PROJECT FINANCING AND MANAGEMENT

Module I Project finance, capital structure

Module II Risk management and the relationship between investment and financing

Module III Project appraisal – Procedures

Module IV Planning and implementation of projects

Module V Venture capital finance and reconstruction of assets in distress

Module I Project finance

The term “project finance” is used loosely by academics, bankers and journalists tom describe a range of financing arrangements. Often bandied about in trade journals and industry conferences as a new financing technique, project finance is actually a centuries-old financing method that predates corporate finance. However with the explosive growth in privately financed infrastructure projects in the developing world, the technique is enjoying renewed attention.

Project financing techniques date back to at least 1299 A.D. when the English Crown financed the exploration and the development of the Devon silver mines by repaying the Florentine merchant bank, Frescobaldi, with output from the mines.1 The Italian bankers held a one-year lease and mining concession, i.e., they were entitled to as much silver as they could mine during the year. In this example, the chief characteristic of the project financing is the use of the project’s output or assets to secure financing.

The following provides a preliminary list of common features of project finance transactions.1. Capital-intensive: Project financings tend to be large-scale projects that require a great deal of

debt and equity capital, from hundreds of millions to billions of dollars. Infrastructure projects tend to fill this category. A World Bank study in late 1993 found that the average size of project financed infrastructure projects in developing countries was $440 million. However, projects that was in the planning stages at that time had an average size $710 million.

2. Highly leveraged: These transactions tend to be highly leveraged with debt accounting usually for 65% to 80% of capital in relatively normal cases.

3. Long term: The tenor for project financings can easily reach 15 to 20 years.4. Independent entity with a finite life: Similar to the ancient voyage-to-voyage financings,

contemporary project financings frequently rely on a newly established legal entity, known as the project company, which has the sole purpose of executing the project and which has a finite life “so it cannot outlive its original purpose.” In many cases the clearly defined conclusion of the project is the transfer of the project assets.

5. Non-recourse or limited recourse financing: The project company is the borrower. Since these newly formed entities do not have their own credit or operating histories, it is necessary for lenders to focus on the specific project’s cash flows. That is, “the financing is not primarily dependent on the credit support of the sponsors or the value of the physical assets involved.” Thus, it takes an entirely different credit evaluation or investment decision process to determine the potential risks and rewards of a project financing as opposed to a corporate financing. In the former, lenders “place a substantial degree of reliance on the performance of the project itself. As a result, they will concern themselves closely with the feasibility of the project and its sensitivity to the impact of potentially adverse factors.” Lenders must work with engineers to determine the technical and economic feasibility of the project. From the project sponsor’s perspective, the advantage of project finance is that it represents a source of off-balance sheet financing.

6. Controlled dividend policy. To support a borrower without a credit history in a highly-leveraged project with significant debt service obligations, lenders demand receiving cash flows from the project as they are generated. This aspect of project finance recalls the Devon silver mine example, where the merchant bank had complete access to the mine’s output for one year. In more modern major corporate finance parlance, the project has a strictly controlled dividend policy, though there are exceptions because the dividends are subordinated to the loan payments. The project’s income goes to servicing the debt, covering operating expenses and generating a return on the investors’ equity. This arrangement is usually contractually binding. Thus, the reinvestment decision is removed from management’s hands.

7. Many participants. These transactions frequently demand the participation of numerous international participants. It is not rare to find over ten parties playing major roles in implementing the project. The different roles played by participants are described in the section below.

8. Allocated risk. Because many risks are present in such transactions, often the crucial element required to make the project go forward is the proper allocation of risk. This allocation is achieved and codified in the contractual arrangements between the project company and the other participants. The goal of this process is to match risks and corresponding returns to the parties most capable of successfully managing them. For example, fixed-price, turnkey contracts for construction which typically include severe penalties for delays put the construction risk on the contractor instead on the project company or lenders. The risks inherent to a typical project financing and their mitigates are discussed in more detail below.

9. Costly. Raising capital through project finance is generally more costly than through typical corporate finance avenues. The greater need for information, monitoring and contractual agreements increases the transaction costs. Furthermore, the highly-specific nature of the financial structures also entails higher costs and can reduce the liquidity of the project’s debt. Margins for project financings also often include premiums for country and political risks since so many of the projects are in relatively high risk countries. Or the cost of political risk insurance is factored into overall costs.

