CHAPTER:1

INTRODUCTION TO PROJECT
BY
Prof.Sujir Prabhakar
INTRODUCTION
Project is a collection of plan, design and execution of
creating new asset or expansion of existing assets in
order to sustain in the business and to get higher
profits.
Any new project implies investment in new assets.
Such expansion produces cash flows.
Project cash flows are long term in nature.
INTRODUCTION
The purposes of new projects are as follows:
1. Expand along the value chain
2. Develop new related products/services
3. Develop new distribution channels
4. Enter new global markets
5. Address new customer segments
6. Move in to unknown space or value innovation
TYPES OF PROJECTS
Brown field projects : it is expansion or modernization
with new technology to increase the effectiveness.
Example: Mumbai and New Delhi international air
ports.
Green field projects: starts from the scratch up to
completion and execution stage. Adds to the value.
Example: Bengaluru International Airport and Cochin
airport.
HISTORICAL JOURNEY OF PROJECT
FINANCE
Earliest recorded project finance is in the year 1299 in
the U.K.
When the British crown enlisted a leading Florentine
Merchant Bank to aid in the development of Devon
silver mines.
Trading expeditions of Dutch East India Company and
British East India Company were project financed.
A HISTORICAL JOURNEY
In the year 1930, in the USA “wild cat” explorers in
Texas and Oklahoma used production payment loans
to finance oil field exploration.
In 1970s project finance began to develop in to its
modern form partly in response to several large
natural resource discoveries and partly in response to
soaring energy prices.
A HISTORICAL JOURNEY
British Petroleum raised USD 945 million on project
to develop the “forties field” in the North sea.
In India PPP model is being followed for developing
infrastructure.
Even corporate have availed project finance for
financing their requirements.
Example: Reliance petro investment, an SPV formed
by Reliance capital.
INDIAN SCENARIO
To sustain GDP growth rate, India has planned an
investment of Rs 100,00,000 crores in the
infrastructure in the next five years.
The central government has chosen private public
participation (PPP) model for completing
infrastructure projects undertaken.
Under PPP model, private parties will develop, operate
huge assets for the government and transfer the assets
back to the government after certain years of cash flow
in the form of annuity or tolls.
LATEST MAJOR PROJECTS IN INDIA
Delhi- Mumbai Expressway is being developed as part
of the Bharatmala Pariyojana. It is a part of phase 1
that stretches over 1350 km. The National Highway
Authority of India.
he first eight lanes elevated the urban expressway in
India, connecting Mahipalpur in Delhi to Kherki
Daula Toll Plaza, Haryana. The Dwarka expressway
will reduce the traffic on NH-8 and be used by 3 lakh
passengers daily. It is a 29.10 km long project, 18.9 km
is in Gurgaon and 10.1 km in Delhi.
LATEST AIRPORT PROJECT IN INDIA
Navi Mumbai Greenfield International Airport, Maharashtra
Also known as D.B. Patil International Airport, this new
international airport is being built in Navi Mumbai. This
new airport aims to serve as a secondary airport for the city
of Mumbai and ease the traffic congestion for regular flyers.
In the first phase of construction, the airport will be able to
cater to 25 lakh flyers every year.
The airport is being built by the City and Industrial
Development Corporation (CIDCO), and its estimated cost
is around Rs 16,700 crores. The estimated time for the
airport to be functional is towards the end of 2023.
LATEST AIRPORT PROJECT IN INDIA
Mopa Airport, Goa-already inaugurated
Mopa Airport is a new international airport in Pernem
taluka in North Goa district. It is the second airport in
Goa after the Dabolim Airport. Developed by the GMR
Group, it is named after the late CM Manohar Parrikar.
The cost of building the airport is around Rs 3,000
crores. It is being built under four different phases. The
first phase was completed and inaugurated in
December 2022. It has the capacity to cater to 44 lakh
flyers. The entire four phases will cater to over 1 crore
flyers each year.
MAJOR SOLAR PARK PROJECTS
The Bhadla Solar Park is the World’s largest Solar
Power Plant. It is based in Bhadla village, in India’s
Rajasthan’s Jodhpur district – a region known for its
solar-friendly high temperatures.
PAVGADA Karnataka, the southwestern state heads
India’s list of states producing solar energy. With a
total installed solar power capacity of about 7,100MW.
REWA Ultra Mega Solar Power Plant in Madhya
Pradesh is Asia’s Largest Single site solar plant.
MAJOR PORT PROJECT IN INDIA
The Union Cabinet gave a green signal to construct
India's 13th port. Vadhavan, Maharashtra, will be the
site of India's 13th port. The total cost of developing
India's 13th port at Vadhavan is estimated to be around
65,544.54 crores.
he government has planned six megaports under the
project, namely the Vizhinjam International Seaport
(Kerala state), Colachel Seaport (Tamil Nadu),
Vadhavan Port (Maharashtra), Tadadi Port
(Karnataka), Machilipatnam Port (Andhra Pradesh),
and Sagar Island Port (West Bengal)
FEATURES OF A PROJECT
All projects are on stand alone basis.
Capital is raised for each project by the promoters
through a special purpose vehicle (SPV).
Capital and debt together are utilized for creation of
assets for that stand alone project.
The repayment capacity of the project depends on
exclusive cash flow to that project.
FEATURES OF A PROJECT
Projected cash flow used for meeting the debt
obligation and other post completion expenditure.
