PF - Unit - 4

19MS207 - PROJECT FINANCE
UNIT IV Financing of Projects 8

Means of Financing Projects-Working Capital Finance for Projects- Taxation and Incentives-
Export Credit Agencies and Development Finance Institutions- Novel Means of Financing
Projects- SEBI Guidelines on Project Financing in India, Sources: Equity, Debentures and Term
Loans from Financial Institutions, Policies and practices of Indian Financial Institutions
Financing the project
The financing area of the project is, in the case of many projects, considered to be
within the stakeholder area of influence and, because of that, is not directly
addressed by the project manager. But without project management tools and
techniques and without studying correctly the cost of the project, it’s impossible to
know exactly the amount of money that the project needs and the cost baseline that
influences the finance needs of the project.
Financial Management
It is defined as the processes to acquire and manage the financial resources for
the project, and it is more concerned with revenue source and analyzing and
updating net cash flows for the construction project than is Cost Management.
Cost Management is stated to be related more to the management of the day-
to-day costs of the project for labor and materials, while financial management
is more oriented towards the analyses of the net cash flow.
Major processes are:

(1)Financial Planning
(2) Financial Control
(3) Administration and Records.
Financial Planning
Planning is the phase in which all requirements of a financial nature are identified and provided for.
Tasks must be identified, requirements placed on a timescale and quantified, and necessary
resources to the financial management must be considered.
1.Source of funds
2.Contract requirements
3.Economic environments
4.Estimated construction cost
5.Project duration
6.Tax benefits
7.Financial advisor
8.Risk factors
Financial Control
This process assures that financial control and cost control are executed in the
most effective way to ensure that all items are within budget and the financial
cash forecast.
Inputs are contract requirements, project financial plan (both as described in the
previous section), cost and revenue benefits (the forecasts developed for the
financial plan), and change requests (the impact of change requests either in
cost or revenues streams must be analyzed and incorporated into the financial
plan and their effect in borrowing and other features considered).
Tools and techniques are the project accounting systems, the internal and
external audits, and the financial reports.
Financial Administration and Records
This process assures that financial information is administrated and that records
are well made. Inputs are the previously presented financial status reports,
contract requirements (attention to contract clauses), and project financial plan.
Tools and techniques are cost, accounting, and financial systems. The outputs
are the traceability of the financial systems and lessons learned. Traceability
consists of storing the financial records in a well-defined and standardized way,
preferably using a computer-aided financial information storage. Lessons learned
should report on the problem areas encountered and the corrective action taken.
Feasibility Studies
The construction of a feasibility study is a method primarily used by the sponsor

with the objective of establishing three key variables:
1.Investment
2.Cost of operation
3.Benefits of operation
Investment
Calculating the investment consists of calculating the planned value (PV) of the
project, as it is considered in the earned value methodology (EVM).
Cost and Benefits
Projecting the operational costs implies the ability to anticipate the direct, indirect,
financing, and ownership costs that the project may originate, either to operate itself
or to be able to produce the expected results.
Cash Flow Projection
After successfully having projected the investment, cost, and benefit, the projection
of the cash flow of the project and of the product of the project is very easy. It is
only to add investment to projected cost and project benefits, and considering the
time value of the money, that is naturally different and less as time goes by.
Financing
Financing the project is to guarantee that the amount of money needed is available.
This means that the project management sponsor, in order to know how much
money is needed, needs to be able to calculate the amount of the cost, benefits and
investment. He or she then needs to adapt the time scale of the money needed, to
finally know how much and when the money is required.
Once it is known how much money is needed for the project, it is the sponsor’s
responsibility to assure that the money is ready when it’s needed. The sponsor may
have direct funding or may establish debt or get other sponsors to fund the project,
but it’s indispensable that he or she have full knowledge of the project money
implications.
TAX AND INCENTIVES
A resident company is taxed on worldwide income whereas a non-resident is

taxed only on income that is received in India, or that accrues or arises, or is
deemed to accrue or arise, in India. Income deemed to accrue or arise in India
includes income accruing or arising, whether directly or indirectly, through or
from (a) any business connection in India, (b) any property in India, (c) any
asset or source of income in India, (d) transfer of a capital asset in India. It
also includes income in the nature of interest, royalties and fee for technical
services, which are taxed on source rule basis. In computing taxable business
income, expenditure incurred wholly and exclusively for the purpose of
business is allowed as deduction subject to computational provisions.
TAX INCENTIVES/ DEDUCTIONS
Special Economic Zones (SEZs) have been set up throughout the country in
order to promote a competitive environment and industrial progress.
Developers and occupiers of SEZs enjoy substantial long term tax holidays
and concessions which are worth exploring when establishing an operation
in India although these may be phased out under the DTC.
New undertakings carrying specified activities within certain designated

sectors (like infrastructure, power and energy) can also enjoy certain tax
deductions on profits, for a period up to 10 years, depending on the sector
and project. New undertakings located in specified North-eastern states of
India are also entitled to certain tax incentives/ deductions. Companies are
advised to consult the scheme relevant to their sector for information on
eligibility, time period and tax exemption schedule.
Novel Means of Financing Projects
Project Financing, PF, is an instrument which allows public bodies to relieve

their budgets of substantial maintenance costs and private individuals to
manage the plant that has been granted under the concession in an
independent economic and financial way. In addition to these purely
monetary aspects, and looking at the whole picture, granting a building or
any other structure of public interest to a private individual makes it
possible to better satisfy the needs of the citizen. PF has assumed great
importance with the sovereign debt crisis and is used in many areas, not
only in sports, of course. This instrument is divided into several phases,
such as the feasibility study, the business plan and the identification of the
necessary guarantees. What we considered essential to focus on is the
business plan, which is also the most important part of the entire PF, as it
illustrates all the business and financial dynamics of the project. It is also
the part that requires the most information and, in fact, the data entered in
the model are the result of estimates, some of which are very accurate and
reliable.

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19MS207 - PROJECT FINANCE

UNIT IV Financing of Projects 8

Major processes are:

The construction of a feasibility study is a method primarily used by the sponsor

Cost and Benefits

A resident company is taxed on worldwide income whereas a non-resident is

New undertakings carrying specified activities within certain designated

Project Financing, PF, is an instrument which allows public bodies to relieve

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