PROJECT FINANCING

DR SUMI KV

INTRODUCTION

INTRODUCTION TO PROJECTS

• When you travel, you happened to see bridges being built, roads being laid, buildings being constructed and a lot of other activities, which are unique in nature and which deliver physical outputs.
• The same way, you might come across several activities, which deliver services like marriage contract, software development, health camp, literacy camp, etc.
• If you look at the above activities, they are unique in nature and they require defined time and resources. We can call these activities as projects and managing these projects has become more critical with the limited time and resources at our disposal.
• Thus, project management has become an important area and its application is found in almost all the business and non-business activities.

PROJECT - MEANING

• Project is defined as temporary but interrelated tasks undertaken to give a unique product or service or result.
• Projects are different from other ongoing operations in an organization, because unlike operations, projects have a definite beginning and an end - they have a limited duration

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• In the words of Gillinger “Project is a whole complex of activities involved in using resources to gain benefits”.

CONCEPT OF PROJECT EXAMPLE

• A project is accomplished by performing a set of activities.
• For example, construction of a house is a project. The construction of a house consists of many activities like digging of foundation pits, construction of foundation, construction of walls, construction of roof, fixing of doors and windows,
• fixing of sanitary fitting, wiring etc.

CHARACTERISTICS OF A PROJECT

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• A project involves investment of money and money’s worth.
• The objective of a project is to earn profit.
• It is concerned with production of goods and services.
• Every project has risk and uncertainty associated with it.
• It has a fixed set of objectives.
• It is subjected to a lot of change.
• It has a definite beginning and an end.
• It has a life cycle reflected by growth, maturity and decay.
• It is combination of various elements such as technology, equipment, materials, machinery and people.
• A project requires team work.

CLASSIFICATION OF PROJECTS

1. QUANTIFIABLE AND NON-QUANTIFIABLE PROJECTS:
2. SECTORAL PROJECTS:
3. TECHNO-ECONOMIC PROJECTS:
4. FINANCIAL INSTITUTIONS CLASSIFICATION:
5. ACCORDING TO THE URGENCY OF THE EXECUTION:

1. QUANTIFIABLE AND NON-QUANTIFIABLE PROJECTS

• Quantifiable projects are those in which quantitative assessment of benefits can be made. Projects for industrial development, power generation, mineral development etc. fall under this category.
• Non quantifiable projects are those in which the benefits cannot be measured quantitatively. Projects involving health, education and defence fall under this category

2. SECTORAL PROJECTS:

1. Agriculture and allied sector.
2. Irrigation and power sector.

d) Transport and communication sector.

e) Industry and mining sector

3) TECHNO-ECONOMIC PROJECTS:

Projects may be classified into the following three groups:

A) Factor Intensity Oriented Classification: Project may be classified as Capital intensive or Labour intensive. If large investment is made in plant and machinery the project will be called Capital intensive. If large investment is made in human resources, the projects will be termed as Labour-intensive.

B) Causation Oriented Classification: It is classified as demand based or raw material based projects. If a project is started by an entrepreneur due to non-availability of certain goods or services and consequent demand for such goods or services the project is said to be based on demand. If project is started by an entrepreneur simply because of the availability of certain raw materials, skills or other inputs, the project is said to be based on raw material.

C) Magnitude Oriented Classification: The size of investment forms the basis of classification. May be classified as Large-scale, Medium-scale and Small-scale.

4) FINANCIAL INSTITUTIONS CLASSIFICATION:

The projects are classified according to their age and experience and the purpose for which the project is being taken up. They are as follows:

1. Profit Oriented Projects:
1. New projects. 2) Expansion projects. 3) Modernization projects. 4) Diversification projects.

B) Service Oriented Projects:

1) Welfare projects. 2) Service projects. 3) Research and development projects.

