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SID Bank - Financing - Financial services for exporters and other international business cooperation - Project financing
Project financing
Project financing is a special non-conventional form of financing of long-term projects, mainly from the area of traffic and municipal infrastructure, telecommunications, power supply, mining, paper industry, ecology, tourism, entertainment industry and the like. As a rule, this is financing of larger new projects or extensive widening of existing facilities, where credit and investment insurers and creditors in their decisions mainly rely on the planned future income of the project as the principal resource for the servicing of granted (insured) loans and the property of the project company as the main form of insurance (collateral).
Taking into account that future income of the company is the basis for success of the project, and the decision to cooperate in the project is closely connected to it, project financing is suitable primarily in the cases where money supply can be predicted or planned with high certainty. Therefore, special attention is kept on (long-term) contracts of the project company, mainly in adequate off-take agreements, and case by case also on contracts on supply of key raw materials, concession agreements without which the company can't operate etc.. When assessing adequacy of these agreements, agreed upon special obligations, which additionally strengthen the agreements, are also given consideration.
Project financing itself is not an automatic substitute for the realization of export transactions, which were not possible to be realized on account of various reasons with more conventional forms of financing (inadequate credit rating of the debtors, securities and the like), but can be an important financial lever for a quicker or more large-scale realization of the project sponsors' plans.
The policy is based on risk sharing among the participants in the project, which may be non-commercial as well as commercial under certain conditions, following the principle that a certain risk is assumed by the participant best equipped for its management, or most capable of influencing it. The minimum of 30% of the project value has to be provided by the project sponsors, while SID Bank provides up to 40% with its support, and the remainder minimum 30% is provided by commercial banks experienced in the area of project financing. Combinations with other financing sources are also possible.
In addition, the sponsors have to be financially strong enough or capable enough to provide to the project company with adequate support (substantiated by obligations determined in advance) at least during the period of construction or realization of the project, and to cover with appropriate stand-by arrangements eventual difficulties in this phase, e.g. project budget cost overrun, additional expenses arising from performance delays etc..
The role of authorized export-credit agency (SID Bank) is therefore principally in assuming of certain risks, for which it is most qualified, (mainly so called non-commercial risks), or for enabling acquisition of additional/supplementary sources (funding), which is mostly connected with possible coverage (in limited extent) against commercial risks of the project.
Due to its complexity the consideration of project financing insurance is as a rule substantially more extensive, time-consuming and expensive, therefore financing on more conventional basis (risks of creditable debtors and/or their guarantors) is recommended whenever possible.