1. Project Financing By CA SNEHAL KAMDAR
FCA, DISA,DIPLOMA IN FORENSIC AUDIT
PARTNER IN JAIN JAGAWAT KAMDAR &CO.
Chartered accountants

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

3. 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.

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

5. 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.

6. 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 or B.O.T basis.

7. 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.

8. 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.

9. 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.

10. 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.

11. 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
Project debt is substantially more expensive ( 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.

12. Stages in Project Financing.
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.

13. 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

14. Stages in Project Financing – Risk Identification and Minimizing.
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

15. Stages in Project Financing – Risk Identification and Minimizing.
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

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

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

18. 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.

19. 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

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

21. 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.

22. Stages in Project Financing – Financial Closure / Project Closure
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.

23. Stages in Project Financing – Repayment & Subsequent Monitoring
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.

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

25. Conclusion – A Typical Project Finance Structure.

26. 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.

27. 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.

28. Thank You.
CA SNEHAL KAMDAR