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Introduction to Project
Funding
1
The firm’s business
environment - Relevant Factors
Government policy
Fiscal policy and legislation
Financial sector
Macro-economic developments
Past and current practices in
project financing
2
Options for project financing
Internal funds
Private sector:
1. Commercial banks
2. Development corporations
3. Equipment vendors & subsidiary finance
Companies
4. Trade finance (suppliers and customers)
5. Equity
Government sector
3
Internal funds
Internal funds can be generated
from:
– Capital introduced by the owner
– Profits & cash flows generated by the
business and retained within it
4
Capital from the private sector
Long-term loans to purchase fixed
assets: secured or unsecured
Short-term loans (including lines of
credits without conditions on use)
Leasing
Equity (issue of shares/stock)
...
5
Capital from the government
sector
Grants
Subsidies
Government-managed
development funds
6
Firms’ criteria in raising
finance
Profitability
Risk of excessive debt
(‘Leverage’, or ‘gearing’)
Matching duration of finance to
duration of project
Procedures for application
7
Participants’ Experiences
of Financing Projects
8
Project finance
- Issues and questions (1)
What was the project?
Which sources were considered?
Which sources were then approached?
What information did they require?
Could you provide this information?
What were their criteria? (Were
these clear to the firm?)
9
Project finance
- Issues and questions (2)
Was the application successful? If
not - why not?
Did any problems arise during the
process of applying?
What requirements did the financier
set concerning post-funding project
management?
10
Project finance
- Issues and questions (3)
What do you consider the firm did
well? … and not-so-well?
Would you do anything differently
another time?
What advice can you offer to others
from this experience?
Does this experience prompt any
questions?
11
Some typical project finance
issues and problems ...
The project is not considered to be
economically feasible (i.e. profitable)
The firm is unable or unwilling to issue more
shares or to raise debt
The firm does not yet have contacts with
commercial banks
The firm is in public ownership and private
sources of finance are not accessible
12
…and some possible solutions (1)
Problem: the project is not considered to be
economically feasible
Solution: Total Cost Assessment of project
Problem: the firm is unable or unwilling to
issue more shares or to raise debt
Solution: Leasing
13
…and some possible solutions (2)
Problem: the firm does not yet have contacts
with commercial banks
Solution: contact chamber of commerce, local
accountants, NGOs funds managers, for
assistance
Problem: the firm is in public ownership and
private sources of finance are not accessible
Solution: contact local national CP centre for
institutional assistance
14
A few general points of
advice...
consider the effect of the current
business environment
search widely for possible alternative
sources of finance
seek advice from experts and from
contacts in other firms
15
Other Potential Sources for
Project Financing
16
Checklist:
“Funding Options”
17
Further potential sources
Internal funds
Equity (owners’ capital)
Leasing / equipment vendors and
subsidiary finance companies
Trade credit (suppliers, customers)
Micro-credits
Development bank loans
Government finance
18
Internal funds (1)
Internal funds = retained profits
(‘reserves’)
Size of reserves depends on:– Past profitability of business
– Minimizing tax liabilities
– Proportion of profits retained
vs.
Paid out to owners in dividends
19
Internal funds (2)
avoids having to approach external
sources (and transaction costs)
preserve borrowing power for future
projects
have an indirect opportunity cost
not available to new firms
must be built up over time
20
Equity capital
Equity = ordinary shares, i.e. owners’
capital
Potential sources of new equity:– more capital from the current owners
(shareholders)
– new shareholders, by private approaches
– venture capital
– a public share offering
21
Equipment vendors and
subsidiary finance companies
Leasing has become a major source of
financing that is provided by some equipment
vendors and subsidiary finance companies
(‘lease-providers’).
With ‘financial leases’ (or ‘capital leases’):
– Title to the equipment is held by the firm
which operates it (the ‘lease-holder’)
– The lease-provider retains a first security
interest in the equipment
– The lease-holder faces the risks and receives
the rewards of ownership
22
Trade finance
potential sources
– suppliers of raw materials
– suppliers of other goods and services
– key customers
their motive: to secure a key
customer or source of supply
risk: being tied to a particular
supplier or customer and unable to
develop business freely
23
Micro-Credits (MC)
aim: ‘to match appropriate technologies
and financing, through the development
of packages that build on community
values’
local initiatives, depending on MC
managers’ knowledge of their own
localities and markets
an expanding source for socially
desirable projects - but little-known
24
Micro Credit example
Grameen Bank (1)
Grameen Bank,Bangladesh: the pioneer
(founder: Mohammed Yunus)
core belief: the credit-worthiness of
the poorest members of a community
aim: to break out of the poverty
cycle, using innovative technologies
a model for many similar banks
operating across the world
25
Micro Credit example
Grameen Bank (2)
finance derived from international
sources (e.g. development banks)
Grameen uses this to make ‘soft’
loans to local borrowers
several projects in renewable
energy and other environmental
investments
website: www.Grameen-info.org
26
Micro Credit example
Grameen’s lending policy
no requirement for security
repayable in weekly instalments
eligibility for subsequent loans
depends on full repayment of any
earlier loans
transparency in bank transactions
helps to encourage repayments by
borrowers, through social pressure
27
Micro Credit example
Grameen - the results
2.34 million borrowers in Bangladesh
94% are women
loans for projects in 39,000 of
86,000 villages in Bangladesh
1977-1997, total lending - US$2
billion
now, 223 Grameen-type programmes
in 58 countries
28
Development banks (1)
examples:
–
–
–
–
World Bank
International Finance Corporation
Inter-American Development Bank
Asian Development Bank
wide and diverse range of
programmes and projects
29
Development banks (2)
development banks aim:– to lend large amounts…
– … but at low transaction costs
therefore, traditionally, mainly
large projects in the public sector
stringent guidelines on project
characteristics and lending criteria
(e.g. to be environmental, social,
developmental, technically innovative)
30
Development banks (3)
Benefits of development bank finance:
can help with technological and
managerial advice on the project
project packaging
liaison with other potential sources
of finance
31
Raising finance from
government schemes
identify the available schemes
find out:– the criteria and conditions of the
scheme
– the procedures for application
develop the firm’s application:– to match the scheme’s criteria
– to identify how the project supports
public policy objectives
32
Grants
low or zero cost of capital
may be available for only part of a project,
or on restrictive terms
preserves borrowing power for other
purposes
accessible via local brokers and/or
international development agencies
BUT:– can conceal true long-term costs
– misses opportunity to build long-term
relationship with financiers
33
Past funding experience
successful past experiences with
financing projects?
how might CP projects be
different? Why might they be ...
– more difficult to finance?
– easier to finance?
could these further sources be
relevant? If so - when and how?
34
Summary
a wide range of potential sources
means:-
– more likely to be able to raise finance...
– … and on better terms
the range varies between countries
and over time
an early search for a wide range
of sources can be very worthwhile
each source will have its own criteria
and procedures
35
Acme Electroplaters:
Part 2
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