Project Financing - Essay Example

Project Financing Introduction The expression “project finance” as applied slackly by academicians, journalists, bankers etc., refers to variety of funding systems. Project financing is a Modern funding method as referred to by and in business deal journals and business meetings. It is in reality a century old funding scheme commenced even before the corporate finance started. On the other hand its volatile development of funding infrastructure proposals privately in the emerging countries, is relishing regenerated care. Kinds of project financing The techniques of Project financing can be traced back to no less than 1299 A.D. During this period the English funded the discovery as well as the evolution of the Devon silver colliery by paying back the Florentine merchandiser banking company and Frescobaldi from the yield of the mines (Kensinger and Martin, 1993 p. 326). The Italian bankers in this case took a lease for one-year and also made up some mining concession, equal to the amount of silver they could excavate in a year. This illustration shows the main feature of project funding is to use the project’s yield or pluses to assure funding. The next type of project funds was utilised to finance ships’ voyages until the 17th century. Capitalists would furnish funds for trade missions on a voyage-by-voyage basis. Once the ship returns the load as well as the ships go into liquidation and the returns of the trip is divided between the capitalists.1 Private capitalists would then resolve either to invest in the ship’s next sail or to apply the assets for other purposes. Definition of Project financing A singular definition for project financing cannot be found. According to Wynant (1980) project financing is “a financing of a major independent capital investment that the sponsoring company has segregated from its assets and general purpose obligations.” The World Bank (1994) specifies project funding as “use of non-recourse or limited-recourse financing.” Apart from this the bank continues its definition and states that the funding of a project does not reoccur since loaners are refunded merely from the cash brought forth out of the project or, on completion of the purpose for which it was funded or on the total collapse of the project. The assets of the project is used for repayment. Lenders too have fixed alternative to the resources of a parent company patronising the project. The most important feature of project financing is the ‘prowess’ of lessening and then allocating the prospect between the several players, like sponsors, service providers, purchasers and loaners (Traverso.1994, p.5). Critical analysis of Project financing Project financing is suited only for comprehensive projects that involve a large amount of debt and equity funds. The capital demand for the project might run into billions of dollars. Road and rail network projects fit into this class. The study undertaken by the World Bank in 1993 detected that the mean dimension of project funded infrastructure projects, in emerging countries was $440 million. On the other hand, projects in their planning phases had a mean size of $710 million.2 Apart from this these dealings lean to be supplied hugely with indebtedness up to 65 – 80 % of capital for comparatively common causes. Also the time period for project funding may simply be around 15 - 20 years. Modern project financings regularly depend on recently founded legal entity, which is identified as the project group and the main intention of which is to execute the project of a finite life. Thus project financing cannot outlive its original purpose.3 The project corporation becomes the recipient. As these freshly constituted entities have either no personal property to their credit or any functioning histories, it becomes crucial for loaners to concentrate on the particular mission’s incomes. According to Chance (1991, p. 3) “the financing is not primarily dependent on the credit support of the sponsors or the value of the physical assets involved.” Thus, it calls for a completely different credit valuation or investment determination procedure to find out the potential dangers and rewards of a project financing. In the former, loaners set a considerable level of trust on the operation of the venture itself. Consequently, they would relate themselves intimately to the viability of the venture and to its understanding with regard to the affect of probable contrary elements (Chance. 1991, p.3). In reality project financing can evoke bigger sums of semi permanent, foreign equity as well as liability for the project. It defends the mission patrons’ income statement. According to Forrester (1995, p.54) “Through properly allocating risk, it allows a sponsor to undertake a project with more risk than the sponsor is willing to underwrite independently.” Under project financing the service provider is liable for building the project based on the expert stipulations laid down in the accord of the project company. These main service providers will then contract out with home companies for factors of the structure. Service providers also possess interests in the ventures. For instance, Asea Brown Boveri produced monetary support, known as the ABB Funding Partners, for the purpose of buying interests in ventures where ABB acts as a service provider. Contributors of the monetary fund are a mix of institutionalised capitalists centred along the energy sphere, and the funding branches of large service providers (Edwards, 1995, p.110). The project financings require preparing disclosure documents on a very extensive basis. In addition to this the capital market investors will most likely not presume construction risk. The trustees of the bond have greater role to play thus giving rise to more disparate investors. Also due to the proceeds, being paid out in a single payment leading to negative costs (Simpson and Avery, 1995, pp.43-47). Conclusion A consciousness of the realities of project finance is crucial. There is a risk that some projects picked out for the sample may not be adequately advanced for sufficient documentation to be obtainable to carry out guarantee (Rodriguez, 2008). Project funding has developed in the course of the centuries into mainly a medium for gathering a syndicate of capitalists, loaners including other players to attempt infrastructure ventures which are large enough for individual capitalists to insure. The current important instances of project financing’s assistance are for projects to build the Trans-Alaskan channel and geographic expedition and operation of the North Sea crude oil fields. Reference 1. Ben, Edwards. 1995. “Too much money, too few deals,” Euromoney. p. 110 2. Clifford, Chance. 1991. “Project Finance”. London: IFR Publishing, p. 3. 3. Esther, Rodriguez 2008. “The Reality of the Equator Principles – Reporting and Assurance”. Accessed from http://www.carbonsmart.co.uk /?q=webfm _send/2 on 20th April, 2010 4. John W. Kensinger and John D. Martin. 1993 “Project Finance: Raising Money the Old-Fashioned Way,” in Donald H. Chew, Jr., ed. The New Corporate Finance: Where Theory Meets Practice. New York: McGraw-Hill, p. 326. 5. Larry, Wynant. 1980. “Essential elements of project financing,” Harvard Business Review. May-June 1980, p.166. 6. Paul, Forrester. J., 1995 “The Role of Commercial Banks in Project Finance,” Journal of Project Finance. p. 54 7. Paul, Simpson and Nicholas, Avery. 1995. “The Role of the Capital Markets in Project Financings,” Journal of Project Finance. pp. 43-47. 8. Victor, Traverso.1994. “The Rules of the Game: Project Finance Challenges in Latin America.” Latin Finance Project Finance in Latin America Supplement. p. 5 9. World Bank. 1994. World Development Report 1994. New York: Oxford University Press, p. 94. Read More