Chartered Accountants in Project Financing

Videocon Telecommunications closed the largest project financing ever for a Greenfield operator in India. The SBI-led Rs. 72 billion ($1.6 billion) financing came solely from Indian lenders. These lenders had to work around the regulatory and logistical challenges of funding a network roll-out across the worlds second most populous country.

Singapore-based DBS Group has decided to make a foray into the project financing business in India and is likely to start the new initiative with a few projects in the power sector.

India is targeting $400 billion of investment in power projects in the five-year period starting 2012 as the country aims to raise generation capacity by more than two-thirds to about 300 gigawatts (GW) by 2017.

These are items that appear often in our business newspapers.

So what is project financing and hows it different from any other kind of financing/lending?

More importantly, can a CA make a mark in this field?

Project financing, as you mightve guessed, is both really large in size (in terms of quantum of lending) and can also be very complex in structure (the Videocon example).

Generally, in banks and FIs, the Project Financing Group is separate from the Corporate Banking Division or even the Investment Banking Division.

It deals with funding for large scale projects across the entire spectrum of the infrastructure and manufacturing sectors. Roads, seaports, airports, power, oil refinery plants, etc. all of these would require project financing.

The crucial factor in financing/lending of this type is that, the repayment of the debt is contingent on the future cash flows expected from the project; as opposed to deriving comfort from the balance sheet strength of the corporate.

In other words, the financing for a project is being done on the basis of the expected success of the project.  For example, a Mumbai Metro One Pvt. Ltd., (the company currently building the metro rail network in Mumbai) gets funding for the project on the basis of the projected revenue earnings from passenger traffic, on completion of the construction. It is not on the basis of Reliance ADAG being the main promoter of the company.

Lets now try and understand some basic characteristics of project financing.

Long term maturity: These projects are typically anything from about 5 years to 25 years.

Capital Intensive: They involve a huge finance outlay in setting up of the project, be it a power plant, an airport, etc. Due to the complex nature of the projects, its critical for the borrower/corporate to have sufficient experience and expertise in the area. For example, Reliance Industries setting up a petrochemical refinery would give comfort to lenders, since they have done it in the past and would therefore have the expertise to set it up and run it competently.

Risky: These projects are highly dependent on factors such as GDP growth, overall health of the world economy, etc. For example, if JSW Steel is setting up a steel plant, projected demand for steel in India as well as world-wide, would be an important factor in forecasting the sales of steel from that plant.

Some of the key skills required in succeeding as a project financier would be interpreting financial statements, understanding how businesses/projects are valued, and carrying out rigorous analysis & research of the industry.

Lets look at how CAs measure up to each of these skills.

As CAs, your deep understanding of financial statements is very handy in preparing financial models to project revenues and cash flows.

Business/project evaluation is a technique which you will easily pick up once you start working in project financing. This is a skill which bankers develop with experience as they work on more and more transactions.

CAs generally carry out high quality industry research and analysis because of their strong foundation in commerce and economics. This helps you in rationally evaluating the risks associated with any project financing deal being evaluated.

How can you build up your CV to enter the field of Project Finance? As mentioned earlier, typically research and analysis as well as valuation models are where you would be working. A certification which can help you here is the NCFM FLIP Equity Research certification (http://www.nseindia.com/content/ncfm/ncfm_eq_research.htm). While the focus is on researching stocks to arrive at a price for it, it does cover industry and economy research, as well as valuation of a company using different models. The skills that you pick up from this certification would be very portable, and relevant to working in the field of project finance.

When you are part of the Project Financing team in a bank or FI, you would typically get aligned to one sector. For instance, you would be one among a team of 6-10 bankers who only look at project financing in say, the oil & gas sector or the energy sector.

As you spend time working on different transactions in that sector, your expertise in that industry builds up. This is one of the key takeaways in your career path as a project financier.

I hope this gives you a basic idea on what project financing is all about. I look forward to hearing your comments on it.