Professional Documents
Culture Documents
PROJECT FINANCE
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Internal resources have traditionally been the chief source of finance for a company. Internal
resources could be a company’s assets, personal savings and profits that have not been reinvested
or distributed among
. Working capital is a short term source of finance and is the money used for a company’s day-
to-day activities, including salaries, rent, payments for raw materials and electricity bills.
Internal Sources
Traditionally, the major sources of finance for a limited company were internal sources:
Personal savings: Quite simply, personal savings are amounts of money that a business
person, partner or shareholder has at their disposal to do with as they wish. If that person
uses their savings to invest in their own or another business, then the source of finance
comes under the heading of personal savings.
Although we would generally discuss personal savings as a source of finance for small
businesses, there are many examples where business people have used substantial sums
of their own money to help to finance their businesses. A good and very public example
here is Jamie Oliver, the television chef. Jamie financed his new restaurant, 'Fifteen',
using fifteen raw recruits to the catering trade and a large amount (£500,000) of his own
cash.
Retained Profit: This is often a very difficult idea to understand but, in reality, it is very
simple. When a business makes a profit and it does not spend it, it keeps it - and
accountants call profits that are kept and not spent retained profits. That's all. The
retained profit is then available to use within the business to help with buying new
machinery, vehicles, and computers and so on or developing the business in any other
way. Retained profits are also kept if the owners think that they may have difficulties in
the future so they save them for a rainy day!
Working Capital: This is the short-term capital or finance that a business keeps.
Working capital is the money used to pay for the everyday trading activities carried out
by the business - stationery needs, staff salaries and wages, rent, energy bills, payments
for supplies and so on. Working capital is defined as:
Working capital = current assets - current liabilities
Where:
Current assets are short term sources of finance such as stocks, debtors and cash - the
amount of cash and cash equivalents - the business has at any one time. Cash is cash in
hand and deposits payable on demand (e.g. current accounts). Cash equivalents are short
term and highly liquid investments which are easily and immediately convertible into
cash.
Current liabilities are short term requirements for cash including trade creditors,
expense creditors, tax owing, dividends owing - the amount of money the business owes
to other people/groups/businesses at any one time that needs to be repaid within the next
month or so.
Sale of Assets: Business balance sheets usually have several fixed assets on them. A
fixed asset is anything that is not used up in the production of the good or service
concerned - land, buildings, fixtures and fittings, machinery, vehicles and so on. At times,
one or more of these fixed assets may be surplus to requirements and can be sold.
Alternatively, a business may desperately need to find some cash so it decides to stop
offering certain products or services and because of that can sell some of its fixed assets.
Hence, by selling fixed assets, business can use them as a source of finance. Selling its
fixed assets, therefore, has an effect on the potential capacity of the business - the amount
it can produce.
External Sources:
Ownership capital is the capital owned by the shareholders of a company. A company can raise
substantial funds through an IPO (initial public offering). These funds are usually used for large
expenses, such as new product development, expansion into a new market and setting up a new
plant. The various types of shares are:
Ordinary shares: These are also known as equity shares and give the owner the right to
share the company’s profits and vote at the firm’s general meetings.
Preference shares: The owners of these shares may be entitled to a fixed dividend, but
usually do not have the right to vote.
Companies that are already listed on a stock exchange can opt for a rights issue, which seeks
additional investment from existing shareholders. They could also opt for deferred ordinary
shares, wherein the issuing company is not required to pay dividends until a specified date or
before the profits reach a certain level.
Unquoted companies (those not listed on stock exchanges) can also issue and trade their shares
in over-the-counter (OTC) markets.
Non-ownership capital includes funds raised from lenders, such as banks and creditors.
Companies typically borrow a fixed amount from a bank, at a predetermined interest rate and
with a fixed repayment schedule. Certain bank accounts offer overdraft facilities. This is used by
companies to meet their short-term fund requirements, as they usually come at a very high
interest rate.
Factoring enables a company to raise funds using its outstanding invoices. The company
typically receives about 85% of the value of the invoice from the factor. This method is more
appropriate for overcoming short-term cash-flow issues.
