25-08-2017, 09:32 PM
PROJECT ON PROJECT FINANCE
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INTRODUCTION
“Project financing is a specialized form of financing that may offer some cost advantages when very large amounts of capital are involved,”
Project finance can be defined as: financing of an industrial (or infrastructure) project with myriad capital needs, usually based on non-recourse or limited recourse structures, where project debt and equity (and potentially leases) used to finance the project are paid back from the cash flow generated by the project.
The term "project finance" is now being used in almost every language in every part of the world. It is the solution to infrastructure, public and private venture capital needs. It has been successfully used in the past to raise trillions of dollars of capital and promises to continue to be one of the major financing techniques for capital projects in both developed and developing countries.
PROJECT FINANCE
Project finance is the long term financing of infrastructure and industrial projects based upon the projected cash flows of the project rather than the balance sheets of the project sponsors. Usually, a project financing structure involves a number of equity investors, known as sponsors, as well as a syndicate of banks that provide loans to the operation. The loans are most commonly non-recourse loans, which are secured by the project assets and paid entirely from project cash flow, rather than from the general assets or creditworthiness of the project sponsors, a decision in part supported by financial modeling. The financing is typically secured by all of the project assets, including the revenue-producing contracts. Project lenders are given a lien on all of these assets, and are able to assume control of a project if the project company has difficulties complying with the loan terms.
Project Finance as a Tool for Growth
Whether expanding manufacturing facilities, implementing new processing capabilities, or leveraging existing assets in new markets, innovative financing is often at the core of long-term projects to transform a company’s operations. Akin to the underlying corporate transformation, the challenge with innovative financial structures such as project finance is that the investment is made upfront while the anticipated benefits of the initiative are realized years later. Experts from GE Commercial Finance and the University of Pennsylvania’s Wharton School of Business note the importance of identifying a lender that can thoroughly understand the underlying changes being implemented by the borrower.
Sources of Finance
A company would choose from among various sources of finance depending on the amount of capital required and the term for which it is needed. When looking at the source of finance, it can usually be divided into three categories, namely traditional sources, ownership capital and non-ownership capital.
Traditional Sources of Finance
Internal resources have traditionally been the chief source of finance for a company. Internal resources could be a company¶s assets, personal savings and profits that have not been reinvested or distributed among shareholders. Working capital is a short term source of finance and is the money used for a company¶s day-to-day activities, including salaries, rent, payments for raw materials and electricity bills.
Internal Sources
Traditionally, the major sources of finance for a limited company were internal sources:
Personal savings:
Quite simply, personal savings are amounts of money that a business person, partner or shareholder has at their disposal to do with as they wish. If that person uses their savings to invest in their own or another business, then the source of finance comes under the heading of personal savings. Although we would generally discuss personal savings as a source of finance for small businesses, there are many examples where business people have used substantial sums of their own money to help to finance their businesses. A good and very public example here is Jamie Oliver, the television chef. Jamie financed his new restaurant, 'Fifteen', using fifteen raw recruits to the catering trade and a large amount (£500,000) of his own cash.
Retained Profit:
This is often a very difficult idea to understand but, in reality, it is very simple. When a business makes a profit and it does not spend it, it keeps it - and accountants call profits that are kept and not spent retained profits. That's all.
Sources of Finance: Non-Ownership Capital
Non-ownership capital includes funds raised from lenders, such as banks and creditors. Companies typically borrow a fixed amount from a bank, at a predetermined interest rate and with a fixed repayment schedule. Certain bank accounts offer overdraft facilities. This is used by companies to meet their short-term fund requirements, as they usually come at a very high interest rate.
Factoring enables a company to raise funds using its outstanding invoices. The company typically receives about 85% of the value of the invoice from the factor. This method is more appropriate for overcoming short-term cash-flow issues.
Hire purchase allows a company to use an asset without immediately paying the complete purchasing price. Trade credit enables a company to obtain products and services from another firm and pay the bill later.
Engineering, Procurement and Construction Contract - (EPC Contract)
The most common project finance construction contract is the EPC Contract. An EPC contract generally provides for the obligation of the contractor to build and deliver the project facilities on a turnkey basis, i.e. at a certain pre-determined fixed price, by a certain date, in accordance with certain specifications, and with certain performance warranties. EPC contract is quite complicated in terms of legal issue therefore the project company the EPC contractor shall have enough experiences and knowledge about the nature of project in order to avoid their faults and minimize the risks during the contract execution. Other alternative forms of construction contract are project management approach and alliance contracting.