Project Funding Sources and Methods, Benefits and Risks of Joint Ventures to the Long-Term Funding of Projects - Essay Example

Project Funding Sources and Methods Name Institution Project Funding Sources and Methods Project Financing Project financing has different definitions including the load relating to the benefits of a given project but reduces the investors’ exposure. It also refers to a debt that the project supports, not by the companies sponsoring the project (Maylor, 2010). Project finance is also a mechanism used to finance any given economic unit though it requires satisfaction of the lender to look at the profits presented by each economic unit as the finance source for reimbursement (Fabozzi & De, 2012). Based on traditional concept of project finance, there are various unique features enabling the promoter to shift risks, debt burden, and liabilities to the others parties and consequently ensuring retaining of some benefits associated with the project. In the modern project management, the definition of project finance has transformed into the concept of financing off-balance sheet. The current definition of project financing is when there is a close tie between financing to any given project. In involves getting a loan by the project based on its virtues, which is projected to be paid by the project’s cash flows. Funding Methods To achieve successful financial arrangement, it is important to design a finance structure, which needs to be enshrined within a set of contracts enabling each party to benefit from agreement. Various capital markets could avail funds to the terms they consider most attractive. For the project, there are many funding sources ranging from debt to equity within both the public and private markets. With expansion and sophistication of project finance investor base, different traditional sources have emerged (Baguley, 2008). Through using the innovative structures and various financial sources, the sponsors are able to achieve the highest financing in regards to the general terms and pricing used. Equity Financing through equity enables the organizations to acquire funds without incurring debt. Therefore, they do not have to repay a specific amount of money within a given time. The project has no ability of paying the dividends before the operations commence with lenders restricting the payments of the dividends in the early years of operations until substantial repayment of the debt. The lenders often demand application of the available free cash flows for repaying the debt (World Bank Group, 2010). Accordingly, when there is need long period of construction, the equity investors could decide to take the delayed dividends. When the project needs long construction period, equity investors might have to accept the delayed dividends. Nonetheless, the equity financiers could fail to invest in the project if the profits are not corresponding to the risks. Equity exists in various forms: public, private, preferred stock, and common stock. Typically, the equity investors are the groups likely to enjoy the project profits directly. Within the early stages, it might be difficult for the public investors to enjoy the common share. When the project shows signs of benefits, the project managers might sell the common equity to the public (Stakeholdermap, 2010). In project finance, equity forms the foundation from which investors provide projects with debt while seeking equity investment margin for safety. Debt Large infrastructural projects are divided into various stages. Various providers of debt could be appropriate at different phases. There are many sources of debt. The common source is commercial bank that have played a significant role in project financing since 1930s (Crundwell, 2008). Currently, bank loans remain the major source of traditional projects finance whenever the maturity period of the loan is less than ten years. However, the financiers often require cooperation from the commercial banks for financing of both construction and permanent projects. Term loan is the commonly used type of commercial loan. Term loan is a business loan that matures within a period of a year and duration of pay depends on the scheduled timeframe. The international commercial banks have syndicates which often offer huge bank loans which many banks undertake to provide the loans to the customers under the defined terms and conditions. Syndicating a loan is important as it makes it easy to raise large amounts of debts; however, it promotes floating-rate debt. The fixed-rate debt market is another source that has increased over the years that offers cheaper and longer alternative to the commercial bank. However, what limits its capacity is the challenge to rate bonds for the international project financing. Currently, rating of the projects is an emerging issue indicating the likelihood that the bond user will be in a position of meeting the scheduled payment of interest. Government and multilateral agencies are also the sources of financing. Benefits and Risks of Joint Ventures to the Long-Term Funding of Projects Businesses, irrespective of the size can use joint ventures in strengthening the long-term relationships or collaborating on the short-term projects. Joint venture is an alternative to the business merger and a strategy that businesses use in achieving common goal (Gutterman, 2009). When entering into joint ventures, it means different entities are coming together