PROJECT FINANCING

Project financing is a method which is used to finance the large infrastructure and industrial projects based on the projected cash flow of the finished project rather than the investors own finance. It is a long term method. Project finance structures usually involve a number of equity investors as well as banks who provides the loan to the project. In other words we can say that project finance is a method of funding in which the lender looks primarily to the revenues generated by a single project, both as a source of repayment and as security for the exposure. It plays an important role in financing development throughout the world. This type of financing is usually for large, complex and expensive installations.

The types of project for which project finance are commonly used include the following:

• Infrastructure projects such as buildings, sports stadium
• Transportation system such as metro.
• Installation of a power plant, chemical processing plants, mines etc.
• Large new industrial undertakings.

Project finance is especially attractive to the private sector because they can fund major projects off balance sheet.

Advantages of project financing

• It eliminates or reduces the lender’s recourse to the sponsors.
• It is treated as an off balance sheet.
• The leverage of a project is maximized.
• It avoids any restrictions or covenants binding the sponsors under their respective financial obligations.
• The credit standing of the sponsors is avoided by any negative impact of a project.
• The company can obtain better financial conditions when the credit risk of the project is better than the credit standing of the sponsors.
• It allows the lenders to appraise the project on a segregated and stand alone basis.
• The company can obtain a better tax treatment for the benefit of the project, the sponsors or both.

Disadvantages of the project financing

• It requires greater disclosure of proprietary information and strategic deals.
• It restricts the managerial decision making to some extent.
• It is substantially more expensive due to its non-recourse nature.
• Due to the creation of an independent entity there are higher transaction costs.
• It often takes longer to structure than equivalent size.

Dr Himani Gupta

Associate Professor

Department of Management Studies