SME’S ACCESS TO EXTERNAL FINANCE IN DBFM CONTRACTS

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SME’S ACCESS TO EXTERNAL FINANCE IN DBFM

CONTRACTS

by

DAAN DELGER

Supervisors: dr. C.H.M. Lutz Mr. P. Wierckx

University of Groningen

Faculty of Economics and Business

MSc Small Business & Entrepreneurship

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Preface

Before you lies my graduation research of my master’s program in the field of small business and entrepreneurship. I have chosen to do this research in combination with an internship, because I prefer the more practical approach the business world has to offer, next to the analytical approach intended by the university. I was offered an internship at a medium sized construction and civil engineering company named de Vries & van de Wiel to do my research. I thankfully accepted their offer and I have worked together with the company and several employees of de Vries & van de Wiel with pleasure for seven months.

I wish to thank several people of de Vries & van de Wiel for their cooperation and guidance during the process of writing this research and helping me graduate from my master’s program. First of all, I wish to thank Pieter Wierckx, who was my internship supervisor during my work. Mr. Wierckx is the financial manager of de Vries & van de Wiel. I am grateful for his financial view on the matter, as well as his extensive background knowledge in the business world of construction and civil engineering and his critical eye when reviewing my research. Furthermore, I wish to thank Dirk Jan de Jong, Harm-Jan Wilzing, Paul Ooteman, Carla Dekker and Jan Mark van Mastwijk for their aid and cooperation during my time at de Vries & van de Wiel.

I also wish to thank Peter Koopman of Rabobank, Geert Wouters of Financing Worldwide, Eric Jan van der Does and Jan van der Doelen of ING and Sjerp Twijnstra from the Dutch department of Infrastructure and Environment for their time and cooperation during the interviews that I conducted with them.

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Abstract

This research focused on the ability of SME’s in the construction sector to gain access to external finance from commercial banks for financing DBFM contracts. Combining literature review, case study analysis and in-depth interviews, it was found that SME’s do not have the scale to execute DBFM contracts on their own; therefore they must work together with other companies. It was found that information asymmetry decreased loan accessibility. This effect can be reduced using equity, collateral, covenants and the SME-financier relationship as instruments to decrease information asymmetry. As this is decreased, loan accessibility increases and cost of financing decreases. These findings indicate opportunities for SME’s to participate in the financially attractive construct of DBFM contracts. The SME-financier relationship was deemed most important. The longer the relationship lasts, the more trust and transparency both parties have to one another, thereby decreasing information asymmetry. Another key criterion is a well-structured business case including all contract relevant information. If the business case is more complete, information asymmetry is lowered, thereby increasing loan accessibility and decreasing cost of finance. When the equity share is higher, information asymmetry is decreased as the financial requirement is lower. However, a strong covenant used by financiers is a minimum debt/equity ratio of two-third debt and one-third equity. The long term contract concessions with the public party in DBFM contracts are also vital in decreasing information asymmetry. The certainty of income payments is an excellent form of collateral, as the uncertainty of non-payment is practically nihil, thereby decreasing information asymmetry drastically. The paper is ended with a recommendation chapter for the construction company where this research was conducted.

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List of figures and tables

Table 1: the advantages of DBFM contracts compared to traditional construction contracts ... 18

Table 2: the disadvantages of DBFM contracts compared to traditional construction contracts .... 19

Figure 1: conceptual model ... 27

Table 4: overview of key information of the theoretical harbor case ... 50

Table 5: overview of key information of the Waddenzee case ... 59

Table 6: overview of relevant cases and their key information ... 67

Table 7: expectations vs. results case study discussion, harbor case ... 75

Table 8: expectations vs. results case study discussion, Waddenzee case ... 76

Table 9: income statement traditional form, E&C saneringen ... 93

Table 10: balance sheet traditional form, E&C saneringen ... 93

Table 11: cash flows traditional form, E&C saneringen ... 93

Table 12: income statement scenario 1, E&C saneringen ... 94

Table 13: balance sheet scenario 1, E&C saneringen ... 94

Table 14: cash flow calculation scenario 1, E&C saneringen ... 94

Table 24: income statement scenario 1, theoretical harbor case ... 98

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Table 28: balance sheet scenario 2, theoretical harbor case ... 99

Table 29: cash flow overview scenario 2, theoretical harbor case ... 99

Table 30: income statement scenario 3, theoretical harbor case ... 100

Table 31: balance sheet scenario 3, theoretical harbor case ... 100

Table 32: cash flow overview scenario 3, theoretical harbor case ... 100

Table 33: overview of costs per period, traditional form Waddenzee project ... 101

Table 34: income statement scenario 1, Waddenzee project ... 101

Table 35: balance sheet scenario 1, Waddenzee project ... 101

Table 36: cash flow overview scenario 1, Waddenzee project... 101

Table 37: income statement scenario 2, Waddenzee project ... 102

Table 38: balance sheet scenario 2, Waddenzee project ... 102

Table 39: cash flow overview scenario 2, Waddenzee project... 102

Table 40: income statement scenario 3, Waddenzee case ... 103

Table 41: balance sheet scenario 3, Waddenzee case ... 103

Table 42: cash flow overview scenario 3, Waddenzee case ... 103

Table 43: Core variables and question indicators for financial experts ... 105

Table 44: Core variables and question indicators for Ministry of Infrastructure and Environment expert ... 107

Table 45: Question indicators and interview questions, financial experts ... 107

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Chapter 1 1.1: Introduction

Design Build Finance Maintain (DBFM) contracts are becoming more and more attractive in the construction sector. A DBFM contract is a contract where the aspects of design, build, finance and maintenance of a project are combined and the responsibilities of executing these aspects are handed over from a public party to a private party (Kenniscentrum, 2004). This is done by making agreements in the contract what the actual result of the project must be for the different aspects. It is output based instead of input based; the result must be sufficient to the imposed conditions instead of a concept delivered for further construction. The public party no longer buys a road or a building, but it pays, during the contract term, for the availability of the construction (Algemene Rekenkamer, 2013).

For example, in the case of a motorway construction, the result must be a transporting infrastructure unit of a minimum capacity and quality between points A and B instead of a piece of asphalt of a certain kind with roadblocks of a certain kind. This way, the contractor has, within predetermined conditions, a lot of freedom in completing this project. The contractor can be a single company but is often a consortium of various companies working on the project together. Especially with smaller sized enterprises, consortiums are often formed to be able to meet the high demands and criteria imposed by the public party for DBFM contracts (S. Twijnstra, personal communication, 10/02/2014). The contractor or consortium can apply the company’s knowledge and creativity to manage the four elements of the contract as effective as possible. Because the design, build, finance and maintenance are in the hands of the same contractor, he can adjust each part of the contract to each other in order to decrease cost (rijkswaterstaat.nl).

