Question

QUESTION 1
a) In order to improve health care delivery in Ghana, among other things, the Government of Ghana in 2012
signed a contract with an Israeli construction company - Messrs Engineering and Development Consultant
to build a 650-bed medical facility. Construction began in April 2013 as a turnkey project. In 2015, the
University of Ghana, which had provided a 400-acre land for the construction of the hospital, established a
Special Purpose Vehicle (SPV) that will operate the facility. The name of the company is the University of
Ghana Medical Centre (UGMC) Limited. UGMC was completed in August 2017 and requires about 800
personnel when it is fully operational. The first phase of the project is priced at $217 million. The second
phase of the project requires about $50 million.
i. According to the typical features of project finance, does the project described above fit the
description of project finance? [4 marks]
ii. What is a turnkey contract and who does a Project company sign one with?
[3 marks]
iii. Under what conditions can the procurement of funds for the second phase of the project be termed
as mezzanine debt? [3 marks]
iv. Using probable scenarios, describe how the project may be affected by political and commercial
risks. [5 marks]
b) Assume that during the second phase of UGMC, an equipment that currently costs $950,000 is required. An
alternative will be to lease the equipment for a rental of $320,000 for 5 years. The interest rate is the last
two digits of your Students ID. Which is a better option for UGMC, lease or buy?
[5 marks]
[Total = 20 mark

Answer 1

SOLUTION:-

1) No above data described does not fit the project finance as data provided is incomplete to determine whether a project is beneficial or not as details of income is not given and sources of finance is also not given in data.

2) Meaning of turnkey project:

* It is a project contract under which a firm agrees to fully design, construct and equip a manufacturing/ business/ service facility and turn the project over to the project owner/ Client when it is ready for operation.

* A turnkey project is generally produced by a term of contractors and project leaders who have experience with the type of project that is being produced.

* These contractors will do everything needed for the project.

* A project idea is often handed over to them and they are expected to produce the project up to the standards set by the project owner/client.

* The project manager or client will only have to do very minimal work.

* They can expect a turnkey project to be returned to them and fully operable when the project is ready.

3) Meaning of mezzanine debt:

* Mezzanine debt occurs when a hybrid debt issue is subordinated to another debt issue from the same issuer.

* Mezzanine debt has embedded equity instruments attached, often known as warrants, which increase the value of the subordinated debt and allow greater flexibility when dealing with bondholders.

* Mezzanine debt is frequently associated with acquisitions and buyouts, for which it may be used to prioritize new owners ahead of exisiting owners in case of bankruptcy.

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