Greenfield projects. What is it and why is the Development Bank of Kazakhstan needed here?

The most difficult thing is to get financing for projects “from scratch”, but such projects are needed in order to ensure the growth of the real gross domestic product in the country. Zulfiya Zeinesheva, Managing Director of DBK, told about how many Greenfield projects are in the loan portfolio of the Development Bank of Kazakhstan and how this area is developing now.

Зульфия Зейнешева

Greenfield projects can be described as projects that create new assets “in the open field”, “from scratch”. As a rule, they are structured using project financing mechanisms when existing industrial groups or companies create new subsidiaries. Often, there is no suitable infrastructure needed to launch enterprises in the project implementation areas: the territory is not built up, is not equipped with communications, engineering networks are being laid for the first time, logistics with construction sites is not established. However, Greenfield projects are significantly more attractive to investors than classic brownfield projects for a number of reasons - when a new project is implemented by modernization or expansion of the existing production assets.

First, the amount of investment in the re-equipment of old enterprises may exceed the cost of starting a project “from scratch”, because here it is necessary to take into account the cost of conducting technical and environmental surveys, and the cost of bringing existing production facilities in line with modern norms and standards. Greenfield projects allow investors at the construction stage to provide engineering solutions for the features and needs of the launched enterprise, without having to adapt to the existing infrastructure. Secondly, from a legal point of view, new project companies without a history are transparent to investors, since the Greenfield project is actually a system of contracts and agreements that ensure the creation of a new asset, and accordingly all participants can distribute risks, fix all obligations and conditions in the most appropriate way for all parties.

Greenfield projects are often considered as high-risk, due to the fact that they are created “from scratch”. The construction period takes a long time, respectively, for both investors and lenders, success will depend on the timeliness of the construction of the asset, the operating cash flows from which, as a rule, are the main source for both investment income and loan repayment. At the same time, banks do not have enough resources and the ability to manage the risks of the construction phase of the project and monitor the credit rating of such borrowers. Second-tier banks, due to the presence of uncertainty factors, are reluctant to finance such projects. However, the Development Bank has been working in this direction for many years and has accumulated sufficient competencies to assess construction risks at the stage of application consideration, as well as monitor their level during construction.

“The risk assessment procedure for such projects in DBK consists not only in a deep and comprehensive analysis of the elaboration of all project aspects and the accuracy of forecasting future cash flows, but also in working out, together with the investor, the most appropriate structure and scheme for the project implementation, including in the project agreements and contracts conditions that minimize the risks of the investment phase, primarily for the investor, and not just the bank. That is, we use the opportunity to structure the project “from scratch” as an advantage. The Bank has developed and successfully applied mechanisms for monitoring project implementation and cost control, as well as tools for sharing risks and fixing responsibility between all project participants,” said Zulfiya Zeinesheva, Managing Director of DBK.

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Currently, the Bank’s portfolio includes 27 Greenfield projects, or 50% of the total loan portfolio accounted for by investment projects - these are major industrial projects in our country, including: a plant for the production of primary aluminum and a complex for the production of railway wheels in the Pavlodar region, a plant for the production of sodium cyanide with a capacity of 15,000 tons per year in Karatau, poultry farms for growing broilers in Akmola region, rail and structural steel plant in Aktobe, the construction of the Aktogay MPP in East Kazakhstan region, a high-tech ferrosilicon production plant in Karaganda, the Saryarka main gas pipeline, the construction of a processing plant and the Saryarka ferroalloy plant with agglomeration plant in Karaganda, a Hyundai passenger car production plant in Almaty, etc.

Most of the Greenfield projects of DBK are launched in the manufacturing industry, while most of them are export-oriented enterprises – 71% of their revenue for 2020 is accounted for by export. 13 thousand working places were created at the launched enterprises.

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The most striking examples of Greenfield projects launched are those in the field of “green” energy. For example, in 2017, the Development Bank supported the construction of a wind power plant of CATEK Green Energy LLP with a total capacity of 100 MW, the construction of which was completed in 2020. At the moment, “the money box” of successfully commissioned greenfield projects in the field of renewable energy include three solar power plants – in the Turkestan and Almaty regions.

“Currently, DBK is stepping up its participation in project financing implemented through public-private partnerships. Thanks to this tool, which is actively developed by the state, the sales risks of the project can be significantly reduced, while the Development Bank, in turn, using the competencies and established risk management mechanisms of the investment phase, ensures that the state partner minimizes such risks,” emphasizes Zulfiya Zeinesheva, Managing Director of DBK.

According to most experts, the advantages of such projects are numerous, but their biggest advantage is that Greenfield projects are an effective development tool not only for business, but also for society as a whole, as they enable social capital to progress. In other words, since the launch of Greenfield projects involves the creation of associated infrastructure and the creation of new production facilities, they open up opportunities, contributing to the multiplier effect of the development of both the economy of the project implementation region and related industries. For example, there are new jobs, new replenishment sources of local budget, new demand for resources from the Greenfield project and the opportunity to develop related businesses.

