A project is defined by primarily by time. It has a desired start date/time and an expected end date/time. Financing aims at sourcing for available and affordable funds, strategizing the utilization of sourced funds and generating the desired returns from the use of such sourced funds. Against this backgrounds, we can comfortably marry the two words together and say that Project Finance can be seen as the sourcing of funds and the utilizations of such sourced funds to finance the start of the desired business endeavour and to complete it with a view to realizing, at least, minimum expected returns. Clearly, this is different from financing an ongoing business that may need external financing to expand in scale – product-wise, market-wise or otherwise. Simply put, Project finance is different from Operations financing.
Project finance can be defined as the structured financing of a new economic unit “the Special Project Vehicle (SPV) or the project company on a non-recourse or limited recourse basis. This means the lenders and investors rely on the cash flow generated by the project to repay their loans and a return on their investments. This is in contrast with lending to ongoing corporate organizations where lenders rely on the strength of the borrower’s balance sheet as can be seen with financing existing business operations.
The calculation of projected cash flow is vital for valuing the ability of the initiative to generate enough cash to cover debt servicing and to pay sponsors dividends that are in line with expected returns.
The financial model is the analytical framework that presents the financial assumptions, workings and expectations of a project and provides a basis for analyzing quantifiable risks of the project.
The financial model is a crucial component of any project investment that companies may intend to develop using debt financing. By analyzing technical, economic, financial, and fiscal variables, the sponsors’ idea is carefully scrutinized to ascertain whether it is viable from an economic and financial standpoint.
The financial model helps us understand:
- The nature of future cash flows
- The degree of certainty that can be attributed to these future cash flows
- The capacity of the project to repay capital and provide a return to the providers of that capital (debt & capital)
- It is also a major tool in “pricing the deal” and “negotiating off the financial model”
This is just a very basic introduction to project finance, you can check out this link for an overview of project finance https://www.dropbox.com/s/4cukyn2kd7yokbn/ProjectFinanceOverview.pdf
Here is a sample of a complex Project Finance: Model:https://www.dropbox.com/s/m9ixke09nr6w9pv/Project-Finance-example.xlsm?dl=0
And if you like to try your hands on project finance model, here is a simple toll road case study and the accompanying Workbook to try your hands on
Case: https://www.dropbox.com/s/w4vl7n6mnb3icev/Financial_Modelling_Test_Instructions.pdf Workbook: https://www.dropbox.com/s/o3x3tusygc2w2mm/FinMod%20Test.xlsx
I have built the model to this cases study, please use the contact form to reach me if you need any assistance or to request for the completed model.
adamolekunolajide's website 
Leave a comment