Net surplus of the cash flow provides return to the
investors.
A thorough study of cash flow should be ensured by
undertaking in depth study of cash flow with the help
of experts.
Any mismatch will have impact on the return on the
investments.
FEATURES OF A PROJECT
Project finance is a “non recourse” debt.
Lenders have no claim on the equity sponsors for the
repayment of debt but fully rely on the project cash
flow for the debt service.
It is a high leveraged (high debt equity ratio) and
complex contractual structure (benefits all).
Project finance is treated as specialized lending under
Basel II guidelines.
FEATURES OF BASEL II
Project finance involves financing for large, complex
and expensive installations(power plants)
Lender is paid exclusively out of cash flow the projects.
Borrowers are usually SPVs are only to undertake
development, ownership and operation of the projects.
Repayments depend on cash flows and collateral value of
projects’ assets.
FEATURES OF BASEL II
Object finance includes methods of funding for
acquisition of physical assets ( ships, aircrafts and
satellites)
Repayment depends on the cash flow generated by
specific assets financed.
If the sanction condition states that repayment of debt
without undue reliance on the specifically pledged
assets, exposure is to be treated as corporate exposure.
Example Indigo Airlines
FEATURES OF BASEL II
Commodities finance is a structured short term
lending to financial reserves, inventories or receivables
of exchange traded commodities ( crude oil, metals
and corps)
Repayment from the proceeds of sale of the
commodities.
The value of commodity encumbered to the lender has
to be treated more as risk mitigation rather than source
of repayment.
FEATURES OF BASEL II
Income producing real estate involves financing of
real estate.
Funding real estate where repayment and recovery
depends on the cash flow of the assets or the borrower.
Funding commercial real estate exhibits high loss, rate
volatility as compared to other types of specialized
lending.
IMPORTANT COMPONENTS OF PROJECT
FINANCE
Process of appraising commercial economic viability
of the project.
Identifying the risk and mitigations for the project.
Tying up funds through equity and long term loans for
implementing the project.
Monitoring the implementation, operation and debt
servicing of the project.
IMPORTANT COMPONENTS OF PROJECT
FINANCE
Lender base credit appraisals where the source of
repayment is the project revenue/cash flows from
operations of the facility rather than general assets or
the balance sheet of the sponsor.
The lenders rely on the assets of project facility
including revenue producing contracts and other cash
flows generated by the facility as collateral for the
debts.
IMPORTANT COMPONENTS OF PROJECT
FINANCE
Project success depends on the performance of the
project both technical and economic.
Debt terms are not based on the sponsor’s balance
sheet, collateral or value of physical assets of the
project.
The financial package is unique to the project.
Interest rate and spread are not proportionate to the
risk involved in the project.
IMPORTANT COMPONENT OFPROJECT
FINANCE
The success depends on cash flow expected by the
project and cash flow can support debt service burden.
Unlike corporate finance the project finance does not
entangle the balance sheet or assets of the sponsor’s
company.
This gives the advantage of bankruptcy remoteness to
the project finance as the sponsors undertake such
project finance.
DIFFERENCES BETWEEN CORPORATE AND
PROJECT FINANCING
ORGANIZATIONAL STRUCTURE:
It is not possible to distinguish cash flows
coming from specific project in a consolidated
company balance sheet
It is organized as a separate company where cash flow
can be accounted
LEVARAGE:
In company financing debt equity ratios depend on
assets and follow an industry bench mark.
DIFFERENCES BETWEEN COPORATE AND
PROJECT FINANCING
Debt equity ratio is high and depends on the
strength of expected cash flow.
NATURE OF ASSETS AND THE NEED FOR
CONTROL:
Corporate financing often used to fund
assets. The borrower has better control over
assets, cash flows and operations.
Project financing often used to risky assets, very
less control on future cash flows.
DIFFERENCES BETWEEN CORPORATE AND
PROJECT FINANCING
ALLOCATION OF RISK:
Corporate creditors have full recourse and risk
are diversified over portfolios of projects that
company may have.
Project finance exposure is often non recourse
or limited recourse to the sponsor’s balance
sheet.
DIFFERECES BETWEEN CORPORATE AND
PROJECT FINANCING
MONITORING:
Corporate finance monitoring is often done
internally.
Project finance often done by a third party.
TRANSACTION COST:
Under corporate finance deals are arranged
Quickly
Project finance take a longer time to structure a
deal and transaction cost is higher.
ADVANTAGES OF PROJECT FINANCE
Project finance in a way distributing risks and is more
efficient than conventional financial system.
Special skills and project focus help to overcome
project risks and help to get good returns.
Separate entity helps in reducing the probability of
risk contamination due to which unsuccessful
investment creates negative value.
Structural arrangements also helps in reducing
ultimate distress cost in the case of actual default.
ADVANTAGES
Compensation package for managers of the project
includes ESOP option. This enhances their
involvement of successful completion of the project.
Reduced overall cost of financing- project finance is
dependent on high contractual arrangements.
DISADVANTAGES
Huge third party cost- project finance structure is very
complex. This results in huge third party, up front
investments or dead weight cost like legal process.
Time consuming process- structuring a project
finance deal involving many parties. It takes
considerable time.
Stringent covenants-imposed by the stakeholders to
safeguard their interest. Loan syndication follows
strict lending norms and conditions.