A THOUGHT ON PROJECT MANAGEMENT

SURANJAN BHATTACHERYAY

IIBS,BANGALORE

WHAT IS FINANCING
It is a science, deals with money, risk & time. It is a set of activities dealing with the management of funds. It is the resource allocation as well as resource management,

acquisition and investment.

It simply deals with matters related to money and market.

It is the study and practice of making money denominated

decision.
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WHAT IS PROJECT FINANCING

Project financing is an innovative and timely financing technique that has been used on many high-profile corporate projects. Project finance is typically defined as limited or non-recourse (A loan where the lending bank is only entitled to repayment from the profits of the project, the loan is funding, not from other assets of the borrower) financing of a new project through separate incorporation of vehicle or Project Company. In other words the lenders finance the project looking at the creditworthiness of the project, not the creditworthiness of the borrowing party, mainly infra project. Project Financing discipline includes understanding the rationale for project financing, how to prepare the financial plan, assess the risk, design the financing mix, and raise the funds

TYPES 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 4 >>Managing change within organization

CHARACTERISTIC FEATURES OF MAJOR PROJECTS

Projects are usually very large & capital intensive They are often 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 deferred for some years They are often located at remote sites demanding additional unproductive investment in infrastructure They often exceed capacity of a single organization to plan, supply & construct They are technically complex demanding resources of skill, manufacturing & production which are not widely available Their functions often overflow national boundaries, products have international impact

Project Appraisal
The purpose of Project Appraisal is to ascertain whether the project will be sound technically, economically, financially and managerially and ultimately viable as a commercial proposition. A project should also be examined, wherever appropriate, from the point of view of its value to the national economy in terms of socio-economic benefits like generation of employment opportunities, forex earnings, the quantum of import substitution etc. The appraisal of a project will involve the examination of:
a) Market Feasibility. b) Technical Feasibility c) Financial Feasibility d) Managerial Competency e) Economic Feasibility
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IMPORTANT TERMINOLOGY
BREAK EVEN POINT. COST OF CAPITAL. DEBT SERVPCE COVERAGE RATIO. FINANCIAL CLOSURE. NET PRESENT VALUE. INTERNAL RATE OF RETURN. PAYBACK PERIOD.

VENTURE CAPITAL/PRIVATE EQUITY.

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PROJECT FUND
sources of finance

Equity Equity Preference Internal accruals

Debt Bonds Term loans Working capital advances Miscellaneous sources

SOURCES OF FINANCE
Finance for project falls into two major categories:
Debt: Borrower has the obligation to repay the loan. Debt also

usually carries obligation to pay interest and to adhere to a prearranged repayment schedule. The lender has priority claim if borrower goes into liquidation.
Equity: Funds subscribed by the shareholders from their own

resources. There is no guarantee that the dividend will be paid and investors tend to loose their money if the project fails to perform. Equity shareholders have the last claim if the project goes into liquidation.
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SOURCES OF FINANCE-Contd
The main sources of debt 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
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markets Joint venture partners Government subscriptions & aids Multilateral investment institutions Venture capitalists

SOURCES OF FINANCE-Contd
Unconventional Sources of Project financing:
Leasing: Use of project assets through off-balance sheet financing Forfeiting: 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 un cleared credit surpluses arising from bilateral trade agreements
Offset: Exporter of technically advanced project incorporates an

agreed value of materials, equipment & services supplied by the buyer.

Franchise Financing: Engineering & construction contractors become
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equity holding joint venture partners for the project they design & build.

SOURCES OF FINANCE-Contd
Unconventional Sources of Project financing-contd: Debt/Equity Swapping: Multinational technology owner
buys host country debt at a discount. The debt is redeemed in local currency at favorable 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 it on commercial basis. Facility is transferred to government at the end of the concession.

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CASE STUDY
ABC Shipyards Limited proposes to set up a Barge manufacturing

facility at Kolkata with the installed capacity to produce 4 barges per annum. The plant will be equipped with state-of-art manufacturing, technologically advanced fabrication equipment.
The proposal is for sanctioning of an overall limit of Rs.21.57 Crs

comprising of term loan of Rs. 10.86crores for 8 years 2 months along with sanction of working capital limit of Rs. 10.71 Crs, comprising of cash credit limit of Rs. 5.71 Crs and LC/BG limit of Rs 5.00 Crs).

