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Project Financing means :Project Financing means :
arranging funds for implementinganew project
undertaking expansion, diversification, modernization or
rehabilitation of existing projects.
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PROJECT FINANCINGPROJECT FINANCING
Project financing is a special case of financing in which lender relies on repayment
from the net cash flow generated by the project.
Project finance is provided against assets ofand the rights in a particular project
rather than against the borrowers balance sheet.
Financers are therefore concerned to analyze the risks associated with the project
before they accept the investment opportunity which it represents.
The cost and terms of financing reflect the financiers view about the riskiness of
the project
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Types of ProjectsTypes of Projects
Manufacturing Projects
Designed or built to order machines /equipment
New product development projects
Greenfield Projects
Establish buildings or operating plants at remote sites Infrastructure projects
Scientific Research Projects
Innovative, experimental, developmental
System development Projects
Systems / software development & implementation
Management Projects
Managing change within organization
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Characteristic features of major projects:Characteristic features of major projects:
very large & capital intensive
dedicated to a single purpose & none of the equipments can be used for other
purpose
time for project development & implementation is quite long, returns are deferredfor some years
they often exceed capacity ofa single organization to plan, supply & construct
they are technically complex demanding resources of skill, manufacturing &
production which are not widely available
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IdentifyingIdentifying sourcesoffinance :
IdentifyingIdentifying suitablesuitable sourcessources ofof financefinance isis thethe firstfirst stepstep inin planningplanning financefinance forfor aa
projectproject..
FinanceFinance forfor projectsprojects fallsfalls intointo twotwo majormajor categoriescategories::
DebtDebt:: BorrowerBorrower hashas thethe obligationobligation toto repayrepay.. DebtDebt alsoalso usuallyusually carriescarriesobligationobligation toto paypay interestinterest andand toto adhereadhere toto aa prearrangedprearranged repaymentrepayment
scheduleschedule.. TheThe lenderlender hashas prioritypriority claimclaim ifif borrowerborrower goesgoes intointo liquidationliquidation..
EquityEquity:: FundsFunds subscribedsubscribed byby thethe shareholdersshareholders fromfrom theirtheir ownown resourcesresources..
ThereThere isis nono guaranteeguarantee thatthat thethe dividenddividend willwill bebe paidpaid andand investorsinvestors tendtend totolooseloose theirtheir moneymoney ifif thethe projectproject failsfails toto performperform.. EquityEquity shareholdersshareholders havehave
thethe lastlast claimclaim ifif thethe projectproject goesgoes intointo liquidationliquidation
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Sources of Finance :Sources of Finance :
The main sources ofdebt finance are:
Commercial banks
Multilateral lending institutions
Suppliers of equipment & services for the project
Suppliers of raw materials to the project
Buyers of output from the project
The main sources of equity finance are:
Corporate cash flow generated by existing business operations
Corporate or individual investors, or funds raised through stock markets
Joint venture partners
Government subscriptions & aids Multilateral investment institutions
Venture capitalists
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Unconventional Sources of Project financing :Unconventional Sources of Project financing :
Leasing:
Use of project assets through off-balance sheet financing.
Forfaiting:
Sale of financial instruments due to mature in future.
Counter-Trade:
Seller accepts goods or services in lieu of cash payments.
Switch Trading:
Making use, via a third party, of uncleared credit surpluses arising from bilateral
trade agreements.
Offset:
Exporter oftechnically advanced project incorporates an agreed value of materials,
equipment & services supplied by the buyer.
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Unconventional Sources of Project financing :Unconventional Sources of Project financing :
Franchise Financing:
Engineering & construction contractors become equity holding joint venture partners
for the project they design & build.
Debt/Equity Swapping:
Multinational technology owner buys host country debt at a discount. The debt isredeemed in local currency at favourable rate of exchange for setting up a local
company. The local company uses transferred technology to earn foreign exchange,
replace imports & generate local employment.
Build Operate Transfer (BOT):
Government grants concession to a project company to build a facility and operate iton commercial basis. Facility is transferred to governmen t a t the end of the
concession.
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Project financing :Project financing :
The most important thing in any project financing
is preparation of Detailed Project Report (DPR)which should be made beautifully for getting theproject approved from banks/financialinstitutions. After preparation of DPR theproposal is moved to the banks/financialinstitutions for processing ofthe file.
Conclusion
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PRESENTED BY
SHOBHIT SINGHEE