The process of financial management

Project finance involves two main types of contracts: concession agreements

with the government, and off-take contracts with consumers.

The process of financial management involves five major steps:

1.      Conducting feasibility studies,

2.      planning project finance,

3.      arranging the financial package,

4.      controlling the financial package,

5.      and managing financial risk.

Conducting Feasibility Studies

Project alternatives are evaluated using financial appraisal techniques such as net present value analysis (NPV) and internal rate of return (IRR).

During this step, the financial objectives of the project are established.

While these objectives differ between various project stakeholders, the

main concerns of the project sponsor are:

• Raising necessary funds for the project at appropriate times, and in

appropriate currencies

• Minimizing project cost and maximizing revenue

• Appropriate risk-sharing among all project stakeholders, including

financiers

• Establishing adequate control and flexibility, including rescheduling

loan and interest repayments if conditions warrant

• The ability to pay dividends to equity holders

Controlling Financial Risk

The various types of financial risks that can be encountered in a project

are provided in Table