DIRE DAWA UNIVERSITY

COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF ACCOUNTING AND FINANCE
MSC IN ACCOUNTING AND FINANCE PROGRAM

PROJECT ANALYSIS AND FINANCING

INDIVIDUAL ASSIGNMENT OF PROJECT FINANCING (MATERIAL PREPARATION)

SUBMITED TO: MESFIN YEMER . (ASSIST. PROFESSOR IN ACFN)

PREPARED BY: Tesfaye Zegeye

ID NO ---------------------- DDU1400056

September, 26- 2022

CHIRO, ETHIOPIA

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Contents
Introduction.................................................................................................................................................3
What is a Project?........................................................................................................................................3
What Does a Project Need?.........................................................................................................................4
What is Project Finance?.............................................................................................................................4
Project Financing.........................................................................................................................................4
Implementation.......................................................................................................................................5
Definition of project financing.....................................................................................................................7
Project Financing;................................................................................................................................7
What Is Special Purpose Vehicle and Why Is It Necessary?.................................................................7
Key Features of Project Financing............................................................................................................7
Zero or Limited Recourse Financing Solution.....................................................................................8
Loan Repayment with Project Cash Flow:............................................................................................8
Better Tax Treatment...........................................................................................................................8
Sponsor Credit Has No Impact on Project............................................................................................8
What Are the Various Stages of Project Financing.......................................................................................8
Identification of the Project Plan.........................................................................................................8
Recognizing and Minimizing the Risk...................................................................................................8
Checking Project Feasibility.................................................................................................................9
2. Financing Stage....................................................................................................................................9
3. Post-Financing Stage............................................................................................................................9
Timely Project Monitoring...................................................................................................................9
Project Closure.....................................................................................................................................9
Loan Repayment..................................................................................................................................9
Types of Sponsors in Project Financing........................................................................................................9
Types of Sponsors in Project Financing....................................................................................................9
Industrial sponsor................................................................................................................................9
Public sponsor...................................................................................................................................10
Contractual sponsor...........................................................................................................................10
Financial sponsor...............................................................................................................................10
REFERANCE................................................................................................................................................11

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Introduction

• Identifying and selecting viable project is not the end by itself. Once a project is selected
after going through rigorous appraisal process, promoters must also decide the way in
which the capital projects will be financed. Projects can be financed using either owner’s
equity or debt. After securing the finance, the implementation plan should be prepared
and the implementation of the project should be undertaken. During implementations,
continuous monitoring and evaluation should start side by side and post implementation
audit should be undertaken at the end. Given the capital budgeting decision of firms,
they must also decide the way in which the capital projects will be financed. When a firm
makes an investment decision, it is concurrently making a financing decision also. For
instance, a decision to build a new plant, to buy new equipment or new machine requires
specific way of financing that project. Therefore, capital budgeting and financing
decisions are very much related and they can be said “different faces of the same coin.

What is a Project?
• High operating margins.

• Low to medium return on capital.

• Limited Life.

• Significant free cash flows.

• Few diversification opportunities. Asset specificity.

• Projects have unique risks:

– Symmetric risks:

• Demand, price.

• Input/supply.

• Currency, interest rate, inflation.

• Reserve (stock) or throughput (flow).

– Asymmetric downside risks:

• Environmental.

• Creeping expropriation.

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 – Binary risks

• Technology failure.

• Direct expropriation.

• Counterparty failure

• Force majeure

• Regulatory risk

What Does a Project Need?

Customized capital structure/asset specific governance systems to minimize cash flow volatility
and maximize firm value.

What is Project Finance?

Project Finance involves a corporate sponsor investing in and owning a single purpose,
industrial asset through a legally independent entity financed with non-recourse debt.

Project finance is a long-term financing of any business venture including infrastructure and
industrial projects based upon the projected cash flows of the project rather than appraising the
financial statements of its stake holders/ sponsors.

 Project Finance is a process of evaluating and selecting long term investments that are
consistent with the goal of shareholders (owners) wealth maximization.

 Project means any commercial or business venture.

Project Financing
The two main source of finance available to a firm are shareholders fund and loan funds.
Stockholders fund come mainly in the form of equity capital and retained earnings and in the
form of preference capital. Loan funds come in a variety of forms like debenture capital, term
loan, deferred credit, fixed deposit and working advance. When should a project use more equity
and when should a project use more debt? Chandra (2009) recommends that a firm should use
more equity under each of the following conditions; the tax rate applicable is negative, business
risk exposure is higher, dilution of control is not an important issue, the assets of the project are
mostly intangible and the projects have many valuable growth options. He further recommend
that a firm should use more debt under the following condition; the tax rate applicable is high,
business risk exposure is low, dilution of control is an issue, the assets of the projects are mostly
tangible and the project has few growth options.. In addition to the above standard source of

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finance, leasing, venture capitalist, international market, international organization, local
government and other miscellaneous sources can be used.