Capital structure

Borrowing funds or raising equity in the local capital market is often a good way to reduce political risk. Any event that harms the profitability of the project will affect local lenders and investors. This prospect tends to furnish a disincentive for the local government to take adverse actions. The stre"n ~hof the disincentive de~endosn how much local investors and lenders have at stake in the project.The capital markets in the developed countries are good potential sources of funding. The capital markets in the emerging countries are less desirable. Funds availability is limited and maturities are short. As of year-end 1995, Brazil, Ecuador, India, Indonesia, Malaysia, Mexico, South Korea, Thailand, and Trinidad and Tobago all had viable corporate debt markets. But in Brazil, the market consisted mainly of leasing company bonds maturing within 18 months from the date of issue. In Mexico, the longest maturity available for corporate debt was 7 years, but only about half had an original maturity exceeding 1 year.South Korea had the deevest corDorate debt market of the countries1 mentioned above, but original debt maturities could not exceed 5 years.A notable exception to the short-maturity limitation was Trinidad and Tobago. Maturities of up to 25 years and 15 years were possible in the government bond market and the corporate bond market, respectively.As the economies within the emerging markets develop, so will the local capital markets. Where such markets exist, project sponsors should carefully consider raising at least a portion of the funds they need in those markets.

It is important to keep in mind that the world capital markets have become more closely integrated over the past two decades. Also, the Euromarkets represent a truly international capital market. At different times, different capital markets may provide funds on the most attractive terms. Also, new financial

instruments, such as interest rate swaps and currency swaps, increase the array of financing alternatives available to a project. A project can borrow in one capital market, use these instruments to transform the characteristics of the loan, and possibly achieve a lower all-in cost of funds than the project could obtain from one of the traditional sources of project-type loans.These new instruments offer opportunities to recharacterise a debt obligation's interest rate or currency characteristics. Consequently, they have expanded the menu of financing alternatives available to a project.Multilateral agencies, such as the World Bank and IDB, and various government agencies, such as Exim bank and OPIC, have stepped up their funding of private infrastructure projects. Local capital markets are a useful source of funds in many emerging markets. Raising funds locally can reduce a project's political risk exposure. Project financial engineering requires examining all likely possible sources of debt and equity-not just the traditional ones-to determine which markets can provide the needed funds on acceptable terms at the lowest possible cost.

Module II Risk management ASSESSING PROJECT RISKSAs a rule, lenders will not agree to provide funds to a project unless they are convinced tbat it will be a viable going concern. A project cannot have an established credit record prior to completion-in fact, it cannot have such a record prior to having operated successfully for a long enough period to establish its viability beyond any reasonable doubt. Consequently, lenders to a project will require that they be protected against certain basic risks. Lending to a project prior to the start-up of construction, without protection against the various business and financial risks, would expose project lenders to equity risks. But lenders, who are often fiduciaries, find it imprudent to assume technological, commercial, or other business risks. Therefore, they require assurances that creditworthy parties are committed to provide sufficient credit support to the project to compensate fully for these contingencies.In light of the business and financial risks associated with a project, lenders will require security arrangements designed to transfer these risks to financially capable parties and to protect prospective lenders. The various risks are characterized here as: completion, technological, raw material supply, economic, financial, currency, political, environmental, and force majeure risks. Each is discussed in the sections that follow.COMPLETION RISKCompletion risk entails the risk that the project might not be completed. Lenders to projects are particularly sensitive to becoming creditors of a "dead horse." They will therefore insist on being taken out of their investment if completion fails to occur. Completion risk has a monetary aspect and a technical aspect. The monetary element of completion risk concerns the risk either (1) that a higher-than-anticipated rate of inflation, shortages of critical supplies, unexpected delays that slow down construction schedules, or merely an underestimation of construction costs might cause such an increase in the capital expenditures required to get the project operational that the project would no longer be profitable; or (2) that a lower-than expected price for the project's output or a higher-than-expected cost for a critical input might reduce the expected rate of return to such an extent that the sponsors no longer find the project profitable. For a major project, a cost overrun of even 25 percent, which in recent years would have been considered a modest overrun for a large construction project, may well equal or exceed the sponsors' total equity contribution.