DBFM contracts are especially interesting for small and medium sized enterprises (SME’s). Because the contract has a length of up to 30 years, the contractor or consortium is ensured of a periodical income source for the whole of the contract’s length. This is beneficial for the company’s growth. Also, because of the long contract length, the businesses are able to build up a strong relationship with the public entity, possibly resulting in more contract agreements. It is thus important for small and medium sized businesses to gain access to these contracts.

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be if the existing contract would be a DBFM contract? How would an external financier evaluate the contract if it would be DBFM? Would it generate extra risk, and how are these dealt with? What control mechanisms are there to secure the financial contract? These questions will be answered in this research paper.

The academic knowledge on these kinds of integrated contracts and how SME’s finance them is still largely unknown. The gap in the literature is that little is known about the SME-financier relationship where there is a guaranteed cash flow paid by the public party to the private party for the delivered services stated in the contract for the whole contract’s length. Thus, the private party would be able to give a guarantee to the financial institution of having a fixed income. This would possibly increase the probability for SME’s to gain access to indirect finance, because part of the risk is covered with the periodical payments from the public party. This contract construction is unique and little is known about this kind of integrated contracts.

Where research in DBFM(O)1-contracting has been done over a whole business group, single projects have not been under investigation. Investigation of single contracts or projects could provide other insights into some specific effects of DBFM(O)-contracts (de Vries, 2011). I expect that single project investigation will result in discovery of several practical problems that need to be addressed. I will lay the focus on the financing problems for SME’s. Such insights are valuable because it may uncover directions for improving and streamlining current integrated contracts, which eventually may result in (further) time, and cost gains, but also in increased quality of products (Lenferink, Tillema & Arts, 2012). Further research is needed to have a better understanding of procurement models like DBFM (Straub et al., 2012). Thus, it is important that this field is researched further.

The theoretical interest of the organizational consequences of these DBFM contracts is that this concept of contracting is relatively new to the construction sector (Klijn, 2009). Thus, it is important that the different relationships existing in DBFM contracts are researched further. This research paper will specifically focus on the SME contractor relationship with the external financier. I expect that the relationship between the SME and the external financier is of vital importance for the SME in order to gain access to finance for the DBFM contract. This is because the relationship and reputation aspects for SME’s may be beneficial in negotiating financial contracts. I expect that if the relationship with the external financier is well established, it becomes easier for them to attract external finance.

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1.2: Research question

The knowledge problem in this literature field is stated above. The literature field on this subject is not much explored (Klijn, 2009; Lenferink, Tillema & Arts, 2012; de Vries, 2013) and there are some organizational issues that need to be addressed (Jensen and Stonecash, 2005; Nilsson, 2009). Furthermore, there is a shortage of studies comparing the merits of DBFM contracts with those of conventional contracts (Boers et al., 2013). I will participate in an internship in a construction company which is specifically interested in the contractor-financier relationship in DBFM contracts. This way, I can expand the literature field by gathering qualitative data on this issue. My contribution will be that I will address the literature gap on this issue in the construction sector. Therefore, the research question is:

How can SME’s in the construction sector gain access to financial capital to finance DBFM contracts? Sub questions that help answer the research question are:

1. What type of financial providers are there for SME’s in the construction sector to gain access to financial capital for a DBFM contract?

There are several ways how SME’s in the construction sector can gain access to financial capital. Some examples are business angels, venture capitalists, public equity, trade credit, financial institution loans, private placements and public debts (Berger & Udell, 1998). I expect that in the construction sector, especially for DBFM contracts, venture capitalists and financial institution loans are ways to gain access to financial capital. Because of the long-term contracts, these kinds of equity providers can generate income over a longer period of time which they are interested in. Because these contracts are more suitable for established SME’s, I do not expect business angels to invest in these kinds of projects, as they are more known to finance business start-ups. I will research what kinds of financiers are most suitable for this type of finance by combining existing literature with qualitative data gathering.

2. What criteria do financiers have for SME’s in the construction sector in order to provide the funds for a DBFM contract?

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3. How do these criteria differ from large companies, and why are they different?

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1.3: Methodology

To provide an answer for the research question and its sub questions described above, a qualitative empirical research was executed consisting of three parts: a literature review, a case study analysis and in-depth qualitative interviews with experts. In this qualitative empirical research, it is tried to understand and explain the general scope of the situation from the inside about external financing in DBFM contracts for SME’s. The theories developed in the literature review gave a foundation for the qualitative empirical research in the cases of data collection, question formulation, observing, analyzing and testing the findings. The ‘how’ question of the matter was researched through an analytical framework and an open research method; these are key factors for qualitative empirical research (Wester et al., 2000). The analytical framework was not fully developed beforehand, but during the research process it was slightly reformed after the right phenomena and answers were found. The open research method is related to the self-developing analytical framework, where it is shifted between reflection, observation and analysis. The problem statement and research questions were sharpened during the research to fit in with practice as fully and extensively as possible.

1.3.1: Literature review

A literature review was conducted to map the existing knowledge on the subject. With this review, parts of the research question can be answered. The opportunity of reviewing existing literature presents the opportunity to make unforeseen discoveries, which could help future research to identify areas where the need is greater (Adolphus, 2011). Online academic article databases such as Business Source Premier, Web of Science and Google Scholar were accessed to find relevant academic articles and books on the subject. Especially, articles in high-quality academic magazines such as Small Business Economics and Journal of Banking and Finance were researched in detail to build a solid foundation for the conceptual model that was developed.

To give a complete answer to the research question, a case study analysis was also performed in combination with several qualitative interviews with experts of the corresponding cases, the public sector (which were the contract providers of the cases) and external financers.

1.3.2: Case study analysis

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valid (Eisenhardt, 1989). The cases were theoretically sampled to focus the effort on useful cases that extend the theory on DBFM contracts and external financing. Because of the limited number of cases which could be studied, it makes sense to choose cases which are particularly interesting and fit the theory best to replicate or extend the emergent theory (Eisenhardt, 1989).