Implementation
The implementation phase for industrial projects which involves setting up of manufacturing
facilities consists of several stages. These include establishing the financial, organizational and
legal basis for the implementation of the project, technology acquisition and transfer, including
basic engineering, detailed engineering design and contracting, including tendering, appraisal of
bids & negotiations and Acquisition of land (UNIDO, 1991). Then construction, personnel
recruitment, promotion and starting operation should be undertaken. The construction stage
involves site preparation, construction of buildings and other civil works, together with the
erection and installation of equipment in accordance with proper programming and scheduling.
The personnel recruitment and training stage, which should proceed side by side with the
construction stage, may prove very crucial for the expected growth of productivity and efficiency
in plant operations. Of particular relevance is the timely initiation of promotion to prepare the
market for the new products and secure critical supplies. Plant commissioning and start-up is
usually a short but technically important span in project implementation. It links the preceding
construction phase and the following operational phase. The success achieved at this point
demonstrates the effectiveness of implementation planning and the execution of the project
(UNIDO, 1991). Translating an investment proposal in to a project is complex, time consuming
and risk taking activity. Delays in implementation can lead to substantial cost and time overrun.
For speedy implementation at a reasonable cost, the following are helpful. First, the major
reasons for the delay of projects are insufficient formulation of projects. If the necessary home
work in terms of preliminary studies and comprehensive and detailed formulation of the project
is not done in advance, many surprise and shocks are likely to spring on the way. The second
solution is assigning specific responsibility to project managers for completing the project within
the defined time frame and cost limit and finally use of network technique like PERT and CPM
will enhance the monitoring and follow up easier (Chandra, 2009). c) Tools for Project
Scheduling The necessary activities for establishing a factory, including: construction, delivery
and assembly of the equipment, recruitment and training of the operating personnel and the
delivery of all production inputs, should be undertaken timely before operation start-up by
making good project planning at the beginning and efficient project implementation. Any delay
on one of the above mentioned stages would have a negative effect on the successful completion
of the project, especially during the start-up phase. In order to avoid this, effective planning and
balanced organization of the various activities are necessary, and can be achieved only by careful
planning and scheduling.

The viability, quality and dependability of the project are more important than the time factor
during pre-implementation phase. However, while in the implementation phase, the time and cost
factors is more critical in order to keep the project within the estimate made in the feasibility
study. Project implementation schedule play a great role in avoiding time and cost overrun

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during implementation phase. Project implementation schedule requires the following activities
to be done in advance. List of all possible activities from project planning to commencement of
production, the time required for performing various activities, the sequence in which various
activities are performed, the resources required for performing various activities, the implication
of putting more resource or less resources than are normally required on time. There are several
tools used to plan and schedule activities in a project. For small projects with few activities, a bar
chart showing when a particular activity would begin and when it would end is fairly simple tool
for drawing up the implementation schedule. For most complex projects which consist of
numerous activities and are fairly large, networking techniques are required. Networking
techniques are the most sophisticated than the traditional Gantt charts. In these techniques, the
activities, events and their interrelationship are represented by a network diagram also called
arrow diagram. There are two basic networking techniques. The first one is program evaluation
and review technique (PERT). This is usually suitable for projects under risk and uncertainty
such as research and development, projects involving new technology, aerospace etc. Hence, the
orientation of PERT is probabilistic. The second one is Critical Path Method (CPM). This was
developed by DuPont Company in USA to solve scheduling problems in industrial setting. CPM
is primarily concerned with the tradeoff between cost and time. It has been applied mostly to
projects that employee fairly stable technology and are relatively risk free. Hence its orientation
is deterministic (Chandra, 2009). In line with project implementation scheduling techniques
discussed above, it is important to make periodic review of the original timetable in the course of
project implementation. This will help to identify any discrepancies that may have occurred
during

This structured financing technique is implemented mostly by the sectors that have low
technological risks and a predictable market. Therefore, the method of funding a project using
Project Financing is generally employed by companies in the telecommunication, mining,
transportation, and power industries .Sports and entertainment venue projects also often avail the
benefit of this financing scheme. Project Financing is also preferred by many financial services
organizations because they can earn better margins if a business chooses to opt this scheme as
opposed to any other financing technique.

Definition of project financing

Project Financing; is a long term, zero or limited recourse financing solution that is available to
a borrower against the right s, asset s, and interests related to the concerned project.

If you are planning to start an industrial, infrastructure, or public Services project and need funds
for the same, Project Financing might be the answer that you are looking for .