The other element of completion risk relates to the technical processes incorporated in the project. In spite of all the expert assurances provided to the lenders prior to the financing, the project may prove to be technically infeasible or environmentally objectionable. Alternatively, it may require such large expenditures, in order to become technically feasible, that the project becomes uneconomic to complete.

TECHNOLOGICAL RISKTechnological risk exists when the technology, on the scale proposed for the project, will not perform according to specifications or will become prematurely obsolete. If the technological deficiency causes the project to fail its completion test, the risk element properly belongs in the category of completion risk. However, the project may meet its completion requirement but nevertheless not perform to its technical specifications. Such failures impair equity returns.The risk of technical obsolescence following completion becomes particularly important when a project involves a state-of-the art technology in an industry whose technology is rapidly evolving.Normally, such technical risks would preclude project financing. However, lenders might be willing to fund the project in spite of these risks, if creditworthy parties (such as output purchasers) are willing to protect lenders from these risks.RAW MATERIAL SUPPLY RlSKParticularly in connection with natural resource projects, there is a risk that the natural resources, raw materials, or other factors of production necessary for successful operation may become depleted or unavailable during the life of the project. As a general rule of thumb, minable reserves should he expected to last at least twice as long as the reserves that will be mined during the project loan servicing period. Prospective lenders to a project will almost always require an independent reserve study to establish the adequacy of mineral reserves for a natural resource project.ECONOMIC RlSKEven when the project is technologically sound and is completed and operating satisfactorily (at or near capacity), there is a risk that demand for the project's products or services will not be sufficient to generate the revenue needed to cover the project's operating costs and debt service and provide a fair rate of return to equity investors. Such a development might result, for example, from a decline in the price of the project's output or from an increase in the cost of an important raw material.Depending on the economics of a particular project, there might be very little margin for a price change to occur before any return to equity is eliminated and the project's ability to service its debt becomes impaired. Project lenders are often willing to permit a mine to close down-and defer repayment of principal-if cash revenue from the mine falls short of the cash operating cost. Repayments resume when the mine becomes capable of generating positive net cash flow.An important element of economic risk is the efficiency with which the project's facilities will be operated. Lenders will insist that the project sponsors arrange for a competent operator/manager.A project has no inherent creditworthiness before operations commence. Lenders have no past operating history that they can study to evaluate the project's economic risks. They will therefore require undertakings from creditworthy parties sufficient to ensure that project debt service requirements will be met

CURRENCY RISKCurrency risk arises when the project's revenue stream or its cost stream is denominated in more than one currency, or when the two streams are denominated in different currencies. In such cases, a change in the exchange rate(s) between the currencies involved will affect the availability of cash flow to service project debt. For example, if the project's revenues are denominated in U.S. dollars and its costs must be paid in a currency other than U.S. dollars, there is foreign currency risk exposure.If the U.S. dollar depreciates relative to the other currency without any changes in dollar price per unit of output, and if project debt is denominated in the same non dollar currency as the project's operating costs, the depreciation in value will increase the risk that the project will not be able to service its debt in a timely manner. This risk can be managed by (1) borrowing an appropriate portion of project debt funds in U.S. dollars, (2) hedging using currency forwards or futures, or (3) arranging one or more currency swapsPOLITICAL RlSKPolitical risk involves the possibility that political authorities in the host political jurisdiction might interfere with the timely development and/or long-term economic viability of the project. For example, they might impose burdensome taxes or onerous legal restrictions once the project commences operation. In the extreme case, there is a risk of expropriation.Political risk can be ameliorated by borrowing funds for the project from local banks (which would suffer financially if the project is unable to repay project debt because its assets were expropriated).It can also be lessen by borrowing funds for the project from the World Bank, the Inter-American Development Bank, or some other multilateral financing agency; if the host country is relying on such agencies to fund public expenditures (expropriation would jeopardize such funding). In addition, project sponsors can often arrange political risk insurance to cover a wide range of political risks (see Chapter 9).Often, the project-sponsors must devote considerable time and effort to obtaining the appropriate legislative and regulatory approvals to allow a project to proceed. The existence of such hurdles can have a significant impact on the sponsors' decision on where to build the project.Making the appropriate arrangements with the host country government can reduce substantially, or even eliminate, this element of political risk.ENVIRONMENTAL RlSKEnvironmental risk is present when the environmental effects of a project might cause a delay in the project's development or necessitate a costly redesign. For example, in connection with a mining project, disposal of tailings is often a very sensitive environmental issue that can add significantly to the cost of operations. Interestingly, the frequent changes in environmental regulations in the United States (at both the state and federal levels), and, often, the aggressive lobbying activities and legal challenges mounted by environmental groups, have given rise to significant environmental risks for environmentally sensitive projects in the United States. To the extent environmental objections are voiced through the political process, they give rise to political risk.FORCE MAJEURE RlSKThis category concerns the risk that some discrete event might impair, or prevent altogether, the operation of the project for a prolonged period of time after the project has been completed and placed in operation. Such an event might be specific to the project, such as a disastrous technical failure, a strike, or a fire. Alternatively, it might be an externally imposed interruption, such as an