In the frame of this research, the cases that were selected were construction projects with the design and build (D&B) contract type, which could be compared to the DBFM model. It was analyzed how the cash flows are going and what the costs of capital and organization are in these existing projects. When this image is clear, it can be analyzed how these costs would have flown if the project was a DBFM project. This way, the project’s original costs can be compared with a DBFM model and their differences and similarities can be discovered. This gives a good image of in which areas a DBFM contract differs from a traditional contract in a practical sense.

The first case that emerged was the ‘E&C saneringen’ case (engineering & construct sanitation). It is a relatively small construction project, in financial as well in time concerns. This case gives a good example of a small-scale project with relatively little cash flows. It is thus relatively easy to analyze this case and compare it to the DBFM model. The case was used as a start-up and testing case for the other cases analyzed.

The second case that was analyzed is a combination of two harbor cases, combined into one theoretical harbor case. This case is a more traditional design and build project, where large investments are needed in the beginning of the time period, and in later periods costs are relatively smaller. Thus, this case can be used as a good example to research if an SME would be able to get external finance for such a project.

The third and last case is called the ‘Waddenzee case’. This project was a dredging task of several waterways and harbors in the Wadden Sea, located in the North Western part of the Netherlands. Here, maintenance plays a larger role: the waterways and harbors had to be held at a certain depth, as regulated in the contract. Thus, in this case the maintenance comes more forward, making it more comparable to a standard DBFM contract.

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1.3.3: Interviews

The experts of the cases provide useful knowledge and insights to give a complete and clear overview of each case to the very detail. This helps the case study analysis to be thorough and it provides the best results. The corresponding people of the public sector help set up the different scenarios of the cases if it were to be a DBFM contract. They give their insights in which kinds of scenarios are most attractive to them and which would be most realistic. This helps strengthen the cases and their scenarios, which are then discussed with external financers.

More data was collected on the financial aspect of the DBFM contracts for small- and medium sized enterprises. To gather this data, qualitative, semi-structured interviews were conducted with financial providers. Financial experts from commercial banks were interviewed, as well as an intermediary between banks and construction companies. Only these people were interviewed, as these are the only financial providers for de Vries & van de Wiel, because of their company size. Thus, venture capitalists are let out of scope in this paper. Questions were asked about their view on DBFM contracts, especially concerning small- and medium sized enterprises. The interview questions were formulated by writing an interview guide based on Emans (2004). The interview guide and the questionnaire can be found in appendix 2.

Using the findings from the case study analysis, they were asked if they would be interested in funding the existing project if it would have been a DBFM project, and why they would be interested or why they would not. Next to that, other interview questions were asked to strengthen or weaken the relationships explained in the conceptual model (see figure 1). These are questions that were derived from the literature review. The independent variables ownership, collateral, covenants, SME-financier relationship, reputation and monitoring and screening are tested for their effect on information asymmetry. In their turn, it is tested for their effect on adverse selection. Thereafter, adverse selection is tested for its effect on loan accessibility for SME’s which is then tested for its effect on the possibility for SME’s to gain access to external financing for DBFM contracts. It is important to gather information on what requirements and demands they ask from the SME, where they look at when they are going to provide a loan to an SME with such a contract and what model of selection they use for loan provision to SME’s in such a situation (given the fact that the SME already possesses the right to execute the DBFM contract).

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importance that they do everything in their ability to successfully obtain a financial loan. Ultimately, a conclusion and a complete answer to the research question and its sub questions are provided. A thorough analysis of the interviews that were held with the several financial experts was done according to the qualitative content analysis described by Flick (2006). The interview results were paraphrased to clarify its meaning. This gives information on a higher level of abstraction. The paraphrased interview results and its interpretation can be found in the chapter ‘interviews with financial experts’. The full answers of the interviewees can be found in appendix 3. The answers were slightly rearranged to better correspond with the interview questions. The findings of the interview with the Dutch Ministry of Infrastructure and Environment expert are used throughout this paper for extra clarification or argumentation.

The results of this analysis have an effect on the overall generalizability of this research. From the analysis, it was concluded that certain factors have a strong, weak or no influence on the effect of information asymmetry on loan accessibility for SME’s in DBFM contracts. This does not explicitly mean that this would always be the case for all SME’s, but basically that this research with this method found or did not find these effects. It may be the case that for SME’s, for example in another sector or another geographical region, the effects are different in strength or prominence. This research using this method found the specific results presented below. Note that this analysis was done with cases specifically from the company of de Vries & van de Wiel, and that the findings are most applicable to this firm.

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Chapter 2 2.1: Literature review

2.1.1: SME’s and DBFM contracts

As stated earlier, a DBFM contract is a contract where the aspects of design, build finance and maintenance of a project are combined (Kenniscentrum, 2004). DBFM contracts are currently the standard for complex projects at the national level in The Netherlands, and are increasingly applied (Lenferink, Tillema & Arts, 2012).

DBFM contracts are a form of public-private cooperation, where:

 the different phases of the projects are contracted out to a consortium of private businesses, in one integrated contract;

 contracts have a long duration, usually between fifteen to thirty years;

 the private consortium is responsible for the project’s financing, and the consortium is paid given a periodical compensation for the delivered services during the lifetime of the contract;  risks of the project are divided between the public and the private parties (Algemene

Rekenkamer, 2013).

The project is often contracted out to a consortium of private businesses rather than one to spread risk. The public party pays the private contractor (consortium) over several years for the delivered services. This way, the contractor is forced to perform at their best on every day of the contract’s length. The length of a DBFM contract can vary from 15 up to 30 years. Instead of getting a ‘lump sum’ at the beginning of the project, where the motivation to perform at your best every day is diminished, the contractor gets a periodical fee for the delivered services for the whole contract’s length. This shifts the responsibility of the delivery of the project from the public party to the private contractor. Next to the periodical payments, public parties also provide one-time payments (milestone payments) if certain goals in the contract are met. The height of these payments varies from one third to one sixth of the total contract sum (Algemene Rekenkamer, 2013; Boers et al., 2013). Because the contracts are developed competitively, the private parties are incented to use the offered working space optimally. If they do not do this, another private contractor will win the contract.

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research shows that the first projects show possible efficiency gains, increased project control and are delivered better in time and within budget as compared to traditional contracting (Committee Ruding, 2008; Dutch Ministry of Finance, 2010; Klijn, 2009; WB Consulting, 2009). The most important critical success factors regarding the performance of these public-private partnership contracts are a strong private consortium, appropriate risk allocation and financial market availability (Li et al., 2005). Projects initiated with such integrated contracts can lead to more sustainable infrastructure development because of the lifecycle optimization incentives provided by the linked contract stages of design, construction and maintenance.

