ON

PROJECT FINANCE

PREPARED BY: PRESENTED TO:

SWATI VIJAYWARGIYA RAVI CHORASIYA

( Exe.Vice.President)
EWDPL PVT.LTD.
INDEX:
INTRODUCTION:

Project finance is the financing of long-term infrastructure and

industrial projects based upon a complex financial structure where
project debt and equity are used to finance the project. Usually, a
project financing scheme involves a number of equity investors, known
as sponsors, as well as a syndicate of banks which provide loans to the
operation. The loans are most commonly non-recourse loans, which are
secured by the project itself and paid entirely from its cash flow, rather
than from the general assets or creditworthiness of the project sponsors.
The financing is typically secured by all of the project assets, including
the revenue-producing contracts. Project lenders are given a lien on all
of these assets, and are able to assume control of a project if the project
company has difficulties complying with the loan terms. Generally, a
special purpose entity is created for each project, thereby shielding
other assets owned by a project sponsor from the detrimental effects of
a project failure. As a special purpose entity, the project company has
no assets other than the project. Capital contribution commitments by
the owners of the project company are sometimes necessary to ensure
that the project is financially sound. Project finance is often more
complicated than alternative financing methods. It is most commonly
used in the mining, transportation, telecommunication and public utility
industries.
OBJECTIVES OF THE PROJECT
.
1. To assess the financial health of organizations that approach
Union Bank of India for
2. credit for import export purposes. This would entail undertaking
of the following
3. procedures:
4. Analysis of past and present financial statements
5. Analysis of Balance Sheet
6. Analysis of Cash Flow Statements
7. Examination of Profitability statements
8. Examination of projected financial statements
9. To assess the suitability of the company for disbursement of
credit. This would involve
THE FOLLOWING ACTIONS: .
1. Use of credit rating charts
2. Evaluation of management risk
3. Evaluation of financial risk
4. Evaluation of market-industry risk
5. Evaluation of the facility
6. Evaluation of compliance of sanction terms
7. Calculation of credit rating
 OBJECTIVES OF STUDY

1. To get an exposure of actual working environment in an

organization;
2. To understand project finance.

NEED OF PROJECT FINANCE

1. Project finance is a finance structure which ensures that the
projects are environmentally, socially, economically and
politically viable.
2. Traditional methods are not suitable for projects which have a
long life and require huge capital investment.
3. Risk sharing is another unique feature of project finance which
traditional methods do not provide.
4. Project Finance improves the return on capital in a project by
leveraging the investment
5. Project finance facilitates careful project evaluation & risk
assessment
Term Loan Assesment
Steps in term loan processing
1. Submission of Project Report along with the Request Letter.
2. Carrying out due diligence
3. Preparing Credit Report
4. Determining Interest Rate
5. Preparing and submission of Term Sheet
6. If not approved
7. if approved
8. Preparation of proposal

PROJECT SUMMARY
Project Owner Applicant/Borrower Entity
• Full legal/business name with address, phone/fax numbers, e-mail,
etc.
• Brief background/main activities
• Authorized/paid up capital
• Shareholdings (names of shareholders with percentage of shares
• Board of Directors (names and position)
Project
• Complete name
• Location (exact address, land area/zoning, etc.)
• Description (concept, profit centers, etc.)
• Type (project finance, refinancing or acquisition finance)
Total Project Cost
• Cost of land
 • Development cost (construction/infrastructure,
furniture, fixtures and equipment, fees and expenses,
etc.)
• Working capital (if applicable)
• Unforeseen, etc.

 NOTE: In a case of a request for refinancing,

please indicate the breakdown of existing debt/loans
outstanding, and respective names of Banks/
Financial Institutions.
Loan Requested
• Amount and Breakdown of the use of the loan proceeds
• Loan Period requested (number of years including the
construction/ development period)
Equity/Financial Responsibility
• Hard Equity presently available (assets: land/properties,
cash, etc.)
• Offered Guarantees (corporate, personal, others)
Studies/Investigations already made (only

author/names and dates)

o Feasibilities Studies (market survey, marketing/operation
plans, financial analysis/projections/debt service, etc.)
o Appraisal Report (land/property valuation, figures, etc.)
 NOTE: Please indicate all amounts/figures in local
currency and equivalent in US Dollars.

