b arch sem 6

1. UNIT – IV
FINANCING FOR PROJECTS
SOURCES COST AND UTILITY IN FINANCING
AGENCIES AND INSTITUTIONS DIRECTLY AND
INDIRECTLY INFLUENCING ECONOMIC
ASPECTS OF PROJECT
By
Ar. A . ANUSHA

2. By
Ar. A . ANUSHA

3. Objectives
To understand what project financing is and
what steps are involved in securing and
managing it.

4. Part – 1 Introduction
For whom is it important to understand project
financing?
Why is it important to understand project
financing?
 What is a project?
 Types of projects.
 What is project financing?
 Key characteristics of project financing.
Advantages of project financing.
 Disadvantages of project financing.

5. Introduction –
For whom is it important to understand project
finance?
 Financial managers
Architects
 Sponsors
 Lenders
 Consultants and practitioners
 Project managers
 Builders
 Suppliers
 Engineers.
 Researchers
 Students.

6. Introduction –
Why is it important to understand project
finance?
The people involved in a project are used to find financing deal
for
 Major construction projects such as
 Mining,
 Transportation and
 Public utility industries, that may result such risks and
compensation for repayment of loan, insurance and assets in
process.
 That’s why they need to learn about project finance in order
to manage project cash flow for ensuring profits so it can be
distributed among multiple parties, such as investors, lenders
and other parties.

7. Introduction – What is a Project?
A Project is normally a long-term infrastructure, industrial or public
services scheme, development or undertaking having:
 large size.
 Intensive capital requirement – Capital Intensive.
 finite and long Life.
 few diversification opportunities i.e. assets specific.
 Stand alone entity.
 high operating margins.
 Significant free cash flows.
Such projects are usually government regulated and monitored which
are allowed to an entity on B.O.O (BUILD - OWN - OPERATE ) or
B.O.T(BUILD – OPERATE - TRANSFER ) basis.

8. Introduction – Types of Project.
 Motorway and expressway.
 Metro, subway and other mass transit systems.
 Dams.
 Railway network and service – both passenger and cargo.
 Power plants and other charged utilities.
 Port and terminals.
 Airports and terminals.
 Mines and natural resource explorations.
 Large new industrial undertakings – [no expansion and
extensions.
 Large residential and commercial buildings.

9. Introduction – What is Project Financing?
International Project Finance Association (IPFA) defined project
financing as:
“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 flows generated by the project.”
Project finance is especially attractive to the private sector because
they can fund major projects off balance sheet.

10. Introduction – Key characteristics of Project
Financing.
The key characteristics of project financing are:
Financing of long term infrastructure and/or industrial projects using
debt and equity.
Debt is typically repaid using cash flows generated from the
operations of the project.
Limited recourse to project sponsors.
Debt is typically secured by project’s assets, including revenue
producing contracts.
 First priority on project cash flows is given to the Lender.
 Consent of the Lender is required to disburse any surplus cash
flows to project sponsors
 Higher risk projects may require the surety/guarantees of the
project sponsors.

11. Introduction - Advantages of Project Financing.
 Eliminate or reduce the lender’s recourse to the sponsors.
 Permit an off-balance sheet treatment of the debt financing.
 Maximize the leverage of a project.
 Avoid any restrictions or covenants binding the sponsors under their
respective financial obligations.
 Avoid any negative impact of a project on the credit standing of the
sponsors.
 Obtain better financial conditions when the credit risk of the project is
better than the credit standing of the sponsors.
 Allow the lenders to appraise the project on a segregated and stand-
alone basis.
 Obtain a better tax treatment for the benefit of the project, the
sponsors or both.

12. Introduction – Disadvantages of Project
Financing.
 Often takes longer to structure than equivalent size corporate
finance.
 Higher transaction costs due to creation of an independent entity.
Can be up to 60bp( basis point)
 Project debt is substantially more expensive (50-400 basis points)
due to its non-recourse nature.
 Extensive contracting restricts managerial decision making.
 Project finance requires greater disclosure of proprietary information
and strategic deals.

13. Part – 2
Stages in Project Financing.
Project identification
Risk identification & minimizing Pre Financing Stage
Technical and financial feasibility
Equity arrangement
 Negotiation and syndication Financing Stage
 Commitments and documentation
 Disbursement.
 Monitoring and review
 Financial Closure / Project Closure Post Financing Stage
 Repayments & Subsequent monitoring.

14. Stages in Project Financing – Project
Identification.
 Identification of the Project
 Government announced
 Self conceived / initiated
 Identification of market
 Product of the project
 Users of the product
 Marketability of the product
 Marketing Plan

15. Stages in Project Financing – Risk
Identification and Minimizing.
Risk Solution
Completion Risk Contractual guarantees from contractors,
manufacturer, selecting vendors of repute.
Price Risk hedging
Resource Risk Keeping adequate cushion in assessment.
Operating Risk Making provisions, insurance.
Environmental Risk Insurance
Technology Risk Expert evaluation and retention accounts.
Interest Rate Risk Swaps and Hedging
Insolvency Risk Credit Strength of Sponsor, Competence of
management, good corporate governance

16. Currency Risk Hedging
Political and
Sovereign Risk
• Externalizing the project company by forming it
abroad or using external law or jurisdiction
• External accounts for proceeds
• Political risk insurance (Expensive)
• Export Credit Guarantees
• Contractual sharing of political risk between
lenders and external project sponsors
• Government or regulatory undertaking to cover
policies on taxes, royalties, prices, monopolies, etc
• External guarantees or quasi guarantees
Stages in Project Financing – Risk
Identification and Minimizing.

