The Effect of Foreign Finance Arranging on the Economy of the Energy Projects

The Effect of Foreign Finance Arranging on the Economy of the Energy Projects

Foreign financing is an inseparable part of the implementation of large-scale projects in the energy sector. The arrangement of financing with different currencies is effective in improving the economic indicators of the project.

To clarify this issue, it is assumed that 300 million US dollars has been financed in the form of three loans each 100 million US dollars equivalent in Rial, Euro, and Chinese yuan renminbi (CNY) currencies for constructing a petrochemical project. These loans will be used in three years and each in one year during the construction of the project. In this paper, the impact of the time of use of each loan on the economy of the project has been investigated.

The table below shows the loan rates, foreign exchange rates against the US dollar, and forecast changes in currency prices against the US dollar in the next 8 years.

The results of different arrangements of these loans are shown in the table below.

As can be seen, the net present value (NPV) of loan installments is the lowest in scenario (1), and this means the highest economic rate of return that will be achieved for the project.

in other words, if loan (A) is spent in the first year and loan (B) is spent in the last year of the construction phase, the net present value of loan installments will be the lowest and this means the highest internal rate of return on equity (IRRe).

In conclusion, the currencies whose value is expected to decrease compared to the US dollar during the repayment period should be spent at the beginning of the project construction phase, and the currencies whose value will increase compared to the US dollar should be spent in the final years of the project construction phase.