earthquake that damages the project's facilities or an insurrection that hampers the project's operation.Lenders normally insist on being protected from loss caused by force majeure." Certain events of force majeure, such as fires or earthquakes, can be insured against. Lenders will require assurances from financially capable parties that the project's debt service requirements will be met in the event force majeure occurs. If force majeure results in abandonment of the project, lenders typically require repayment of project debt on an accelerated basis. In the case of events covered by insurance, lenders will require the project sponsors to pledge the right to receive insurance payments as part of the security for project loans.Project sponsors will have to rebuild or repair the project--or else repay project debt-out of the insurance proceeds, if one of these insured events occurs.Most of the aforementioned risks represent business risks (as opposed to credit risks). Business risks are not normally accepted knowingly by lenders. However, by means of guarantees, contractual arrangements, and other supplemental credit support arrangements, the project's business risks can be allocated among the various parties involved in the project (i.e., project owners, purchasers of the project's output, suppliers of raw materials, governmental agencies), thus providing the indirect credit support the project needs to attract financing.

The relationship between investment and financing_ financing Decision: This function is mainly concerned with determination of optimum capital structure of the company keeping in mind cost, control and risk. It is also known as Procurement of Fund.

_ Investment Decision: It is also known as Effective Utilization of Fund. In this respect finance department has to identify the investment opportunities and to choice the best one , after a proper evaluation.

Introduction:

Risk is inevitable in a business organization when undertaking projects. However, the project manager needs to ensure that risks are kept to a minimal. Risks can be mainly between two types; negative impact risk and positive impact risk.

Not all the time would project managers be facing negative impact risks as there are positive impact risks too. Once the risk has been identified, project managers need to come up with a mitigation plan or any other solution to counter attack the risk.

Project Risk Management

Managers can plan their strategy based on four steps of risk management which prevails in an organization. Following are the steps to manage risks effectively in an organization.

Risk Identification

Risk Quantification

Risk Response

Risk Monitoring and Control

Let's go through each of the step in project risk management:

Risk Identification:

Managers face many difficulties when it comes to identifying and naming the risks that occur when undertaking projects. These risks could be resolved through structured or unstructured brainstorming or strategies. It's important to understand that risks pertaining to the project can only be handled by the project manager and other stakeholders of the project.

Risks, such as operational or business risks will be handled by the relevant teams. The risks that often impact a project are supplier risk, resource risk, and budget risk. Supplier risk would refer to risks that can occur in case the supplier is not meeting the timeline to supply the resources required.

Resource risk occurs when the human resource used in the project is not enough or not skilled enough. Budget risk would refer to risks that can occur if the costs are more than what was budgeted.

Risk Quantification:

Risks can be evaluated based on quantity. Project managers need to analyze the likely chances of a risk occurring with the help of a matrix.

Using the matrix, the project manager can categorize the risk into four categories as Low, Medium, High, and Critical. The probability of occurrence and the impact on the project are the two parameters used for placing the risk in the matrix categories. As an example, if a risk occurrence is low (probability = 2) and it has the highest impact (impact = 4), the risk can be categorized as 'High'.