Upon submission of the above requested information, EVALUATION

FUNDING S.L. would be in the position to initially check the
parameters of your project, contact potential loan arrangers/lenders
interested specifically in this type of project and get back to you in
about 2 to 3 working days with the results.

At that time you will be informed – if applicable, and if you decide to

proceed with us – of the respective fees to be paid for our services
(Project Appraisal/Evaluation Report and Loan Arranger/Lender
Contact), and the necessary step-by-step procedure to follow towards a
successful Project Evaluation and Funding.

9. Submission of Proposal to designated authority

10.If No queries raised If queries raised
11.Sanction of proposal on various
12.Terms & Condition
13.Communication of Sanction
14.Terms & Condition
15.Project Rejected
16.Solve the queries
17.Acknowledgement of Sanction
18.Terms & Condition
19.Application to comply with
20.Sanction Terms & Condition &
21.execution of Loan Documents
22.Disbursement
 Generation of Ideas

Initial Screening

Is the idea Prima Facie Promising

Plan Feasibility Analysis Terminate

Conduct Market Analysis Conduct Technical Analysis

Conduct Financial Analysis

Conduct Economic
& Ecological Analysis

Is the Project Worthwhile

?

Prepare Funding Proposal Terminate

PROJECT EVALUATION
Project evaluation is a high level assessment of the project to see
whether the project is worthwhile to proceed and whether the project
will fit in the strategic planning of the whole organization. Project
evaluation helps to decide which of the several alternative projects has a
better success rate, a higher turnover.

STEPS IN PROJECT EVALUATION

Inception of Idea

Economic Analysis

Need & Justification

Strategic Analysis

Project Design Selection

Cost Analysis

Revenue Analysis

Financial Analysis

Sensitivity Analysis
KEY PARAMETERS TO BE EVALUATED IN A
PROJECT

The key parameters to be evaluated in a project are:

1. Risk Analysis
2. Demand Analysis
3. Project Cost Estimation
4. Revenue Analysis
5. Financial Analysis
6. Project Selection Criteria

RISK ANALYSIS
Risk analysis is a technique to identify and assess factors that may
jeopardize the success of the project. Risks associated with capital
investment proposals can be broadly classified as:

1. Financial Risk
2. Other-Risk:

Financial Risk:

Financial risk is defined as the possibility that the actual return on an

investment will be different from the expected return. Many techniques
are available for determining financial risk involved with the projects
like Risk adjusted Discount Rate, Certainty Equivalent, Sensitivity
Analysis, DCF, Break Even Analysis, Probability Assignment, Standard
Deviation etc.
OtherRisks:

Other risks constitute risks which may be an obstacle in the success/

Completion of the project. Risks which can be included in other risk are
1. Availability Risk
2. Completion (technical and timing) Risk
3. Counterparty credit risk
4. Country (political) Risk
5. Inflation Risk
6. Input and throughput Risk
7. Market (demand) Risk
8. Technological Risk
DEMAND ANALYSIS:

Success of a project depends on the projects usage potential and user

willingness to pay. Demand analysis involves forecasting the demand on
the basis of market surveys and manufacturing capacity of the unit and
this is decided through the study of demand and supply. The potential
users, their habits, and possibility of changing these habits, the pricing
of the products, the designing are studied under demand forecasting. In
the demand analysis we check if there is a scope for laying a pipeline, if
the demand at destination is less, then a pipeline is not required.
The major Steps in demand analysis are
 Determining different uses of a project output
 Determining current consumption level and future demand
 Finding financial and economical benefits from the project
PROJECT COST ESTIMATION
Accurate estimation of costs is vital for the effective evaluation of the
project since it is important for knowing the financial feasibility of the
project. The capital costs and operating costs of the project is
considered in this step.
The following factors needs to be kept in mind while estimating costs.
 Base Cost Estimate
 Contingency Costs
 Cost Factor for difference between domestic & foreign inflation
rates
 Financing cost incurred during the construction period on loans
specifically borrowed for project is capitalized at the actual
borrowing rates.