Indications have been found that the conditions of DBFM projects shape an innovative environment. The supposed conditions to achieve innovations within DBFMO projects compared to traditional projects are the integration of activities and therefore a more collaborative environment, the use of output specifications, the possibility of optimizing costs and performance through whole life commitments and risk transfer from public to private parties (Straub et al., 2012). The integration of stages in DBFM contracts improves relations between actors because interests are aligned with a shared common goal within the contract and consortium. However, the closed character of procurement can obstruct the involvement of public and local government, also in later stages (Lenferink, Tillema & Arts, 2012).

DBFM contracts prove to enhance interaction between stages (Lenferink, Tillema & Arts, 2012). Integrated DBFM contracts can lead to more inclusiveness through lifecycle optimizations, inspired by lifecycle costing in procurement and lifecycle management in later stages. Life cycle costs in DBFM contracts can be reduced when investment and exploitation costs are brought in line with one another (Straub et al., 2012).

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Traditionally, design, construction, and maintenance stages are separated and poorly integrated, leading to sub optimizations (Dorée, 2001). In DBFM contracts, the contractor delivers a service (i.e. availability of infrastructure) during a period that can span 15 to 30 years. Through integrated contracts, government distributes responsibilities to other actors, e.g. local stakeholders or consortia of private parties (Lenferink, Tillema & Arts, 2012). It is expected that private contractors are able to identify and develop innovative facilities, deliver more quickly and at lower cost, and can provide private funding and operate facilities more efficiently (Savas, 2000).

The different activities of DBFM contracts are often subcontracted separately by the consortium, resulting in fragmented interests and non-collaborative working, as is the case in traditional projects (Leiringer et al., 2009). There also appears to be a lot of inefficiencies between the different departments in terms of collaboration and the strive to optimize project outcomes (Sogol, 2010). It is hard to calculate the net present value of the costs and benefits of a long-term DBFM project. In many cases, audit offices found that the discount rate applied was either too high or too low, seemingly making the project respectively more preferable with a higher discount rate when compared to other project types and vice versa (Boers et al., 2013).

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Advantage Description Source Lower cost/

increased efficiency

The projects are better delivered within the time and cost limits compared to traditional contracts; the contractor can adjust each part of the contract to each other to decrease cost. Private contractors are able to identify and develop innovative facilities, deliver more quickly and at lower cost, and can provide private funding and operate facilities more efficiently. DBFM contracts prove to enhance interaction between stages.

Dutch Ministry of Infra-structure & Environment, 2011; rijkswaterstaat.nl; Committee Ruding, 2008; Dutch Ministry of Finance, 2010; Klijn, 2009; WB Consulting, 2009; Savas, 2000; Lenferink, Tillema & Arts, 2012; Straub et al., 2012; Blayse & Manley, 2004; Akintoye et al., 2005; Leiringer, 2006

Increased innovation

Contractors can apply the consortium's combined knowledge and creativity to manage the four elements of the contract as effective as possible whereas this would not be achieved if the companies worked separately. The collaborative environment, the use of performance specifications, optimizing life cycle costing and risk transfer between public and private partners are of influence on an innovative environment of DBFM projects.

rijkswaterstaat.nl; Straub et al., 2012; Lenferink, Tillema & Arts, 2012; Blayse & Manley, 2004; Akintoye et al., 2005; Leiringer, 2006

Better quality of end product

Product quality increases because of the application of the consortium's combined knowledge that would have worked separately in case of a traditional build project.

Lenferink, Tillema & Arts, 2012; Straub et al., 2012; Blayse & Manley, 2004; Akintoye et al., 2005; Leiringer, 2006

Partnership creation

Due to the long contract's length, a company is able to build a strong partnership with the public entity and other consortium members, possibly resulting in more contract agreements

Lenferink, Tillema & Arts, 2012

Risk spreading

The PPP approach is most effective if the party that is best able to control a particular risk also bears the risk in question. This can be beneficial to a public client because the chances for budget overruns are smaller

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Table 2: the disadvantages of DBFM contracts compared to traditional construction contracts

Disadvantage Description Source

Private financing

A key part of DBFM contracts is that the project is financed by the private party. This factor especially gives difficulties for small and medium sized enterprises as it is traditionally harder for them to acquire financial capital, thus making it harder for them to attain a DBFM contract

Lenferink, Tillema & Arts, 2012;

Algemene

Rekenkamer, 2013, Dutch Ministry of Finance, 2010 Inflexibility Because of the long-term contract, flexibility is low because

all parties must abide to the rules set at the start of the contract, whereas changes and/or modifications are difficult to implement and may lead to enormous cost differences

Algemene Rekenkamer, 2013, Dutch Ministry of Finance, 2010; Roosjen, 2013 Obstruction of government involvement

The closed character of procurement of a DBFM contract may block governments to get involved in the project

Lenferink, Tillema & Arts, 2012

Maintenance cost

estimation

It is very difficult to estimate how high the maintenance costs are going to be. Non-building-related costs are usually financed separately, if they are budgeted at all

Klijn, 2009

Limited experience

Savings for DBFM contracts are often just estimates, and no one knows in advance if the savings will be realized because there is (as yet) only limited experience with long term DBFM contracts

Deloitte, 2006

Net present value calculation

It is hard to calculate the net present value of the costs and benefits of a long-term DBFM project. In many cases, audit offices found that the discount rate applied was either too high or too low, seemingly making the project respectively more preferable with a higher discount rate when compared to other project types and vice versa

Boers et al., 2013

Comparison with

traditional contracts

Making a careful comparison between DBFM(O) contracts and their more traditional procurement counterparts is extremely difficult. This is because of the large number of unknowns, the long life of the project, the high cost of mitigating the risks involved, the difficulty of making accurate projections of future market prices and the absence of comparative data

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It must be kept in mind that DBFM contracts traditionally are relatively large in size. A single SME faces extreme difficulties to engage in a standard DBFM contract alone (S. Twijnstra, personal communication, 10/02/2014). Thus, opportunities for SME’s in DBFM contract must be searched for in the form of a consortium. In a consortium, the contract’s high demands and criteria can be met more easily. Also, the corporate risk of the project is spread among the members of the consortium, as well as the financial risk for both the consortium members and the external financial provider. Another opportunity for SME’s to engage in a DBFM contract is in the form of a sub-contractor for a larger company. Because of the long-term contract’s length of a DBFM contract, corporate continuity is strengthened due to the fact that they are ensured of work in progress for a long period of time (S. Twijnstra, personal communication, 10/02/2014).

