Practical aspects of financial closure for a Project (Part-1)

Project Financing Module:

In the Finance field Project financing is playing great role. Under various financing options for various businesses and industries, Project finance is different nature from other financing options. We may seek finance for any type of project like new, expansion, modernization, replacement etc. However the concept of financing options and methods are similar. Major project finance seeking industry is infrastructure industry and particularly those are doing project in Public Private Partnership scheme (PPP). These projects are basically BOOT, DBFOT etc which involve huge capital investment and return investment will take long time and also Social Cost Benefit Analysis is the very important factor for public infrastructure projects. As a finance professional, getting financial closure for the project is great challenge. In this article I would like to discuss the practical aspects of Project financing module which covers means of project finance and basis for preparation of project finance and how to do the financial closure and prepare, compliance pre and post finance periods.

Means of Project Finance:

Means of Project finance is the finance or funding methodology planned for the particular project. Such as What ever the project finance we may seek from bankers or lenders. In detailed planned combination between the Equity and debt for the capital expenditure requirement and projected working capital plan for the operative expenditure requirement.  Every project finance may comprise for finance for capital assets and operating capital (i.e Working capital). Some time either capital assets or operations alone. In addition to that project finance also may seek the Bank Guarantee (BG). Bank guarantee may be for performance bank guarantee for the particular project work or seeking BG against release of mobilization advance to start up the work.  From here I am discussing about basic steps for calculating the means of project finance in each facility like Term loans or Capex loan and Working capital requirement and Bank Guarantee and important factor to decide those funding arrangements.

Finance proposals:

For getting finance for the project, we need to submit the proposals to the bankers/lenders, it may contains Detailed Project report (DPR), Project memorandum and Projected financials for the project and key financial ratios. It contains the detailed plan and methodology of the contractor to proceed according to the project authority.

Bank Guarantee:

In project finance, Bank guarantee is the basic requirement for all project finance seekers, because that is the starting point or finance closure for the all the project, Bank guarantee is the basic requirement for any client who looking for contractors for doing any job on project base. Getting BG is the first step in the project finance. BG value should be the value of certain percentage on the project value. BG format and conditions are according to the project authority. How ever BG conditions are also vetted by the banking authority also. BG has some validity period basically from 12 months to 18 months. Generally project authority seeking the BG entire tenure of the project period. So contractor need to extent the validity as and when required. BG can be produced for performance or financial position according to the project terms and conditions.

Consequence of BG:

BG plays very critical role and project works as well as project finance. Most of the BG issued for the project has the irrevocable nature. In case project contractor defaults in the project, they may lose the BG with the project authority. It makes the contractor keep always in line with their responsibility in the project authority.

For getting bank guarantee contractor has to keep the deposit with banker as margin money on BG, Margin money may be the specific percentage on the BG value and also need to pay the charges on issue for the BG to the banker.

Next part we will start discuss about the Capex loan & working capital finance

Thanks

CMA Ramesh Krishnan