Risk Response

When it comes to risk management, it depends on the project manager to choose strategies that will reduce the risk to minimal. Project managers can choose between the four risk response strategies which are outlined below.

Risks can be avoided

Pass on the risk

Take corrective measures to reduce the impact of risks

Acknowledge the risk

Risk Monitoring and Control:

Risks can be monitored on a continuous basis to check if any change is made. New risks can be identified through the constant monitoring and assessing mechanisms.

Risk Management Process:

Following are the considerations when it comes to risk management process.

Each person involved in the process of planning needs to identify and understand the risks pertaining to the project.

Once the team members have given their list of risks, the risks should be consolidated to a single list in order to remove the duplications.

Assessing the probability and impact of the risks involved with a help of a matrix.

Split the team into subgroups where each group will identify the triggers that lead to project risks.

The teams need to come up with a contingency plan whereby to strategically eliminate the risks involved or identified.

Plan the risk management process. Each person involved in the project is assigned a risk in which he/she looks out for any triggers and then finds a suitable solution for it.

Risk Register

Often project managers will compile a document which outlines the risk involved and the strategies in place. This document is vital as it provides a huge deal of information.

Risk register will often consist of diagrams to aid the reader as to the types of risks that are dealt by the organization and the course of action taken. The risk register should be freely accessible for all the members of the project team.

Project Risk; an Opportunity or a Threat?

As mentioned above risks contain two sides. It can be either viewed as a negative element or a positive element. Negative risks can be detrimental factors that can haphazard situations for a project.

Therefore, these should be curbed once identified. On the other hand, positive risks can bring about acknowledgements from both the customer and the management. All the risks need to be addressed by the project manager.

Conclusion

An organization will not be able to fully eliminate or eradicate risks. Every project engagement will have its own set of risks to be dealt with. A certain degree of risk will be involved when undertaking a project.

The risk management process should not be compromised at any point, if ignored can lead to detrimental effects. The entire management team of the organization should be aware of the project risk management methodologies and techniques.

Module III Project appraisal – Procedures

The Role of Project Appraisal

• To stop bad projects

• To prevent good projects from being destroyed

• To determine if components of projects are consistent

• To assess the sources and magnitudes of risks

• To determine how to reduce risks and efficiently share risks

Introduction

Project appraisal is the process of assessing and questioning proposals before resources are committed. It is an essential tool for effective action in community renewal. It’s a means by which partnerships can choose the best projects to help them achieve what they want for their community.

But appraisal has been a source of confusion and difficulty for projects in the past. Audits of the operation of Single Project Budget schemes have highlighted concerns about the design and operation of project appraisal systems, including:

Mechanistic, inflexible systems A lack of independence and objectivity A lack of clear definition of the stages of appraisal and of responsibility for these stages A lack of documentary evidence after carrying out the appraisalIt’s no surprise that audits or inspections aren’t impressed with the quality of appraisals, and are specifically found with problems like;

Individual appraisals which do not cover the necessary information or provide only a superficial analysis of the project

Particular problems in dealing with risks, options and value for money Appraisals which are considered too onerous/burdensome for smaller projects Rushed appraisalsProject appraisal is a requirement before funding of programs is done. But tackling problems like those outlined above is about more than getting the systems right on paper. Experience in projects emphasizes the importance of developing an ‘appraisal culture’ which involves developing the right system for local circumstances and ensuring that everyone involved recognizes the value of project appraisal and has the knowledge and skills necessary to play their part in it.

What can Project Appraisal Deliver?

Project appraisal helps project initiators and designers to;

Be consistent and objective in choosing projects Make sure their program benefits all sections of the community, including those from ethnic groups

who have been left out in the past Provide documentation to meet financial and audit requirements and to explain decisions to local

people.

Appraisal justifies spending money on a project. Appraisal asks fundamental questions about whether funding is required and whether a project offers good value for money. It can give confidence that public money is being put to good use, and help

identify other funding to support a project. Getting it right may help a community make its resources go further in meeting local need

Appraisal is an important decision making tool. Appraisal involves the comprehensive analysis of a wide range of data, judgments and assumptions, all of which need adequate evidence. This helps ensure that projects selected for funding:

Will help a partnership achieve its objectives for its area are deliverable Involve local people and take proper account of the needs of people from ethnic minorities and other

minority groups are sustainable Have sensible ways of managing risk.

