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Project Finance

Project Finance. What is project ?. A project usually defined as a major productive capital investment e.g. In - oil or mineral development - heavy industry - forestry, agriculture - power generation, transportation, (toll roads, bridges) - telecoms.

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Project Finance

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  1. Project Finance .

  2. What is project ? A project usually defined as a major productive capital investment e.g. In - oil or mineral development - heavy industry - forestry, agriculture - power generation, transportation, (toll roads, bridges) - telecoms

  3. Green Field Vs Brown Field Projects Green Field: When a company or government entity starts a new venture by constructing new operational facilities from the ground up. Brown Field: When a company or government entity purchases or leases existing production facilities to launch a new production activity. 

  4. Greenfield Advantages Provides maximum design flexibility to meet project requirements New facility will reduce required maintenance Can be designed to meet current and future needs Opportunity to improve corporate image Suitable for either lease or own option

  5. Greenfield Disadvantages Some sites are not fully developed and have additional development costs such as headwork costs for sewer and water Approval time frames may be longer for new sites High demand of industrial sites may mean that sites available have difficulties (slope, ground conditions)

  6. Brownfield Advantages May include existing environmental licences and approvals Existing infrastructure may already be in place Total project may cost less, but depends on how extensive the fit-out or modifications are, and whether existing structures and services can be utilised without major upgrades (ie electrical, drainage) Occupancy may be faster depending on amount of alterations

  7. Brownfield Disadvantages Design and operation efficiency is often compromised to suit existing constraints Site location may be inner-city and therefore pose operating difficulties in future (traffic congestion, noise if residential close) Older structures can be lightweight design and not meet structural requirements for more advanced fit-out to current standards Fire services often may not comply with regulations and building codes Higher risk of cost blow-outs(overruns) for unforeseen situations Site/buildings may have contamination issues  Existing buildings will often have lower roof heights

  8. Project Finance Financing of a particular economic unit in which a lender looks initially to the cash flows and earnings of that economic unit as the source of funds from which a loan will be repaid and to the assets of the economic unit as collateral for the loan

  9. Characteristics of Project Finance • Project cash flows • Normally higher levels of debt • Variety of contractual obligations and undertakings to manage and reduce risk - Bank Guarantees - Letters of Credit to cover greater risk during construction period

  10. Continued • A variety of funding sources - export credits - development funds - specialised asset finance - conventional debt and - equity finance

  11. Structure of a Project Finance Scheme

  12. Benefits of Project Financing • Limitation of Equity Investment to Project’s Economic Requirement -Enhanced Returns • Risk Sharing and Diversification • Accounting Treatment Preserves Corporate Borrowing Capacity • Access to Long Term Financing • Tax Benefits

  13. Project Finance Process • Strategic/commercial evaluation • Systematic identification and exploration of risks • Valuation (NPV of cash flows), Financial Viability • Design of risk bearing/sharing package • Appropriate funding package • Impact of financing package on net cash flows and sensitivity analysis

  14. Risk Analysis • Resource & input • Technical • Construction • Legal • Economic • Political

  15. Common causes of failure • Completion delay • Cost overrun • Technical failure • Uninsured casualty losses • Increase price/shortage of raw materials • Technical obsolescence • Government interference • Loss of competitive position • Expropriation (Private property taken by govt for the benefit of public) • Poor management

  16. Funding Instruments Debt is sourced from a variety of providers • Conventional senior debt (Term Loan, LCs, etc) • Export Credit Agencies e.g. ECG (Export Credits Guarantee Corp of India) , Coface India Credit Management Service Pvt. Ltd, Exim bank, etc • Buyer and Supplier credits • Non commercial finance e.g. development loans from regional national or international development agencies e.g. EIB(European Investment Bank), EBRD (European Bank for Reconstruction and Development), Asian Development Bank

  17. Continued 5. Long and short term asset finance e.g. Leasing 6. Bond issues 7. Subordinated Debt

  18. Cash Flow Monitoring & Repayment Escrow/Trust & Retention arrangement : The cash flows of the SPV are captured by way of TRA arrangement. Such an arrangement provides for appropriation of all cash flows of the company by the independent agent (acting on behalf of security trustee). This is then allocated in a pre determined manner to various requirements including debt servicing and it is only after all requirements are met that the residual cash flow is available to the project company. Thus, the lender would have the security of cash flows in addition to the assets of the company.

  19. Continued Debt Service Reserve Account (DSRA) : In order to ensure regular payment of interest plus instalment, DSRA equivalent to the instalment plus interest of some specified period is maintained as a cushion. The funds in DSRA are normally created out of the cash flow surplus left after the servicing of debt and operation & maintenance expenses.

  20. Types of Financing by Banks working capital finance, term loan, project loan, subscription to bonds and debentures/ preference shares/ equity shares acquired as a part of the project finance package which is treated as "deemed advance” and any other form of funded or non-funded facility. Take-out Financing Inter-institutional Guarantees

  21. APPRAISAL OF PROJECT MARKETING 1) Reasonable demand projections keeping in view the size of the market, consumption level, supply position, export potential, import substitute, etc. 2) Competitors' status and their level of operation with regard to production and sales. 3) Technology advancement/Foreign Collaborator's Status/Buy-back arrangements etc. 4) Marketing policies in practice, for promotion of product(s) and distribution channels being used. Expenses on marketing are done so as to popularize the product. 5) Local/foreign consumer preferences, practices adopted, attitudes, requirements etc.

  22. Continued 6) Influence of Govt. policies, imports and exports in terms of quantity and value. 7) Marketing professionals employed, their competence, knowledge and experience. TECHNICAL 1) Product and its life cycle, product-mix and their application. 2) Location, its advantages/disadvantages, availability of infrastructural facilities, Govt. concessions, if any, available there. 3) Plant and machinery with suppliers' credentials and capacity attainable under normal working condition.

  23. Continued 4) Process of manufacturing indicating the choice of technology, position with regard to its commercialisation and availability. 5) Plant and machinery - its availability, specification, price, performance. 6) Govt. clearance/licence, if any, required e.g. pollution control certificate, changes in regulatory policies of local/State/Central Govt. etc. activity is prohibitive or not, location of unit in restrictive area (i.e. near to Residential, Historic Monuments etc). 7) Labour/Manpower, type of skills required and its availability position in the area.

  24. Continued FINANCIAL 1) Total project cost and how it is being funded/financed. 2) Contingencies and inflation, duly factored in project cost. 3) Profitability projections based on realistic capacity utilisation and sales forecast with proper justification. Unrealistic/ambitious sales projections without reference to past performance and justification to be avoided. 4) Break-even analysis, fund flow and cash flow projections. 5) Balance sheet projections should be realistic and based on latest available data. The components of financial ratios should be subjected to close scrutiny.

  25. Continued 6) Aspect of support of parent company, wherever applicable, may be taken into account. MANAGERIAL 1) Financial standing and resourcefulness of the management. 2) Qualifications and experience of the promoters and key management personnel. 3) Understanding of the project in all of its aspects - financing pattern, technical knowledge and marketing programme etc. 4) Internal control systems, delegation of adequate powers and entrusting responsibility at various levels. 5) Other enterprises, if any, wherein the promoters have the interest and how these are functioning.

  26. Continued ECONOMIC 1) Impact on increase in level of savings and income distribution in society and standard of living. 2) Project contribution towards creation and rate of increase of employment opportunity, achieving self sufficiency etc. 3) Project contribution to the development of the region, its impact on environment and pollution control.

  27. . Thank You

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