Hire purchase allows a company to use an asset without immediately paying the complete
purchasing price. Trade credit enables a company to obtain products and services from another
firm and pay the bill later.
. This option gives the financing company some ownership as well as influence over the
direction of the enterprise.
Depending on the date of maturity, sources of finance can be clubbed into the following:
Long-term sources of finance: Long-term financing can be raised from the following sources:
Medium-term sources of finance: Medium-term financing can be raised from the following
sources:
Preference shares
Debentures/bonds
Public deposits/fixed
Commercial banks
Financial institutions
State financial corporations
Lease financing / hire purchase financing
External commercial borrowings
Euro-issues
Foreign currency bonds
Short term sources of finance: Short-term financing can be raised from the following sources:
Trade credit
Commercial banks
Fixed deposits for a period of 1 year or less
Advances received from customers
Various short-term provisions
Financial Institutions in Project Financing
Financial sector plays an indispensable role in the overall development of a country. The most
important constituent of this sector is the financial institutions, which act as a conduit for the
transfer of resources from net savers to net borrowers, that is, from those who spend less than
their earnings to those who spend more than their earnings. The financial institutions have
traditionally been the major source of long-term funds for the economy. These institutions
provide a variety of financial products and services to fulfil the varied needs of the commercial
sector. Besides, they provide assistance to new enterprises, small and medium firms as well as to
the industries established in backward areas. Thus, they have helped in reducing regional
disparities by inducing widespread industrial development.
The Government of India, in order to provide adequate supply of credit to various sectors of the
economy, has evolved a well developed structure of financial institutions in the country. These
financial institutions can be broadly categorized into All India institutions and State level
institutions, depending upon the geographical coverage of their operations. At the national level,
they provide long and medium term loans at reasonable rates of interest. They subscribe to the
debenture issues of companies, underwrite public issue of shares, guarantee loans and deferred
payments, etc. Though, the State level institutions are mainly concerned with the development of
medium and small scale enterprises, but they provide the same type of financial assistance as the
national level institutions.
2. Specialized Financial Institutions (SFIs):- are the institutions which have been set up to
serve the increasing financial needs of commerce and trade in the area of venture capital,
credit rating and leasing, etc.
o IFCI Venture Capital Funds Ltd (IVCF):- formerly known as Risk Capital &
Technology Finance Corporation Ltd (RCTC), is a subsidiary of IFCI Ltd. It was
promoted with the objective of broadening entrepreneurial base in the country by
facilitating funding to ventures involving innovative product/process/technology.
Initially, it started providing financial assistance by way of soft loans to promoters
under its 'Risk Capital Scheme‘. Since 1988, it also started providing finance
under 'Technology Finance and Development Scheme' to projects for
commercialization of indigenous technology for new processes, products, market
or services. Over the years, it has acquired great deal of experience in investing in
technology-oriented projects.
3. Investment Institutions: - are the most popular form of financial intermediaries, which
particularly catering to the needs of small savers and investors. They deploy their assets
largely in marketable securities.
IDBI BANK
Project Finance: -
Under the Project Finance scheme IDBI Bank provides finance to the corporate for projects. The
Bank provides project finance in both rupee and foreign currencies for Greenfield projects as
also for expansion, diversification and modernization. IDBI Bank follows the Global Best
Practices in project appraisal and monitoring and has a well-diversified industry portfolio. IDBI
Bank has signed a Memorandum of Understanding (MoU) with LIC in December 2006 for
undertaking joint and take-out financing of long-gestation projects, including infrastructure
projects.
Objective: - To provide long term finance for the establishment of new industrial, infrastructure,
Agri-horticulture, fishery and animal husbandry projects as well as expansion, diversification
and Modernization of existing ones
Eligibility: -Industrial concerns conforming to the definition in Section 2 (c) of the IDBI Act,
Infrastructure, Agro-horticulture, Fishery and Animal Husbandry projects
Project Cost: -Minimum assistance: NEDFi ordinarily finances projects with loan component of
Rs.25 lakh and above, However smaller projects in innovative fields and in the hill states are also
considered.
Maximum assistance: -Normally, NEDFi can consider up to maximum exposure of 10% of paid
up capital & reserves. However, it can consider projects requiring higher investment in
consortium with other financial institutions and banks.
