Introduction

High value and Large Projects take considerable time to be completed and become operational. They need even more time to start commercial production. There are a number of known unknowns and unknown unknowns which could actually impact the project commencement. Most projects are financed with a large element of Debt. The Equity portion does not have to be serviced ab initio, and its servicing commences only when the project stabilises and generates adequate net profits. The debt portion used in project construction and implementation, on the other hand, carry interest from the day one of commencement of drawl. But how is the interest accrued during the period of construction actually paid? As project financing became complex and involved large projects, this issue became extremely important. Since the mid-1980s, it became a standard practice to include Interest During Construction (IDC) as part of the project cost, and it would be funded like other elements of the project. In effect, the interest expenditure (treated as revenue expenditure in normal accounting), gets capitalised and funded like a capital asset by way of debt and equity. This measure was introduced to facilitate smooth implementation of large projects with long gestation period.

Banks and project financing

From the mid-1990s, commercial banks assumed the mantle of project financing and their involvement increased for two reasons. Firstly, the Development Financial Institutions (DFIs), specialised in project financing, diversified their business profile by entering commercial banking due to their inability to raise low-cost term funding hitherto available to them in the form of issuance of SLR bonds. Secondly, with the entry of private players in infrastructure segments like Power, Road, Telecom, etc demand for project financing increased.

To read more, please subscribe.