PROJECT FINANCING
Types of Projects
• Manufacturing Projects
• Designed or built to order machines /equipment
• New product development projects
• Greenfield Projects
• Establish buildings or operating plants at remote sites
• Infrastructure projects
• Scientific Research Projects
• Innovative, experimental, developmental
• System development Projects
• Systems / software development & implementation
• Management Projects
• Managing change within organization
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PROJECT FINANCING
Characteristic features of major projects:
• Projects are usually very large & capital intensive
• They are often dedicated to a single purpose & none of the
equipments can be used for other purpose
• Time for project development & implementation is quite long,
returns are deferred for some years
• They are often located at remote sites demanding additional
unproductive investment in infrastructure
• They often exceed capacity of a single organization to plan,
supply & construct
• They are technically complex demanding resources of skill,
manufacturing & production which are not widely available
• Their functions often overflow national boundaries, products
have international impact
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PROJECT FINANCING
Project financing is a special case of financing in which lender
relies on repayment from the net cash flow generated by the
project.
Project finance is provided against assets of and the rights in a
particular project rather than against the borrower’s balance
sheet.
Financers are therefore concerned to analyze the risks
associated with the project before they accept the investment
opportunity which it represents.
The cost and terms of financing reflect the financier’s view
about the riskiness of the project
Project Financing 3
PROJECT FINANCING
Project financing is required in a number of
situations:
• For companies in general, to avoid constraints on corporate
borrowing
• For project sponsors, where one party one party is not able
to take on a major project by itself, to spread the risk
among several parties to lessen the financial impact and to
increase their capacity to undertake more projects
• For multinational corporations to protect their corporate
balance sheets from the impact of large projects
• For governments to share the costs and risks of exploiting
natural resources
• For governments to increase foreign capital investment in
the country at no cost to the country
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PROJECT FINANCING
Characteristics of financing strategy
• The project will fail, no matter what its technical merit,
unless enough finance is available to complete it
• The design, implementation and management of the
financing demands the same level of commitment of
planning and management as the project itself
• Financial planning should begin at the same time, or
earlier, than technical project planning
• While financing package is likely to reflect the complexity
of project, finance has some inherent characteristics
which themselves add to the complexity of undertaking.
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PROJECT FINANCING
Identifying sources of finance
Identifying suitable sources of finance is the first step in
planning finance for a project.
Finance for projects falls into two major categories:
• Debt: Borrower has the obligation to repay. Debt also
usually carries obligation to pay interest and to adhere to a
prearranged repayment schedule. The lender has priority
claim if borrower goes into liquidation.
• Equity: Funds subscribed by the shareholders from their
own resources. There is no guarantee that the dividend will
be paid and investors tend to loose their money if the project
fails to perform. Equity shareholders have the last claim if
the project goes into liquidation.
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PROJECT FINANCING
The main sources of debt finance are:
• Commercial banks
• Multilateral lending institutions
• Suppliers of equipment & services for the project
• Suppliers of raw materials to the project
• Buyers of output from the project
The main sources of equity finance are:
• Corporate cash flow generated by existing business
operations
• Corporate or individual investors, or funds raised
through stock markets
• Joint venture partners
• Government subscriptions & aids
• Multilateral investment institutions
• Venture capitalists
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PROJECT FINANCING
Unconventional Sources of Project financing:
• Leasing: Use of project assets through off-balance sheet
financing
• Forfaiting: Sale of financial instruments due to mature in
future
• Counter-Trade: Seller accepts goods or services in lieu of
cash payments
• Switch Trading: Making use, via a third party, of
uncleared credit surpluses arising from bilateral trade
agreements
• Offset: Exporter of technically advanced project
incorporates an agreed value of materials, equipment &
services supplied by the buyer.
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PROJECT
FINANCING
Unconventional Sources of Project financing:
• Franchise Financing: Engineering & construction
contractors become equity holding joint venture partners for
the project they design & build.
• Debt/Equity Swapping: Multinational technology owner
buys host country debt at a discount. The debt is redeemed in
local currency at favourable rate of exchange for setting up a
local company. The local company uses transferred technology
to earn foreign exchange, replace imports & generate local
employment.
• Build – Operate – Transfer (BOT): Government grants
concession to a project company to build a facility and operate
it on commercial basis. Facility is transferred to government at
the end of the concession.
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