YT YouTube2Text

YouTube2Text → Transcripts → Project Finance

Project Finance — Transcript

by NPTEL-NOC IITM · 3,929 words · 603 segments · language en · Watch on YouTube

Open in transcriber Summarize with AI Download SRT/VTT

Full transcript

0:21Welcome, welcome to banking and finance
0:25loss course. This is the third week.
0:28This week we are discussing different
0:30kinds of finance and this is the 15th
0:34session. In this session we will
0:37specifically discuss about project
0:39finance as part of different kinds of
0:43finance. In this week we have discussed
0:46debt length different kinds of debt
0:48finance compared it with equity finance.
0:51We have understood leverage buyout. We
0:54have discussed different finance
0:56structures and debt financing in the
0:59previous classes. So in this class we
1:02will discuss project finance.
1:05Project finance is usually used to
1:09finance large projects or where the
1:12volume of debt required is huge. This is
1:15one major component or generally where
1:18people companies are people establishing
1:21companies resort to project finance.
1:24And earlier in developed development
1:27financial institutions used to finance
1:30in this pattern. Now actually
1:32development financial institutions were
1:35specifically set up some of them to
1:37finance large projects and to finance
1:40long-term projects and to finance pay
1:44where repayment will be long-term and
1:47where the development is required. So
1:50those were some of the reasons for
1:51establishment of different different
1:53kinds of development financial
1:55institutions and they were giving
1:58finance in the project finance model.
2:01Banks were not providing project finance
2:04in those days. But with the size of the
2:07banks becoming bigger with merger of the
2:10banks and also the volume of deposits in
2:13the banks growing very high and with
2:16banks competing with global markets and
2:19banks being nationalized and uh
2:22attracted huge deposits. All of them
2:24became banks also became very bigger in
2:27size and also in terms of volume of
2:30money and also the kind of banking
2:32operations also has seen major changes.
2:36Banks have ventured into many many
2:38businesses and their potential to
2:40provide loans of large volume to big
2:43projects also has made a reason for
2:46banks also entering into project finance
2:49and providing finance to large projects
2:52in the project finance model. But
2:55usually financial institutions use it to
2:58provide and generally projects of
3:00national importance are also considered
3:03for project finance. Besides some
3:06corporates, private companies also
3:08taking project finance. Without public
3:11private partnership also this is
3:13possible. There are multiple models in
3:16which project finance is provided. There
3:19could be public private partnership
3:21where government and a private company
3:23come together and then partner and build
3:26a large project. Private company will
3:28build a large project, own it and then
3:30transfer it to the government as a
3:32national property. This is called build
3:35own transfer model B. Then there are
3:38other models like build, own, operate
3:41and transfer model which is called B.
3:45Build own operate model. So there are
3:47multiple models depending on the
3:50agreement and usually a special purpose
3:53vehicle is established to raise project
3:56finance. Let us understand how it works
3:59in more greater detail. Now in the fi
4:02financing of project finance, lender
4:05finances the project and once the
4:07project work is completed the cash flow
4:10from the project is used to repay the
4:13loan. This is one major uh concept of
4:16project finance where the lender has to
4:19look at the project so that this project
4:23will generate so much cash flow that it
4:25will be able to repay the loan that is
4:28given to this particular project. So the
4:31lender is financing the project not the
4:34person. Let us understand the
4:37distinctions between project finance and
4:40the regular finance. In regular finance,
4:44the creditworthiness of the borrower is
4:46very very important because if he is
4:49creditw worthy, he's giving collaterals
4:51and then he repays his credit history.
4:54All this becomes very very important.
4:57But in project finance, you should look
4:59at the project's creditworthiness
5:02because the cash flow of the project is
5:05supposed to repay the project finance
5:08and not the cash flow that is there to
5:10that person or to that company. So in a
5:13way the creditworthiness of the project
5:16is more importantly to be weighed as
5:19opposed to the creditworthiness of the
5:21project proponent
5:23because if the project fails repayment
5:26will not be recovered. You cannot
5:28recover the loan that is given repayment
5:31will be lost or in a way the borrower
5:34will not be able to repay. The risks
5:36have to be assessed more carefully. Why?
5:39Because it is done through the SPV. When
5:42we say what is the distinction between
5:44this SPV and the creditworthiness let me
5:47give you an example. Suppose there are
5:49big companies like say Tatas, Vipro,
5:52Bajage, Infosys or any of the major
5:56company that you know which is operating
5:58in India. Suppose they are operating and
