Project Finance Definition - Essay Example

Project Finance (Project Management) To begin with it would be reasonable to provide some background information about the essence of project financeand its role in the provision of large infrastructure projects. Project finance is one of the most important instruments of financial management and corporate finance. It is used to finance development and implementation of the different projects. The role of this instrument just cannot be overestimated, especially, in the conditions of the global financial crisis. First of all, the term “project finance” should be explained. One of the most appropriate definitions of this term is the following. “Project finance is the financing of long-term infrastructure, industrial projects and public services based upon a non-recourse or limited recourse financial structure where project debt and equity used to finance the project are paid back from the cashflow generated by the project” (Project Finance Definition). Simply speaking, project finance is the process of accumulation of money and its investment in some particular project. Usually, there are two types of project finance – equity financing and debt financing. The debts and an interest rate are paid from the cash flows, generated by a project. Generally, project finance can be called as a part of project management. Project finance is usually a long-term process. The reason for it is that the projects financed are long-term as a rule. This process begins from looking for the ways of a project’s financing and ends with paying dividends to stakeholders and investors. . “It takes a lot more than a good idea to develop a successful manufacturing venture. You need to know where to find the resources, both financial and technological, and you need to find the right people with the right skills to do the job. Knowing where to look for these resources can save you precious time and money, and earn you some valuable partners in the process” (Sudarkasa). Of course, this process has some stages. There are five main stages of the project finance. These stages are the following: Identification and development of a project – any project should be presented to potential investors in some formal way. They should be able to weigh up all the pros and cons for a project. This information is needed to make a final decision whether to invest or not in a project; Determination the feasibility of the project – the main factor for investors is whether a project is able to bring social and economic benefits or not. That is why a vivid plan how to earn money should be drawn and presented to all the stakeholders. These two stages are among the most important in the process of project finance. Their main goal is to conquer attention of potential investors and convince them to share their financial resources; Identification of the sources of technology – a particular technology of a project’s realization should be identified. In fact, this stage should show particular process of production of a product or service; Identification of sources of finance – after providing all the details of a project, the certain sources of finance should be identified. As it has been already mentioned, there two main ways of financing – debt financing and equity financing. Equity financing is financing of a project, using own money. Debt financing is financing of a project, using borrowed money. Every way has its particular advantages and disadvantages. A final choice depends on the whole range of factors. Among them the following ones may be pointed out: character of business and industry, features of an organization, organizational culture and structure, etc. Mitigation of a project’s risks – finally all the potential risks for investors should be identified and presented. It is important for both investors and developers of a project. They should realize potential risks and losses and find the ways of their prevention. Among the instruments of risk management the following ones may be pointed out: diversification, hedging, flexible business strategy, etc. The main goal of the project finance is to attract funding and to use them to implement large-scale project. The sources of funding for such projects can include a companys own funds and borrowed funds, including - bank loans, leasing, loans, investments and government agencies, funds raised from the placement of shares and bonds. These sources can be used separately or in any combination. Therefore, the role of project finance is to attract money to implementation of large-scale projects. Infrastructure projects are among the largest in a national economy. They are usually realized by governments. Also, governments usually do not have enough money to realize a project. That is why they look for additional ways of financing. For example, they apply to the different financial institutions. The main economic institutions that provide funds for project finance should be identified. Among them the following ones may be pointed out: federal and commercial banks, financial and investment companies, funds, international institutions, NGOs, etc. Since, globalization is one of the most significant trends in the development of the modern world, the role of international institutions in project finance just cannot be overestimated. The role of major international banks in project financing is multifaceted. They do not only have significant financial capacity of direct financial support for projects, based on lending and leasing services, but they are often an organizer and coordinator of funding, service providers of placement of shares and bonds, buyers of stocks or securities for future facilities are financial guarantors of projects, etc.. Financing of large projects in developing countries is in crisis because of debt problems. Earlier, international banks evaluated risk of projects supposing to receive significant profit from the sales of the object. Now the banks are forced to consider such factors as the borrowers creditworthiness and the country where the project is developed. Under such conditions, the great importance in that field is played by international and regional development banks, including the European Bank for Reconstruction and Development (EBRD), the Inter-American Development Bank (IDB), the Asian Development Bank (AzBR) and others, s well as structures of the World Bank. Thus, the EBRD was established to assist countries in Central and Eastern Europe in economic growth. Therefore, the funds of this structure play an important role in supporting various projects, development of small and medium enterprises in Eastern European countries. To conclude the following items should be mentioned. The modern business world is characterized with the consequences of the global financial crisis. One of such consequences is financial hunger. It is very difficult to get needed sources to finance a project. That is why the role of project finance, effective project finance is growing. Its main goal is to get required investments to finance a particular project. The investors are usually banks, financial and investments companies, international companies, etc. The role of international bank is growing in the conditions of globalization. Reference list Brealey, R.A., I. A. Cooper, and M.A. Habib, 1996, Using Project Finance to Fund Infrastructure Investments, Journal of Applied Corporate Finance, Vol. 9, No. 3, pp. 25 38. Gatti, S. Project Finance: Theory and Practice Project Finance Definition. Available from: . [11 November 2012] Sudarkasa, M. Five Basic Steps to Finance Your Project. Available from: . [12 November 2012] Wynant, L., 1980, Essential Elements of Project Finance, Harvard Business Review, May June, pp. 165-173. Read More