The fact that DBFM contractors must finance the project externally, combined with the difficulties for SME’s to attain these external financial resources, makes this the major disadvantage to DBFM contracts (see table 2). Although DBFM contracts theoretically contain a lot of advantages (see table 1), it is very difficult for SME’s to successfully gain access to these contracts. Most of the research on DBFM contracts and external financing methods is done from a public or policy making point of view (see table 2). There is little research on this topic from an organizational point of view. This paper helps addressing this literature gap by researching the possibilities and opportunities for SME’s in these kinds of integrated contracts.

Because payments to the private contractor are made after completion of construction, the resources needed for the design and build phases must be financed by the contractor beforehand. The contractor must thus acquire financial capital to fund the construction process. This can either be done with internal (equity) or external funds (e.g. bank loans). Small- and medium sized enterprises are limited in the extent of their internal earnings and in their potential to issue equity. Therefore, they are more dependent upon external financing (Scholtens, 1999). However, SME’s may not be able to obtain these funds as the financial market profiles SME’s as high risk and uncertainty, making them less willing to provide these funds (Scholtens, 1999). Thus, it is interesting how SME’s deal with these financial resource constraints in order to successfully complete these types of contracts.

2.1.2: Financing options

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for company failure and bankruptcy. As a result of these relatively high risks, compared to larger enterprises, they have to pay higher interest rates to financial institutions when they attain financial resources to cover for these risks. Small firms often are relatively young so they have not been able to cumulate retained profits. As a result, internal finance is available as a funding source only in the later investment stages (Scholtens 1999). Small and medium sized enterprises are financially more constrained than large firms and are less likely to have access to formal finance (Beck & Demirguc-Kunt, 2006).

External financing is thus the more convenient way for SME’s to gain access to financial capital. There are several methods to gain access to financial capital. The most convenient ones are informal, venture capital, stock market, bank and government financing (Scholtens, 1999; Berger & Udell, 1998). Public offering through ownership sharing (stock market) is virtually impossible for small firms, as they often lack a track record which is needed to retain public equity (Scholtens, 1999). Thus, the stock market is not suited for small firms to gain financial capital and will not be discussed.

Informal investors provide risk capital to new and expanding enterprises, and actively support them with their know-how and experience. There are two groups of informal investors: the category of friends and relatives and the category of wealthy ex-entrepreneurs who participate in young and expanding firms, the so-called “business angels” (Scholtens, 1999). Informal investors mostly invest in start-up micro firms which are relatively very young of age (Berger & Udell, 1998). The older and larger a firm gets, the less likely it will be that informal finance is used in SME’s.

Venture capital is risk capital of specialized firms outside the organized financial markets. It is their core business to get thorough insight into the risks associated with specific enterprises (Scholtens, 1999). Venture capital is usually provided as equity or as a convertible or subordinated loan (Scholtens, 1999) and is a more formal form of finance than business angel finance (Berger & Udell, 1998). Venture capitalists generally invest in relatively small firms that show high growth potential but have a limited track record. Close relationships between firms and venture capitalists appear to be a feasible instrument for SME’s to raise finance (Scholtens, 1999). However, venture capitalists actually extend relatively little finance to firms in the early stages compared to other financial options (OECD, 1996; Brouwer & Hendrix, 1998; Berger & Udell, 1998).

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SME’s has debt from at least one financial institution (Berger & Udell, 1998). With large and well-diversified portfolios, financial institutions can guarantee a yield to their depositors and can credibly commit themselves to monitor the return of their investment projects. Almost all (91,9%) small business debt to financial institutions is secured by collateral and guarantees of the SME (Berger & Udell, 1998). However, they are often very anxious in financing SME’s as this will - because of lacking track records - be difficult to signal to their depositors as creditworthy businesses (Scholtens, 1999). Government funding is the last discussed way of external financing for SME’s. The obvious ways of governmental regulation, also for SME’s, are taxation and the provision of subsidies and grants. This may stimulate or repress initiative and innovation in the private sector (Mankiw, 1986). However, governmental support favors high risk, large scale projects because of substantial fixed costs in complying with the government support and because of information costs (Scholtens, 1999). Public aid to SME’s has led to rather meagre results (OECD, 1995). Thus, government funding is not one of the most prominent ways for SME’s to gain access to finance.

For micro firms and start-ups, it is most convenient to access informal finance. Firms that are a little more evolved can often rely on venture capital. For all SME’s, financial institutions such as banks are a reliable option for financial resources. Governmental funding is often reserved for larger projects, something SME’s are regularly not involved in.

2.1.3: Information asymmetry

Scholtens (1999) analyzed how various control mechanisms are fit to reduce information asymmetry and how various types of capital suppliers are endowed to finance SME’s. Asymmetric information means that the parties engaging in the contract do not have equal access to all contract-relevant information (Spence, 1976). If the management has more information than outsiders, the outsiders cannot assess the true value of the firm and therefore can only assign average quality to this firm. As a result, the firm gets average terms of financing (Scholtens, 1999). Financiers will negatively adjust their financing terms, which ultimately results in a market collapse (Akerlof, 1970). This results in adverse selection between the entrepreneur and its financier with respect to its current operation, the quality of the project and/or its prospects (Leland & Pyle, 1977). To reduce these uncertainties, the investor can undertake an assessment of the entrepreneurs investment intentions (screening) and the control of his behavior during the contract (monitoring) (Scholtens, 1999).