Interest Rate: -Based on Prime Lending Rate fixed from time to time. Actual rate within the
prevailing rate band depends upon creditworthiness of borrower and risk perception. As on date,
the prevailing interest rate is 15% per annum. There is provision for 1% rebate on interest rate
for timely repayment on due dates.
Documentation: -
1. Loan Agreement.
2. Deed of hypothecation.
6. Resolution under Section 293 (1) (a) and 293(1) (d) of the Company’s Act.
Ex-Im Bank
Ex-Im Bank established the limited recourse project finance or "project finance" program as
developing nations turned away from sovereign-guaranteed borrowing for large infrastructure
projects. The program helps U.S. exporters compete in the development of private infrastructure
and in the extraction of natural resources.
Program Description
The term "project finance" refers to the financing of projects that are dependent on project cash
flows for repayment, as defined by the contractual relationships within each project. By their
very nature, these types of projects rely on a large number of integrated contractual arrangements
for successful completion and operation. The contractual relationships must be balanced with
risks distributed to those parties best able to undertake them, and should reflect a fair allocation
of risk and reward. All project contracts must fit together seamlessly to allocate risks in a manner
which ensures the financial viability and success of the project.
Appropriate project finance candidates include Green field projects and significant facility or
production expansions. These projects do not rely on the typical export finance security package,
which provide lenders recourse to a foreign government, financial institution or an established
corporation. While Ex-Im Bank's analytical approach for project finance is different from the
traditional export finance approach, many of Ex-Im Bank's requirements remain the same.
Ex-Im Bank's project finance program has several financing options which project sponsors can
utilize to develop an appropriate financing plan. During construction and operations, political
only and comprehensive guarantees are available.
Ex-Im Bank has no dollar limits based on project size, sector or country. While there is no
minimum transaction size, the applicant should carefully consider the costs associated with a
limited recourse project financing approach. Generally, Ex-Im Bank utilizes financial, legal, and
technical advisors for project finance transactions. However, for small project finance
transactions, Ex-Im Bank may consider, on a case-by-case basis, not utilizing financial advisors,
and relying instead upon internal due diligence as well as the due diligence of an arranging bank
(or other major project lender).
FLEXIBLE COVERAGE:-
Where appropriate, Ex-Im Bank offers the maximum support allowed under the rules of the
OECD Arrangement, including:
Financing of interest accrued during construction related to the Ex-Im Bank financing.
Financing of host country local costs of up to 30 percent of the U.S. contract value.
The rules outlined by the OECD Arrangement allow Ex-Im Bank to provide flexible loan
repayment terms to match a project's revenue stream. Thus, project finance transactions can be
structured with tailored repayment profiles, more flexible grace periods, and more flexibility on
total repayment terms.
Ex-Im Bank implements these flexibilities on a case-by-case basis for qualifying project finance
transactions. Generally, extended grace periods or repayment terms must be justified by project
cash flows or project considerations specific to certain industry sectors. For example, extended
grace periods and back-ended repayment profiles may be justified for telecommunications
projects but are likely not appropriate for power plants.
Full flexibility for setting a project's grace period, repayment profile, and maximum
repayment term, subject to a maximum average life of 5.25 years; or
The extension of a project's average life up to 7.25 years, subject to constraints for setting
a maximum grace period of 2 years and a maximum repayment term of 14 years.
The new flexible terms are subject to the following additional constraints and/or considerations:
If the project's repayment term extends beyond 12 years, 20 basis points are added to the
CIRR Rate for direct loans.
The flexible terms are offered in High-Income OECD markets only with additional
constraints.
The average life allowed under the new flexible terms will be taken into consideration
when meeting the Minimum Premium Benchmark fees required as of April 1, 1999.
APPLICATION PROCESS
Project Finance Letter of Interest: - A Project Finance Letter of Interest (LI) is an indication of
Ex-Im Bank's willingness to consider financing a given export transaction. To apply, interested
parties must complete the Ex-Im Bank LI application and clearly indicate Limited Recourse
Project Finance. The non-refundable processing fee for an LI is $100. The applicant should
attach an executive summary of the project which identifies the type of project, location of the
project, parties to the transaction, status of the project, total project cost, U.S. cost and the
anticipated project time frame. The Project Finance LI differs from Ex-Im Bank's traditional LI.