5) ACCORDING TO THE URGENCY OF THE EXECUTION:

It is classified into three. They are as follows:

1. Normal Projects: In this type of project adequate time is allowed for implementation. This type of project will require minimum capital cost.
2. Crash Projects: Additional capital costs are incurred to save time. It is normally achieved in procurement and construction where time is brought from vendors and contractors by paying extra money to them
3. Disaster Projects: Vendors who can supply within a very short time are selected irrespective of the cost. Naturally capital cost will go up very high but projects time will get much reduced

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PROJECT LIFE CYCLE

The project is initiated to achieve a mission and is said to be completed when the mission is achieved. The project lives between these two cut off periods and this intermediate time is called Project Life Cycle. Project life cycle consists of the following three stages:

1. Pre-Investment Phase: It is concerned with formulation of objectives, demand forecasting, evaluation of input characteristics, selection of strategy, projections of financial profile, cost benefit analysis and finally pre-investment appraisal. Some expenditure has to be incurred in the form of conducting surveys, feasibility studies etc.
2. Construction Phase: This stage consumes maximum expenditure. Construction phase consists of developing the infrastructure for the project. The capital requirement includes cost on land, buildings, civil works, machinery equipment, ancillaries etc.
3. Normalization Phase: The primary objective of this stage is to produce the goods and services for which the project was established. The expenditure has to be incurred on raw materials, fuel, utilities, and administration and operation maintenance. Etc.

PROJECT MANAGEMENT

• Project management is the process of planning, organizing, monitoring and controlling of all aspects of a project and motivating all involved to achieve project objectives of safety and completion within a defined time, cost and performance.
• Harson has defined project management as ,” the achievement of a project’s objectives through people, and involves organizing, planning and control of the resources assigned to the project together with the development of constructive human relations with all those involved, both in company and with the other companies involved”.

Project management is used in a wide variety of industries and for a wide variety of projects. Here are a few examples:

• Construction: Building a new bridge, office building, or house
• Software development: Creating a new mobile app, website, or video game
• Marketing: Launching a new product line or advertising campaign
• Event planning: Organizing a conference, festival, or sporting event
• Research: Conducting a clinical trial or developing a new medical device
• Manufacturing: Designing and producing a new car, airplane, or smartphone

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How each phase of project management would apply to the construction of a new house:

Initiation:

The homeowner identifies the need for a new house and defines the scope of the project (e.g., number of bedrooms and bathrooms, square footage, desired features).

The homeowner meets with a contractor to discuss their needs and budget.

The contractor provides the homeowner with a preliminary estimate for the project.

The homeowner approves the project and signs a contract with the contractor.

Planning:

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The contractor develops a detailed project schedule, budget, and resource allocation plan.

The contractor identifies the materials and equipment that will be needed.

The contractor subcontracts out any work that they will not be performing themselves (e.g., electrical work, plumbing work,

The contractor obtains the necessary permits and inspections

• Execution:

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• The contractor and their subcontractors begin construction on the house.
• The contractor monitors progress against the project schedule and budget.
• The contractor identifies and resolves any potential problems early on.

Monitoring and control:

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• The contractor tracks progress against the project plan and makes adjustments as needed.
• The contractor monitors the quality of the work being done.
• The contractor communicates with the homeowner regularly to keep them updated on the progress of the project.

Closing:

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• The contractor completes all of the work on the house.
• The contractor inspects the house to ensure that it meets the homeowner's expectations.
• The contractor delivers the keys to the homeowner.
• The contractor and the homeowner conduct a final walkthrough of the house to ensure that the homeowner is satisfied with the work that has been done.

PHASES OF PROJECT MANAGEMENT

1. . Project Identification: It refers to identification of business/investment opportunities. It involves scanning of the environment to find out investment opportunities.
2. Project Formulation: It is the translation of the idea into concrete project with scrutiny of its important preliminary aspects.
3. Project Appraisal: It involves searching, scrutiny, analysis and evaluation of market, technical, financial and economic variables. It examines the viability of the project.

4. Project Selection: It is the process of choosing a project rationally in the light of objectives and inherent constraints on the basis of appraisal.

5. Project Implementation: It is the stage of birth of an enterprise. At the end of this stage, the idea becomes a reality.

6. Project Follow Up and Evaluation: It is the process of assessing the performance of the project after it started functioning. Project evaluation simply means assessing the progress of the project.

