chairman Waltz declines to discuss the subject in any more detail until the issue has been regulated at company level, which should take place in the near future.

Special purpose fund

Meanwhile, the supervisory board of Merko Ehitus, a listed Estonian construction company, has put EEK 300 mln (EUR 19.1 mln) in reserve for its clients, following a request from the management board. Part of the fund is to be used for co-financing new construction contracts. The company’s priorities include: participation in PPP projects, co-financing EU-financed construction projects in the private sector and co-financing development projects with significant potential by covering up to 30 pct of the project costs – but only on the condition that a comprehensive business plan has been drawn up for the project, and that the rest of the finance has been secured. ν