Appraisal lays the foundations for delivery. Appraisal helps ensure that projects will be properly managed, by ensuring appropriate financial and monitoring systems are in place, that there are contingency plans to deal with risks and setting milestones against which progress can be judged.

Getting the system rightThe process of project development, appraisal and delivery is complex and partnerships need systems, which suit local circumstances and organization. Good appraisal systems should ensure that:

Project application, appraisal and approval functions are separateAll the necessary information is gathered for appraisal, often as part of project development in which projects will need support

Race/tribal equality and other equality issues are given proper consideration

Those involved in appraisal have appropriate information and training and make appropriate use of technical and other expertise

There are realistic allowances for time involved in project development and appraisal Decisions are within a implementers’ powers There are appropriate arrangements for very small projects There are appropriate arrangements for dealing with novel, contentious or particularly risky projects.

Appraising a project

Key issues in appraising projects include the following. Need, targeting and objectivesThe starting point for appraisal: applicants should provide a detailed description of the project, identifying the local need it aims to meet. Appraisal helps show if the project is the right response, and highlight what the project is supposed to do and for whom.

Context and connectionsAppraisal should help show that a project is consistent with the objectives of the relevant funding program and with the aims of the local partnership. Are there links between the project and other local programs and projects – does it add something, or compete?

ConsultationLocal consultation may help determine priorities and secure community consent and ownership. More targeted consultation, with potential project users, may help ensure that project plans are viable. A key question in appraisal will be whether there has been appropriate consultation and how it has shaped the project

Options

Options analysis is concerned with establishing whether there are different ways of achieving objectives. This is a particularly complex part of project appraisal, and one where guidance varies. It is vital though to review different ways of meeting local need and key objectives.

InputsIt’s important to ensure that all the necessary people and resources are in place to deliver the project. This may mean thinking about funding from various sources and other inputs, such as volunteer help or premises. Appraisal should include the examination of appropriately detailed budgets.

Outputs and outcomesDetailed consideration must be given in appraisal to what a project does and achieves: its outputs and more importantly its longer-term outcomes. Benefits to neighborhoods and their residents are reflected in the improved quality of life outcomes (jobs, better housing, safety, health and so on), and appraisals consider if these are realistic. But projects also produce outputs, and we need a more realistic view of output forecasts than in the past.

Value for moneyThis is one of the key criteria against which projects are appraised. A major concern for government, it is also important for local partnerships and it may be necessary to take local factors, which may affect costs, into account.

ImplementationAppraisal will need to scrutinize the practical plans for delivering the project, asking whether staffing will be adequate, the timetable for the work is a realistic one and if the organization delivering the project seems capable of doing so.

Risk and uncertainty You can’t avoid risk – but you need to make sure you identify risk (is there a risk and if so what is it?), estimate the scale of risk (if there is a risk, is it a big one?) and evaluate the risk (how much does the risk matter to the project.) There should also be contingency plans in place to minimize the risk of project failure or of a major gap between what’s promised and what’s delivered.

Forward strategiesThe appraisal of forward strategies can be particularly difficult, given inevitable uncertainties about how projects will develop. But is never too soon to start thinking about whether a project should have a fixed life span or, if it is to continue beyond a period of regeneration funding, what support it will need to do so. This is often thought about in terms of other funding but, with an increasing emphasis on mainstream services in neighborhood renewal, appraisal should also consider mainstream links and implications from the first.

SustainabilityIn regeneration, sustainability has often been talked about simply in terms of whether a project can be sustained once regeneration funding stops but sustainability has a wider meaning and, under this heading, appraisal should include an assessment of a project’s environmental, social and economic impact, its positive and negative effects.

While appraisal will focus detailed attention on each of these areas, none of them can be considered in isolation. Some of them must be clearly linked – for example, a realistic assessment of outputs may be essential to a calculation of value for money. No project will score highly against all these tests and considerations. The final judgment must depend on a balanced consideration of all these important factors.

OR

Stages in Project Appraisal and Approval

Why should a project evaluation be done in stages?

