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Project financing is a specialised skill. It requires a blend of industry knowledge and financial expertise in order to evaluate the undertaking and structure the optimal funding package for the enterprise. As the project’s cash flows are a primary consideration, the evaluation process will include a validation of the project’s feasibility with regard to several aspects such as the sponsor’s track record, the market, technology and production, management and human resources, the environment, regulations and statutory approvals. The optimal means of finance would then be determined including the sponsor’s contribution and gearing level, the loan tenure and repayment plan, and the credit enhancements that may be required. In certain cases where justified, the project financing may be in the form of preference shares.
The evaluation of any project is carried out with the objective of establishing its viability. As such, this process has to consider critical aspects related to the proposed undertaking, prior to sanctioning any loan. In this regard, information generally required for any financing proposal is given below.
Background, business experience, technical expertise, track record and other information concerning the project proponents, shareholders, directors and key project personnel is of prime importance.
A description of the market served by the business, covering aspects such as market structure, its growth prospects, competition, distribution/delivery channels, opportunities/hindrances, regulatory and tariff environment along with key competitive strengths possessed by the business.
A description of the production or service process from input to output, covering aspects such as the project site, production/service facilities, technology, raw materials/consumables, utilities, organisational structure, management/manpower, environment, licensing and other regulatory clearances, along with the project implementation timeline and critical path activities.
An estimated cost of the project in local and foreign currencies, covering factors such as fixed assets,intangible assets and current capital. These costs should be substantiated by BOQs, multiple quotations (for fixed assets) and terms of trade (for current capital).
Shareholders’ contribution(s), long-term/short-term financing plan, gearing and total leverage, commercial banking and other trade credit facilities, financial projections and other forecasts, key assumptions, break-even and sensitivity analysis are also factors which are bound to be considered.
Up to 8 years inclusive of a grace period depending on the project implementation schedule (usually up to two years).
Interest benchmark plus margin; interest benchmark could be Average Weighted Prime Lending Rate (AWPLR) for DFCC funds or: Average Weighted Deposit Rate (AWDR) for credit line funds. Other benchmarks may be applicable depending on the circumstances.