More information about DBK’s credit instruments can be found on the Bank’s website https://www.kdb.kz/services/investment-projects/

Greenfield projects can be described as projects that create new assets “in the open field”, “from scratch”. As a rule, they are structured using project financing mechanisms when existing industrial groups or companies create new subsidiaries. Often, there is no suitable infrastructure needed to launch enterprises in the project implementation areas: the territory is not built up, is not equipped with communications, engineering networks are being laid for the first time, logistics with construction sites is not established. However, Greenfield projects are significantly more attractive to investors than classic brownfield projects for a number of reasons - when a new project is implemented by modernization or expansion of the existing production assets.

First, the amount of investment in the re-equipment of old enterprises may exceed the cost of starting a project “from scratch”, because here it is necessary to take into account the cost of conducting technical and environmental surveys, and the cost of bringing existing production facilities in line with modern norms and standards. Greenfield projects allow investors at the construction stage to provide engineering solutions for the features and needs of the launched enterprise, without having to adapt to the existing infrastructure. Secondly, from a legal point of view, new project companies without a history are transparent to investors, since the Greenfield project is actually a system of contracts and agreements that ensure the creation of a new asset, and accordingly all participants can distribute risks, fix all obligations and conditions in the most appropriate way for all parties.

Greenfield projects are often considered as high-risk, due to the fact that they are created “from scratch”. The construction period takes a long time, respectively, for both investors and lenders, success will depend on the timeliness of the construction of the asset, the operating cash flows from which, as a rule, are the main source for both investment income and loan repayment. At the same time, banks do not have enough resources and the ability to manage the risks of the construction phase of the project and monitor the credit rating of such borrowers. Second-tier banks, due to the presence of uncertainty factors, are reluctant to finance such projects. However, the Development Bank has been working in this direction for many years and has accumulated sufficient competencies to assess construction risks at the stage of application consideration, as well as monitor their level during construction.

“The risk assessment procedure for such projects in DBK consists not only in a deep and comprehensive analysis of the elaboration of all project aspects and the accuracy of forecasting future cash flows, but also in working out, together with the investor, the most appropriate structure and scheme for the project implementation, including in the project agreements and contracts conditions that minimize the risks of the investment phase, primarily for the investor, and not just the bank. That is, we use the opportunity to structure the project “from scratch” as an advantage. The Bank has developed and successfully applied mechanisms for monitoring project implementation and cost control, as well as tools for sharing risks and fixing responsibility between all project participants,” said Zulfiya Zeinesheva, Managing Director of DBK.

Currently, the Bank’s portfolio includes 27 Greenfield projects, or 50% of the total loan portfolio accounted for by investment projects - these are major industrial projects in our country, including: a plant for the production of primary aluminum and a complex for the production of railway wheels in the Pavlodar region, a plant for the production of sodium cyanide with a capacity of 15,000 tons per year in Karatau, poultry farms for growing broilers in Akmola region, rail and structural steel plant in Aktobe, the construction of the Aktogay MPP in East Kazakhstan region, a high-tech ferrosilicon production plant in Karaganda, the Saryarka main gas pipeline, the construction of a processing plant and the Saryarka ferroalloy plant with agglomeration plant in Karaganda, a Hyundai passenger car production plant in Almaty, etc.

Most of the Greenfield projects of DBK are launched in the manufacturing industry, while most of them are export-oriented enterprises – 71% of their revenue for 2020 is accounted for by export. 13 thousand working places were created at the launched enterprises.

The most striking examples of Greenfield projects launched are those in the field of “green” energy. For example, in 2017, the Development Bank supported the construction of a wind power plant of CATEK Green Energy LLP with a total capacity of 100 MW, the construction of which was completed in 2020. At the moment, “the money box” of successfully commissioned greenfield projects in the field of renewable energy include three solar power plants – in the Turkestan and Almaty regions.

“Currently, DBK is stepping up its participation in project financing implemented through public-private partnerships. Thanks to this tool, which is actively developed by the state, the sales risks of the project can be significantly reduced, while the Development Bank, in turn, using the competencies and established risk management mechanisms of the investment phase, ensures that the state partner minimizes such risks,” emphasizes Zulfiya Zeinesheva, Managing Director of DBK.

According to most experts, the advantages of such projects are numerous, but their biggest advantage is that Greenfield projects are an effective development tool not only for business, but also for society as a whole, as they enable social capital to progress. In other words, since the launch of Greenfield projects involves the creation of associated infrastructure and the creation of new production facilities, they open up opportunities, contributing to the multiplier effect of the development of both the economy of the project implementation region and related industries. For example, there are new jobs, new replenishment sources of local budget, new demand for resources from the Greenfield project and the opportunity to develop related businesses.

More information about DBK’s credit instruments can be found on the Bank’s website https://www.kdb.kz/services/investment-projects/

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