A. Idea and Project Definition

B. Pre-Feasibility Study

C. Feasibility and Financing

D. Detailed Design

E. Project Implementation

F. Ex-Post Evaluation

A. Idea and Project Definition

Sources of Ideas for Investments

Key questions

a. Where is the demand?

b. Is this project consistent with the organization’s expertise, current plans and strategy for the

future?

Project Definition

Project definition is defined broadly to include the scope and specification of the objectives

of the project, its output, its different stakeholders, its economic and social benefits, and the

data requirements.

Most of the project’s data requirements are identified in the pre-feasibility and feasibility

stages of the project where the project’s variables and parameters are analyzed in detail.

The data are generally arranged in what we refer to as “building blocks” because they

constitute the foundation for the different types of analyses.

B. Pre-Feasibility Study

Examines overall potential of project

Should maintain same quality of information across all variables

Wherever possible should use secondary information

Biased information better than mean values

Key questions:

a. Is this project financially and economically feasible throughout the project’s life?

b. What are the key variables?

c. What are the sources of risk?

d. How can the risk be reduced?

C. Modules of Pre-Feasibility and Feasibility Study

Building Blocks

Demand (including environmental factors) Module

o Study of sources of demand, nature of market, prices and quantities

o Major distinction between domestic versus internationally traded goods and services

o For internationally traded goods, prices are given to the project by world markets

• Secondary information most important

o For domestic market, primary research more important

• financial and economic values are often affected by project

Technical (including environmental factors) Module

A study of input requirements for investment and operations and their costs

o In this module, secondary information can be used very effectively

o Need to avoid conflict of interest between supplier of technical information and seller of

investment equipment, or contractor for construction

Environmental Assessment Module

o Environmental Assessment augments information for the Economic Analysis

o Identification of Environmental Impacts and Risks

o Where possible, Quantify the Environmental Impacts

Human Resources and Administrative Support Module

o What are managerial and labour needs of the project?

o Does organization have the ability to get the managerial skills needed?

o Is timing of project consistent with quantity and quality of management?

o What are wage rates for labor skills required?

o Manpower requirements by category are reconciled with availabilities and project timing

Institutional Module

o This module deals with the adequacy of the institution responsible for managing the different

stages or phases of the project.

o Insufficient attention to the institutional aspects creates serious problems during the

implementation and operations phases of the project.

Analysis Modules

Financial/Budget Module

o Integration of financial and technical variables from demand module, technical module, and

management module – this is not a mechanical exercise

o Construct cash flow (resource flow) profile of project

o Identify key variables for doing economic and social analysis

Economic Module

o Examines the project using the whole country as the accounting entity

o Evaluation of externalities including environmental

Social Appraisal or Distributive and Basic Needs Analysis

o Identification and quantification of extra-economic impacts of project

o Distributive Appraisal

o Income, Cost, and Fiscal Impacts on various stakeholders

o Poverty Alleviation and Political Necessities

o Basic Needs: Evaluate the impact of project on achieving basic needs objectives.

Basic needs will vary from country to country

D. Integrated projects

o Integrated projects can get very complex and need to be approached cautiously to avoid costly errors.

o It is possible for the bundled project to be financially and economically viable even though some of the components are not.

o Dropping the components that generate negative returns will maximize the project’s benefits.o Defining and understanding the objectives of the project is particularly important when analyzing

integrated projects.o Ultimately, the ‘bundle’ that succeeds the most in accomplishing the desired objectives should be

undertaken.o If the objective of the project is to maximize the wealth of people in Country, then the component

or bundle that yields the highest economic NPV should be undertaken.

Module IV Planning and implementation of projects Techniques of Project Planning and Implementation: Ten Steps to Success

"Techniques of Project Planning and Implementation: ten Steps to Success" provides students and practitioners with the concepts and tools necessary for effective project planning in ten steps: 1) identifying projects, programs and policies; 2) proposal writing; 3) implementation process; 4) budgeting; 5) administrative organization; 6) workplan creation; 7) logical framework analysis; 8) monitoring and evaluation; 9) impact assessment; and 10) report writing

Module V Venture capital finance and reconstruction of assets in distress

Asset Reconstruction

In today’s market scenario, committed focus on core business strengths is critical to the long term survival of a company. Banks and Financial Institutions would also like to release their valuable capital resources from non-performing assets (NPAs). Asset reconstruction services are helping clients at assisting in consolidating their focus and unlock the resources through acquisitions, takeovers, sell offs and joint ventures. The final goal is the maximization of economic returns from assets employed or likely to be employed for the business.