17.  Technical feasibility
 Location
 Design
 Equipment
 Operations / Processes.
 Financial feasibility
 Business plan / model
 Projected financial statements with assumptions
 Financing structure
 Pay-back, IRR, NPV etc.
Stages in Project Financing – Technical and
Financial Feasibility.

18. Stages in Project Financing – Equity
arrangement.
 Sponsors
 Lead sponsors
 Co – sponsors
 Private equity participation
 Angel investors – Private equity funding
 Financial institutions
 Non-financial institutions.

19. Stages in Project Financing – Negotiation and
syndication.
 Lenders
 Banks.
 Non- banking financial institutions.
 International lending institutions.
 Syndication
 Lead arranger.
 Co-arrangers.
Negotiation
 Pricing.
 Documentation.
 Disbursement.

20. Stages in Project Financing – Documentation.
 Commitment letters / MOUs
 Commitment letters from sponsors and investors
 MOU signing with financiers.
 Documents
 Offer Letters
 Lending agreements
 Security documents
 Disbursement plan
Contracts
Management/shareholder agency relationship
Inter corporate agency relationship
Government/corporate agency relationship
Bondholder stockholder relationship

21. Stages in Project Financing – Disbursement.
 Equity Disbursement
 Shares application.
 Shares proceeds.
 Share certificates.
 Loan Disbursement
 Sponsor loans
 Advance payments
 Progress Payment

22. Stages in Project Financing – Monitoring and
Review
 Why?
 Project is running on schedule
 Project is running within planned costs.
 Project is receiving adequate costs.
 How?
 First hand information.
 Project completion status reports.
 Project schedule chart.
 Project financial status report.
 Project summary report.
 Informal reports.

23. Stages in Project Financing – Financial Closure
/ Project Closure
Financial closure is the process of completing all project-related financial
transactions, finalizing and closing the project financial accounts,
disposing of project assets and releasing the work site.
Financial closure is a prerequisite to project closure and the Post
Implementation Review (PIR). A project cannot be closed until all
financial transactions are complete, otherwise there may not be funds or
authority to pay outstanding invoices and charges. Financial closure
establishes final project costs for comparison against budgeted costs as
part of the PIR. Financial closure also ensures that there is a proper
disposition of all project assets including the work site.
Project closure and commencement take place after financial closure.

24. Stages in Project Financing – Repayment &
Subsequent Monitoring
 Repayments
 Grace period.
 Monthly installment.
 Quarterly installments.
 Dividends
 Monitoring?
 Appointment of directors and managers.
 Management meetings.
 Board meetings.

25. Part – 3
Conclusion.
 A typical project financing structure.
 Highlights of project financing structure.

26. Conclusion – A Typical Project Finance
Structure.

27. Conclusion – Highlights of Project Financing
Structure.
 Independent, single purpose company formed to build and operate
the project.
 Extensive contracting
 As many as 15 parties in up to 1000 contracts.
 Contracts govern inputs, off take, construction and operation.
 Government contracts/concessions: one off or operate-transfer.
 Ancillary contracts include financial hedges, insurance for Force
Majeure, etc.

28. Conclusion – Highlights of Project Financing
Structure.
 Highly concentrated equity and debt ownership
 One to three equity sponsors.
 Syndicate of banks and/or financial institutions provide credit.
 Governing Board comprised of mainly affiliated directors from
sponsoring firms.
 Extremely high debt levels
 Mean debt of 70% and as high as nearly 100%.
 Balance of capital provided by sponsors in the form of equity or
quasi equity (subordinated debt).
 Debt is non-recourse to the sponsors.
 Debt service depends exclusively on project revenues.
 Has higher spreads than corporate debt.

29. AGENCIES AND INSTITUTIONS
DIRECTLY AND INDIRECTLY
INFLUENCING
ECONOMIC ASPECTS OF
PROJECT

30. Institutions and Economic
Development
Are institutions the cause of
current economic performance?

31. By institutions we mean rules of structural
social interaction (both formal and informal) –
they structure incentives in human exchange (be
it economic, political or social).
Formal institutions –
 property rights
 legal system
 rule of law
 constitution.
Informal institutions –
how to behave in everyday life (linked to religion, history, social
acceptability).

32. Efficiency or Social Conflict view of
Institutions:
(1)Institutions affect economic outcomes but society will
choose those institutions that maximise social surplus
(2) Institutions are not always chosen by all of society
but instead by the few, hence not efficient.
(3) North (1981) argues that institutions act to constrain
the individual in order to enhance the welfare of the
‘principals’.

33.  Institutions can and will likely result in an elite forming
who will attempt to retain their position of power.
 There may be successful or may not be, but they can be
replaced by an alternative elite.
 For the basis of this lecture we assume that institutions
can be
(i) Developmental or
(ii) predatory
(i) Developmental Institutions –
encourage investment, growth and productivity.
(ii) Predatory – extractive institutions that favour the few.

34. Fundamental Causes of Growth
Economics Institutions:
encouraging investment through incentives, human capital,
entrepreneurship, innovation, occupational choice, land ownership.
Cultures:
values, beliefs, religions
Geography:
climate (affect productivity and worker effort), agricultural (technological)
productivity higher in temperate zones than in tropics, burden of
infectious diseases, natural endowments, transport costs
Trade and Integration:
affects productivity changes.

35. Types of Institutions
(i) Institutions that protect individual property rights –
e.g. defend against expropriation of resources.
(ii) Institutions related to democratic political rights (Sen)
(iii) Institutions correcting co-ordination failure –
efficiency of government for example in implementing policy
(e.g. South Korea).
Countries can have good and bad institutions then –
e.g. South Korea has one party political system.

36. QUESTIONS ???

37. Thank You.