Presented By: Anil Agrawal

Content
1. Project Finance in India
2. Components of Project Finance
3. Key features of Project Finance
4. Types of sponsors for Project Finance
5. Sources of Project Finance
6. Steps involved in Project Finance
7. Stages of Funding
 Project Finance in India
What is Project Finance?

 These are the long-term financing of projects related to infrastructure and industrial.

 These are based upon non-recourse or limited alternative of financial structure in which project debt
and equity used for financing are paid back from the cash flow generated by the project.

 They are non-recourse loans, that are fortified by the assets in the project and paid from cash flow in the
project.
 Components of Project Finance

 Limited Recourse Financial Structure: When sponsors using equity or debts

create specific economic entity called Special Purpose Vehicle (SPV) through
structure financing of the Project Finance.

 Cash Flow Payments generated from the project finance initiative: The
cash flow generated from the SPVs must be adequately sufficient to pay off the
capital debts and interests.

 Providing finance for long-term public services, infrastructure and

industrial projects: These are used in sectors related to infrastructure, oil
extraction and power production.
 Key Features of Project Finance
 Non- Recourse- Creditors have limited claim to the value of assets secured.

 Expensive- These require huge floatation costs as compared to other.

 Separate Legal entity- Separate legal entity has to be formed for execution of these projects.

 Long term- These projects lasts for more number of years.

 Capital Intensive- These requires huge amount of debt and equity.

 Types of sponsors for Project
Finance
Project sponsors have clear-cut motives and objectives behind participating in the
project finance ventures which depend upon the type of sponsorship. Type of
sponsors are involved in it-

 Financial Sponsors: With the objective of capital investing in deals of high

profits, they play a specific part in the initiative of the Project Finance. They
seek high substantial profits and returns on their investment.

 Public Sponsors: Sponsors that have the objective to work for the social
welfare of people like central, local or state government, municipalities, public
companies.
 Types of sponsors for Project
Finance…
 Industrial Sponsors: They fore seek the initiative of the project which is related
or linked to the core of the business in some ways or as the integrated upstream
and downstream.

 Contractors: They build, run or develop plants. They provide subordinate debt
or equities. They are interested to participate in the initiatives of the Project.
 Sources of Project Finance
The various source from which a project can be financed are:

 Commercial loan

 Bridge finance

 Bonds and other debt instruments (for borrowing from the capital market)

 Subordinate loans
Sources of Project Finance
 Commercial Loan

 Commercial loans are those funds borrowed from commercial

banks and other financial institutions

 They are the main source of debt financing.

 Bridge Financing

 Bridge financing is a short-term arrangement for financing.

 These are taken for the initial period of project or the construction period.

 They are generally used till a long-term financing arrangement is not

implemented.
 Bonds and other debt instruments

 Bonds are debt instruments that bear long-term interests.

 These are purchased through the capital markets.

 Or through private placement that means direct sale to the purchaser (an
institutional investor).
 Subordinate Loan

 Subordinate loans are similar to commercial loans.

 These are subordinate or secondary to commercial loans.

 As these are claim on income and assets of the project.

 Steps involved in Project Finance
Following steps are involved while financing a project:

 Identifying the Project

 Determining the feasibility of the project

 Identifying the sources of technology

 Identifying sources of Project Finance

 Mitigating the Project Risks

Stages of Funding
Step 1: Pre-bid stage

Step 2: The contract-negotiation stage

Step 3: Money-raising stage

 Step 1: Pre-bid stage

 The first stage of funding in Project Financing is pre-bid stage.

 There are two main steps under this-

(a) Bidding process

(b) Feasibility studies

 Bidding process

 Host government legally required to initiate a formal tender process for private
sector involvement in the proposed project.

 A company or group of several companies are invited to bid as the private

sector Sponsor for the implementation rights of the project.

 Alternatively, a private entity may, under its own initiative, submit proposal to
a host government for a specific project. If the project interests the party, then
the two parties negotiate terms of a license or concession directly, without
formal tender..
 Feasibility studies

 The Sponsor from Private Sector assess the project viability.

 The feasibility of the project in future is studied thoroughly.

