VCE Summer Internship Program 2020

Smart Task Submission Format

Intern’s Details
Name Gaurav Parmar

Email-ID [email protected]

Smart Task No. 3

Project Topic Project Finance: Modelling and Analysis

Smart Task (Solution)

Task Q1: How a new venture is assessed to qualify as project finance. What are the factors that
needed to be considered?

Task Q1 Solution :

Project finance is the financial analysis of the complete life-cycle of a new venture. Typically, a
cost-benefit analysis is used to determine if the economic benefits of a new venture are larger than
the economic costs.

There are various factors are considered when new venture is assessed to qualify for project
finance:

1. Project credibility and valuation : If lenders or investors decide to put money in a project, it's
because they hope the investment will pay off. They'll make sure previsions are based on
verifiable facts and are realistic or not.

2. Analysis of Financial History / Financial Statements and structure : when assessing the
financial structure and statements, then some aspects need to be considered like Debt to
equity ratio, Principal repayment schedule, Sinking fund, and Trust and retention
mechanism.

3. Assessment of promoter history and background : An assessment of the promoters’ history is

conducted to ensure the commitment of promoters to the project. The main motive is to
identify the background and track record of the promoters sponsoring the
project. Assessment of promoters includes management profiles and structure, shareholder
agreement etc.

4. Legal due diligence: If it involves due diligence of the associated environmental by

conducting environmental impact assessment study. Determining the rights and liabilities of
the different participants within the project scope, analysing the schedule and
implementation plan of the project and evaluating the appropriateness of liquidated damages
if the project fails to deliver as promised.

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VCE Summer Internship Program 2020
Smart Task Submission Format

5. Technology Assessment: In this includes assessment of technology aspect of detailed

project.

6. Industry specific assessment: In this includes due diligence of industry specific factor like
market trends and costs, creditworthiness of Off taker, market attractiveness risk
guarantees, long term demand, market drives, regulatory and policy scenario etc.

500 Words (Max.)

Task Q2: Explain in detail the revenue model for Solar PV Project, Residential Building,
Manufacturing Unit and other PPP projects.

Task Q2 Solution :

A revenue model is a framework for generating financial income. It identifies which revenue source

to pursue, what value to offer, how to price the value, and who pays for the value. It is a key
component of a company's business model.

Revenue Model for solar PV Project:

Here 2 type of revenue model for solar PV project-

1. Customer owned business model: in customer invested themselves in solar rooftop and
revenue is generated by selling the generated energy or savings are made by consuming
the generated electricity.
2. Third party owned business model:

● Solar leasing: Leasing has been one of the most important tools for offsetting risk. In
solar leasing the rooftop owner leases a rooftop system from a company.

● Solar Power Purchase Agreement (PPA) or Renewable Energy Service Company

(RESCO) model: The most commonly known model in solar industry is the Solar PPA
or RESCOmodel. In this model, the developer constructs the power plant and sells
the generated energy to the end consumer. The end consumer simply pays for the
energy usage without worrying about the technical and financial aspects of the plant
as per the PPA

Revenue Model for Residential Building:

In a residential project, analyse a property from the perspective of an equity investor (Owner) or

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VCE Summer Internship Program 2020
Smart Task Submission Format

debt investor (lender), In the property and determine whether or not the equity or debt investor
should invest, based on the risk and potential returns. In residential estate, individuals or
businesses, i.e. tenants, pay rents to property owners to use their space.

Three main type :

1. Acquisition: Acquire an existing property, change little to nothing and rent it or sell it.

2. Renovation: Acquire an existing property, change it significantly and rent it or sell it

3. Development: Buy land , pay to build a new and find tenants and rent it or sell it

From above the owner earns income from this rent or sells it and they use part of it to pay for
expenses such as utilities, property taxes, and insurance.

Revenue model for manufacturing units

Manufacturing is the production of merchandise using labour, materials, and equipment, resulting in
finished goods. Revenue is generated by selling the finished goods. They may be sold to other
manufacturers for the production of more complex products (such as aircraft, household appliances
or automobiles), or sold to wholesalers, who in turn sell them to retailers, who then sell them to end
users and consumers. Manufacturers may market directly to consumers, but generally do not, for
the benefits of specialization.

Revenue models for other PPP’s projects:

Other PPP projects are funded wholly or primarily through government payments. This is the case
in most social infrastructure projects, but government payments also occur in many economic
infrastructure projects.

● For other projects, where it would be possible to charge the user for the use of the
infrastructure contracted under the PPP (for example, a road), it may be decided that no
charge will be applied (that is, it would be a toll free highway). That is a public finance
decision as to whether the project should be funded through user charges to the specific
users or through utilizing tax revenues to make government payments (the tax revenues
could be derived from usage-related taxes, such as a fuel tax, or from general tax revenues.
● There are projects in which charges to users will be applied (for example, a light rail transit
system) and collected by the private partner. But if those user charges are insufficient to
meet the private partner’s costs and provide a return on its investment.

 Finally, there may be user charges, but the PPP is structured so that the private partner’s
revenue consists entirely of government payments. The government retains the user
revenues in public hands.

500 Words (Max.)

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VCE Summer Internship Program 2020
Smart Task Submission Format

Task Q3: What should be the additional points that needed to be included in a financial model, if
the financing bank is from abroad and the debt is in US$ but revenue is in INR.

Task Q3 Solution :

Under the current Reserve Bank of India (RBI) regulations, a person resident in India is permitted,
subject to a prior approval from RBI, to open, hold and maintain a foreign currency account with an
authorised dealer bank for certain specified purposes as recognised by the RBI. This is required for
getting financing from abroad, so that if we have debt we have to pay in US$ and if we get revenue
in India that US$ converting in INR for that we require foreign currency exchange rate.

The additional points that needed to be included in a financial model, if the financing bank is from
abroad and the debt is in US$ but revenue is in INR that are the financial model should include
a basic assumption of the Foreign currency exchange and also there must be currency exchange
rate (USD/INR) been mentioned in the financial model so that the fin flow sheet is consistent. In
currency exchange included the service tax and transaction charges need to be paid for financing
of the project.

500 Words (Max.)

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