Our strength in asset reconstruction lies in the large clientele across various industries and know-how which we have gathered with years of experience. This allows us to bring the right buyer and seller together and formulate an appropriate resolution strategy after a detailed assessment of their individual requirements. We have also increased access to numerous opportunities available through our

empanelment and dealings with several banks and asset reconstruction companies.

Our wide range of Asset Reconstruction Services consists of :

• Identification of distress asset acquisition opportunities• Assessing synergies between the buyers and sellers• Asset valuation/ Business valuation• Due diligence & Resolution strategies• Fulfilling and assessing legalities• Interim Intellectual/ Business asset management• Arranging the lease/hire of business assets• Sourcing of surplus assets• Creation of an asset bank

Debt Restructuring

Debt restructuring is an adjustment made by both the debtor and the creditor to smooth out temporary difficulties in the way of loan repayment.

Companies use debt restructuring in order to avoid non-payment on the existing loan or to take advantage of low interest rate. A company restructures its debt by paying off the existing debt with a new loan or by altering the terms and provisions of the existing debt.

Debt Re-structuring have been our major strong point. We provide effective solutions to restructure debt profiles through the latest financial tools prevailing in the market.

Asset Reconstruction Companies are special entities which use market forces to consolidate and attractively package lender interests and arrange funding for asset reconstruction. The need for Asset reconstruction arises in India from the bad loans emanating out of a systemic banking crisis.

ARCs in India adopt a trust structure, whereby issuing pass through securities or pay through securities. A generic business model of a typical ARC is to buy distressed assets from a Bank/Financial Institutions; and then choose between directly securitizing them or first reconstructing the asset and then securitizing it before sale to investors. Another opportunity to invest in the reconstruction exercise lies in partnering the ARC in reconstructing debt. The same is unavailable to retail investors & only Qualified Institutional Buyers can participate in it.

Any instrument issued by an ARC needs to possess certain features before it becomes palatable to the investors. These include marketability, credibility of the issuer & credit enhancer, transparency, wide distribution, homogeneity & the presence of a special purpose vehicle.

The regulatory framework under which asset reconstruction has evolved has been through a process of upheaval since the initial financial sector reforms. The essentials of debt recovery include the ascertainment of dues as reflected in Decree/Certificate and the execution of the same for realization of

amount. The deficiency of the legal framework in both these regards has been in the centre of attention of the authorities & regulators. However, successive legislations have failed to address this issue with success. Moreover, ambiguity & lack of clarity on various legal issues have further clouded the environment.

The problem faced by ARCs, extend beyond just the regulatory framework. A number of issues like high incidence of stamp duties, taxation of SPVs, lack of a proper market for the instruments, pricing problems, allowing more participants, & credibility of current ARCs need to be addressed with great urgency. Without these reforms, expecting to develop a proper environment for setting up & working of ARCs would be a futile exercis

What Is Asset Reconstruction?

Asset reconstruction is the handling of distressed assets to attempt to recover their value and clear them from the books. It arises in response to a financial crisis that causes the number of bad loans to rise rapidly in response to a series of economic problems. Some governments directly fund asset reconstruction programs as part of an economic recovery plan, and it is also possible to see private firms performing this service.The asset reconstruction company assumes bad assets from another company to clear them from that company's books. It may purchase the assets at a very discounted price, causing the original company to take a loss, but clearing nonperforming assets can allow it to start accurately assessing financial health and working on a recovery plan. Once the company takes possession, it can work on recovering those assets.

For example, an asset reconstruction company may assume a group of home loans in default. The company can pursue collections and if this does not work, it can start foreclosing and selling the properties in order to extract cash from the loans and close them out. The asset reconstruction company specializes in this activity and can handle the process more efficiently than a regular financial institution, because it has the personnel, experience, and support network to do so. It may own a real  estate firm that can handle the process of evaluating the properties, listing them, and making any necessary modifications to make them more saleable.