REVENUE ANALYSIS
Revenue analysis is estimation of the revenues which would be earned in
the future. Revenue projections are formed on the basis of Output sales.
It helps in finding out the profits/ losses in the future. Revenue analysis
is all the more important in project finance because the debts have to be
repaid through the revenues generated by the project.

FINANCIAL ANALYSIS
Financial analysis refers to an assessment of the viability, stability &
profitability of a project. It seeks to ascertain whether the proposed
project will be financially viable in the sense of being able to meet the
burden of servicing debt and whether the project will satisfy the return
expectations of those who provide the capital.

PROJECT SELECTION CRITERIA

Once information about expected return and costs has been gathered,
the next question arises: whether the project should be selected or not.
There are many methods of evaluating the profitability of the project.
The various commonly used methods are as follows:
1)PAY-BACK PERIOD METHOD:
It represents the period in which the total investment in permanent
assets pays back itself. Under this method various investments are
ranked according to the length of their pay-back period and the
investment with a shortest pay back period is preferred. The pay-back
period can be ascertained in the following manner:

Payback period = Investment

Cash Flows/year
2) AVERAGE RATE OF RETURN METHOD:
This method takes into account the earnings expected from the
investment over their whole life. According to this method the project
with the highest rate of return is selected. The return on investment is
calculated with the help of following formula.

ARR = Average Annual Profits after depreciation & Taxes x

100
Average Investment
Where, Average Investment = Original Investment + Salvage Value
2

3) NET PRESENT VALUE METHODS:

The Net present value method is the modern method of evaluating
investment proposals. This method takes into consideration the time
value of money and attempts to calculate the return on investments by
introducing the factor of time-element.

NPV= Present value of cash inflows – Present value of cash

outflows.
4) INTERNAL RATE OF RETURN METHOD:

It is also known as trial & error yield method. The following steps are
required to practice the internal rate of return method:
a) Determine the future net cash flows during the entire economic
life of the project. The cash inflows are estimated for future
profits before depreciation but after taxes.
b) Determine the rate of discount at which the value of cash inflows
is equal to the present value of cash outflows. If annual cash flows
are equal then it can be easily found out otherwise it has to be
found out by hit and trial method.
c) Accept the proposal if the IRR is higher than or equal to the
minimum required rate of return i.e. cost of capital or otherwise
reject the proposal.
 d) In case of alternative proposals select the proposal with highest
IRR.
5) PROFITABILITY INDEX
This method is also known as benefit cost ratio and is similar to NPV
approach. It measures the Present Value of returns per rupee
invested based on the following formula:
PI = Present value of Cash Inflows
Present value of cash Outflows
 TAX CALCULATION
In project finance basically three types of taxes are calculated while
doing financial analysis and these are:
 Minimum Alternate Tax
 Income Tax
 Capital Gains Tax

Minimum Alternate Tax (MAT)

Normally, a company is liable to pay tax on the income computed in
accordance with the provisions of the income tax Act, but the profit and
loss account of the company is prepared as per provisions of the
Companies Act. There were large number of companies who had
profits as per their profit and loss account but were not paying any tax
because income computed as per provisions of the income tax act was
either nil or negative. To avoid this practice, MAT was introduced in
section 115JB of the Income Tax Act. Profit computed under the
regular method is called regular profit and profit computed under sec
115JB is called Book profit and the tax computed is called MAT.
If a company is having regular profits then income tax @ 33.99% (30%
tax + 10% surcharge + 3% education cess) is charged on it. However if
the books show losses, then MAT is calculated and if MAT shows
profits, tax is calculated @ 11.33% (10% tax + 10% surcharge + 3%
education cess). And if MAT shows losses, then tax is not to be charged.
MAT Credit
When a company pays tax under MAT, tax credit is allowed in respect
thereof during the years when the company pays normal corporate tax.
The tax credit earned is the difference between the amount payable
under MAT and the regular tax. The amount of MAT credit can be set-
off only in the year in which the company is liable to pay tax as per the
regular tax. MAT credit will be allowed carry forward facility for a
period of five assessment years immediately succeeding the assessment
year in which MAT is paid.
MAT CALCULATION
First of all, the book profits are calculated using the formula
Book profit= Taxable profit + depreciation previously deducted - actual
depreciation as per Income tax Act
MAT loss is added to the book profit to obtain the adjusted book profit
on which the MAT is calculated @ 11.33% (MAT rate).

