Challenges in project financing in India

by Pooja Late so cut

Project finance remains the preferred form of financing for large infrastructure projects in almost everywhere in the world. The number of investment banks in India interested in project finance is dwindling, or they are focusing on markets where pricing is higher. It takes a lot more than a good idea to develop a successful project. 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.

Project finance is financing projects of long-term infrastructure, industrial projects and public services based upon a non-recourse or limited recourse financial structure, in which project debt and equity used to finance the project are paid back from the cash flow generated by the project. Project financing is a loan structure that relies primarily on the project's cash flow for repayment, with the project's assets, rights and interests held as secondary security or collateral. Project finance is especially attractive to the private sector because companies can fund major projects off balance sheet.

The advantages of project finance as a financing mechanism are apparent. It can raise larger amounts of long-term, foreign equity and debt capital for a project. It protects the project sponsor’s balance sheet. Through properly allocating risk, “it allows a sponsor to undertake a project with more risk than the sponsor is willing to underwrite independently.” It applies strong discipline to the contracting process and operations through proper risk allocation and private sector participation. The process also applies tough scrutiny on capital investment decisions. Despite the complexity inherent in the nature of the financing, some contend that every project financing can be fitted into the same basic structure and essentially has the same components

Project finance has enjoyed explosive growth in the past five years. Its emergence has resulted from a number of favorable trends, e.g., privatization, deregulation of industries, new attitudes towards the role of the private sector in developing countries and at the multilateral agencies, etc. Financing infrastructure projects, especially in developing countries, entails a formidable set of risks. It is the role of the project finance advisor, the project sponsor and other participants to structure the financing in such a manner that mitigates these risks. Lenders and investors always are initially concerned about financing immobile assets in distant, politically-risky areas of the world.

Commercial banks represent a primary source of funds for financing projects. In arranging these large loans, the investment banks often form syndicates to sell-down their interests. The syndicate is important not only for raising the large amounts of capital required, but also for de facto political insurance. Even though investment banks are not generally very comfortable with taking long term project finance risk in emerging markets, they are very comfortable with financing projects through the construction period

Author’s Bio

Brown Cain, a project analyst in this article explain the advantages that comes along finance development and how investment banking in India aid the process for those who wants to go into project financing.