OBJECTIVES OF PROJECT MANAGEMENT

The ultimate objective of project management is to attain the objectives for which the project has been undertaken. The other objectives of project management are as follows:

1. To achieve maximum productivity at minimum cost.
2. To maximize income and return.
3. To minimize risk and uncertainty.
4. To eliminate waste and improve efficiency.
5. To make the most efficient and effective use of resources- manpower, money, materials, technology etc

NEED OF PROJECT MANAGEMENT

1. Complexity of Project: Project involve time, effort, money etc. If there is any fault in

• planning or implementation of projects, the resources put in the projects would be a waste.
• 2) Achievement of Objectives: Unless projects are managed well, the objective for which
• the projects are undertaken cannot be achieved.
• 3) Environmental Changes: A project should be well equipped to meet the environmental
• challenges .The success of the project depends upon how the project is able to cope with the
• changing environment.
• 4) Competition: To face out the competition provision of a good or a service is not
• sufficient. It must provide a package which meets an entire need rather than just part of that need .

• 5) Constraints: The constraints relate to time, materials, demand, labour etc. The success
• of a project depends on how well it is possible to manage the so called constraints.
• 6) Risk and Uncertainty: At every stage of project life cycle there are challenges and
• problems. As the project moves new challenges and problems may arise. The risks and
• uncertainties cannot be eliminated but can be minimized through proper management of project.
• 7) Time Overrun and Cost Overrun: If a project takes more time than the scheduled time,
• it is known as time overrun. If a project incurs more costs than budgeted, it is called cost overrun.
• 8) Project Control and Evaluation: It is done either at the end of the project or few years
• after the completion of the project. This enables to learn lessons from the projects.

GENERATION OF PROJECT IDEAS

• Emergence of project ideas from different sources is called generation of project ideas. The idea should be sound and workable, so that it may be exploited. The entrepreneur has to be imaginative and foresighted to discover a business/Project idea.

SOURCES OF THE PROJECT IDEAS

• The business idea arises from an opportunity in the market. Entrepreneurs should have a keen and open mind to look for opportunities and generate business ideas. It is not a matter of analysis but of instinct. Ideas come from many sources. Some of the sources are as below:
• OUR OWN NEEDS
• TRADE AND PROFESSIONAL JOURNALS.
• PROJECT PROFILES.
• TRADE FAIRS AND EXHIBITIONS

• SUCCESS STORIES OF FRIENDS AND RELATIVES.
• PROSPECTIVE CONSUMERS.
• RESEARCH ORGANISATION.
• UTILISATION OF WASTE MATERIALS.
• STUDY OF GOVERNMENT POLICY.
• DEVELOPMENT OF OTHER NATIONS.
• ITEMS RESERVED FOR SMALL SCALE UNITS

SCREENING OF PROJECT IDEAS

• The need for screening of the ideas arises because all the ideas generated may not be promising. Only the most promising or most profitable ideas are to be selected for further study.
• The process of evaluating the project ideas with a view to select the best and promising idea after eliminating the unprofitable ideas is called screening of project ideas. The following factors need to be considered:

1. Cost of The Project: A study of the cost structure under material cost, labour cost, factory

• overheads etc., will give a good idea regarding different types of costs.
• 2) Profitability: The project yielding higher return must be selected.
• 3) Marketing Facilities: Existing and potential demand in domestic and export market, nature of
• competitions, sales and distribution system, consumption trends etc., should be assessed and
• evaluated before taking the final decision.
• 4) Availability of Imputs: The resources and imputs required for the project must be reasonably
• assured. The availability of skilled workers is to be ensured before launching an enterprise.
• 5) Consistency with Government Regulations and Priorities.
• 6) Compatibility with the Entrepreneur: The idea must suit the interest, personality and
• resources of the entrepreneur. It should not be beyond his capacity.

PROJECT FORMULATION

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• It is the process of examining technical, economic, financial and commercial aspects of a project.
• It is the process and steps through which an opportunity becomes a project in which the entrepreneur is willing to invest his time, money and other resources.
• This study is undertaken to find out whether the proposed project would be feasible or not

ELEMENTS OF PROJECT FORMULATION

• Feasibility Analysis: It involves an examination of the project idea in the light of internal and external constraints.
• Internal constraints arise because of limitations of the project sponsoring body and external constraints arise due to the characteristic of the environment.
• If on feasibility analysis, the project is found feasible, the same is put to further analysis.