6:01their business is in thousands of crores
6:03and if they approach a bank for 100
6:05crore loan, it may not look very high
6:08amount for their company's business and
6:11they will be easily able to repay given
6:13their profits as a company's whole
6:15profile. But in project finance that is
6:18not how they start a business. Suppose
6:21Tata Bajage or this Infosys or VRO they
6:24are taking project finance for a
6:26particular project or L&T or any other
6:29company they will establish an SPV that
6:32is another subsidiary company where they
6:35will invest the sponsor company or the
6:38sponsoring person will invest some
6:40amount of equity in that SPV. Suppose
6:43that SPV that is let us call it the
6:45project company. The project company is
6:48taking 100 cr loan. They may invest only
6:50five cr equity. So the entire 100 cr is
6:54financed by the banks or the financial
6:57institutions whichever is financing the
6:59project. Now this 105 cr will be used to
7:02build that project and once the project
7:05is completed the cash flow from the
7:08project will be used to repay the
7:10project. Usually until the project is
7:12completed also repayment won't start. So
7:15there is also a period where the
7:17interest also get accumulated and
7:19compounded to the principal and will be
7:22recovered later even that is possible.
7:24So it depends on what kind of project,
7:26how many years it will take to complete,
7:29what is the cash flow risks, what is the
7:31risks of completing the project, what is
7:33the creditworthiness of the project.
7:36Because if you look at the company which
7:38is sponsoring the SPV and give the loan,
7:41if the project fails, there is no need
7:43for that SPV to repay because the
7:46original sponsor's liability is limited
7:49to that 5 crore equity they have
7:51invested in that SPV and not to the
7:54complete loan that is given to that
7:58company. That means the company's
8:00sponsor's liability is limited only to
8:03the investment they made in the SPV and
8:06they are not liable for the repayment of
8:09the project finance. This is one major
8:12difference between project finance and
8:15regular finance.
8:17And why then people take these projects?
8:20Because for large projects, huge money
8:22will be available will be required to do
8:26the project up work that is construction
8:30work or manufacturing work or whatever
8:32is the project. So for laying the road
8:35or something like that, it requires huge
8:37money and it takes time to do that. And
8:40after that is done the asset will start
8:42recovering some cash. So till that time
8:45the financer has to wait. So this model
8:48of financing is called project
8:50financing. And if the project fails
8:53obviously the recovery will fail and
8:55there could be some very unforeseen
8:58difficulties in a project construction
9:00or uptaking which requires a realistic
9:03estimate. Now let us understand what
9:06kind of risks can be there. Suppose
9:09there is a highway road laying project.
9:12Now this project will require uh laying
9:16for say five six years. It will take
9:19time to lay that project of say 30
9:21kilometer or 100 kilome stretch. Let us
9:24imagine a 100 kilometer road laying
9:27stretch is being given to a particular
9:30contractor. Now this particular
9:32contractor is going in the project
9:34finance model. Now he will set up a SPV
9:39a special purpose vehicle. Suppose this
9:41is a highway road is a government thing
9:43national highway authority will be
9:45dealing with that. So it can be done in
9:48public private partnership. So in the
9:50SPV the government may invest some 10 cr
9:53or so and the company which got the
9:55project on tender may also put another
9:5810 cr but this 20 cr won't be sufficient
10:00to lay the road. It may require another
10:03500 cr. This 500 cr the com no company
10:07may be willing to lay that because 500
10:10cr a company has to invest and then
10:12construct the road for five six years
10:15after that the recovery will start in
10:17the meantime the interest and the amount
10:19the money gets struck. So they may not
10:22be willing to do that. So the government
10:24may provide project finance or the
10:27government may support the private
10:29company to get that project financed. So
10:32when this project finance is given to
10:35that private company, they may invest 10
10:37cr or 20 cr in that SPV as equity and
10:41the government also may invest some
10:43minor amount but they may raise 5 600 cr
10:46from the banks or financial institution
10:49to lay the road and it may take another
10:51five years. And here how does they repay
10:54the loan? That will be repaid only by
10:57the toll fee that will be recovered
10:59after the completion of the road and
11:01after public start using that road. Now
11:05here what are the risks that the bankers
11:07have to see? Now while financing a
11:10highway road project there could be
11:12problems like land acquisition. Public
11:14may protest against giving their land or
11:17even if it is acquired because state
11:20governments and the central government
11:22government has the authority to take the
11:25land of any public under eminent domain
11:28concept and pay them compensation. But
11:31people may go to court challenging the
11:33government decision. They may change