Capital Gains Tax

If any Capital Asset is sold or transferred, the profits arising out of such
sale are taxable as capital gains in the year in which the transfer takes
place. Capital asset gains are of two types

 Long term capital gains: Gains on assets held for more than 36
months before they are sold or transferred. In case of shares,
debentures and mutual fund units the period of holding required
is only 12 months. Rate of tax applied on long term capital gains is
22.66% (20% tax + 10% surcharge + 3% education cess).
  Short term capital gains: Gains on assets held for less than 36
months are included in this category. Rate of tax applied on short
term capital gains is 15%.

CALCULATION OF CAPITAL GAIN

Net capital gain is calculated with help of formula:

Net Capital Gain = Gross Gain (Cost of Acquisition + Indexation Cost)

– Expenses on Sale

Indexation CostBase
= Original
year/yearvalue X Present
of Acquisition year Index
Index

Capital gain is calculated at 22.66% of Net Capital Gain.

CHALLENGES IN PROJECT FINANCING

Infrastructure development has huge potential in developing

countries of the Asia-Pacific region. Emerging economies in this
area need billions of dollars in private funding to spark
infrastructure investment. However, the classic problem of
supply and demand puts forth an obstacle – while the demand
for infrastructure investment is enormous, these economies
have failed to attract a supply of private investment in
infrastructure projects. This lack of ventures in building
adequate infrastructure can be attributed to weak tariff
regulation, reluctance in honoring concession commitments,
inconsistent enforcement of laws, corruption, poor governance
practices, lack of availability of long-term local currency
financing at fixed interest rates, weak accounting and dis-
closure norms, and weak securities legislation.
As the problem persists, investors are now reluctant to take
currency mismatch, interest rate and refinancing risks.
Traditionally, commercial banks have been the suppliers of long-
term financing in Asia and in doing so they have heavily relied
on short-term deposits to meet their funding requirements. Such
a practice, especially in a weak banking environment, exposes
the banking sector to systemic risks.
A testament to these issues is the large number of infrastructure
projects in Asia that were financed in hard currency and later
struggled with the adverse impact of Asian financial turbulence
and required restructuring. We are all aware that the real cost of
the Asian financial crisis was in the form of reduced lending
volumes, and

..
KEY LEARNINGS FROM THE PROJECT
Each and every activity in life helps us to learn new things. This project
too was a perfect learning experience and has helped me to learn a lot.

 Corporate aspect:
This project has provided me with good exposure to actual working
environment of an organization. .
 Financing of Projects:
Project finance is a new & emerging concept for financing the
projects. This project has helped me to understand the nitty- gritties
& application of project finance which cannot be understood by
reading books.
 Procedure of evaluating projects:
Through this project, I have learned the various aspects of
evaluating the project, financial tools for assessing the viability of
project, cost estimation and how depreciation, taxes etc impact the
evaluation of the projects.
LIMITATIONS
Each and every project or research carried out has some
limitations, be it time constraints or any other such issues that
invariably, plague the result.

 There was a constraint with regard to time allocation for the

research study i.e. for a period of two months.
 Data collection was strictly confined to secondary source thus is
subject to slight variation than what the study includes in reality.
 There were various technical terms used in the project,

which were difficult to understand.

CONCLUSIONS
At the end it may be concluded that project financing is a good method
for financing and evaluating the projects. It covers all the aspects of the
project and help in mitigating the risks. This project includes step wise
analysis starting from need & justification to sensitivity analysis.
REFERENCES/BIBLOGROPHY:

 BOOKS
1. Financial Management By I M Pandey
2. Financial Management By D K Goel
3. Projects: Appraisal, Evaluation and Financing by Prasanna
Chandra
 WEBSITES
1. www.google.com
2. www.incometax.india.in

3. www.scribd.com