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Project finance is the funding (financing) of long-term infrastructure, industrial projects, and public services using a non-recourse or limited recourse financial structure. The debt and equity used to finance the project are paid back from the cash flow generated by the project.
Project financing is a loan structure that relies primarily on the project cash flow for repayment, with the project assets, rights, and interests held as secondary collateral. Project finance is especially attractive to the private sector because companies can fund major projects off-balance sheet.
FEATURES OF PROJECT FINANCING
KEY PARTIES TO A PROJECT FINANCING
The construction contractor is one of the key project parties during the construction phase of the project. Typically, a construction contractor remit will be based on one of two models.
Turnkey model: where the construction company designs, engineers, procures and constructs the project output, assuming all responsibility for timely completion.
EPC model: where the construction contractor engineers, procures and constructs the project output but does not design it. Consortia of contractors may be involved in larger projects. As far as liability is concerned those contractors can be either severally or jointly and severally liable. Several liabilities means that each contractor is only liable for its contribution to the project, while under joint and several liabilities any contractor can be pursued for the whole of the obligation and it will then be the responsibility of the consortium to sort out the extent of each contractor& Obligations. Lenders prefer the joint and several liability, since the risk of failure of performance is then the total responsibility of each member of the consortium.
STAGES OF PROJECT FINANCE
- Identification of the Project Plan – This process includes identifying the strategic plan of the project and analyzing whether its plausible or not. To ensure that the project plan is in line with the goals of the financial services company, it is crucial for the lender to perform this step.
- Recognizing and Minimising the Risk – Risk management is one of the key steps that should be focused on before the project financing venture begins. Before investing, the lender has every right to check if the project has enough available resources to avoid any future risks.
- Checking Project Feasibility – Before a lender decides to invest on a project, it is important to check if the concerned project is financially and technically feasible by analyzing all the associated factors.
- Arrangement of Finances – To take care of the finances related to the project, the sponsor needs to acquire equity or loan from a financial services organization whose goals are aligned to that of the project.
- Loan or Equity Negotiation – During this step, the borrower and lender negotiate the loan amount and come to a unanimous decision regarding the same.
- Documentation and Verification – In this step, the terms of the loan are mutually decided and documented keeping the policies of the project in mind.
- Payment – Once the loan documentation is done, the borrower receives the funds as agreed previously to carry out the operations of the project.