The financing used for long-term for industrial and infrastructure-based projects is called project financing. These are not provided on the basis of the balance sheet of the sponsors but on the basis of the cash flow that will be generated from the project. The structure of project financing involves all the banks, lending institutions and the equity investors or sponsors. The project finance overview gives an apt detail regarding each and every step involved in the project which is really important for the investors.
Stages of Funding in Project Financing:
There are typically three steps involved in the funding of Project Finances. These broadly classified and generalized stages are-
- The pre-bidding stage: The very first stage of project financing has two steps that must be undertaken for having Project Finances in India. These steps are-
- Process of bidding: In the first scenario, to initiate the process of tender formally for the involvement of private sector in the project proposed; legally, a host government is required. To bid in the project company for getting the right of implementation of project as the private sector sponsors, company or group of companies are invited.
Alternatively, in the second scenario for project financing, under its own initiative a private company could submit a proposal that is unsolicited to the host government, specifically proposing a project. If the project interest the host company or government then the two parties undergo a direct negotiation without a formal tender on terms of the concession or licenses.
- Studying the feasibility of the project: The sponsors from the private sector usually, assess the viability of the project on the grounds of environmental influence, legality, technicality, profitability etc.
- The stage of negotiation of contract: After the bidding procedure, the parties participating in the project negotiates and formalize the agreements and conditions of the project financing defining various aspects like economical, commercial, legal and technical outlines. Also, the provisions related to risk-sharing are formulated in a way that usually, eradicates or removes the risk from the whole project. And then allocate the same to someone who is in the position to actually absorb it. Until the project negotiation stage in the development of the contract comes to a proper ending, the sponsors are not able to approach the markets for further finances. This whole stage is done or completed in the following steps-
- Agreements of projects: It involves the contracts and agreements formulated in relation with the Operations and Maintenance (O&M), Input supplies and Engineering, Procurement and Construction (EPC).
- Securing the revenue: The financial and economic viability of a project financing, after its completion within schedule and the budget, will primarily depend on the marketability of the output from the project. If an Off take Agreement is missing then the sponsor may conduct a commission for the market study of the projected demand on the projects expected life. Under the set of reasonable assumptions in economic value, the study is ought to confirm the demand will be sufficiently enough to the planned output of the project financing absorbed at a price that covers the whole cost of production, enables the service debt on the project and also, provides equity investors with high return rates.
- Financial model of the project: A financial model is to be presented containing the accurate assumptions related to the project financing and it should also reflect the provisions decided and made in the agreement.
- The money or fund-raising stage: This stage of the project financing starts with the initialization of the project agreements and it comes to an end only when the project is completed or an entity is commissioned after building. The four steps in this stage are-
- Financial sources: Projects of investment grade rate, located in developing and industrialized countries have sources of private debt available to them in both credit and capital market.
- Financial ability: A project financing must generate sufficient cash flow, so as to provide the lenders with amounts that makes them secure about their provided debts and investments.
- Ratio of debt to equity: A projects appropriate Debt to Equity ratio totally depends on the off-take agreements strength.
- Construction: The construction in the project financing only begins when the sponsors are sure that the financing is secured.