What is Project Finance?
Project finance is the financing of long-term infrastructure, industrial projects, and public services, like toll bridges, highways, pipelines, power plants, oil fields, etc.
It has the following features:-
- Project finance is done through debt or equity or a mix of them.
- The risk in the project determines the amount of loan or equity. The greater risk of the project will have a greater equity component.
- Cash flow from the project is primarily used for repayment of loans.
- Project finance may be with or without recourse.
Steps in Project Finance:-
- Feasibility study
- Project Planning
- Project Report
- Project Appraisal
- Definitive Agreement i.e Loan agreement or other documents
- Disbursal of fund
- Utilization Reports to the bank/investor
The project is evaluated primarily from the market, technical, and financial feasibility points of view. This is a primary stage and a macro view of the project is taken.
- Market Feasibility: A study is conducted to evaluate whether potential demand and supply of the proposed product/services are there, within or outside the country. Forecasting is made on that basis.
- Technical Feasibility: The study of technical aspects include viable technology and its alternatives, availability of raw materials and other resources, product mix, product costs, capacity utilization, environment, etc.
- Financial Feasibility: This requires detailed analysis and projections of prices of inputs and outputs, financing mix, repayment schedule, financial forecasts, risk analysis, etc.
What is Project Planning?
Once the feasibility study gives the positive affirmation for undertaking the project, the next stage comes Project Planning. Study Project planning defines the project activities and end products that will be performed and describe how the activities will be accomplished. The purpose of project planning is to define each major task, estimate the time and resources required, and provide a framework for management review and control. The project planning activities and goals include defining:
- The specific work to be performed and goals that define and bind the project.
- Estimates to be documented for planning, tracking, and controlling the project.
- Commitments that are planned, documented, and agreed to by affected groups.
- Project alternatives, assumptions, and constraints.
The planning process includes steps to estimate the size of the project, estimate the technical scope of the effort, estimate the resources required to complete the project, produce a schedule, identify and assess risks, and
Repetition of these steps is necessary to establish the project plan. Typically, several iterations of the planning process are performed before a plan is actually completed.
Importance of the Project Plan
A project plan is a formal, approved document that is used to manage and control a project
The project plan forms the basis for all management efforts associated with the project. It is a document that is also expected to change over time. The project plan documents the pertinent information associated with the project; the information associated with the plan evolves as the project moves through its various stages and is to be updated as new information unfolds about the project.