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personally bound to the enterprise, there is no principal-agent relationship and therefore there is no agency problem. This means that the more equity the entrepreneur invests in his enterprise, the less impact the agency problem has, thus information asymmetry decreases. Adverse selection in case of debt financing may be reduced by posting collateral and covenants in debt contracts (Bester, 1985). This reduces the required interest rate and therefore tempers moral hazard. With collateral, the entrepreneur provides an ex-ante payment to the investor that improves the ex-post bargaining power of the investor (Scholtens, 1999). With covenants included in a contract, the bank has leverage in case of a default; in such a scenario, the bank expropriates collateral from the firm (Bester, 1985). The relationship between the entrepreneur and the financier is regarded crucial in financial intermediation (Fama, 1985). Improved sharing of information is beneficial for both the entrepreneur and the investor: the investor can make a better assessment of the risk associated with the entrepreneur (screening) and can control moral hazard; the entrepreneur benefits from a lower risk premium on finance and/or improved availability of credit (Scholtens, 1999). Reputation is made up of personal characteristics and the entrepreneur’s capabilities and skills and his track record (if there is one). Reputation results from a repeated game: a major self-selection device is the choice of loan maturity (Diamond, 1993). With loan maturity, it is meant that the longer (and better) the relationship with the lender, the more trustworthy the entrepreneur becomes in the eyes of the lender, thereby improving his reputation. Lending agreements may signal that the firm is trustworthy as it has proved to be a trustworthy borrower who punctually pays interest and redeems obligations (Scholtens, 1999). These four control mechanisms can help decrease information asymmetries and therefore increase their probability to gain access to financial capital from investors.

2.1.4: The SME-financier partnership

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Even though these theories imply that the effect of close firm-creditor ties on the cost of funds is ambiguous, in general, the availability of funds should increase (Petersen & Rajan, 1994). Competition can also have important implications for how much collateral firms have to provide. As borrowers have access to more competitor banks, the probability of having to pledge collateral or personal guarantees decreases (Voordecker, 2006; Beck & Demirguc-Kunt, 2006).

It is thus important for SME’s to build a relationship with one financier to take maximum advantage of partnership benefits. By producing information about the firm and using it in their credit decisions, financiers can overcome the aforementioned information asymmetry problem (Leland & Pyle, 1977). If scale economies exist in information production, and information is durable and not easily transferred, this theory suggests that a firm with close ties to financial institutions should have lower cost of capital and greater availability of funds relative to a firm without such ties (Petersen & Rajan, 1994). However, increased competition in financial markets reduces the value of relationships because it prevents a financial institution from reaping the rewards of helping the firm at an early stage (Mayer, 1988; Rajan, 1992).

Research shows that the availability of finance from institutions increases as the firm spends more time in a relationship, as it increases ties to a lender by expanding the number of financial services it buys from it, and as it concentrates its borrowing with the lender (Petersen & Rajan, 1994). It is thus highly valuable for SME’s to build and maintain their relationship with their financier in order to increase financial resource availability and negotiate better interest rates. The longer a borrower has been servicing its loans, the more likely the business is viable and its owner trustworthy (Diamond, 1991). Conditional on its past experience with the borrower, the lender now expects loans to be less risky. This should reduce its expected cost of lending and increase its willingness to provide funds (Petersen & Rajan, 1994). In longer lasting relationships, information sharing is increased, decreasing the information asymmetry problem. Cost of capital is hereby decreased and it positively influences the availability of financial resources for SME’s.

2.1.5: Pecking order theory

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more about the real profitability of the project than outsiders. Insiders tend to over-value their projects whereas outsiders have to rely on the information given by the insiders, and they usually under-value the project. Thus, entrepreneurs tend to favor internal finance over external finance (Scholtens, 1999).

When internal funding is depleted, entrepreneurs prefer debt financing over equity. External financing using debt is better than financing by equity (Myers & Majluf, 1984). Debt financing is less information-sensitive and costly than equity. Firms acquire increased access to financing options, especially debt financing, as information asymmetries dissipate over time (Mac an Bhaird, 2010). Firms should go to bond markets for external capital, but raise equity by retention if possible (Myers & Majluf, 1984). Debt over equity also signals that stock price is undervalued, showing confidence that the investment is profitable. The debtors are prior claimants and they can also use debt covenants, and therefore are less exposed to the change of overvaluation (De Vries, 2011). If the firm reaches its maximum debt capacity, the pecking order theory presumes an equity issue (Myers, 2001). Equity financing closes the hierarchical order of financial preference. It has the highest financial cost because of increased informational asymmetry (Scholtens, 1999). With equity financing, the entrepreneur includes external ownership in his project, which is unfavorable because he then also has to share profits. However, he also shares risk. Gathering equity finance also signals that stock price is overvalued.

The opportunities for using this pecking order depend on the stage in a firm’s life cycle and on the possibilities for building up retained earnings and financial slack (Scholtens, 1999). The pecking order model depends on specific assumptions and may not follow in other contexts (Myers & Majluf, 1984).

2.1.6: Life cycle costing

Because of the high level of integration in DBFM contracts, more inclusiveness can be reached through lifecycle optimizations (Lenferink, Tillema & Arts, 2012). Life cycle costing is an interesting theory to optimize project integration and decrease costs. The life cycle cost of an item is the sum of all funds expended in support of the item from its conceptions and fabrication through its operation to the end of its useful life (White & Ostwald, 1976). Thus, the LCC of a physical asset begins when its acquisition is first considered, and ends when it is finally taken out of service for disposal or redeployment (when a new LCC begins) (Woodward, 1997).

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Optimizing the trade-off between those cost factors will give the minimum life cycle cost of the asset. This process involves estimation of costs on a whole life basis before making a choice to purchase an asset from the various alternatives available (Woodward, 1997). The theory of life cycle costing is highly comparable with the DBFM principle. They both try to optimize project integration and decrease costs. Consideration of cost factors over the whole life cycle is important in both the LCC theory and a DBFM contract. The length of the DBFM contract can be seen as the life cycle of the project. Thus, life cycle costing can be applied to compare a DBFM contract with a traditional contract. Using life cycle cost theory, the financial cash flows of a DBFM contract can be compared to a traditional contract and the financial needs can be established. All the costs of the project’s operational life are considered. This gives the best overview of the different costs of the whole life cycle of the project.

This is mutually beneficial for the contractor as well as the financier of a DBFM contract. The contractor knows beforehand what costs to expect for the whole duration of the contract, rather than just the acquisition costs at the beginning of the contract. Life cycle cost of an asset can, very often, be many times the initial purchase or investment cost (Hart, 1978; Hysom, 1979). He can thus make a good estimate on how profitable the project will be.

The financier gets a good image of all the costs, uncertainties and risks of the project as well, thus it becomes easier for them to calculate potential risks. Because a lot of project information becomes transparent, the life cycle costing approach may increase the chance for SME’s to gain access to financial resources for DBFM contracts. This approach to decision making encourages a long-term outlook to the investment decision-making process rather than attempting to save money in the short term by buying assets simply with lower initial acquisition cost (Woodward, 1997).

