1 Introduction to Project Funding

2 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

3 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

4 Internal funds Internal funds can be generated from: –Capital introduced by the owner –Profits & cash flows generated by the business and retained within it

5 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) ...

6 Capital from the government sector  Grants  Subsidies  Government-managed development funds

7 Firms’ criteria in raising finance  Profitability  Risk of excessive debt (‘Leverage’, or ‘gearing’)  Matching duration of finance to duration of project  Procedures for application

8 Participants’ Experiences of Financing Projects

9 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?)

10 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?

11 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?

12 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

13 …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

14 …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

15 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

16 Other Potential Sources for Project Financing

17 Checklist: “Funding Options”

18 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

19 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

20  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 Internal funds (2)

21 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

22 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

23 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

24 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

25 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 Micro Credit example

26  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: Grameen Bank (2) Micro Credit example

27 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 Micro Credit example

28 Grameen - the results  2.34 million borrowers in Bangladesh  94% are women  loans for projects in 39,000 of 86,000 villages in Bangladesh  , total lending - US$2 billion  now, 223 Grameen-type programmes in 58 countries Micro Credit example

29 Development banks (1)  examples: – World Bank – International Finance Corporation – Inter-American Development Bank – Asian Development Bank  wide and diverse range of programmes and projects

30 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)

31 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

32 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

33 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

34 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?

35 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

36 Acme Electroplaters: Part 2