CHAPTER 5 & 6:
PROJECT FINANCING,
IMPLEMENTATION, AND
MANAGEMENT
PROJECT FINANCING
The allocation of financial resources to a
project constitutes an obvious and basic
prerequisite for;
Investment decisions,
Project formulation
Pre-investment analysis, and
Determining the cost of capital.
The capital outlay of a project can be
appropriately determined only after plant
capacity, location, civil works, technology,
and equipment have been decided
Cont…
Defining the financial requirements of a
project at the operational stage in terms of
working capital is equally necessary.
These estimates should cover a period of
time and be reflected in a cash flow
analysis.
Sources of Finance
A generally applied financing pattern for
an industrial project is to cover the
initial capital investment by equity and
long-term loans and to meet working
capital requirements by short-term
and medium-term loans.
Equity can be raised by issuing two
types of shares: ordinary shares; and
preference shares.
Cont…
Preference shares usually:
Carry a dividend independent form profit,
without, or with only limited voting rights.
can be convertible or non-convertible,
can be cumulative or non-cumulative,
redeemable or non-redeemable.
Dividend payment on ordinary shares
with full voting rights,
depends on the profitable operation of the
company.
Loan financing
It is easy for a sound project to obtain
loans.
The loan capital can be classified in different
forms: short-term, medium-term and longterm.
Short-term loans are available against
pledging of inventories.
Working capital funds should even be partly
met out of long-term funds
Cont…
Long-term loans is usually subject to
certain regulations and Further certain
ratios in the capital structure of the company
need to be maintained.
Investment may also be financed partly by
issues of bonds and debentures.
Internal cash generation is also a source of
finance
Cont…
Supplier credit: Imported machinery and spares
can be availed on deferred-payment terms with
payments spread over to 6 to 10 years and even
longer.
Leasing requires usually a down payment and the
payment of an annual rent, the leasing fee.
leasing essentially represents a form of off-balance
sheet financing.
the problem is basically to decide which alternative
should be preferred, leasing or purchasing of
capital assets.
Cost of capital
To obtain finance, an investor must pay a
charge for the funds lent.
This charge comprises an interest, as well as
fixed charges, dividends on equity capital,
and interest on current account.
Public policy and regulations
on financing
The extent of initial equity depends on the
anticipated profitability and alternative sources of
capital participation all under the prevailing
regulations on financing and taxation norms.
When there is well-developed capital market,
equity funds can be raised through public issues
of shares.
Banks and other institutions underwrite such share
issues.
In some cases, specialized financial institutions
also participate in the equity financing
Cont…
In considering foreign equity participation
for the projects, it is necessary to get
government approval.
In some countries such approval is not
granted particularly to non-priority sectors
of investment.
In some cases, in sectors involving large
investments or in projects with a great
employment potential, foreign participation
is welcomed.
Financing Institutions
Most developing countries have established
development-financing institutions, usually
called industrial finance corporations or
industrial development banks
The institutions have been set up at national
and at state levels.
Cont …
• Some of the national institutions provide foreign currency
loans, which are financed by international institutions, such as
the World Bank and its affiliates.
• Various international financial institutions and funding
facilities exist and finance is available for the industries in
developing countries. Some of these include
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World Bank,
International Development Association,
International Finance corporation,
the special fund of the Organization of petroleum Exporting
Countries,
 the Kuwait Fund for Arab Economic and Social Development, and
 the International Investment Bank
Cont …
There are also institutions, which are operating on regional
basis, such as;
the African Development Bank,
the Asian Development Bank,
the European Investment bank and
the Inter-American Development Bank.
Funds have been set up by the oil exporting countries, such
as;
the Arab Fund for Economic and Social Development and
the Islamic Development Bank.
Bilateral institutions have been set up in most of the
countries
INVESTMENT PROMOTION
AGENCIES
In most developing countries, development agencies
have been established with the primary task of;
Identifying investment projects,
Formulating them in opportunities studies, and
Seeking prospective promoters
They use market, industry and resources-based
project studies. They also offer;
Consultancy services for the preparation of pre-investment
studies, covering technical, financial and economic aspects
of project proposals.
Many of these agencies have also started with the
supervision of projects during the investment phase.
National Financing Agencies; The national
development banks and commercial banks that
take part in project financing also offer
investment consultancy.
