by sachin sharma manipal jaipur

2. 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.

3. 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.

4. The International Project Finance Association defines
Project finance as “financing of long-term
infrastructure, industrial projects, power plant, etc.,
where project debt and equity used to finance the
project are paid back from the cash-flow generated by
the project.”
The two key aspects of project financing are:
1. The project revenues (cash flows) are expected to
service debt or equity interest taken by the providers
of capital.
2. The loans are secured by the project assets or, to
the extent security interests are restricted or have
limited value, are secured by contingent support from
sponsors and other project participants.

6. 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.

7. 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.
 Avoid any restrictions binding the sponsors under their
respective financial obligations.
 Avoid any negative impact of a project on the credit standing
of the sponsors.
 Obtain a better tax treatment for the benefit of the project,
the sponsors or both.

8. 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.
 Project debt is substantially more expensive due to its non-
recourse nature.
 Extensive contracting restricts managerial decision making.
 Project finance requires greater disclosure of proprietary
information and strategic deals.

9.  Litigious with regard to negotiations.
· Complexity due to lengthy documentation.
· Requires broad risk analysis and evaluation to be
performed.
· Requires qualified people for performing the
complicated procedures of project finance.
· Higher level of control which might be exercised
by the banks, which might bring conflict with the
businesses or contracts.

10. 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.