Financial Estimation

Proper estimation of cost of the project is necessary for optimum utilisation of

funds during implementation. This emphasises the need for a correct estimate of
the project cost
Project Cost
The cost of the project represents the total of all items of outlays associated with a
project. It consist of the following components
Cost of land and its development
Buildings
Plant & Machinery
Electric Power
Preliminary and Preparative Expenses
Provision for Contingencies
PROJECT FINANCING
To be successful in developing new business, it is essential that firms have
knowledge of project finance and are aware of how the potential projects they
which to develop are to be financed.
Over the past two decades there have been considerable changes in the techniques
used to meet the financing needs of projects particularly in view of the increasing
scarcity of funds, high interest rates and the high level of debt in the beneficiary
countries. The most common sources of project finance in developing countries or
countries in transition are:
Export Credit Agencies
Project financing from export credit agencies is generally available in two froms
and often in a combination of both: either from the national export-import bank
and / or as foreign aid. When tied together they are called mixed credits, and if the
country is a member of the Group on Export Credits and Credit Guarantees
(ECCG) of the OECD Trade Committee, these credits are regulated by OECD
arrangements. Most foreign aid of this type is used to purchase goods and services
from the private sector in the country that provides the financing. These agencies
provide a number of project finance services.
Loans and Guarantees
These consist of concessional loans or guarantees for a concessional loan or a
combination of both. In some countries, the agency provides a guarantee for
financing, which is then used to secure loans commercial banks.

Suppliers credit
This is credit guaranteed by the export credit agency, which is made available,
often at a concessional rate of interest, for a fixed period. Repayment is over a
period of 5-10 years from the completion date of the project, and the repayments of
the capital plus interest is secured by negotiable paper such as promissory notes or
bills of exchange. Bank charges, bonds, insurance costs, etc., are usually included
in the project offer if this type of financing is foreseen. The main disadvantage for
the contractor is that no progress payments are made ant that project finance is not
available until the project is completed. The supplier is usually required to assume
some of the risk of financing.
Buyers credit
This is essentially an arrangement between banks whereby a bank in the country of
the contractor enters into a loan agreement with a bank in the country of the client
or in the country in which the work is to be undertaken. Lending banks are
authorized to make progress payments in cash, to the contractor on submission of
invoices together with appropriate paper such as bills of lading. The loan
agreement specifies the conditions under which the loan is to be repaid and bank
charges are paid direct by the lending bank to the borrowing bank.
Direct foreign investment
Direct foreign investment in developing countries has been a major source of
project finance for many industrial plants developed by industrialized counties in
developing countries in developing countries in transaction. Many international
manufacturers in such areas as electronics, textiles and automobile spare parts have
been forced to manufacture products in countries that have low labour costs in
order to be competitive.
In order to encourage the flow of direct foreign investment into developing
countries, the World Bank created the Multilateral Investment Guarantee Agency
(MIGA) in 1988.
MIGAs guarantee program products investors from non-commercial risks of
currency transfer, expropriation, war and civil disturbance. It insures only new
investments, including expansion of existing investments, privatizations and
financial restructuring.
Bilateral funding agencies
A considerable amount of project finance made available in developing
countries and countries in transition in provided direct by agencies from industrial
countries. Many governments will often fund small and medium sized projects out
of their own funds, either directly or indirectly by means of equity investments,

investment gratis, subsidized loans, tax concessions or subsidies on utilities,

manpower, energy or raw materials.
Commercial banks
Commercial banks are a major source of project finance, offering loans for
five to ten years with floating rates of interest based on the LIBOR or the United
States prime rate. Commercial bank loans for large projects are typical arranged as
syndicated bank loans. There are two basic options open to project developers:
either the project developer assumes full responsibility for obtaining project
finance or it used the services of a bank specializing in project finance.
Alternatively, the client may use a local or regional bank to arrange or engineer a
financial package. The bank been determines the maximum foreign exchange
requirements and the possibilities of obtaining export credits and aid funds and
prepares a project finance package.
Industrial lenders
Institutional lenders, such as insurance companies, pension funds and
charitable organizations are becoming significant sources of project funding,
particularly for industrial buildings and shopping centre developments as well as in
the developments of build-own-operate projects, which are particularly prevalent
in ASEAN countries.
Leasing companies
In the Asia and Pacific region, a number of Japanese leasing companies have
access to low-cost Japanese Government funding, and they are thus able to offer
attractive term financing for equipment and facilities. Several industrial facilities
and industrial parks have been developed on a lease-back basis. Project financing
of this type will be particularly pertinent to ASEAN countries trying to develop
industrial estates, shopping centre complexes, etc.
Contractors
Contractors often initiate project finance but they are rarely able to
participate in the long-term financing of projects. They may participate in the form
of fixed-price contracts, with guarantees, and sometimes may take part of their fees
in the form of equity in the project. Contractors can also provide assistance to their
clients in developing the financial planning, as they are often experienced in
dealing with multilateral and bilateral lending agencies, export credit agencies,
banks, etc.