under a contract that allows them to do their activities together within a given period. Benefits Joint venture could assist the business in growing faster, increase the productivity level, and generation of greater profits (Investopedia, 2015). Any successful joint needs to offer the business accessibility to the new markets and ensure effective distribution of the networks, increase the capacity level, distribution of the risks and associated costs with the partner, and increase accessibility to numerous resources such as experienced workers, finance, and technology. In addition, joint venture enable business growth without borrowing the funds or look for outside investors (Chamber of Commerce of Metropolitan Montreal, 2012). Businesses are able to use joint ventures customer database of the customer in marketing the product and offering the products and services of the partners to the existing customers. The partners can join forces to purchase, research, and undertake development activities. Joint venture is flexible and has limited lifespan, which limits the commitment of the partners. Risks Partnering with other businesses could be complex considering the amount of time and effort required in building the best business relationship. Joint venture problems could arise if the objectives of the venture are unclear and not communicated to each partner and if the partners have different objectives for the joint venture. In addition, problems could occur if there is imbalance in the expertise level, investment, and the assets contributed by each partner for the venture. Differences in cultures and management styles used in businesses could lead to poor integration and cooperation. Besides, in the early stages, the partners might not have adequate leadership and support (Nibusinessinfo, 2011). Success in the joint ventures depends on adequate research and effective analysis of the aims and objectives of both parties. It is important to follow that up with effective communication of the business to each partner involved. Project Financial Management through PMBOK Cost management requires the managers to understand and know the resources needed for the project: human and financial resources (Project Management Institute, 2013). Therefore, it needs creation of careful budget and adherence to it for achievement of the required project benefits. However, financial management ties to time management, since to ensure that the project is completed on budget, it has to be completed on time (Bowen, 2016). There are many processes involved with PMBOK finance management. The first process involves cost estimation. In project management, different methods are used to estimate the cost of the project including the analogous estimation, which involves utilizing the same activities and making the estimates of the current project based on the result of the past project. Parametric modeling is another method, which involves pre-construction of formula using various attributes of the project. Bottom-up estimation requires the managers to estimate the cost and duration of the smallest activities then summing them up with an aim of creating the estimate of the entire project (Hoffman, 2008). In the modern financial management, computerized tools are important in offering assistance associated with estimation of project cost. The second process involved in the PMBOK, cost management strategies, is cost budgeting. In this case, the project managers rely on the information collection from the estimates used in setting up the budget of the project. Therefore, it is important that the budget considers various stages involved in the life cycle of the project. The third and the final step involved in PMBOK cost management is cost control. It is important that the project managers carefully monitor the cost of the projects. Such monitoring process involves ensuring that if the actual cost is deviating from the initially estimated or budgeted cost, then the managers are able to effect the change of getting the project spending on the right track (Chartered Institute of Management Accountants, 2014). Lastly, cost control requires informing the relevant authorities and stakeholders on the cost discrepancies when the actual cost of the project seem to vary too much from the initially budgeted cost. Financial reporting is an important aspect involved in financial management. It needs to include initial project budget and cost for the time reported, variance, which is the difference between the budgeted and actual cost, remaining funds, and graphs reflecting the spending trend and effect on the overall project (Sarda, 2007). Financial Management Plan Resource Planning Resource planning involves determining the physical resources such as materials, people, and equipment and quantities of each needed to perform various objectives of the project. It has different inputs including work breakdown structure, which is a deliverable-oriented grouping of the elements of project, which organize and define the total project scope and identification of project elements that require resources (Engineering Dictionary, 2012). Resource planning also requires historical information including scope statement containing project description and objectives, resource pool description, organizational policies, and the tools and techniques to the resource planning. The outputs are resource requirements, which is the description of the types of resources needed