11:36challenge the compensation awarded as
11:38inadequate
11:40or they may dispute that the land is
11:42does not belong to the person who from
11:44to whom the compensation is given. So
11:46there could be multiple cases like this.
11:49So these cases may delay the project and
11:52the project proponent and the contractor
11:54who is building the road will be put to
11:57great loss of uh money and also his
12:01investment
12:03and his time the project finance that he
12:05raised on that will get being
12:07accumulated
12:09on that and he will go into bankruptcy
12:12position. Then the national highway road
12:15project though it is given say by the
12:17central government if it is crossing
12:19multiple states each state has its own
12:22problems. Suppose there could be public
12:25protests over this particular road
12:27expansion stating
12:30that this road is not going through
12:31their village or this gold road is going
12:34through their village. Some villagers
12:36might protest that the road is going
12:38through their village because it might
12:40disrupt their peaceful living. Some
12:43people might say that their business
12:44opportunities is lost because the road
12:47route is not in conssonance with the
12:49previous road. So there could be protest
12:52for any reason there and this is just
12:54one example. And state governments also
12:57have a policies which they may change
12:59from time to time. And that could also
13:03affect say for example they may say the
13:05entire business of all commercial
13:09businesses of uh uh vegetable vendors
13:12and other vendors will be beside the
13:15highway or beside the highways. There
13:18should not be schools and colleges
13:20educational institutions. Now these kind
13:23of policies will be challenged by those
13:25people
13:27saying that the school is existing here
13:29and the highway is coming now so you
13:31better stall the highway now not the
13:33school. So these kind of any kind of
13:36policy decision changes could also
13:38affect the uh project and it could delay
13:41or it could stall the project midway. So
13:44this also could be some kind of problem.
13:46Then there are other problems like new
13:49technology may come for road laying
13:50which could become very very cheaper and
13:53the government would say now switch to
13:55that and this person may not have that
13:57knowledge or the technology to adopt and
13:59it could incur more costs and there
14:02could be some unforeseen calamities like
14:04COVID or manpower problems or earthquake
14:08or natural calamities floods anything
14:11like this. So these are multiple risks
14:13but when we compare these risks now
14:16these are not the regular risks banks or
14:19financial institutions were equipped to
14:21deal with. Banks and financial
14:24institutions are equipped to deal with
14:26risks like what is the collateral
14:28available? What kind of lean power they
14:31have over the assets? How to recover the
14:33news from these persons by filing cases
14:36or what are the kind of documents they
14:39must be asked to submit while taking
14:41finance. So verifying the documents
14:44authenticity these are the kind of risks
14:46they have earlier foreseen with regular
14:49finance and they are equipped with that.
14:52But these are the risks alien to a
14:54financial institutions regular finance
14:56business. So this challenges the uh
15:00bankers and financial institutions
15:03ability to foresee the difficulties and
15:06when we talk so besides all these risks
15:09if a bank or a financial institution is
15:11completely convinced that they are this
15:14project is worth to be given they will
15:16give the loan. So assessing the risks is
15:19one of the major component of a project
15:21finance. It might require banks or
15:24financial institutions to appoint some
15:26consultants who are experts in that
15:28field like engineers or structural
15:30engineers in a road laying project or a
15:33kind of sociologist. It could be anybody
15:35whom they think as appropriate and ask
15:38them to study the risks and suggest them
15:40whether it is a worthwhile project
15:42something like that. So they have to
15:44develop that requisite expertise
15:46depending on the project they are going
15:48to finance. And when we talk about
15:51repayment of a project finance, usually
15:55project finances are repaid from the
15:58cash flow of that particular project.
16:01Say in this example of we have taken of
16:03the highway road. It could be toll fee,
16:06it could be user fee
16:09that the contractor collects or the
16:12government collects and repays the
16:13contractor. It could be any model
16:16depending on the terms of the agreement
16:18between the government and contractor in
16:21the public private partnership agreement
16:23of project finance. So here they may
16:25agree that the contractor only will
16:27collect the toll fee until his loan is
16:30completely repaid and his fee is also
16:33collected and after that the road gets
16:35transferred to the government or it
16:37could be the other way the government
16:39keep collecting and keep paying the
16:41contractor or the government could pay
16:43half the cost while construction and
16:45half the cost could be collected through
16:47the project finance. So there are
