Introduction to Project
Funding
1
The firm’s business
environment - Relevant Factors





Government policy
Fiscal policy and legislation
Financial sector
Macro-economic developments
Past and current practices in
project financing
2
Options for project financing
 Internal funds
 Private sector:
1. Commercial banks
2. Development corporations
3. Equipment vendors & subsidiary finance
Companies
4. Trade finance (suppliers and customers)
5. Equity
 Government sector
3
Internal funds
Internal funds can be generated
from:
– Capital introduced by the owner
– Profits & cash flows generated by the
business and retained within it
4
Capital from the private sector
 Long-term loans to purchase fixed
assets: secured or unsecured
 Short-term loans (including lines of
credits without conditions on use)
 Leasing
 Equity (issue of shares/stock)
 ...
5
Capital from the government
sector
 Grants
 Subsidies
 Government-managed
development funds
6
Firms’ criteria in raising
finance
 Profitability
 Risk of excessive debt
(‘Leverage’, or ‘gearing’)
 Matching duration of finance to
duration of project
 Procedures for application
7
Participants’ Experiences
of Financing Projects
8
Project finance
- Issues and questions (1)






What was the project?
Which sources were considered?
Which sources were then approached?
What information did they require?
Could you provide this information?
What were their criteria? (Were
these clear to the firm?)
9
Project finance
- Issues and questions (2)
 Was the application successful? If
not - why not?
 Did any problems arise during the
process of applying?
 What requirements did the financier
set concerning post-funding project
management?
10
Project finance
- Issues and questions (3)
 What do you consider the firm did
well? … and not-so-well?
 Would you do anything differently
another time?
 What advice can you offer to others
from this experience?
 Does this experience prompt any
questions?
11
Some typical project finance
issues and problems ...
 The project is not considered to be
economically feasible (i.e. profitable)
 The firm is unable or unwilling to issue more
shares or to raise debt
 The firm does not yet have contacts with
commercial banks
 The firm is in public ownership and private
sources of finance are not accessible
12
…and some possible solutions (1)
 Problem: the project is not considered to be
economically feasible
 Solution: Total Cost Assessment of project
 Problem: the firm is unable or unwilling to
issue more shares or to raise debt
 Solution: Leasing
13
…and some possible solutions (2)
 Problem: the firm does not yet have contacts
with commercial banks
 Solution: contact chamber of commerce, local
accountants, NGOs funds managers, for
assistance
 Problem: the firm is in public ownership and
private sources of finance are not accessible
 Solution: contact local national CP centre for
institutional assistance
14
A few general points of
advice...
 consider the effect of the current
business environment
 search widely for possible alternative
sources of finance
 seek advice from experts and from
contacts in other firms
15
Other Potential Sources for
Project Financing
16
Checklist:
“Funding Options”
17
Further potential sources
 Internal funds
 Equity (owners’ capital)
 Leasing / equipment vendors and
subsidiary finance companies
 Trade credit (suppliers, customers)
 Micro-credits
 Development bank loans
 Government finance
18
Internal funds (1)
 Internal funds = retained profits
(‘reserves’)
 Size of reserves depends on:– Past profitability of business
– Minimizing tax liabilities
– Proportion of profits retained
vs.
Paid out to owners in dividends
19
Internal funds (2)
 avoids having to approach external
sources (and transaction costs)
 preserve borrowing power for future
projects
 have an indirect opportunity cost
 not available to new firms
 must be built up over time
20
Equity capital
 Equity = ordinary shares, i.e. owners’
capital
 Potential sources of new equity:– more capital from the current owners
(shareholders)
– new shareholders, by private approaches
– venture capital
– a public share offering
21
Equipment vendors and
subsidiary finance companies
 Leasing has become a major source of
financing that is provided by some equipment
vendors and subsidiary finance companies
(‘lease-providers’).
 With ‘financial leases’ (or ‘capital leases’):
– Title to the equipment is held by the firm
which operates it (the ‘lease-holder’)
– The lease-provider retains a first security
interest in the equipment
– The lease-holder faces the risks and receives
the rewards of ownership
22
Trade finance
 potential sources
– suppliers of raw materials
– suppliers of other goods and services
– key customers
 their motive: to secure a key
customer or source of supply
 risk: being tied to a particular
supplier or customer and unable to
develop business freely
23
Micro-Credits (MC)
 aim: ‘to match appropriate technologies
and financing, through the development
of packages that build on community
values’
 local initiatives, depending on MC
managers’ knowledge of their own
localities and markets
 an expanding source for socially
desirable projects - but little-known
24
Micro Credit example
Grameen Bank (1)
 Grameen Bank,Bangladesh: the pioneer
(founder: Mohammed Yunus)
 core belief: the credit-worthiness of
the poorest members of a community
 aim: to break out of the poverty
cycle, using innovative technologies
 a model for many similar banks
operating across the world
25
Micro Credit example
Grameen Bank (2)
 finance derived from international
sources (e.g. development banks)
 Grameen uses this to make ‘soft’
loans to local borrowers
 several projects in renewable
energy and other environmental
investments
 website: www.Grameen-info.org
26
Micro Credit example
Grameen’s lending policy
 no requirement for security
 repayable in weekly instalments
 eligibility for subsequent loans
depends on full repayment of any
earlier loans
 transparency in bank transactions
helps to encourage repayments by
borrowers, through social pressure
27
Micro Credit example
Grameen - the results
 2.34 million borrowers in Bangladesh
 94% are women
 loans for projects in 39,000 of
86,000 villages in Bangladesh
 1977-1997, total lending - US$2
billion
 now, 223 Grameen-type programmes
in 58 countries
28
Development banks (1)
 examples:
–
–
–
–
World Bank
International Finance Corporation
Inter-American Development Bank
Asian Development Bank
 wide and diverse range of
programmes and projects
29
Development banks (2)
development banks aim:– to lend large amounts…
– … but at low transaction costs
 therefore, traditionally, mainly
large projects in the public sector
 stringent guidelines on project
characteristics and lending criteria
(e.g. to be environmental, social,
developmental, technically innovative)
30
Development banks (3)
Benefits of development bank finance:
 can help with technological and
managerial advice on the project
 project packaging
 liaison with other potential sources
of finance
31
Raising finance from
government schemes
 identify the available schemes
 find out:– the criteria and conditions of the
scheme
– the procedures for application
 develop the firm’s application:– to match the scheme’s criteria
– to identify how the project supports
public policy objectives
32
Grants
 low or zero cost of capital
 may be available for only part of a project,
or on restrictive terms
 preserves borrowing power for other
purposes
 accessible via local brokers and/or
international development agencies
 BUT:– can conceal true long-term costs
– misses opportunity to build long-term
relationship with financiers
33
Past funding experience
 successful past experiences with
financing projects?
 how might CP projects be
different? Why might they be ...
– more difficult to finance?
– easier to finance?
 could these further sources be
relevant? If so - when and how?
34
Summary
 a wide range of potential sources
means:-
– more likely to be able to raise finance...
– … and on better terms
 the range varies between countries
and over time
 an early search for a wide range
of sources can be very worthwhile
 each source will have its own criteria
and procedures
35
Acme Electroplaters:
Part 2
36