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COST OF PROJECT & MEANS OF FINANCE

COSTS (INR in Crs) Particulars Land & site development Building & other civil works Amounts 5.05 0.79 Particulars Equity Term Loan Amounts 4.65 10.86 MEANS (INR in Crs)

Material Handling Equipments

Plant & Machinery Other Fixed Assets Vehicles Consultancy Fees Interest during construction Margin money for WC
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2.09
3.93 0.98 0.08 0.20 0.10 1.86

Contingencies

0.43

RATIONALE
Managerial Competency One of the Directors name of ABC Shipyard LTD exists in the RBI and ECGC SAL list. It has been ensured that even though the name matches but the Director of ABC Shipyard Ltd is not the same person. Promoters are having longstanding established experience in the activity and project land belongs to them. Industry /Market Scenario Present barge manufacturing industry in India is showing bright future prospect. The market is growing day by day and there is a latent demand in the market. The demand for barge is enhancing not only in India as well as in neighbouring countries like Bangladesh, Myanmar. Estimates: Besides project cost, estimates for the proposed loan tenor submitted , seems to be rational as opined by the financier.
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Parameters as per the set norms vis--vis present proposal

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Parameters as per the set norms vis--vis present proposal-contd

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CASE STUDY-COMMENTS
Well accepted and controlled Financial & Operating Risks like

TOL/TNW, Debt Service Coverage Ratio, Return on Investment, Interest Coverage Ratio etc. As per the Financiers set norms, credit rating of the project is within the acceptable norms. Technicality of the project is approved by a technical expert company. Rational repayment period of 8 years, no need of Take out funding option. Promoters contribution is around 30%, signifies moderate financial strength, involvement and seriousness of the promoters. Project need imported capital goods with repayment terms of max 3 years under buyers credit arrangement with overseas bank. Possibility of extending foreign currency loan (TL/LC) as the project is having scope of foreign exchange earnings with natural hedge to avoid the possibilities of exchange loss. Based on the projected financials, sensitivity analysis thereof and available risk mitigation, proposed project seems to be viable with the corporate guarantee of the sponsors company..
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PROJECT RISK ANALYSIS

Risk analysis is one of the most complex and slippery aspects of capital budgeting. Many different techniques have been suggested and no single technique can be deemed as best in all situations. TECHNIQUES OF RISK ANALYSIS
Analysis of standalone Risk

Analysis of Contextual Risk

Sensitivity Analysis Break Even Analysis

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Scenario Analysis Hillier Model

Corporate Risk Analysis

Market Risk Analysis

Simulation Analysis

Decision Tree Analysis

Risk Mitigation
RISK Completion Risk Price Risk Resource Risk Operating Risk Environmental Risk Technology Risk Insolvency Risk AVAILABLE REMEDIES Contractual guarantees from manufacturer, selecting vendors of repute Hedging Keeping adequate cushion in assessment. Making provisions, insurance. Insurance Expert evaluation and retention accounts. Credit Strength of Sponsor, Competence of management, good corporate governance Swaps and Hedging

Interest Rate Risk

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Risk Mitigation- contd

RISK Currency Risk Hedging AVAILABLE REMEDIES

Political and Sovereign Risk

Externalizing the project company by forming it abroad or using external law or jurisdiction External accounts for proceeds Political risk insurance (Expensive) Export Credit Guarantees Contractual sharing of political risk between lenders and external project sponsors Government or regulatory undertaking to cover policies on taxes, royalties, prices, monopolies, etc External guarantees or quasi guarantees

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Disadvantages of Project Financing

Project financing is structured around a set of contracts that has to be

negotiated with all the parties of the project. Process takes longer time to structure than equivalent size corporate finance. up to 60bp

Higher transaction costs due to creation of an independent entity. Can be

Project debt is substantially more expensive (50-200 basis points) due to

its non-recourse nature and a quite complex in nature.

Extensive contracting restricts managerial decision making. Credit support for a project financing is provided through contractual

commitments rather than through a direct promise to pay. conventional financing strategic deals.

It typically require a great investment of Managements time than

Project finance requires greater disclosure of proprietary information and

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THANK YOU
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