National consulting firms; Building up efficient
consulting firms is of great importance to
developing countries.
International
Organizations;
Industrial
investment consultancy has long been one of the
traditional tasks of international organizations
such as the United Nations, UNIDO, FAO, ILO,
as well as the World Bank.
International consulting firms and
consultants
The use of international consulting firms and
consultants in investment consultancy
comprises
The preparation of pre-feasibility and feasibility
studies,
The training of management staff in this field,
Assistance in building up and expanding
national consulting firms and investment
promotion agencies etc.
CHAPTER 6; PROJECT
IMPLEMENTATION
To implement a project means to execute all the onand off-site work tasks necessary to bring a
project from the feasibility study stage to its
operational stage.
The project implementation phase embraces the
period from the decision to invest to the start of
commercial production.
The choice of financing as well as the financial
implications of investment and production delays
should receive particular attention.
Cont …
The implementation schedule must present the
costs of project implementation as well as the
schedule for the complete cash out flows, in order
to allow the determination of the corresponding
inflow of funds, as required for financing the
investments.
A realistic schedule should be drawn up the
various stages of the project implementation phase.
Such schedule must initially define the various
implementation stages in terms of the resources
and duration of activities required for each stage
and then establish a time schedule.
Implementation planning and budgeting includes
the following major tasks:
Determination of the type of tasks, on-and off-site,
necessary to implement the project.
Determination of the logical sequence of events
Preparation of a time-phased implementation schedule,
Determination of the resources needed to complete the
individual tasks
Preparation of an implementation budget and cash flow
for the implementation phase.
Documentation of all implementation data allowing the
implementation plan and budget, as well as the forecasts
made in the feasibility study, to be updated.
Stages of project implementation
The main stages of project implementation do not always lend
themselves to a stage-by-stage analysis with one stage
invariably leading to another. A great deal of overlapping
and simultaneous planning of various activities is inevitable.
1. Appointment of the implementation team
2. Company formation; can generally be divided into the
following four steps:
Starting of a letter of intent between business partners to
establish a company
Agreement between the business partners on the financial
arrangements and drafting of the documents required by the
authorities.
Formal application to the authorities
Official approval or registration of the new company.
Cont . . .
3. Government approvals
4. Financial planning
 Detailed arrangements for project financing need
to be initiated in line with the financial
requirements of project implementation.
 A sound debt-equity ratio should be aimed at
Project management and
organization
The investor should first set up a project
management team manned by a key person who
would build up a company.
The team should have the necessary authority and
ideally form the nucleus of the managerial, technical
and operational staff that is to be put in charge of
operating the plant.
Organizational build-up
During the stage of organizational build-up
requirement of human resources is initiated.
the
Technology acquisition and transfer
The acquisition of technology is a key element of the
implementation phase and has many legal, economic,
financial and technical aspects.
Detailed engineering and contracting
The generation of drawings, descriptions, bills of
quantity and equipment specifications engages many
engineers, architects and planners, and will require
efficient coordination.
The phase of tendering, negotiations and contract
awards must be provided reasonable time in order to
obtain the best approvals.
Acquisition of land
A critical step in a project is the acquisition of land.
Construction and installation
At the stage of feasibility study the realistic planning
of construction works and installation of
equipment is of crucial importance.
Supply of materials
It is necessary to finalize arrangements for the
delivery of basic production materials during
implementation phase.
Pre-production marketing
The preparation of the sales market must start
enough to ensure that the output can be sold as
scheduled.
Plant commissioning
The plant commissioning comprises the following
activities:
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Pre-operational checks,
Trial runs,
Performance test and
Acceptance and take-over.
Implementation scheduling
Various methods of analysis and scheduling are available.
The most simple and popular method involves the bar or
Gantt chart, which divided project implementation into
various time-phased activities and shows the duration of
each activity.
Projecting the implementation budget
to determine the cost of resources required to
implement an investment project
Project Monitoring and Evaluation
The project appraisal [capital budgeting process]
process should not end with the decision to accept a
project.
Continual monitoring of the project is the necessary
next step to help ensure project success.
Progress reviews can provide early warnings of
potential cost overruns, revenue shortfalls, invalid
assumptions, and outright project failure.
Post-completion audits allow management to determine
how close the actual results of an implemented project
have come to its original estimates.
Monitoring of a project can also have important
psychological effects on managers.