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2.2: Conceptual model

Following the problem statement, research question and its sub questions and the literature review, a conceptual model was created to visualize the key constructs and variables and their relations of this research. The conceptual model can be seen in figure 1. Concluding from the literature review, it was found that information asymmetry reduces the loan accessibility for SME’s. Moderating factors for this relationship are ownership, collateral, covenants and the SME-financier relationship, which strengthen this relationship. Thus, ownership, collateral, covenants and the SME-financier relationship can be seen as instruments to reduce information asymmetry, thus increasing the possibility for SME’s of gaining access to external finance for DBFM contracts. These factors and their effects are explained below. It is researched if these academic findings also hold for small- and medium sized construction companies when engaging in DBFM contracts.

Figure 1: conceptual model

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In this model, the factor information asymmetry includes adverse selection and moral hazard, as theorized by Akerlof (1970). Adverse selection is part of information asymmetry where undesired results are selected due to a lack of information transparency, resulting in suboptimal outcomes. Adverse selection is reduced by screening (Scholtens, 1999). Moral hazard is a situation where one party is more willing to take higher risks, when they know that the potential cost of the risk are not for their account. In such a situation, both parties do not possess all relevant information, and misuse of this asymmetry may take place. Moral hazard is reduced by monitoring (Scholtens, 1999). Also, moral hazard can be reduced by increased entrepreneurial ownership of the enterprise by investing equity, which reduces the principal-agent relationship. Both adverse selection and moral hazard are reduced by posting collateral and covenants in debt contracts (Bester, 1985). The SME-financier relationship is crucial in financial intermediation: the better this relationship, the more information is shared between them and the lower information asymmetry gets (Fama, 1985; Scholtens, 1999). Specific SME-financier relationship information generated over time that cannot be verified by new lenders creates an informational monopoly over the firm by the current lender (Petersen & Rajan, 1994). This creates a situation where the current lender knows that the borrower is less risky than average, thus creating a lower risk premium on finance and/or improved availability of credit (Scholtens, 1999; Greenbaum, Kanatas & Venezia, 1989; Sharpe, 1990; Rajan, 1992).

Scholtens also mentions reputation as a moderator on the information asymmetry-loan accessibility relationship. However, in this model, reputation is merged with SME-financier relationship. These two factors are closely connected to each other: generally, the better the company’s reputation, the better the SME-financier relationship and vice versa. SME-financier relationship thus also includes company reputation in this model.

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Chapter 3 3.1: Case study analysis

In this chapter, a case study analysis is described on three cases, namely the ‘E&C saneringen’ case, the ‘theoretical SME-sized harbor’ case and the ‘Waddenzee’ case. Each case is described in their concerning paragraph below.

3.1.1: The model

A financial model was built in Microsoft Excel to analyze all the ingoing and outgoing cash flows for a construction project. The model is able to calculate these cash flows by manually entering all the income and cost sources in an income statement sheet. Furthermore, deriving from these income and cost sources, the model can calculate a balance sheet, the working capital and all financial activities (overdrafts and interest costs and incomes) per period for a project. Also, several parameters can be inserted, including minimum cash balance, equity to be invested, interest percentages and buyer and supplier credit terms. All numbers are rounded up or down to whole numbers. Bear in mind that this may give some round off differences in the scenario overviews. Because the model and all its parameters are fully adjustable, a DBFM-like cash flow overview can be created using existing or fictional data. The model can then calculate ratios and numbers such as profitability, net present value, payback period and enterprise value. Thus, the model is able to compare a traditional project and its cash flows with a hypothetical DBFM project using the same data but adjusting the income sources. This comparison gives important data on changes in profitability and other project ratios mentioned earlier, comparing the two contract types.

Note that this model is a simplified version of reality and there are several assumptions to be made. This limits its practical implementation. In practice, a wide range of other factors also come into play such as taxes, yearly changing inflation, changing interest rates etcetera. In order to make the case study less complicated, only the most important factors as described above are included or certain factors such as interest rates are generalized to give organized overview of reality.

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periodical payment is lower to adjust for interest and inflation. The opposite happens when cash inflows are received in a late stage of the contract.

3.1.2: Opportunities to reduce information asymmetry

After the scenario descriptions, in each case suggestions are made to reduce information asymmetry, and thereby increasing the probability of gaining external finance. These suggestions are based on the instruments that were found in the literature review that can reduce information asymmetry. This helps answering the main research question. These suggestions are formulated with the aid of the financial manager of the construction company de Vries & van de Wiel, who is also one of the supervisors of this paper. The opportunities are both from a specific point of view from the company de Vries & van de Wiel, as well as the SME construction sector in general. Below, the four instruments and their opportunities to reduce information asymmetry are explained in general. Specific opportunities for each scenario are described in their corresponding chapter.

3.1.2.1: Ownership

It is difficult for SME’s to use equity in projects as a form of a bank guarantee, since they are small by definition and thus do not have a lot of equity. Usually, the shareholders (who are the owners of the company) are used as a guarantee for the bank, and their invested equity is used for partial funding of projects. To obtain the needed equity needed to get funding for larger projects, an SME is often forced to realize an increase in capital through their shareholders or in terms of personal responsibility for the board of directors or other natural persons. Hereby, the risk of the loan is put back with the natural person. Because the board usually does not want to take unnecessary risk, ownership as a form to reduce information asymmetry in a project is of limited applicability for SME’s. Because of the company size of de Vries & van de Wiel, investing equity in relatively smaller projects is often not a problem for them. However, in larger projects, where copious amounts of equity is demanded, this may also trouble even the larger SME’s such as de Vries & van de Wiel in gathering large amounts of equity.

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Large firms usually have more equity and therefore it is relatively easier for them to retrieve external finance. Thus, often an SME must look for other ways to reduce information asymmetry as increasing ownership in a project is often difficult to realize. De Vries & van de Wiel state that they also run into these equity problems when looking for funding for larger projects.

3.1.2.2: Collateral

For financing of equipment or property, the equipment or property itself is often used as collateral for the loan. This can be seen in forms of mortgages on buildings, ships or vehicles. De Vries & van de Wiel often use their machinery such as dredging ships as collateral, as these usually have high value. Also, a claim in the form of future payments to be retrieved from a public party can be used as a certainty for the bank. Here, a part of the income payments are contractually agreed to go directly to the debt provider. This can also be done with direct debits, which are automatically used to pay interest or pay back a part of the loan.