The LI application is available on Ex-Im Bank's web page.
Competitive Letter of Interest: - On a case-by-case basis, Ex-Im Bank is willing to consider
providing evidence of support during the early stage of the project development by performing a
more in-depth project analysis and issuing a Competitive Letter of Interest (CLI). Each CLI
issued will provide an indicative exposure fee range and a list of preliminary issues identified by
Ex-Im Bank. Applicants responding to an international invitation to bid for a project, or
applicants pursuing projects in difficult markets are eligible to apply. The cost for a CLI analysis
is $1000. In addition to the information required for an LI, applicants should submit any other
available information such as project agreements, proposed financing plan, risk mitigation
proposals, etc. Please refer to the Competitive Letter of Interest Fact Sheet on the web page.
2) Five copies of the materials listed below under "Project Criteria and Application Information
Requirements."
Preliminary Review: - The Project Finance Business Development staff will review the material
submitted within five to ten business days from the date that the application is received to
determine completeness.
Incomplete Applications: - If the application is incomplete, it will be returned to the applicant
with an explanation of its deficiencies. If the application is not determined to be suitable for
limited recourse project financing but could still be considered for another form of Ex-Im Bank
financing, it will be forwarded to the appropriate division and the applicant will be notified.
Evaluation Fee: - Before the financial advisor begins his review (Phase I of evaluation), the
applicant will be required to pay an evaluation fee and execute a contract with the financial
advisor. In addition, the applicant will need to execute an indemnity agreement with the financial
advisor. No evaluation by Ex-Im Bank and the financial advisor will commence without payment
of the financial advisor evaluation fee, execution of the contract and the indemnity agreement. If
Ex-Im Bank agrees to proceed with the project after completion of the Phase I evaluation, the
applicant will be required to pay additional related fees for the Phase II due diligence. The
application will be returned to the applicant if the arrangements for the financial advisor are not
completed within thirty days.
Other Fees: - For all projects Ex-Im Bank will require, either in conjunction with other lenders
or for its own use, the advice of independent outside legal counsel, independent engineers, and
insurance advisors. In addition, there may be other fees associated with conducting proper due
diligence. Payment for these and any other fees will be the responsibility of the project sponsors
or the applicant.
Preliminary Project Letter (Phase I): - Upon satisfactory completion of the phase I evaluation
process, the Structured Finance Division will issue a Preliminary Project Letter within 45 days
from the date evaluation begins by the financial advisor. The PPL will indicate if Ex-Im Bank is
prepared to move forward on a financing offer and the corresponding general terms and
conditions based upon the information available at the time of application.
Evaluation Post-PPL (Phase II): -After issuance of the PPL, Ex-Im Bank will work with the
applicant to proceed to a Final Commitment. Please note that Ex-Im Bank does not issue
Preliminary Commitments for project finance transactions. Ex-Im Bank will continue to utilize
the financial advisor for Phase II of the due diligence process.
Attachments
Information Required:-
I. General Project:-
In most cases the project should have long-term contracts from creditworthy entities for
the purchase of the project's output and the purchase of the project's major project inputs
such as fuel, raw materials, and operations and maintenance. Such contracts should
extend beyond the term of the requested Ex-Im Bank financing. In sectors such as
telecommunications and petrochemicals if long-term contracts are not available, Ex-Im
Bank will evaluate the transactions on a case-by-case basis, looking for economically
compelling business rationale.
The project should contain an appropriate allocation of risk to the parties best suited to
manage those risks. Sensitivity analysis should result in a sufficient debt service coverage
ratio to ensure uninterrupted debt servicing for the term of the debt.
Total project cost should be comparable to projects of similar type and size for a
particular market.
Product unit pricing and costs should reflect market based pricing.
Information Required:-
2. Agreements for key elements of the project. Ex-Im Bank considers key agreements to include
all contracts necessary for the project to be built and operate. This includes contracts relating to
infrastructure as well as supply and off take agreements. These agreements should be in
substantially final form. Ex-Im Bank will not accept summaries or outlines of these agreements.
