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 Project Financing 1 ‡Managing change within organization

products have international impact Project Financing 2 . supply & construct ‡ They are technically complex demanding resources of skill. 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. manufacturing & production which are not widely available ‡ Their functions often overflow national boundaries.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.

Project finance is provided against assets of and the rights in a particular project rather than against the borrower·s balance sheet. The cost and terms of financing reflect the financier·s view about the riskiness of the project Project Financing 3 . project.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. sheet. represents. Financers are therefore concerned to analyze the risks associated with the project before they accept the investment opportunity which it represents.

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.PROJECT FINANCING Project financing is required in a number of situations: situations: ‡For companies in general. 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 4 investment in the Project Financing at no cost to the country country .

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. undertaking. finance has some inherent characteristics which themselves add to the complexity of undertaking. or earlier.PROJECT FINANCING Characteristics of financing strategy ‡ The project will fail. than technical project planning ‡ While financing package is likely to reflect the complexity of project. no matter what its technical merit. Project Financing 5 .

Debt Debt: repay. liquidation. that the dividend will be paid and investors tend to loose their money if the project fails to perform. perform. Finance for projects falls into two major categories: categories: ‡Debt: Borrower has the obligation to repay. The lender has priority claim if borrower goes into liquidation. project. ‡Equity: Funds subscribed by the shareholders Equity: from their own resources. also usually carries obligation to pay interest and to adhere to a prearranged repayment schedule. Equity shareholders have the last claim if the project goes into liquidation.PROJECT FINANCING Identifying sources of finance Identifying suitable sources of finance is the first step in planning finance for a project. Project Financing 6 . schedule. There is no guarantee resources. liquidation.

or funds raised through stock markets ‡Joint venture partners ‡Government subscriptions & aids ‡Multilateral investment institutions Project Financing 7 ‡Venture capitalists .PROJECT FINANCING The main sources of debt finance are: 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: are: ‡Corporate cash flow generated by existing business operations ‡Corporate or individual investors.

via a third party. buyer. Trading: of uncleared credit surpluses arising from bilateral trade agreements ‡Offset: Exporter of technically advanced project Offset: incorporates an agreed value of materials.PROJECT FINANCING Unconventional Sources of Project financing: financing: ‡Leasing: Use of project assets through offLeasing: offbalance sheet financing ‡Forfaiting: Sale of financial instruments due to Forfaiting: mature in future ‡Counter-Trade: Seller accepts goods or Counter-Trade: services in lieu of cash payments ‡Switch Trading: Making use. Project Financing 8 . equipment & services supplied by the buyer.

The company. ‡Build ² Operate ² Transfer (BOT): Government (BOT): grants concession to a project company to build a facility and operate it on commercial basis. . ‡Debt/Equity Swapping: Multinational technology Swapping: owner buys host country debt at a discount. debt is redeemed in local currency at favourable rate of exchange for setting up a local company. is transferred to government at the end of 9the Project Financing concession. Facility basis. local company uses transferred technology to earn foreign exchange. build. The discount. replace imports & generate local employment.PROJECT FINANCING Unconventional Sources of Project financing: financing: ‡Franchise Financing: Engineering & construction Financing: contractors become equity holding joint venture partners for the project they design & build. employment. concession.

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