Chapter 3

Project Financing

What is Project Financing?

International Project Finance Association (IPFA)
defined project financing as:
The financing of long-term infrastructure,
industrial projects and public services based
upon a non-recourse or limited recourse
financial structure where project debt and
equity used to finance the project are paid back
from the cash flows generated by the project.
Note:
Project Finance
finance

differs

from

Conventional

For whom is it important to understand project

finance?
Financial

managers
Sponsors
Lenders
Consultants and practitioners
Project managers
Builders
Suppliers
Engineers.
Researchers
Students.

Why is it important to understand project

finance?
The people involved in a project are used to
find financing deal for major construction
projects such as mining, transportation and
public utility industries, that may result such
risks and compensation for repayment of loan,
insurance and assets in process. Thats why
they need to learn about project finance in
order to manage project cash flow for ensuring
profits so it can be distributed among multiple
parties, such as investors, lenders and other
parties.

Main Characteristics:
Based

on projects instead of on the project

sponsors.
Debt and Equity are paid back from the cash
flow generated by the project.
The project debt lenders bear the risks.
Non-recourse or limited recourse financing
structure.

Parties Involved
Project

company
Sponsors
Lenders
Suppliers
Purchaser
Adviser
Insurer

Generic Structure of Project Finance

Means of Finance(Source of Finance)

Long Term Sources of Finance:Long-term
financing means capital requirements for a
period of more than 5 years to 10, 15, 20 years
or maybe more depending on other factors.
Medium Term Sources of Finance:Medium term
financing means financing for a period of 3 to 5
years.
Short Term Sources of Finance:Short term
financing means financing for a period of less
than 1 year.

Share

Capital or Equity Shares-The part of the

capital of a company that comes from the issue of
shares.
Preference

Capital or Preference Shares-A

share which entitles the holder to a fixed dividend,
whose payment takes priority over that of ordinary
share dividends.
Retained

Earnings or Internal AccrualsRetained earningsrefer to the percentage of

netearningsretainedby the company to be
reinvested in its core business, or to pay debt.
Debenture

/ Bonds-a long-term security yielding

a fixed rate of interest, issued by a company and
secured against assets.

Term

Loans-Aterm loanis a monetaryloanthat is

repaid in regular payments over a set period of time.

Venture

capital-Capital invested in a project in

which there is a substantial element of risk, typically a
new or expanding business.

Trade

Credit-Trade creditis an essential tool for

financing growth.Trade creditis thecreditextended
to you by suppliers who let you buy now and pay
later.

Advances

received from customers

International
Lease

Financing

Finance

Financial Institutions in India

They are divided in two categories.
The first type refers to the regulatory
institutions and the second type refers to
the intermediaries.

The regulators are assigned with the job of

governing all the divisions of the Indian financial
system.
These
regulatory
institutions
are
responsible for maintaining the transparency and
the national interest in the operations of the
institutions under their supervision.
Reserve

Bank of India (RBI)

Securities and Exchange Board of India (SEBI)
Central Board of Direct Taxes (CBDT)
Central Board of Excise & Customs

Intermediaries can be grouped into

Domestic

Commercial banks
Specialized
Infrastructure
Institutions
Export credit agencies
International commercial banks
Multilateral agencies
Bilateral agencies.

Financing

Domestic Commercial Banks

In India, domestic commercial banks, and
specialised infrastructure financing institutions
are amongst the major domestic sources for
debt financing to infrastructure projects.
The commercial banks such as State Bank of
India (SBI), ICICI Bank Limited and Industrial
Development Bank of India Limited (IDBI Ltd.)
are amongst the lending institutions actively
involved in financing infrastructure projects.

Specialized Infrastructure Financing Institutions

Infrastructure Development Finance Company (IDFC)
and Infrastructure Leasing & Financial Services
Limited (IL&FS)
Export credit agencies
It normally provides loan and guarantee in order to
promote export of equipment and services of the ECA
countries.
International commercial banks
One of the largest sources of private finance in the
form
of
syndicated
loans
for
infrastructure
development in developing countries. Lending by
these banks to the infrastructure projects is based on
detailed analysis of project risks. In order to limit their
exposures for the projects and the countries, they
normally adopt syndication route, where a number of
banks come together to provide the financing.

Multilateral agencies such as the World

Bank and Asian Development Bank have
been actively supporting infrastructure
projects development by providing both
funding and technical assistance and
project advisory services for projects in
India. These institutions have funded public
sector infrastructure projects, PPP projects.
Finally, their participation in financing
infrastructure projects also has a positive
impact of the project by reducing the risk
perception on the part of other investors to
the projects.

Bilateral agencies also provide funding to

privately financed infrastructure projects in
a limited manner, though they have been
traditionally
funding
public
sector
infrastructure projects. Similar to the
multilateral agencies, they also play an
important catalytic role in the early stages
of promotion of private sector participation
in infrastructure projects.

Intermediaries that include the banking and nonbanking financial institutions are as follows:
Unit Trust of India (UTI)
Securities Trading Corporation of India Ltd. (STCI)
Industrial Development Bank of India (IDBI)
Industrial Reconstruction Bank of India (IRBI), now
(Industrial Investment Bank of India)
Export Import Bank of India (EXIM Bank)
Small Industries Development Bank of India (SIDBI)
National Bank for Agriculture and Rural Development
(NABARD)
Life Insurance Corporation of India (LIC)
General Insurance Corporation of India (GIC)
Shipping Credit and Investment Company of India Ltd.
(SCICI)
Housing and Urban Development Corporation Ltd.
(HUDCO)
National Housing Bank (NHB)