4. A summary of the anticipated project financing plan and security package, including the
proposed source, amount, currency and terms of the debt and equity investments; the sources of
finance in the event of project cost overruns; and description of escrow accounts. Information on
the terms, security requirements, and status of financing commitments of other lenders to the
project, if applicable, should be provided. All other sources approached for financing
(multinational development banks, other export credit agencies, commercial banks, capital
markets and private investors) must be disclosed.
5. Projected annual financial statements covering the period from project development through
final maturity of the proposed Ex-Im Bank financing, to include balance sheet, profit and loss,
source and application of funds statements, and debt service ratios. Projections should include a
sensitivity analysis for not only the expected scenario, but pessimistic and optimistic cases as
well.
This information should also be provided electronically in Lotus 123 or Excel. The structure of
the financial model should be in a format that is user friendly. Ex-Im Bank must be able to
review and adjust the assumptions in the model.
6. Assumptions for the financial projections, including but not limited to the basis for sales
volume and prices; operating and administrative costs; depreciation, amortization and tax rates;
and local government policy on price regulation.
7. Market information to include ten years of historical price and volume data; present and
projected capacity of industry; product demand forecast with assumptions; description of
competition and projected market share of the project as compared to the shares of the
competition; identity and location of customers; and marketing and distribution strategy.
8. A description of the principal risks and benefits of the project to the sponsors, lenders, and
host government.
9. A description of the types of insurance coverage to be purchased for both the pre and post-
completion phases of the project.
10. Information on infrastructure required for the project to operate, specifically information
pertaining to the timing, status and developmental plans.
11. A clear articulation of the need for Ex-Im Bank coverage.
II. Participants
Project sponsors, off take purchasers, contractors, operators, and suppliers must be
able to demonstrate the technical, managerial and financial capabilities to perform
their respective obligations within the project.
Information Required:-
1. Sponsors must provide in English a brief history and description of their operations, a
description of their relevant experience in similar projects, and three years of audited financial
statements.
2. If the sponsors are part of a joint venture or consortium, information should be provided for all
the participants. A shareholders agreement should also be provided. All documents pertaining to
this area (joint venture agreement, management and service agreements) should be in
substantially final form.
3. Off take purchasers and suppliers should provide in English a history and description of
operations, at least three years of audited financial statements, and a description of how the
project fits in their long-term strategic plan. If the project utilizes raw materials (oil, gas, coal,
ethane, etc.) copies of contracts that have been reviewed by legal counsel for appropriateness and
in adherence with local law should be provided.
4. Contractors and operators must provide resumes of experience with similar projects and recent
historical financial information.
III. Technical
Project technology must be proven and reliable, and licensing arrangements must
be contractually secured for a period extending beyond the term of the Ex-Im Bank
financing.
Information Required:-
1. Technical description and a process flow diagram for each project facility.
5. Project implementation schedule, showing target dates for achieving essential project
milestones.
Legal and regulatory analysis needs to demonstrate that the country conditions and the
project structure are sufficient to support long-term debt exposure for the project through
enforceable contractual relationships.
Ex-Im Bank's relationships with the host government will be addressed on a case-by-case
basis. An Ex-Im Bank Project Incentive Agreement (PIA) with the host government may
be required. The PIA addresses certain political risks and Ex-Im Bank's method of
resolution of conflict with the host government pertaining to these issues. Only certain
markets will require a PIA.
Information Required:-
1. A description of the host government's role in the project, and progress made toward obtaining
essential government commitments, including authorizations from appropriate government
entities to proceed with the project. Copies of all permits, licenses, concession agreements and
approvals are required in addition to a description of all permits necessary to complete the
project and their status. This information is critical for Ex-Im Bank application consideration.
2. A definition of the control, if any, that the government will have in the management and
operation of the project, and status of any assurances that the government will not interfere in the
project's operation. If the government is also a project sponsor, these issues will be of particular
importance.
3. Evidence of the government's current and historical commitment and policies for availability
and convertibility of foreign currency.
4. Status and strategy for obtaining government undertakings to support any government parties
involved in the project, to the extent that such undertakings are needed to provide adequate credit
support for such entities.