PROJECT FINANCING OVERVIEW AND FUNDAMENTALS
Content
1.1 Meaning of project financing……………………………………………………..1
2.1 Project financing verse cooperate financing……………………………………….5
3.1 Development of project financing thought…...…………………............................6
4.1 Focus on project financing………………………………………...........................7
5.1 Features of project financing……………………………………............................7
6.1 Advantage an disadvantage of project financing………………………………….9
7.1 difference between resource and non resource loan……………………………...9
8.1 players of project financing……………………………………………………….10
9.1 The role of participants in project finance………………………………………...11
10.1 working with lenders…………………………………………………………….14
11.1 The operations and management of agreements………………………………...15
12.1 power of financiers……………………………………………………………....16
13.1 A Sources of funding…………………………………………………………….17
14.1 Equity funds verse debt funds…………………………………………………...18
15.1 determinants of debt –equity ratio……………………………………………….24
16.1 The process and means of raising equity capital………………………………...24
17.1 Contract structure, documentation and risk sharing………………………….….30
18.1 Project risk management………………………………………………………...30
19.1 Documentation to key project management……………………………………..36
20.1 Dispute resolution………………………………………………………………..39
21.1 Concept of financing infrastructure concepts……………………………………43
22.1 Role of public partnership projects……………………………………………...45
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,1.0 Meaning of project financing
What is a Project?
A Project is normally a long-term infrastructure, industrial or public services scheme,
development or undertaking having( large size assets, Intensive capital requirement, finite
and long Life ,have few diversification opportunities i.e. assets are specific, Stand-alone
entity, have high operating margins have significant free cash flows. These types of projects
are usually government regulated and monitored.
Characteristics of a general project
(1) A project has a set of objectives or a mission. Once the objectives are achieved the project
is treated as completed example if the ministry of roads has a project to contract a road from
Johannesburg to polokwane once the road is complete then the objective is achieved.
Another example if the ministry of health has the objective of having all children vaccinated
for polio by the end of the year once that is done then the project is achieved
(2) A project has a life cycle. The life cycle consists of five stages i.e. conception stage,
definition stage, planning & organizing stage, implementation stage and commissioning
stage. Example before any project begins it will star with a thought then move on to defining
what the project is all about, this involve the processes and organizing what is needed in
terms of resources (technological, human ,financial and the infrastructure needed) then it
moves onto the methods and methodologies and lastly commissioning of the project
(3) Every project is unique. No two projects are similar. Setting up a cement plant and
construction of a highway are two different projects having unique features. Projects may
share the same goal but have different objectives, and methods of implementation eg a
project that may have a goal of having healthy nation may have different methods of
implementation and /or even have different objectives. Eg one may have the objective of
having a healthy nation by educating the mothers and parents who buy and cook food on
which foods to buy while the other its objective maybe to increase access to variety of food
by building market stores the sell healthy foods next to the residential areas which will
encourage people to buy and cook healthy foods .while the first one its objective forced on
education while the next one the forces was on access
(4) Project is a team work and it normally consists of diverse areas. There will be personnel
specialized in their respective areas and co-ordination among the diverse areas calls for team
work. A project can only be successful if all members work as a team and are all willing to
work towards the set goals and objectives
(5) A project is a complex set of activities relating to diverse areas. Example the human
resource activities or recruitment will link to finance which links to salaries and this will
also link to selection of the right personnel who will implement the set goals and with the
help of suppliers and other external customers achieve the set goals
(6) A project has risk and uncertainty: Risk and uncertainty go hand in hand with project. A
risk-free project( only means that the element is not apparently visible on the surface and it
will be hidden underneath).When one starts a project they anticipate various risks like
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,political instability/ interference, natural calamities, problems with suppliers ,fire, theft, poor
management etc
(7) A project is always customer specific. It is the customer who decides upon the product to
be produced or services to be offered and hence it is the responsibility of any organization to
go for projects/services that are suited to customer needs.Example the government is the one
that decides if an oil pipeline project is to be done in a specific place or not.
