21-09-2012, 11:20 AM
PROJECT FINANCING
PROJECT FINANCING.doc (Size: 110 KB / Downloads: 26)
INTRODUCTION
Role of Infrastructure in Development
It is now well recognized that a country’s development is strongly linked to its infrastructure strength. Infrastructure helps determine a country’s ability to expand trade, cope with population growth, reduce poverty and a host of other factors that define economic and human development. Good infrastructure raises productivity and lowers production cost, but must also expand fast enough to accommodate growth. The precise links between infrastructure and development have been subject to extensive debate. The link between infrastructure and economic growth has been studied extensively in literature, the World Bank report (1994) of the World Bank for instance. The results show that infrastructure development can have a significant impact on the economic growth. For low-income countries basic infrastructure such as water, irrigation and to a lesser extent transportation are more important. As the economies mature into a middle-income category, their share of power and telecommunications in the infrastructure and investment increases. An estimate however shows that a 1% increase in infrastructure stock* is positively associated with a corresponding growth in GDP across countries.
Impact of Infrastructure on External Trade and Production
Reliable and adequate quantity of infrastructure is a key factor in the ability of countries to compete globally. In particular, the competition for new export markets is specially dependant on high quality infrastructure. According to studies, increased globalisation of the world trade has been not only due to the liberalization of trade policy but also due to the major advances in the communication, transport and technologies.
There is an increasing trend not only in terms of greater globalisation of trade but also in terms of globalization of production. It is possible for companies located in different parts of the globe to produce components. In the recent years India has been used as a base for sourcing by a host of companies such as Sony, Toyota, ABB and the like for their raw materials as well as for components. To be able to fulfil the requirements of sourcing MNCs world-class infrastructure facilities including appropriate logistical support and multi-modal transport facilities are essential.
Need for Increasing the Role of the Private Sector
In the mid 1980s evidence emerged in several countries that infrastructure services were not meeting the demand. Many governments have realized that the traditional state owned utility approach is no longer adequate. Although circumstances have varied across countries and sectors, the shift towards greater private involvement has been driven by the need to provide better services to more people at a lower cost.
The main reason for a shift towar4ds private infrastructure is the growing dissatisfaction with the public ownership monopoly and provision of infrastructure facilities. Under-investment by many state utilities has resulted in a back-log of unmet demand for infrastructure services: in many countries this is the principal constraint to growth. Power shortages have led to a shortfall in production, higher costs and a decline in investment. Similarly limited availability and the poor quality of telecommunications have made it difficult for business in many developing countries to participate in the new international information based economy, Fiscal constraints faced by the governments and technological developments are other factors which have favoured increased private participation
SYSTEM OF PROJECT FINANCING
There is a growing realisation in many developing countries of the limitations of governmentsin a manging and financing economic activiteies, particularly large infrastructure projects. Provision of infrastructure facilities, traditionally in the government domain, is now being offered for private sectore investments and management. This trend has been reinforced by the resource crunch faced by many governments. Infrastructure projects are usually characterised by large investments long gestation periods, and very specific domestic markets.
In project financing the project, its assets, contracts, inherent economic and cash flows are separated from their promoters or sponsors in order to permit credit appraisal and loan to the project, independent of the sponsors. The assets of the specific project serve as a collateral for the loan, and all loan repayments are made out of the cash of the project. In this sense, the loan is said to be of non-resource to the sponsor. Thus, project financing may be defined as the scheme of ‘financing of a particular economic unit in which l lender is satisfied in looking at the cash flows and the earnings of that economic unit as a source of funds, from which a loan can be repaid, and to the assets of the economic unit as a collateral forte the loan’*2. In the past, project financing was mostly used in oil exploration and other mineral extraction through joint ventures with foreign firms. The most recent use of project financing can be found in infrastructure projects, particularly in power a telecommunication projects.