16:49multiple ways in which it could be uh
16:52divided between how to repay the banker,
16:54whether government will collect and
16:56repay the banker or whether
16:59the contractor will collect and repay
17:02the banker. It depends on the terms of
17:04the agreement between government
17:05contractor and the financial institution
17:08which has lent the finance. And the
17:11lending could be in consortium model or
17:13syndicate lending model which we have
17:15seen in the previous class. And the debt
17:17agreement will determine the mode of
17:19repayment mostly. But one essential
17:22thing in project finance is the project
17:25sponsor is not going to repay the loan.
17:28But it is the project special purpose
17:30vacant. That is the project company
17:32which will promise to repay through the
17:34cash flow from the project. That is the
17:36essence of project finance as opposed to
17:39the regular finance.
17:42And what are the risks associated other
17:45than the risks that could be foreseen
17:47there could be new road that may come up
17:49in the state state government also may
17:52lay some roads which may connect the uh
17:56two different places more in a very
17:59shorter distance than what this highway
18:01road is connecting. So your tollfree
18:03connectivity will be uh tollfree
18:06collection will be less because people
18:08will start commuting through the other
18:10routes because other forms of
18:11connectivity also may arise like a metro
18:14may be developed or a speed train like
18:17one BAT express may come or some other
18:20connectivity models might become more
18:22popular than the highway which the toll
18:25is expected to generate like say for
18:28example even flights say an airport may
18:30come up in between by people might
18:33travel through trains instead of flights
18:35instead of traveling through the road.
18:37So other forms of connectivity may pick
18:40up does the transport number of vehicles
18:43that will commute through that
18:45particular road might get lesser in
18:48number and less toll fee may be
18:50collected as opposed to what was
18:52estimated. Then there could be some
18:54fraud in computation like say the toll
18:57fee collecting cyber equipment may may
19:00be hacked or the toll fee calculation
19:04amount may be lost or some fraud may
19:06happen any embezzlement criminal
19:09misappropriation again they have to be
19:11dealt and government may change the
19:14criteria for collection. Say for example
19:16the government changed there are public
19:18protests against the toll fee which is
19:20abnormal or may say that the num amount
19:23of kilometer usage is less or annual fee
19:28payments should come something like that
19:30that may also reduce the amount of fee
19:32that you may collect and the sponsor
19:35company may go bankrupt and that is the
19:38SPV even the limit to which the SPV
19:41promise you to invest
19:44that also may cannot be recovered. This
19:46is generally a bankruptcy remote entity.
19:49Usually repayment is not very much
19:51dependent on sponsor but even the
19:54limited amount which the sponsor
19:55guaranteed that also may become a risky
19:58amount to recover. These are some of the
20:01problems that are the risks that are
20:03there with the project finance. And what
20:06are the strategies that the financial
20:08institutions have developed to address
20:11this risk? That is generally the debt
20:14agreement. They determine the terms of
20:16the contract. So these debt agreements
20:19have to bind the successive governments
20:21and any policy changes should not affect
20:24the existing debt agreement. So the
20:27terms of continuity of the contractual
20:29terms with any government change or
20:32policy changes should not be adversely
20:34affecting the project proponent and the
20:37contractor. So they have to understand
20:39then the co-obligation terms if it is a
20:42public private partnership or consortium
20:45lending or syndicate lending which
20:47financer will provide first who will
20:49provide how much when they will provide
20:52what are the terms to when at what
20:54intervals they will provide. These terms
20:57have to be very very carefully entered
20:59into otherwise suppose you got 100 cr at
21:03the very first installment and the care
21:05dispute is in litigation the money will
21:07be given to you and then it will get
21:10interesting charged but the work is not
21:12continuing or suppose the contractor has
21:15laid some road but the finance is not
21:17coming for another one year the road the
21:20road that was laid was kept pending and
21:23the your toll fee receivable also got
21:25delayed. So these kind of things will
21:27also affect. So the co-obligation terms.
21:30So the terms of the obligations of the
21:33contractor, government and the financers
21:35have to be very selectively and
21:37critically laid very carefully drafted
21:40in the very beginning itself and even
21:43the selection of the financers and also
21:46guaranteeing finance at the time
21:49required also is very important. Say the
21:51contractor may say sanction me 100 cr
21:54loan but I will take whenever I require.
21:56So that kind of terms also should be
21:58negotiated
22:00very carefully and very well in advance
22:03otherwise the there will be huge risk
