Project

Project Finance Analysis and Modeling

G SOUMYA NIKITHA

1. How a new venture is assessed to qualify as project finance. What are

the factors that needed to be considered
 Project finance involves
tangible assets with a defined start/stop construction period, with working capital and
“contingency” costs limited to what is required to complete the asset construction and reach
commercial operation.  There are typically separate “Special Purpose Vehicles” (SPVs)
established to own project assets.  The SPV has limited or no recourse to a parent company let
alone its owners.

Factors for financing are usually assessed according to the following 6 criteria:

Calibre of the business principals

Principals are the primary source
of fuel for business projects. Their vision, energy and the effort they are willing to make are the
factors that make or break a project.

Business environment risks

Lenders make sure that your
industry is not perceived to be subject to inordinate risk. The upcoming lifting of a tariff barrier, a
procedure that creates pollution or the fact that your business is situated within a fragile sector of
the economy may cause a lender to be overly cautious.
The company should also be
adequately covered by insurance that is tailored to the nature of its activities.
Project credibility
If lenders or investors decide to put
money in your project, it's because they hope the investment will pay off. They'll make sure your
previsions are based on verifiable facts and are realistic.

Company's ability to pay and financial structure

You'll have to prove to lenders that the company is able to meet all of its financial obligations. The
company's financial structure should therefore show a healthy balance between loans and assets .

Principals' financial history

In lenders' eyes, the future can largely be predicted by the past. It is more than likely that they will
run a credit check on the business principals to see if principals effectively met past financial
obligations. A bankruptcy or unpaid debt may negatively impact a principal's credibility.

Security
Debt financing is usually secured against company assets, which should be sufficient to allow
lenders to cover their risk.
 2. Explain in detail the revenue model for Solar PV Project, Residential
Building and Manufacturing Unit.

What is a revenue model?

Revenue models often get conflated with revenue streams, probably because each is a single
revenue source. They are also confused with business models, of which revenue models are a
part. Revenue models help business owners determine how to manage their revenue streams and
are required to complete a business model.

A revenue model is a framework for determining how you manage revenue streams, and the
resources required for them, to generate revenue. It is vital for mapping out values: what value to
offer in the market, how it’s priced, and how it’s paid for by your customers.
Revenue model for Solar PV Project

Solar energy power plants (both utility and rooftop scale) have seen
tremendous amount of growth in last few years. With such growth in conjunction with the country’s
ambitious target of 100 GW, the market is to achieve new heights. However, acting as a hitch to
such target (from consumer’s perspective) may be selecting the correct investment plan (or more
commonly business model) by which a consumer can get desired return

A Revenue model in simple terms may be defined as a plan which would

deliver a particular product or service and earn profits in return. With reference to solar power
plant a business model is the method by which either revenue is generated by selling the
generated energy or savings are made by consuming the generated electricity. From a consumers
and/or investors prospective it is important that he chooses the right business model to minimize
his risks and maximizes his returns. This article aims to educate its reader on the various types of
business models he could possibly choose from.
Gross metering: 

Metering is an important aspect for financial settlement in the solar

power plant. The number of units exported to and imported from the grid is recorded in the meter.
Gross metering (from the two types of known metering arrangement models) uses two separate
meters for recording the export and import of energy (Figure 2). While connected to the grid, the
energy is fed into the grid at a tariff known as Feed in Tariff (FiT) and the consumer buys the
energy at his normal applicable tariff. Prevalent in the areas with good grid reliability, this model
would ensurea minimum (guaranteed) amount of return to the consumer.

Net metering: 

The second type of metering arrangement is known as net metering. Indirectly

promoting captive consumption of energy, "net metering uses the net difference between the
export and import of energy measured by a bi-directional net meter .This type of arrangement
does away with the need of storage as the energy (when needed say at night) is imported from the
grid. Such model is suitable for few categories of consumer whose tariffs are higher then cost of
generation from solar plant. Most utility/regulators tend to limit the size of the power plant such that
the annual energy generation is less that the customer’s demand.

Captive consumption (off grid route): 

Off grid captive consumption kind of power plants are set up where the
consumer has almost poor or no access to the grid. Such plants are set up with an intention to
either consume or store all the energy generated by the plant. This plant can replace the old age
Diesel Generator (DG) which could reduce both the cost and pollution however it would require a
storage source (battery) to be integrated with it for continuous supply of energy.
Revenue model for Residential Building

A Residential Building development model usually consists of two sections: Deal Summary and
Cash Flow Model.  Within the Deal Summary, all important assumptions – including the schedule
(which lays out the timeline), property stats, development costs, financing assumptions, and sales
assumptions – are listed and used to calculate the economics and profitability of the project.

The Cash Flow Model begins with the revenue build up, monthly expenses, financing, and finally
levered free cash flows, NPV (net present value), and IRR (internal rate of return) of the project. In
the following sections, we will go through the key steps to building a well-organized real estate
development model.

Schedule and Property Stats

The first step in building a real estate development model is to fill in the assumptions for schedule
and property stats.  Here is a list of items which should be included:
Development Costs

For the next step in creating a real estate development model, we will input the assumptions for
development costs in terms of the total amount, cost per unit, and cost per square foot.  
Development costs might include land cost, building costs, servicing, hard and soft contingency,
marketing, etc. Using the property stats filled in earlier, we can calculate all these numbers and
complete the development costs section. The section should look something like this:

Sales Assumptions

In sales assumptions, we will calculate the total revenue from this project. Suppose market
research is done and based on comparables, we believe that $500 per square foot is a realistic
starting point for the sales price. We will then use this as the driver for revenue. After calculating
sales (total, $/unit, $/SF), sales commissions (e.g., 50%), and warranty, we can figure out the net
proceeds from this project.