• Techno-Economic Analysis: It is mainly concerned with the identification of the project
• demand potential and selection of the optimal technology suitable for achieving the project objectives. This study includes:
• a)Estimation Of Demand Or Market Potential: The entrepreneur has to estimate
• the expected share of the sale in the market, intensity of competition, mobility of products to
• other places etc., The data collected from various sources are first complied, tested and
• tabulated in a form suitable for interpretation.
• b)Selection Of Technology: It refers to that combination of controlled variables
• which will ensure the achievement of the project objectives with minimum expenditure of
• resources.

Project Design and Network Analysis: A project comprises certain sequential activities

• which are interrelated. These activities can be shown in the form of a diagram, which is
• called network diagram. Project design is concerned with the development of a detailed
• work plan of the project and its time estimates. When a network is designed, its analysis is
• carried out to identify the optimal course of action so as to complete the project with the
• minimum of time and cost, subject to the available resources. Important network analysis
• techniques are PERT (Programme Evaluation Review Technique) and CPM (Critical Path
• Method).

Input Analysis: Input analysis is primarily concerned with the identification, qualification

• and evaluation of project inputs. The objective of input analysis is to identify nature of
• resources needed to estimate the quality of the required resources and to ensure that there is
• continuous and adequate supply of inputs. Input analysis is the basis for financial analysis
• and cost benefit analysis.
• Financial Analysis: It involves estimates about the project costs and revenues and the funds required for the project. It seeks to find out whether the project will generate income to
• realize the ultimate objective for which it is undertaken.

• Social Cost Benefit Analysis: Under cost benefit analysis the investment projects are evaluated from the point of view of the society as a whole. The cost benefit analysis aims at analyzing the real contribution of an investment project towards welfare of the country as a whole. It implies the enumeration and evaluation of all the relevant costs and benefits. It can be applied to both private and public investments.
• Pre-Investment Appraisal: The proposal gets the final and formal shape. The purpose of pre-investment appraisal is to enable the concerned authorities to take an investment decision about the project i.e. to accept or reject.

• Case Study:
• A company is considering developing a new product line of sustainable clothing. The company has identified a growing demand for sustainable clothing among consumers, but there are a number of challenges that the company would need to overcome to develop and launch a successful product line.
• Question:
• What are the key steps that the company should take to formulate the project of developing and launching a new line of sustainable clothing?

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• The company should take the following key steps to formulate the project of developing and launching a new line of sustainable clothing:
• Define the project scope: The company should clearly define the scope of the project, including the specific products that will be developed, the target market, and the launch date.
• Identify the project goals and objectives: The company should identify the specific goals and objectives of the project, such as increasing market share, generating profits, and reducing environmental impact.
• Identify the project stakeholders: The company should identify all of the stakeholders who will be affected by the project, such as employees, customers, suppliers, and the community.
• Conduct a market analysis: The company should conduct a market analysis to assess the demand for sustainable clothing and to identify the key competitors.
• Develop a product development plan: The company should develop a product development plan that outlines the steps that will be taken to develop the new line of clothing.
• Develop a marketing plan: The company should develop a marketing plan that outlines how the new line of clothing will be marketed and sold to consumers.
• Develop a financial plan: The company should develop a financial plan that estimates the costs and benefits of the project.
• Identify and assess risks: The company should identify and assess all of the risks associated with the project, such as technological risk, market risk, and financial risk.
• Develop a risk management plan: The company should develop a risk management plan that outlines how the risks will be mitigated.
• Once the company has completed these steps, it will have a well-formulated project plan that will increase the chances of success.
• Additional Considerations:
• In addition to the key steps listed above, the company may also want to consider the following when formulating the project:
• Sustainable sourcing: The company should carefully consider the sources of the materials that will be used to produce the new line of clothing. The company should strive to source materials from sustainable suppliers.
• Ethical manufacturing: The company should also carefully consider the manufacturing practices that will be used to produce the new line of clothing. The company should ensure that the manufacturing practices are ethical and that the workers are treated fairly.
• Social impact: The company should consider the social impact of the project. The company should consider how the project will create jobs, improve the lives of workers, and benefit the community.

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• FEASIBILITY STUDY REPORT
• It analyses availability of raw material, skills and expertise, capital, market etc. It should be noted that any project must be technically feasible, financially sound, economically viable and socially acceptable.
• The feasibility report contains only important information obtained from technical analysis, financial analysis, economic analysis; social cost benefit analysis etc.It forms the basis for investment appraisal and decision making.