3.1.2.3: Covenants

Examples of covenants that are used in project financing are solvability, liquidity and profitability ratios such as the proportion between equity and debt, equity and total assets, profit margin and debt and profit margin and total assets. For example, for SME’s the ratio between equity and debt often needs to be a minimum of 30%. Also, guarantees of the parent company can be used as a covenant in the contract to create more security for the debt provider. Another covenant that is commonly used is that the whole company guarantees for one single holding of the company, might something go wrong with repayment. Otherwise, the debt would only be claimable on the holding or the part of the company with which the debt agreement was made, where the rest of the company would be free of risk, making it harder for banks to reclaim their investments.

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A bank can also demand certain covenants regarding payment transactions. To get more transparency and insight in the payment systematics of a company, the most commonly used covenants are that a minimum percentage of transactions are to be processed by the bank involved, that all automatic debits are to be processed by the bank involved and that a minimum percentage (often more than half) of the project’s size is to be accommodated at the bank involved. When these demands are met, the bank has insight in a lot of transactions of the company. These covenants are used by banks that do business with de Vries & van de Wiel to achieve transparency and thereby decreasing information asymmetry.

To increase repayment certainties, a bank can demand that the payments to be done by the client to the contractor directly go to the bank. Hereafter, the bank sends the rest of the sum to the contractor. This gives the bank more certainty that their repayments are met. This is called a pledge on a claim.

3.1.2.4: SME-financier relationship

The SME-financier relationship is deemed important for various reasons, as explained in the literature review. This relationship is often used to display a reciprocal trust, where the financier can secure loans against lower premiums and the client is able to pay interest and repayment sufficiently and in time. However, in recent years, and especially for the construction sector, financiers have become more and more objective in terms of lending policy. Trust is of lesser importance compared to financial statements of the last years.

Especially in an economic downturn, assets of a construction company decline in price and profit margins decrease. This decreases company value and increases risk. In an economic boom, companies in the construction sector are known to retain high profits and grow significantly. This is of course attractive for a bank. They are more than willing to provide loans to them, especially with companies with whom they have a good relationship with. However, in economic downturn, financiers are more risk averse, thereby the loan accessibility for SME’s decreases. The increased risk adversity in recent years of financiers especially to the construction sector is a result of the aftermath of the financial crisis of 2008.

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there are more critical factors playing crucial roles than their relationship of the past. It is the current financial situation that matters most when providing loans. Loan accessibility may also be region dependent on the portfolio composition of debt providers in that region. It may be the case that there is little to no room in the portfolio for a construction project, making it even harder to find external funding for a project. Thus, the SME-financier relationship may not always be a successful instrument to reduce information asymmetry.

3.1.3: Terminology

Throughout the upcoming scenarios and paragraphs, several financial formula and calculation methods are used. To explain how each number is calculated, the used formulas and calculations are described below.

Accounts receivable: the accounts receivable post on the balance sheet reflects the amount which debtors owe the construction company for that month. As there is a 30 day debtor payment period, a part of the revenue will not be paid until the next period. To reflect this in the cash flow overview, the accounts receivable post of that month is subtracted from the cash flow of that month.

Cash balance: the cash balance on the asset side of the balance shows the cash remainder after all costs are paid for in that month. If there is a positive cash balance in that period, a yearly 2% savings interest rate is added to the total income. If costs exceed revenue, the cash balance remains zero and the difference goes to the overdraft post. If costs exceed revenue if there is still cash left on the balance, this is subtracted from this balance first.

Equity: the equity post on the balance sheet is the amount of equity invested by the construction company plus the interest income. The total sum of equity on the liability side of the balance sheet is equity + retained earnings.

Retained earnings: on the retained earnings post, the net result of that period is visible. If this number is positive, this adds up to the project’s total equity. If this number is negative, this number is subtracted from the project’s total equity. If the total equity turns negative as a result of this, this number is accounted for with the cash balance and the overdraft posts.

Liabilities: the liabilities post shows all the debt of the project. It is the sum of the accounts payable and the overdraft posts.

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costs of the accounts payable post of that month is not subtracted to the cash flow of that month, but is accounted for after 60 days.

Overdraft: the overdraft post shows the deficit of that period. If the overdraft is 0, there is no deficit and thus no external financial need. However, when there is overdraft visible, this is a result of costs exceeding revenue for that period. This is the amount that the project is in debt. Over this debt, a yearly 5% interest rate is added to the total cost, as this debt is to be supplemented by external finance. The overdraft is cumulative: the shortage of a period is included in the overdraft of the next period, until the overdraft is cleared by the free cash flow of that month.

Earnings before interest (EBI) or free operational cash flow: the earnings before interest are the operational cash flow of the project. It is simply the total income of the project minus the total cost (excluding interest cost).

Change in working capital: the change in working capital of a period is the accounts payable post minus the accounts receivable post. This shows the current liquid assets of the company. This amount is cumulative: the working capital of last period is included in the working capital of the current period.

Interest cost/income: interest cost is a yearly 5% of the project’s overdraft of that period. This is an extra cost factor to be accounted for in the free cash flow. Interest income is a yearly 2% of the project’s free cash balance of that period. This is an extra income source to be accounted for in the free cash flow.

Free cash flow: the free cash flow is the sum of the free operational cash flow and interest income, minus interest payments. This reflects the actual amount of cash generated (or shortage of cash) in that period. In this calculation, all changes in actual cash flow have been accounted with.

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NPV =

𝐹𝑂𝐶𝐹

1,05

𝑡 Where:

 NPV = net present value

 FOCF = free operational cash flow of a period  t = period (in years)

t changes following the according period that the free operational cash flow number will happen. For example, if the cash flow happens in year 6, then t = 6. 1,05 is adjusted accordingly if the NPV per month or quarter is calculated. The present value of each period is calculated, where after all present values of all periods are accumulated. This total number represents the net present value of the project.

NPV percentage of total turnover: to calculate the percentage of the net present value of the total turnover, the NPV of a project is divided by the project’s total turnover. This number shows how profitable the project is when brought back to the present value of the cash flows.

Equity value (EV): the equity value is the value of the project for the project´s owners. It is calculated in a similar way to the net present value, however instead of using the free operational cash flow, the free cash flow is used. In this formula, interest incomes and payments are taken into account. To calculate the equity value of a project, the following formula is used:

𝐸𝑉 =

𝐹𝐶𝐹

1,05

𝑡 Where:

 EV = equity value

 FCF = free cash flow of a period  t = period (in years)

SME’S ACCESS TO EXTERNAL FINANCE IN DBFM CONTRACTS