PROJECT FINANCE

PROJECT FINANCE
Raising of funds to finance an economically separable capital investment project in which the providers of funds look primarily to cash flow from the project to service their debt and provide returns on their equity Creation of Special Purpose Vehicle Types of Projects
Physical Infrastructure
Roads Building Dam Airports Ports Water Supply Energy

Soft Infrastructure: Health , Education

DEMAND SUPPLY GAP

Annual investment needs in Urban Infrastructure alone are about Rs. 400 billion* as against an availability of Rs. 50 billion, (excluding new mass transit and township development projects) High Cost of construction Generally projects have returns over long period No cash inflows during gestation period Have Pre operative expenses also Funds are kept for contingencies also

SERVICE PROVISION OPTIONS

Infrastructure Services

Status Quo: Govt creates assets & provides services

Public Private Partnership

Privatization: Private Sector creates assets & provides services

Commercialization: Govt creates assets & hands over to Pvt Sector to provide services
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WAY FORWARD

Small Number Of Profitable Projects

Larger Number Of Marginally Profitable Projects

Unprofitable, But Imperative Projects

Maintenance Works

Build Operate Transfer BOT

Govt. Leveraged Privatisation

Budgetary Allocation

Dedicated Funds (Road Fund)

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PROJECT FINANCING

Sponsor/ Corporate
Equity Funds Financial Institutions Multi-lateral Institutions
World Bank, IFC

Public Finance
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PROJECT FINANCE PROCESS

Identification of Project
Government Approvals Bidding Process Calculation of Viabilities Project Financing

Project Implementation
Revenue Collection

UNDERSTANDING VIABILIT Y OF PROJECTS

Managerial Viability: Managerial Competence Technical Viability: Is it possible to build that project in the given time & Cost Financial & Economic Viability: The Cost Benefit analysis
Ratios like Debt Service Coverage Ratio Cash Flow projections, mode of Financing etc. NPV, IRR has to be calculated Risk Calculation : Sensitivity Analysis, Scenario Building, Simulation

BOTTLE NECKS IN PROJECT FINANCING

Time Delays Cost Overrun Corruption Unforeseen Risk Huge Investment Lack of Government Funds User Unwilling to pay

WAYS OF DEALING WITH TIME & COST ISSUES

PERT: Project Evaluation Review Technique

CPM: Critical Path Method, used for reduction in total time by reducing the longest chain of work

OTHER FINANCING OPTIONS

Term Loan: In case of term loan bank or financia l institution gives

gener ally 3 -7 year loan for acquisition of fixed assets

Deferred Payment Guarantee: Instead of taking term loan & paying interest to bank , company takes the asset on installme nts/ deferred payment. The bank does credit appr aisa l and takes guarantee for the deferred payment. Hire Purchase: It is a contractua l arrangeme nt under which the owner (Hire Vendor) lets his goods on hire to the hirer on condition of periodic installme nt payment and owner sh ip is transferred at the payment of last installme nt LEASE FINANCE: A Lease is a transfer of a right to enjoy the proper ty at a price or a rent. So instead of buying the asset user (lessee) uses the asset and pays lease rentals to lessor.

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