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PROJECT APPRAISAL AND EVALUATION

• The project has to be appraised in relation to the feasibility of the technical, economic, financial, commercial, managerial, social and other aspects of the project.
• It is defined as critical and careful second look at the project by a person not associated with the project preparation.
• The objective of a project appraisal is to decide whether to accept or reject an investment proposal.

ELEMENTS OF PROJECT APPRAISAL

There are mainly seven aspects of project appraisal. They are:

1) Technical Feasibility: - It includes detailed estimates of the goods and services needed for the project- land, machineries and equipments, raw material, trained labour etc. Location of the project should be given special attention in relevance to technical feasibility. Another important feature of technical feasibility relates the type of technology to be adopted for the project.

2) Economic Viability: - It is a study on capital cost, working capital, operating cost and revenue, marketing, profitability etc. It also includes an appraisal of anticipated demand and capacity utilization.

3) Commercial Viability: - T he appraisal of commercial aspects of a project involves a study of the proposed arrangements for the purchase of raw materials and sale of finished products etc. The main objective is to see that the proposed arrangements will ensure that the best value is obtained for money spent.

4) Financial Feasibility:- It seeks to ascertain whether the project is financially viable regarding the cost of project, cost of production and profitability, cash flow estimate and Profoma balance sheet. It will study whether the project will satisfy the return expectations of those who provide the capital.

5) Managerial Competence: - Proper evaluation of managerial ability and talent is an essential part of appraisal of a project. While evaluating the management, back ground of the entrepreneur and promoters, their character and integrity, past record of promotion etc are studied.

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6) Social Consideration: - The social objective of a project are also considered keeping in

view of the interests of the public. The projects which offers large employment potential, which are

located in backward areas or projects which will stimulate small industries or growth of ancillary

industries are given special consideration.

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7) Ecological Analysis: - It is necessary to ensure whether the project causes pollution, whether it disturbs the equilibrium of ecology and whether it fits into the environment.

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8) Project Risk Analysis:- Project face a host of risk such as project completion risk, resource risk, price risk, technology risk, political risk, interest rate risk etc. An analysis of such risks is helpful in the appraisal of a project.

CASE STUDY:�

• A company is considering launching a new product line of electric vehicles. The company has developed a prototype of an electric car that is more affordable and has a longer range than anything currently on the market. The company believes that the electric car has the potential to be a major success, but it is important to carefully appraise the project before making a final decision.
• Question:
• What are the key factors that the company should consider when appraising the project?

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• Answer:
• The company should consider the following key factors when appraising the project:
• Market demand: The company should assess the demand for electric cars in the target market. The company should consider factors such as the growing awareness of environmental issues, the increasing cost of gasoline, and the government incentives for electric cars.
• Competitive landscape: The company should assess the competitive landscape. The company should consider the following factors:
• The number of other companies that offer electric cars
• The features and pricing of competing electric cars
• The brand reputation of competing companies
• Financial feasibility: The company should develop a financial model for the project. The model should show that the project is expected to be profitable over the long term. The company should consider the following factors:
• The cost of developing and manufacturing the electric car
• The cost of marketing and selling the electric car
• The expected sales volume of the electric car
• Risk assessment: The company should identify and assess the key risks associated with the project. The main risks are:
• Technological risk: The company needs to ensure that the electric car is manufactured to a high standard and that it meets all safety and regulatory requirements.
• Marketing risk: The company needs to develop a successful marketing campaign to launch the electric car and generate awareness among consumers.
• Sales risk: The company needs to ensure that it has a strong sales channel in place to distribute the electric car to retailers and consumers.
• The company should weigh the potential rewards of the project against the risks involved before making a final decision.
• Additional Considerations:
• In addition to the key factors listed above, the company may also want to consider the following when appraising the project:
• Environmental impact: The company should consider the environmental impact of the electric car. The company should consider the following factors:
• The emissions of the electric car
• The sourcing of the materials used to manufacture the electric car
• The disposal of the electric car at the end of its life cycle
• Social impact: The company should consider the social impact of the electric car. The company should consider the following factors:
• The creation of jobs in the electric car industry
• The impact on the oil and gas industry
• The impact on the transportation sector
• The company should consider all of these factors when appraising the project to make an informed decision.