Financing Assumptions

For financing, there are three critical assumptions:  loan to cost percentage, interest rate, and land
loan.

Before calculating the total loan amount, we need to figure out the total development cost amount.
Since we have not yet calculated the interest expense, we can link the cell to the cash flow model
for now and obtain the value once the cash flow model is filled in. The commissions are the same
as the sales commissions in the sales assumptions section. The total development costs can be
calculated as:

Total Development Cost = Land Cost + Development Cost + Sum of Interest and
Commissions Now we can fill in the rest of the financing assumptions.
The Max Loan Amount obtained for this project = Total Development Cost x Loan to Cost
Percentage

Equity amount = Total Development Cost – Max Loan Amount

Revenue model for Manufacturing Unit.

Connectivity is what gives the  Internet its power. Ever since

consumers widely adopted the World Wide Web, new possibilities have existed for buying and
selling goods and services. Companies that already sold products directly to consumers gained
another channel for doing so, and companies that relied on wholesalers and distributors to sell
their products via different retail outlets suddenly were able to eliminate, partially or completely,
those parties from their distribution channels. Selling directly, via the manufacturer model, often
resulted in higher profits for manufacturers and more savings for consumers. Selling products or
services directly to consumers is at the heart of the business model known as the manufacturer
model.

New age technology is enabling manufacturers to explore and

exploit new business models. Two examples come to mind. The first, a large industrial power
equipment manufacturer, seeks to generate services revenue secured via long-term contracts, by
offering what matters most to its customers—equipment up-time. By monitoring and predicting the
behavior of the installed equipment, using cloud-based big data analytics, the company heads off
equipment problems for customers and quickly addresses any issues. These exclusive services
are offered at a premium.
Elsewhere a diversified manufacturing firm has started its journey to become a ‘software-centric
enterprise,’ by monetizing insights gleaned from data that resides on its products in the field.
These insights can be shared with the customer for performance enhancements, for example,
tuning airplane engine performance for specific, and dynamic, flying conditions in order to save on
fuel costs. The manufacturer takes a share of the savings accrued.

The advent of the Internet of Things changes the picture

significantly, enabling the production of smart, connected products that let manufacturers be in
touch with customers throughout the entire life of the product. First let us look at business model
change driven by this phenomenon. Connected products let the manufacturer disintermediate the
channel and transform from being a business-to-business (B2B) player to a business-to-business-
to-consumer (B2B2C) player. This paradigm shift allows manufacturers to work on new business
models, especially around services.
 The other big model shift is the concept of ‘extended mobility’ driven by connected cars. The
emergence of the shared car concept is creating a new business model, which will require auto
manufacturers to establish new ways to engage customers. In five years, we would not be
surprised to see a significant portfolio of auto manufacturer revenues coming from this new
channel, which a few years ago was unimaginable.

3. What should be the additional points that needed to be included in

a financial model, if the financing bank is from abroad and the debt
is in US$ but revenue is in INR.
Financial modeling is the process of creating a summary of a company's expenses and
earnings in the form of a spreadsheet that can be used to calculate the impact of a future event or
decision
A financial model has many uses for company executives. Financial analysts most often use it to
analyze and anticipate how a company's stock performance might be affected by future events or
executive decisions.

ECB raised directly by GoI as sovereign debt. GoI has in the past pushed public sector utilities
(PSUs) to borrow from external markets for fiscal and BoP support, and foreign portfolio investors
(FPIs) are allowed to buy domestic government bonds denominated in rupees. But it has so far
avoided borrowing directly on its own books from international financial markets. The budget
announcement marks a structural shift in policy.
Another former RBI governor, C Rangarajan, doesn’t think so — and for good reasons. “The
proposal… does not appear to be correct. This essentially means the exchange risk is borne by
GoI, unlike the situation in which foreign investors are allowed to invest in government bonds in
rupees,” he wrote in ET on the budget, adding, “Second, there is certainly no  need for government
to borrow as the foreign inflows are adequate.”

Global interest rates are at historic lows. This has intensified what former chair of the US Federal
Reserve Ben Bernanke called a ‘global savings glut’. India, with a deficit of savings over
investment, could tap into this glut. The cost of hedging against forex riskwould be countervailed
by the saving in the coupon rate.
FACTOR’s if the financing bank is from abroad and the debt is in US$ but revenue is in INR.
1) Direct borrowing by the sovereign is always cheaper than for any other entity. As long as the
policy shift simply means that overall ECB limits remain unchanged, with GoI borrowing more and
the corporates less in international financial markets, there would be net welfare gains for the
economy.
2) The sovereign is the best credit in the country. As such, sovereign bonds set the lowest
possible benchmark for Indian borrowers in international financial markets.
3) Instead of relying on the sovereign bond yields of other similarly rated developing countries,
they would now borrow at spreads above Indian sovereign bonds, controlling for tenure of the loan
and credit rating. GoI can lower the yields on its own sovereign bonds through good
macroeconomic management.

4) India has a huge infrastructure deficit. Global experience is that most of this investment would
need to come directly or indirectly from government. Private enterprise can play only a marginal
role, in view of the higher risks, lower returns and longer gestation periods of the underlying
investment. Such investments generate large externalities, indirectly benefitting the larger
economy much more than the investor directly. As the case of China illustrates, first-class
infrastructure lowers the cost of overheads, making the economy more efficient, productive and
hence more internationally competitive.