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 its sponsors (see below for further explanation). They are most commonly non-recourse loans, which are secured by the project assets and paid entirely from project cash flow. It involves a financial analysis of the complete life cycle of the project.
During the lifetime of the project, they are treated as a distinct entity from its parent. A project finance venture undertaken is completely an off–balance sheet item for the parent. Therefore, all financing this entity avails must be repaid entirely out of its cashflows and subject to its assets. The assets of the parent cannot be encroached upon to pay back the project’s liabilities.
A. What are the traditional methods and how is project financing different?
The traditional method or corporate financing is a method where the sponsor uses all the assets and cash flows from the existing firm to guarantee additional credit provided by the lenders. If the project fails, then all the remaining assets and cashflows can serve as a source of repayment for all the creditors.
In the case of project financing the existing firm and the new project are considered as two separate entities, the new project is incorporated as a separate Special Purpose Vehicle. If the project fails, project creditors have no claim on the parent’s assets and cash flows
B. Who are participants involved in Project financing?
1. Sponsors –
They are usually the equity share capital holders of the parent company who wish to seek project finance.
2. The financial institution or banks –
This maybe a single lender or a consortium of financial institutions. They are the providers of senior debt and hold precedence over debt extended (if any) by the sponsors. The loan is secured strictly against the cash flows and assets of the SPV only.
3. Special Purpose Vehicle(SPV) –
- SPV is a separate legal entity floated by the sponsors of the project. The project finance obtained is directed exclusively only towards this SPV. The SPV acts as a corporate veil between the lenders and the parent company
4. Host government –
It refers to the government of the home country where the SPV is located. The SPV must be incorporated by the government’s rules and regulations.
5. Off-takers –
They are bound via an off-take agreement to mandatorily purchase a certain minimum quantity of products from the selling party. An off-take agreement is frequently resorted to in mining, construction, and other industries of mass significance. An off-take agreement ensures the seller of the existence of a market upon completion.
6. Suppliers and contractors –
They are necessary for the execution of a contract. They are the key suppliers of raw materials. They also perform crucial functions in project execution.
C. How does project financing as a service fit here? What do they do?
Transacting a project finance deal is not merely a negotiation of financial structuring but rather necessarily involves an analysis of various elements for example real property rights, construction and development contracts, equipment warranties, concession agreements, power purchase and interconnection agreements, cash management, environmental permitting, economical and regulatory matters, tax analysis and the cost-benefit analysis
D. Various services offered across the life cycle could be:
1. Strategy and planning:
Assisting long-term planning of individual projects or a portfolio by focusing on feasibility, alignment with corporate objectives, and governance procedures to maximize return on investment.
2. Financing and procurement:
Raising project finance; establishing and managing the procurement process to acquire services, material, or equipment to deliver the project, and prioritizing capital allocation between projects.
3. Project organization, execution, and construction:
Setting up the project for success and strengthening client capabilities to deliver on time and to the budget including risk identification, analysis, and mitigation of risk.
4. Operations and maintenance:
Assessing ongoing lifecycle costs and providing insights around optimizing the performance and value of assets in operation.
5. Completion and handover:
Handling all the documentation and legal requirements associated with handing over the project.
E. Why is this form of service seeing a boom and what is the future of project financing as a service?
There is a growing need to replace traditional financing practices with the methods of project financing. Such financing structures require expertise to coordinate and manage the multidimensional risk associated with the complex structure throughout the project life cycle.
Despite multiple advantages, project finance is quite complex and costly to assemble. Moreover, the lack of know-how and competence of key stakeholders calls for a complex multidisciplinary approach to guarantee project execution.
Project financing services provide end-to-end services through the project initiation, execution, and completion stages. It is looked at as a single go-to point for various during all stages of the project with the confidence of expertise rendered.
India so far has witnessed many successful completions of infrastructural projects through project finance such as roadways, airports, power plants, mines, etc. With ample backing from the Indian Government, a rise in the implementation of massive projects especially those associated with urban development can be expected to grow by approximately 75% in 2030. Offshore lending is being liberalized too, to open more financial sources against the predominant Indian Banks. A steep increase in the demand for Project Financing Services can be hence forecasted pointing towards an economic boom.
What can Diligen do?
With an array of services being provided by Diligen, it runs with the motto of high usage with minimal wastage. Financing being the bloodline of any business, Diligen understands that this resource must be handled with due care and expertise. With a team of professionals, Diligen performs the project with detailed research backing to support the project financing service. Diligen partners in the pre-bid, negotiation, and fundraising stage and ensures that the most viable option is selected.