 Technical, legal, environmental, economical, financial and global aspects and

viabilities are considered.
Step 2: The contract-negotiation stage
Contract-negotiation stage contains the following steps:

 The participants negotiate and formalize the agreement of the project.

 Technical, economical and commercial outlines of the project are defined.

 Risk sharing provisions of the documents are structured to removed risks from
the project

 allocate it to someone who has a better position to absorb it.

 Step 2: The contract-negotiation stage…

 The sponsor cannot approach the financial markets until the contract
negotiation stage in the development of the project ends completely.

 Three steps under it are-

(a) Project agreements

(b) Securing revenue

(c) Financial model

 Project agreements

The project agreements can be related to any one of the following-

 Engineering, procurement and construction (EPC) contract.

 Operations and maintenance (O&M) agreement.

 Input supply contract.

 Securing revenue

 Economic and financial viability of an on-schedule and within budget

completed project depends on the marketability of the project's output.

 If Offtake agreement is absent, then the sponsor commissions a market study to

project the demand over the expected life of the project.

 The study must confirm that, under a reasonable set of economic assumptions,
demand will be sufficient to absorb the planned output of the project at a price
sufficient to recover full cost of production, enable the project to service debt,
and provide an acceptable rate of return to equity investors.
 Financial model

• A financial model will be produced that reflects the provisions

made and reached at in the project agreements, which also
contain reasonably accurate assumptions with regard to cost
financing.

• The developer will focus on the level of projected

distributions, their pace and timing, and the acceptability of
the project's resulting internal rate of return (IRR).
 Financial model…
 The financial model through sensitivity analyses often considers the
weakness that can be resulted from-
(a) Construction delays or adverse regulations.
(b) Cost overruns.
(c) Inefficiency of the facility relative to existing and projected
competition
(d) Interest rate fluctuations.
(e) Unavailability of extractive reserves or major project inputs, and
major unanticipated inflation or volatility in foreign exchange
rates.
 Step 3: Money-raising stage

 The money-raising stage begins when all project agreements are initialized and
ends when the facility is build and commissioned.
 The sponsors at this stage, mobilize financing requirements and supervise the
management in construction and commissioning the facility successfully.
 The sponsor is responsible for all development costs till the financial closing.
(a) Sources of finance
(b) Finance-ability
(c) Debt-to-equity ratio
(d) Construction
 Sources of finance

 Projects located in industrialized countries as well as developing countries that

are rated investment grade have the availability and access to all sources of
private debt in both capital as well as credit markets.

 Whereas, projects located in developing countries with middle and low-income

that are not investment grade have access to multilateral, bilateral and export
credit agency debt only.
 Finance-ability

The project must generate enough

cash flow so as to give lenders a
margin of safety with respect to its
debt service obligations.
 Debt-to-equity ratio

 The lowest capital cost is achieved when debt is maximized as a percentage

of total capitalization. And the
 amortization schedule for the project debt is matched closely with the
permitted cash flow of the project by the financial markets.
 Appropriate debt-to-equity ratio of the project depends on the strength of the
off-take agreement.
 An offtake agreement with strong presence, permits the sponsor to achieve a
debt-equity ratio as high as 3.
 The absence of an off-take can make the ratio as low as 1.5 or lower.
 Construction

 The sponsors do not begin construction until finances are secured.

 Once construction begins, draws from committed loans are used to match the
construction expenditures schedule.

 Matching the funds, minimizes excess warehousing or short-term bridge

financing.
How can we help you?
We can provide complete handholding in arranging finance from banks and financial
institutions. Through our dedicated team of Chartered Accountants and finance
professionals, we can guide you right from planning stage to final disbursement stage.
We will also assist in preparation of detailed project report, presentation before lender
and negotiations.

We have an expert team of Chartered Accountants, Company Secretaries, Cost

Accountants. We have more than 20 years of experience and provide services to both
Domestic and Multinational Companies in area of Funding, Regulatory, Taxation, Audit
and Transaction Advisory.

For any assistance, please feel free to contact us:

M: 9899217778, L: 011-43580751
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