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PROJECT REPORT

• A project report may be defined as a document with respect to any investment proposal based on certain information and factual data for the purpose of appraising the project.
• It states as to what business is intended to be undertaken by the entrepreneur and whether it would be physically possible, financially viable, commercially profitable and socially desirable to do such a business.
• Project report is an essential document for procuring assistance from financial institutions and for fulfilling other formalities for implementation of the project. The project report (Detailed Feasibility Report) is based on a preliminary report or pre-investment report. Thus the project report is a post investment decision report.

OBJECTIVES OF THE PROJECT REPORT

1. It facilitates business planning and planning the future course of action.

2) It enables an entrepreneur to compare different investment proposals and select the most suitable project.

3) It provides a SWOT analysis, wherein the strengths, weaknesses, opportunities and threats involved in the projects as shown.

4) The project report enables the entrepreneur to ensure that he is proceeding in the right direction.

5)In case of public sector projects this report would also enable the concerned authorities to take an objective decision on the project.

6) It facilitates project appraisal.

7) It helps the financial institutions to make appraisal as regards financial, economic and technical feasibility

IMPORTANCE OF PROJECT REPORT

• Project report is a written plan of the project to be undertaken for the attainment of objective. It enables an entrepreneur to know the inputs required and confirms that he is proceeding in the right direction. It spells out the reasons of allocating resources of the firm for the production of goods and services during a specific period. An important aspect of the project report lies in determining the profitability of the project with minimum risks in the execution of the project. The important uses of P.R. are summarized as follows:

IMPORTANCE CONTD…

• It helps the entrepreneur in establishing techno-economic viability of the project.
• It helps in getting term loan from banks and financial institutions.
• It helps in approaching bank for getting working capital loan.
• It helps in securing supply of scarce raw materials also.
• It gives a general idea of resource requirements and means of procuring them.
• It shows the feasibility of the project and possibility of achieving profits.

CONTENTS OF PROJECT REPORT

1. INTRODUCTION: General information regarding the company and production description.
2. BACKGROUND OF THE PROMOTER: - Name, address, age, family background, educational qualification, work experience, investment potential etc.
3. PRODUCT: - Details of products to be produced, details of application of the product, proposed product mix, product standard etc.
4. MARKET AND MARKETING:- Market potential analysis, major buyers, area to be covered, trade practices, sales promotion devices, trade practice and trade channels adopted by the competitors, demand analysis, proposed market research etc.

5.LOCATION:- Locational advantages, criteria for selecting the location, exact location of the project, other choices.

6. PRODUCTION PROCESS: - Details of technology, process flow chart, manufacturing process, production programme etc.
7. RAW MATERIAL: - List of raw material required in terms of quality and quantity, sources of requirement, cost of raw material etc.
8. UTILITIES: -Water, power, steam-sources and costs, effluent disposal etc.
9. TRANSPORT AND COMMUNICATION: - Method, possibility of getting and costs of transport.
10. MANPOWER REQUIREMENT: -Requirement of skilled, semi skilled personnel, technical and non-technical personnel, cost of procurement, capacity, and suppliers cost, alternatives available, cost of miscellaneous assets.

11) LAND AND BUILDING: - Land area, construction area, cost of construction, detailed plan, plant lay out along with cost.

12) PLANT AND MACHINERY: - Details of machinery and equipment required.

13) COST OF PROJECT AND SOURCES OF FINANCE: - Working capital required, preliminary and pre-operative expenses, contingencies and arrangements for the meeting the cost of project.

14) FINANCIAL VIABILITY OF THE PROJECT: -Cost of production and profitability for the first years, break even analysis, and analysis of cash flow and fund flow statements.

REQUISITES OF AN IDEAL PROJECT REPORT

The essentials of an ideal project report are as follows:

 Project report should be prepared with the help of an expert team.

 Assumptions in the project report should avoid extremities.

 Project report is the means and not the end.

 Product demand, capital resources, raw material availability, labour resources etc must be estimated properly after considering varied factors.

 Project report should be based on proper survey and systematic preliminary study of the project.

 Thorough discussions must be made with experts, various personnel of concerned departments before finalizing the report.

 The end result should be to receive finance and to get the project implemented.  Complete satisfaction of the entrepreneur/promoter should be ensured before the report is submitted to the financial institutions.

• Bcf - Bills co- acceptance facility
• Dpgs – deferred payment guarantees