22:05for the project proponent and the
22:07project executing team. So the risk
22:10assessing team and their capabilities
22:11are very very important. You can't
22:13expect a financer to have all these
22:16assessing abilities. It is very
22:18important that they also take some
22:20consultants or take some people who can
22:23you know what you call assess the
22:26capabilities in a way they they must be
22:28able to foresee the difficulties or they
22:30had expertise in building that kind of
22:32thing. They may take another contractor
22:35who laid the another road into a
22:38financer can take a other contractor as
22:40a consultant to tell them about the
22:42risks or something like that. So there
22:45is nothing wrong in taking a risk
22:47assessing team which has the capacity to
22:49judge the risks and accordingly frame
22:53the terms and analyze the pros and cons
22:56and then provide project finance and
22:58more importantly proper documentation
23:01and even though it might cost legal
23:03charges huge but still it's very
23:05important to carefully drafted debt
23:08agreement and other co-obligation terms
23:11documents for the interest of all the
23:13parties and protect the interest in so
23:16that there is no future problem to the
23:20any party in the project finance that is
23:23either the SPV that is the sponsor and
23:25the uh financial institution or the
23:28institutions or if it is a government
23:30project the government and all the
23:32parties terms have to be carefully
23:33drafted. What are the major advantages
23:36of project finance? It definitely has
23:39helped in boosting infrastructure
23:41development. All the highways and the
23:44airports and the uh railways the big big
23:48major industries whatever we see
23:50majority of them had got their finance
23:52in the project finance model and they
23:55have definitely contributed to
23:57infrastructure development in India and
24:00big businesses cannot be done without
24:02huge finance. So the huge finance should
24:06not be a hindrance for national
24:08development and for contributing to the
24:11infrastructure or other development
24:13projects in India and anyway the project
24:16itself based the project there are many
24:18projects which takes years to even
24:20establish imagine an iron and steel
24:22factory even to establish a factory it
24:25takes years before it starts producing
24:27iron or something like that. So these
24:30projects require project finance and
24:33financially viable for all stakeholders
24:35because contractor is laying the road
24:38with the banker's money or the financial
24:41institutions money. Government is
24:43getting the road done through the
24:44contractor. So government is not
24:46investing for the banker. They are
24:49getting the interest that is repaid and
24:51for the public a road is coming. They
24:54can do the business. They can go and far
24:56away places, get some employment, their
24:59opportunities will grow and when they
25:01are commuting they pay dual fee. So for
25:04the public there is a facility that is
25:06coming. So in a way it contributes to
25:08the benefit of all the stakeholders and
25:11also contributes to the national
25:14development. So in a way project finance
25:16is very crucial for major infrastructure
25:18projects and other projects and it has
25:21immensely contributed to the uh
25:24development of the nation and not only
25:26the development financial institutions
25:29but bankers also have every major bank
25:32has project finance wing which they have
25:34been financing for many years now. So
25:37this has definitely helped specifically
25:40infrastructure projects major roads,
25:43airports and all of this we can see
25:45because of this even railway stations
25:47and all these developments majority of
25:50them were done through the project
25:52finance model and it is no longer
25:54limited to development financial
25:56institutions that is DFI alone bankers
25:59also are doing and in view of the large
26:01scale operations all our major banks are
26:04doing project finance these days. So
26:07with this we will conclude our
26:09discussion on different kinds of finance
26:12and we will go to discuss the powers and
26:15functions of the Reserve Bank of India
26:17and other banks the next week. Thank
26:21you.

About this transcript

This page contains the full transcript of Project Finance by NPTEL-NOC IITM, generated from the public captions YouTube serves with the video. The transcript has 3,929 words across 603 segments, with the original timestamps preserved so you can click any line to jump to that moment in the embedded player.

What you can do with it

Use the transcript to take notes, quote the speaker, build a study guide, generate a summary with ChatGPT or Claude via the YouTube Summary tool, or export it as a timed subtitle file with YouTube to SRT. You can also re-open it in the transcriber to translate the transcript into 100+ languages.

Free YouTube transcript tool

YouTube2Text is a free YouTube transcript generator — no signup, no daily limit. Paste any YouTube link and get the full transcript instantly, with timestamps, click-to-jump, translation to 100+ languages, AI prompts for ChatGPT, Claude, and Gemini, and exports to TXT, SRT, VTT, or Markdown.