Page 141 - DMGT521_PROJECT_MANAGEMENT

Project Management

Notes 6. Miscellaneous Sources: A small portion of the project finance may come from miscellaneous
sources like unsecured loans, public deposits, and leasing and hire purchase finance.
Unsecured loans are typically provided by the promoters to bridge the gap between the
promoters’ contribution (as required by the financial institutions) and the equity capital
the promoters can subscribe to. Public deposits represent unsecured borrowings from the
public at large. Leasing and hire purchase finance represent a form of borrowing different
from the conventional term loans and debenture capital.

Task Discuss about Incentive Sources.

9.2.1 Planning the Means of Finance

We have described the various means of finance that can be tapped for a project. How should
you go about determining the specific means of finance for a given project? The guidelines and
considerations that should be borne in mind for this purpose are as follows:

1. Norms of regulatory bodies and financial institutions
2. Key business considerations

Norms of Regulatory Bodies and Financial Institutions

In some countries, the proposed means of finance for a project must either be approved by a
regulatory agency or conform to certain norms laid down by the government or financial
institutions in this regard. The primary purpose of such regulations is to impart prudence to
project financing decisions and provide a measure of protection to investors. In addition, the
norms of financial institutions, which often provide substantial assistance to projects significantly
shape and circumscribe project financing decisions.

Key Business Considerations

The key business considerations which are relevant for the project financing decision are: cost,
risk, control, and flexibility.
1. Cost: In general the cost of debt funds is lower than the cost of equity funds. Why? The
primary reason is that the interest payable on debt capital is a tax-deductible expense
whereas the dividend payable on equity capital is not.
2. Risk: The two main sources of risk for a firm (or project) are: business risk and financial
risk. Business risk refers to the variability of earnings before interest and taxes and arises
mainly from fluctuations in demand and variability of prices and costs. Financial risk
represents the risk arising from financial leverage. It must be emphasized that while debt
capital is cheap it is also risky because of the fixed financial burden associated with it.

3. Control: From the point of view of the promoters of the project, the issue of control is
important. They would ordinarily prefer a scheme of financing which enables them to
maximise their control, current as well as potential, over the affairs of the firm, given their
commitment of funds to the project.
4. Flexibility: This refers to the ability of a firm (or project) to raise further capital from any
source it wishes to tap to meet the future financing needs. This provides maneuverability
to the firm. In most practical situations, flexibility means that the firm does not fully

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