PROJECT MANAGEMENT &

ENTREPRENEURSHIP
(KHU702)
UNIT – 4
Project Financing

By: Mahesh Dhakar

 Project Financing
Project Financing
Project financing is a loan structure that relies primarily on the project's
cash flow for repayment, with the project's assets, rights, and interests held
as secondary collateral. Project finance is especially attractive to the private
sector because companies can fund major projects off-balance sheet (OBS).

Project Financing is a long-term, zero or limited recourse financing solution

that is available to a borrower against the rights, assets, and interests related to
the concerned project.
 Key Features of Project Financing
Key Features of Project Financing:
Since a project deals with huge amount funds, it is important that you learn
about this structured financial scheme. Below mentioned are the key features
of Project Financing:

Capital Intensive Financing Scheme: Project Financing is ideal for ventures

requiring huge amount of equity and debt, and is usually implemented in
developing countries as it leads to economic growth of the country. Being
more expensive than corporate loans, this financing scheme drives costs
higher while reducing liquidity. Additionally, the projects under this plan
commonly carry Emerging Market Risk and Political Risk. To insure the
project against these risks, the project also has to pay expensive premiums.
 Key Features of Project Financing
Risk Allocation: Under this financial plan, some of the risks associated with
the project is shifted towards the lender. Therefore, sponsors prefer to avail
this financing scheme since it helps them mitigate some of the risk. On the
other hand, lenders can receive better credit margin with Project Financing.
Multiple Participants Applicable: As Project Financing often concerns a
large-scale project, it is possible to allocate numerous parties in the project to
take care of its various aspects. This helps in the seamless operation of the
entire process.
Asset Ownership is Decided at the Completion of Project: The Special
Purpose Vehicle is responsible to overview the proceedings of the project
while monitoring the assets related to the project. Once the project is
completed, the project ownership goes to the concerned entity as determined
by the terms of the loan.
 Key Features of Project Financing
Zero or Limited Recourse Financing Solution: Since the borrower does not
have ownership of the project until its completion, the lenders do not have to
waste time or resources evaluating the assets and credibility of the borrower.
Instead, the lender can focus on the feasibility of the project. The financial
services company can opt for limited recourse from the sponsors if it deduces
that the project might not be able to generate enough cash flow to repay the
loan after completion.
Loan Repayment With Project Cash Flow: According to the terms of the
loan in Project Financing, the excess cash flow received by the project should
be used to pay off the outstanding debt received by the borrower. As the debt
is gradually paid off, this will reduce the risk exposure of financial services
company.
 Key Features of Project Financing
Zero or Limited Recourse Financing Solution: Since the borrower does not have
ownership of the project until its completion, the lenders do not have to waste time
or resources evaluating the assets and credibility of the borrower. Instead, the
lender can focus on the feasibility of the project. The financial services company
can opt for limited recourse from the sponsors if it deduces that the project might
not be able to generate enough cash flow to repay the loan after completion.
Loan Repayment With Project Cash Flow: According to the terms of the loan in
Project Financing, the excess cash flow received by the project should be used to
pay off the outstanding debt received by the borrower. As the debt is gradually paid
off, this will reduce the risk exposure of financial services company.
Sponsor Credit Has No Impact on Project: While this long-term financing plan
maximises the leverage of a project, it also ensures that the credit standings of the
sponsor has no negative impact on the project. Due to this reason, the credit risk of
the project is often better than the credit standings of the sponsor.
 Various Stages of Project Financing
1. Pre-Financing Stage
Identification of the Project Plan - This process includes identifying the
strategic plan of the project and analysing whether its plausible or not. In
order to ensure that the project plan is in line with the goals of the financial
services company, it is crucial for the lender to perform this step.
Recognising and Minimising the Risk - Risk management is one of the key
steps that should be focused on before the project financing venture begins.
Before investing, the lender has every right to check if the project has
enough available resources to avoid any future risks.
Checking Project Feasibility - Before a lender decides to invest on a project,
it is important to check if the concerned project is financially and technically
feasible by analysing all the associated factors.
 Various Stages of Project Financing
2. Financing Stage
Being the most crucial part of Project Financing, this step is further sub-
categorised into the following:
Arrangement of Finances - In order to take care of the finances related to the
project, the sponsor needs to acquire equity or loan from a financial services
organisation whose goals are aligned to that of the project
Loan or Equity Negotiation - During this step, the borrower and lender
negotiate the loan amount and come to a unanimous decision regarding the
same.
Documentation and Verification - In this step, the terms of the loan are
mutually decided and documented keeping the policies of the project in
mind.
Payment - Once the loan documentation is done, the borrower receives the
funds as agreed previously to carry out the operations of the project.
 Various Stages of Project Financing
3. Post-Financing Stage
Timely Project Monitoring - As the project commences, it is the job of the
project manager to monitor the project at regular intervals.
Project Closure - This step signifies the end of the project.
Loan Repayment - After the project has ended, it is imperative to keep track
of the cash flow from its operations as these funds will be, then, utilised to
repay the loan taken to finance the project.
 Types of Sponsors in Project Financing
In order to determine the objective of the project and the risks related to it, it is
important to know the type of sponsor associated with the project. Broadly
categorised, there are four types of project sponsors involved in a Project
Financing venture:
Industrial sponsor - These type of sponsors are usually aligned to an upstream
or downstream business in some way.
Public sponsor - The main motive of these sponsors is public service and are
usually associated with the government or a municipal corporation.
Contractual sponsor - The sponsors who are a key player in the development
and running of plants are Contractual sponsors.
Financial sponsor - These type of sponsors often partake in project finance
initiatives and invest in deals with a sizeable amount of return.
 Project Cost Estimation
Cost estimating is the practice of predicting the final total cost of a project that
has an outlined scope. It is the fundamental part of project cost management (a
discipline used by project managers since 1950 to manage costs).

