Transcript Project Finance

Project Finance
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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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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.
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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
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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)
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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
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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
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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
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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
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Continued
• A variety of funding sources
- export credits
- development funds
- specialised asset finance
- conventional debt and
- equity finance
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Structure of a Project Finance
Scheme
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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
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Project Finance Process
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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
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Risk Analysis
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Resource & input
Technical
Construction
Legal
Economic
Political
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Common causes of failure
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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
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Funding Instruments
Debt is sourced from a variety of providers
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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
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Continued
5. Long and short term asset finance e.g. Leasing
6. Bond issues
7. Subordinated Debt
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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.
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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.
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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
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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,
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attitudes, requirements etc.
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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.
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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.
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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.
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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.
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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.
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Thank You
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