and quantities of each element. Cost Estimating Cost estimating involves approximating the costs of resources needed to complete the project activities and involves identification and consideration of different costing alternatives (Khan & Jain, 2007). The elements include cost estimating and pricing which is a business decision of how much the project will charge the product or service. The inputs include the work breakdown structure, activity duration estimates, historical information, resource requirements, resource rates both scheduled and non-scheduled, and chart accounts describing the coding structure used by organizations in reporting financial information (Georgia Technology Authority, 2008). The cost estimation tools and techniques include analogous method, parametric modeling, bottom-up estimation, and computerized tools. The outputs from cost estimating include the cost estimates, cost management plant, and supporting details. Cost Budgeting Cost budgeting of allocating the overall cost estimates to various project activities to establish the cost baseline needed to measure project performances. The inputs of cost budgeting include project schedules, cost estimates, and work breakdown structures. The tools and techniques used in developing the project cost estimate are used in developing also the work items for the budget (Cooke, Tate & Cooke, 2011). The main output from cost budgeting is the cost baseline, which is the time-phased budget that the project managers use in measuring, and monitoring cost performance on the project. It involves totaling the estimated costs through the period and often displayed inform of an S-curve. Cost Control Cost control involves influencing the factors that create the changes in the cost baseline in ensuring that such changes are beneficial, determination of the changes in the cost baseline, management of the actual changes whenever they occur. It include informing the in charge of the authorized changes, monitoring the cost performance for detection of variance from the plan, prevention of incorrect and inappropriate changes included in the cost baseline, and ensuring accurate recording of the changes (GpmFirst, 2015). The inputs to cost control include the cost baseline, performance reports, and change requests. The tools and techniques used in cost control include cost change control system, performance measurement, additional planning, and computerized tools. References Baguley, P. (2008). Project management. London: Hodder Education. Bowen, R. (2016, June 7). A Summary of PMBOK Practices - Cost Management. Retrieved March 8, 2017, from http://www.brighthubpm.com/monitoring-projects/18942-a-summary-cost-management-practices-from-pmbok/ Chamber of Commerce of Metropolitan Montreal. (2012). Joint ventures and partnering. Retrieved March 8, 2017, from http://www.infoentrepreneurs.org/en/guides/joint-ventures-and-partnering/ Chartered Institute of Management Accountants. (2014). Financial management. London: BPP Learning Media. Cooke, H., Tate, K., & Cooke, H. (2011). Project management. New York: McGraw-Hill. Crundwell, F. K. (2008). Finance for engineers: Evaluation and funding of capital projects. London: Springer. Engineering Dictionary. (2012). Resource Planning, Cost Control and Cost Management Techniques. Retrieved March 8, 2017, from http://www.aboutcivil.org/cost-control-cost-management-techniques.html Fabozzi, F. J., & De, N. C. (2012). Project financing. London: Euromoney Institutional Investor PLC. Georgia Technology Authority. (2008, January 8). Project Financial Management Guidelines | GTA – Enterprise Policies, Standards, and Guidelines. Retrieved March 8, 2017, from https://gta.georgia.gov/psg/article/project-financial-management-guidelines GpmFirst. (2015). Estimating, Budgeting and Cost Control. Retrieved March 8, 2017, from http://www.gpmfirst.com/books/risk-and-financial-management-construction/estimating-budgeting-and-cost-control Gutterman, A. S. (2009). A short course in international joint ventures: Negotiating, forming, and operating the international joint venture. Petaluma, CA: World Trade Press. Hoffman, S. L. (2008). The law and business of international project finance. New York: Cambridge University Press. Investopedia. (2015, March 31). What are the primary advantages of forming a joint venture? | Investopedia. Retrieved March 8, 2017, from http://www.investopedia.com/ask/answers/033115/what-are-primary-advantages-forming-joint-venture.asp Khan, M. Y., & Jain, P. K. (2007). Financial management. New Delhi: Tata McGraw-Hill. Maylor, H. (2010). Project management. Harlow, England: Financial Times Prentice Hall. Nibusinessinfo. (2011). Joint venture - benefits and risks | nibusinessinfo.co.uk. Retrieved March 8, 2017, from https://www.nibusinessinfo.co.uk/content/joint-venture-benefits-and-risks Project Management Institute. (2013). Agile Project Management: Essentials from the Project Management Journal. London: J. Wiley & Sons. Sarda, D. P. (2007). Project finance: Appraisal & follow-up. Jaipur, India: ABD Publishers. Stakeholdermap. (2010). Project Funding - sources of finance for projects and programmes. Retrieved March 8, 2017, from https://www.stakeholdermap.com/project-management/project-funding.html World Bank Group. (2010). Sources of Financing and Intercreditor Agreement | Public private partnership. Retrieved March 8, 2017, from https://ppp.worldbank.org/public-private-partnership/financing/sources Read More