Cost estimation validates the project budget and enables the monitoring and
controlling of project costs when the project is in progress. The approximate
project cost is then being referred to as a cost estimate or a planned price. It
includes all project expenses and is fairly difficult to forecast, since the project
scope is an ever-changing phenomenon. Oftentimes, project cost estimation is
much like looking into a crystal ball.
 Project Cost Estimation
Cost estimating is the practice of predicting the final total cost of a project that
has an outlined scope. It is the fundamental part of project cost management (a
discipline used by project managers since 1950 to manage costs).
Cost estimation validates the project budget and enables the monitoring and
controlling of project costs when the project is in progress. The approximate
project cost is then being referred to as a cost estimate or a planned price. It
includes all project expenses and is fairly difficult to forecast, since the project
scope is an ever-changing phenomenon. Oftentimes, project cost estimation is
much like looking into a crystal ball.
Good cost estimation is essential for keeping a project under budget. Many
costs can appear over the life cycle of a project, and an accurate estimation
method can be the difference between a successful plan and a failed one.
Estimation, however, is easier said than done. Projects bring risks, and risks
bring unexpected costs.
 12-Step Process for Cost Estimation
The U.S. government has identified a 12-step process that results in reliable and
valid cost estimates.
1. Define Estimate’s Purpose: Determine the purpose of the estimate, the level
of detail which is required, who receives the estimate and the overall scope of
the estimate.
2. Develop Estimating Plan: Assemble a cost-estimating team, and outline their
approach. Develop a timeline, and determine who will do the independent cost
estimate. Finally, create the team’s schedule.
3. Define Characteristics: Create a baseline description of the purpose, system
and performance characteristics. This includes any technology implications,
system configurations, schedules, strategies and relations to existing systems.
4. Determine Estimating Approach: Define a work breakdown structure (WBS),
and choose an estimating method that is best suited for each element in the
WBS. Cross-check for cost and schedule drivers; then create a checklist.
 12-Step Process for Cost Estimation
7. Identify Rule and Assumptions: Clearly define what is included and excluded
from the estimate, and identify specific assumptions.
8. Obtain Data: Create a data collection plan, and analyze data to find cost
drivers.
9. Develop Point Estimate: Develop a cost model by estimating each WBS
element.
10. Conduct Sensitivity Analysis: Test sensitivity of costs to changes in
estimating input values and key assumptions, and determine key cost drivers.
11. Conduct Risk and Uncertainty Analysis: Determine the
cost, schedule and technical risks inherent with each item on the WBS and how
to manage them.
12. Update Estimate: Any changes must be updated and reported on. Also,
perform a postmortem where you can document lessons learned.
Importance of Cost Estimation in a Project
Importance of Cost Estimation in a Project
Types of Project Cost Estimation Techniques
Working Capital
Working Capital
 Concept of Working Capital
Working capital can be classified or understood with the help of the
following two important concepts:
Concept of Working Capital
Requirement of Working Capital
Requirement of Working Capital
Funds and its Types
Funds and its Types
Funds and its Types
Funds and its Types
Sources of Funds and Classification
Sources of Funds and Classification
Sources of Funds and Classification
Sources of Funds and Classification
Capital Budgeting
Objectives of Capital Budgeting
Process of Capital Budgeting
Phases of Capital Budgeting
Phases of Capital Budgeting
Phases of Capital Budgeting
 Risk & Uncertainty in Project Evaluation
Risk in Project Evaluation
 Risk & Uncertainty in Project Evaluation
Uncertainty in Project Evaluation
Differences Risk & Uncertainty
Differences Types Risks & Uncertainty in a Project
Types Risks
 Differences Types Risks in a Project
Types Risks
 Differences Types Risks in a Project
Types Uncertainty
Risks Management Process
 Projected Financial Statements
Projected Financial Statements
 Projected Financial Statements
Projected Financial Statements
 Projected Financial Statements
Types of Projections on the Basis of Duration
 Importance of Projected Financial Statements
Importance
 Importance of Projected Financial Statements
Importance
 Projected Balance Sheet
Balance Sheet
 Projected Balance Sheet
Important Components of Balance Sheet
Income Statement
Components of Income Statement
 Importance of Income Statement
Importance of Income Statement
 Fund Flow Statement
Fund Flow Statement
 Importance of Fund Flow Statement
Fund Flow Statement
Importance of Fund Flow Statement
Steps Require to Prepare Fund Flow Statement
Steps Require to Prepare Fund Flow Statement
Difference Between Prepare Fund Flow Statement
and Cash Flow Statement
Fund Flow Statement vs Cash Flow Statement
Detailed Project Report, Objectives and Importance
Detailed Project Report, Objectives and Importance
Detailed Project Report, Objectives and Importance
Detailed Project Report, Contents and Objectives
Importance of Detailed Project Reports
Importance of Detailed Project Reports