(8) Changes occur throughout the life span of a project as a natural outcome of many
environmental factors. The changes may vary from minor changes, which may have very
little impact on the project, to major changes which may have a big impact or even may
change the very nature of the project. Example technology change is inevitable ,the project
may be force to keep up with the new technology other changes may be the changed that will
have environmental impact
(9) A project is always aimed at optimum utilization of resources for the overall development
of the economy. At the final end the project aims to utilize the resources well for the benefit
of growing the country‘s economy
(10)Projects have the quality of Sub-contracting: A high level of work in a project is done
through contractors. The more the complexity of the project, the more will be the extent of
contracting. Example a project on building an oil company the company will have to sub
contract businesses that deal in excavation, tendering of cement electrical companies etc.
(11) a project has unity in diversity: A project is a complex set of thousands of varieties. The
varieties are in terms of technology, equipment and materials, machinery and people, work,
culture and others.
There is no singular definition of project finance.
It can be defined as a Loan arrangement in which the repayment is derived primarily from the
project's cash flow on completion, and where the project's assets, rights, and interests are
held as collateral.
Project Finance can be characterized in a variety of ways and there is no universally adopted
definition but as a financing technique it can be defined as:
―The raising of finance on a Limited Recourse basis, for the purposes of developing a large
capital- intensive infrastructure project, where the borrower is a special purpose vehicle and
repayment of the financing by the borrower will be dependent on the internally generated
cash flows of the project‖
This definition in itself raises a number of interesting questions, including:
What do we mean by ‗Limited Recourse‘ financing – recourse to whom or what?
Why is Project Finance typically used to finance large capital intensive infrastructure
projects?
Why is the borrower a special purpose vehicle (SPV) under a project financing?
What happens if the internally generated cash flows of the project are not sufficient to
repay the financiers of the project?
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, Why is it important to understand project finance ?
We need to learn about project finance in order to manage project cash flow for ensuring
profits .These profits can be distributed among multiple parties, such as investors, lenders
and other parties
Types of Project.
o Motorway and expressway. (Roads)
o Metro, subways and other mass transit systems.( Railway network and service)
o Dams.
o Power plants and other charged utilities.
o Air and sea Port terminals.
o Mines and natural resource explorations.
o Large new industrial undertakings
o Large residential and commercial buildings.
What is 'Corporate Finance?'
Corporate finance consists of the financial activities related to running a corporation, usually
with a division or department set up to oversee the financial activities. Corporate finance is
primarily concerned with maximizing shareholder value through long-term and short-term
financial planning and the implementation of various strategies. Everything from capital
investment decisions to investment banking falls under the domain of corporate finance.
Among the financial activities with which a corporate finance department is involved are
capital investment decisions. Should a proposed investment be made? How should the
company pay for it with equity or with debt, or a combination of both? Should shareholders
be offered dividends on their investments in the company? These are just some of the
questions a corporate financial officer attempts to answer on a consistent basis. Short-term
issues include the management of current assets and current liabilities, inventory control,
investments and other short-term financial issues. Long-term issues include new capital
purchases and investments.
In organization where corporate finance is practiced, the objective of practicing it is to
maximize the wealth of the shareholders. Corporate finance mainly deals with the sources of
funds and how the optimum capital structure will be achieved.
Terms mostly used in corporate finance
Capital Structure: To understand corporate finance, you need to know capital
structure well. A firm which runs its operation on day to day basis (not project wise)
needs to find source of funds. The source of funds can comprise of their own capital
funding or taking loan from creditors around in the market. Capital structure is how a
firm finances its operations and growth by sourcing the money from different
avenues.
Dividend Policy: Many firms source their major funds from equity shareholders.
Equity shareholders buy shares from the firm and invest their money in the firm.
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