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What is Project Finance?

Project financing is, 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 flow generated by the project. In other words, project financing is a loan structure that relies primarily on the project's cash flow for repayment, with the project's assets, rights, and interests held as secondary security or collateral. Unlike corporate finance, lenders do not have recourse to the assets of the sponsors (e.g. the parent corporation) should the project fail. This special non-recourse or limited recourse feature makes project finance attractive to sponsors because financing is offbalance sheet. It does not jeopardize the parent companys ability to borrow funds for other purposes or investors assessment of its liabilities in the balance sheet. However, with the trend towards better corporate governance and greater transparency, corporations are generally required to report material off-balance sheet items at least in the footnotes of their annual or quarterly reports. The disclosure covers debt and guarantees as well as purchase, lease, and contingent obligations. Increasingly, project financing is emerging as the preferred alternative to conventional methods of financing infrastructure and other large-scale projects worldwide. Project Financing discipline includes understanding the rationale for project financing, how to prepare the financial plan, assess the risks, design the financing mix, and raise the funds. A knowledge-base is required regarding the design of contractual arrangements to support project financing; issues for the host government legislative provisions, public/private infrastructure partnerships, public/private financing structures; credit requirements of lenders, and how to determine the project's borrowing capacity; how to prepare cash flow projections and use them to measure expected rates of return; tax and accounting considerations; and analytical techniques to validate the project's feasibility.

Project finance is finance for a particular project, such as a mine, toll road, railway, pipeline, power station, ship, hospital or prison, which is repaid from the cash-flow of that project. Project finance is different from traditional forms of finance because the financier principally looks to the assets and revenue of the project in order to secure and service the loan. In contrast to an ordinary borrowing situation, in a project financing the financier usually has little or no recourse to the non-project assets of the borrower or the sponsors of the project. In this situation, the credit risk associated with the borrower is not as important as in an ordinary loan transaction; what is most important is the identification, analysis, allocation and management of every risk associated with the project. Financiers are concerned with minimizing the dangers of any events which could have a negative impact on the financial performance of the project, in particular, events which could result in: (1) the project not being completed on time, on budget, or at all; (2) the project not operating at its full capacity; (3) the project failing to generate sufficient revenue to service the debt; or (4) the project prematurely coming to an end.

Project Appraisal Project Appraisal is the analysis of a proposed project to determine its merit and acceptability in accordance with established criteria. This is the final step before a project is agreed for financing. It checks that the project is feasible against the situation on the ground, that the objectives set remain appropriate and that costs are reasonable. Appraising a project involves Market, Technical, Economic, Ecological and Financial Appraisals. These are the various facets of project analysis which include: Market Anaysis covers majorly two questions: What would be the aggregate demand for the proposed product/service in the future? What would be the market share of the project under appraisal?

Technical Appraising Whether pre-requisites for the success of project have been considered? Good choices with regard to location, size, process, machines etc.

Economic Appraisal Social cost -benefit analysis Direct economic benefits and costs in terms of shadow prices Impact of project on distribution of income in society Impact on level of savings and investments in society Impact on fulfillment of national goals :(1) Self sufficiency (2) Employment and (3) Social order Ecological Appraisal Impact of project on quality of :- Air, Water, Noise, Vegetation, Human life Major projects ,such as these, cause environmental damage o Power plants o Irrigation schemes o Industries like bulk drugs, chemicals and leather processing. Likely damage & the cost of restoration

Financial Appraisal Whether the project is financially viable? o Servicing debt o Meeting return expectations