The repayment of this loan can be done using the cash flow generated once the project is
complete instead of the balance sheets of the sponsors. In case the borrower fails to comply with
the terms of the loan, the lender is entitled to take control of the project. Additionally, financial

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companies can earn better margins if a company avails this scheme while partially shifting the
associated project risks. Therefore, this type loan scheme is highly favored by sponsors,
companies, and lenders a like. In order to bridge the gap between sponsors and lenders, an
intermediary is formed namely Special Purpose Vehicle (SPV).

The main role of the SPV is to supervise the fund procurement and management to ensure that
the project assets do not succumb to the aftereffects of project failure. Before a lender decides to
finance a project, it is also important that all the risks that might affect the project are identified
and allocated to avoid any future complication.

What Is Special Purpose Vehicle and Why Is It Necessary?

During Project Financing, a Special Purpose Vehicle (SPV) is appointed to ensure that the
project financials are managed properly to avoid non-performance of assets due to project
failure. Since this entity is established especially for the project, the only asset it has is the
project. The appointment of SPV guarantees the lenders of the sponsors’ commitment by
ensuring that the project is financially stable.

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 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 .

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, lender scan receive better credit margin with
Project Financing .

Multiple Participant s Applicable: As Project Financing often concerns a large scale project , i t is
possible to allocate numerous parties in the project to take care of its various aspects .This helps
in the seamless operation of then 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 to owner ship goes to the concerned entity as
determined by the terms of the loan.

Zero or Limited Recourse Financing Solution : Since the borrower does not have ownership of
the project until its completion, the lender s do not have to waste time or resource s evaluating

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the asset s and credibility of the borrower .Instead, the lender can focus on the feasibility of the
project .The financial services company can option 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.

Better Tax Treatment: If Project Financing is implemented, the project and/ or the sponsor scan
receive the benefit of better tax treatment .Therefore; this structured financing solution is
preferred by sponsors to receive funds f or long term projects.

Sponsor Credit Has No Impact on Project : While this long term financing plan maximizes 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 .

What Are the Various Stages of Project Financing ?

1. Pre-Financing Stage

Identification of the Project Plan - This process s includes identifying the strategic plan of the
project and analyzing whether it’s 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.

Recognizing and Minimizing 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 analyzing all the
associated factors.

2. Financing Stage
Being the most crucial part of Project Financing, this step is further sub-categorized 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 organization whose goals are aligned to
that of the project.

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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.

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, utilized 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 categorized, there are four types of
project sponsors involved in a Project Financing venture:

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 categorized, 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 is 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 types of sponsors often partake in project finance initiatives and
invest in deals with a sizeable amount of return.

Project Financing is a long-term, non-recourse or limited recourse financing scheme that is used
to fund massive projects which can be repaid using the project cash flow obtained after the
completion of the project. This scheme offers financial aid off balance sheet, therefore, the credit

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of the shareholder and Government contracting authority does not get affected. In Project
Financing, multiple participants are allowed to handle the project while the ownership of the
project is entitled according to the terms of the loan only after the project is completed. This
Financial scheme offers better credit margin to lenders while shifting some of the risk from the
sponsors to the lenders.

As the Indian Government continues to investment on the infrastructure of the country, it is

expected that there will be massive developments in future in terms of power, transportation,
bridges, dams etc. Most of these projects will be using the Public Private Partnership (PPP)
method indicating arises in Project Financing during the upcoming years

1. What are the main features of non-recourse/recourse financing ?

Some of the main features of non-recourse/recourse financing are mentioned below:

 Government guarantee may be provided.

 Retention and Use of Trust.
 Financing via Special Purpose Vehicles

2. What are the main features of non-infrastructure financing?

The main features of Non-Infrastructure Financing are mentioned below:

 The loan can be availed in foreign currency.

 The proposals are disposed of fast.
 Depending on the bank, the repayment tenure may be up to 84 months.
 Funds are provided for setting up industrial/manufacturing units.
 Loans are provided for the expansion of existing units.

3. What are the main characteristics of Infrastructure Financing?

The main characteristics of Infrastructure Financing are mentioned below :

 You may be able to borrow in foreign currency .

 The capital costs are large.
 The revenues can only be in local currency.
 Any services that are provided cannot be traded.
 It is not easy to transfer the assets.
 The gestation periods are long.

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REFERANCE

Chandra (2009) ,project (UNIDO, 1991).forest resource management,Alicia tuovila 28,2022,

David kindness,Suzanne kvilhaug A Framework for Incorporating Critical Thinking Into Accounting
Education. Journal of Accounting Education (Vol. 13, No. 3) 299-318.

McWilliams, V.B. and C.C. Pantalene. 1994. Structuring the Finance Curriculum: A Survey. Financial
Practice & Education (Vol. 4, No. 1) 37-46.

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