FINANCING A NEW PROJECT
Feb 22 - 28, 2010
It is a highly instructive experience for any corporate banker. It usually calls for a detailed analysis of feasibility prepared by the borrowing company or on its behalf, by the financial sector consultants.
Corporate banker's job is to critically examine each and every aspect of the feasibility. A standard feasibility is divided into a number of sections that deal with the various aspects of the project, for example: management aspect, technical aspect, marketing aspect, financial aspect and economic aspect. The management section of the feasibility presents the management profile of the company/group. If a public limited company, the names of directors with their shares in the business are disclosed. The educational background and market/industry exposure of individual directors are stated. This section might contain copies of such exhibits as form-29, company registration certificate, individual directors' asset and liability positions etc. If it happens to be a well known business or industrial group, a lot of information would be available in the market which can be used by the corporate bankers.
An interface with the main sponsoring directors may also give an insight in to the management capability of the company/group. A company already in the business has its borrowing record available with the apex regulatory bodies, SBP, SECP etc.
Reports issued from these bodies are a good source of information for the corporate lenders. Obviously, where no management track record is available, that is in the case of new entries into the business and industrial sector, the job of corporate lenders becomes quite difficult. They must go extra miles to determine the worth and capability of the new group.
Technical aspect deals with the evaluation of plant, machinery and equipment that is going to be utilized in the project, if it is a manufacturing/industrial project. As the name suggests, the technicality aspect demands the involvement of an engineer or a group of engineers. The foremost job of the engineer(s) is to collect market information on operational efficiency of the proposed plant and machinery. In case the technology is used in the country for the first time, the corporate lenders have to be extra careful as the operational efficiency under local conditions might turn out to be quite different from what has been stated by the machinery suppliers/manufacturers. For price check, the standard norm is to call international tenders. This job is undertaken by the borrowing company and three competitive international bids are submitted to the bank. The company might show its preference for a certain bid and give supporting reasons. The bank engineers have to form their independent view, and they may recommend rejection of either of the bids, or even all of the three bids. However, it is important for the bank engineers that they take a pragmatic view and be able to convince the company representatives about their reservations. To assess the utilities requirement for the project is also the job of bank engineers. Proper gas and power load requirements are calculated and compared with those mentioned in feasibility and also the machinery manufacturers' brochure.
A certificate from the respective utility companies confirming availability of the required load connections on demand or on a particular future date must be produced by the borrowing company. The issue of sufficient water availability at the site should also be dealt with accordingly.
Normally, project land is acquired while the feasibility is under preparation. The bank civil engineer must visit the project land site to ascertain its suitability for the project from all technical angles. In case the land has been purchased, the original documents showing transfer of title to the company should be examined and photocopies retained. The ongoing market for similar land should be ascertained to ensure fair price disclosure in the project cost. This is important as the cost of land represents sponsors' initial equity investment. Cases have been reported where agricultural land acquired at a very nominal price is shown in the project cost at industrial land price. Once the final decision on the selection of plant and machinery is made, the civil engineer will check if the feasibility includes proper building design in line with the specifications of the machinery suppliers/manufacturers. The calculation of the total cost of building and civil works given in the feasibility should also be critically examined - the broad parameters being the total constructed area and the going construction rates for each type of construction.
The marketing aspect of feasibility deals with the salability of the proposed product under the existing market conditions, both domestic and foreign, in case the company plans to enter the two markets simultaneously. The standard procedure is to determine the current demand and supply gap for the particular product. The supply side data is easily available which is the sum total of all existing companies production. The aggregate demand for that product is determined taking into account various factors that may include the inventory turnover of the existing companies, their sales record, position of their receivables, the nature of the product, consumer dependability on the product, any possibility of change in consumer taste, threat of price and quality competition from abroad etc. The factor of continuous growth in population is used to support a higher demand forecast. Market forecast is the trickiest aspect of business. It involves transformation of some qualitative market aspects into quantitative estimates of demand for a specific product. Market forecast is affected by a number of imponderables. The feasibility should list the assumptions used to reach the demand forecast figure for the product. The assumptions may relate to demographic, economic, political, religious, technological and cultural trends.
Demand forecasting methods may range from simple linear methods to the highly sophisticated statistical methods that are beyond the scope of this subject. Demand forecast is made by the corporate bankers with the help of simple linear methods. The more important aspect for the corporate bankers is the analysis of four P's of marketing: product, price, place and promotion.
Product features determine the market acceptability. Place refers to the distributional channels and sales network is used to deliver the product to the end consumer. Promotion refers to advertisement, publicity and related marketing efforts. Price is the most important aspect for a corporate lender. The price assumptions stated in the feasibility need to be verified meticulously. In the financial section, the importance of product price in determining the viability of the project will be discussed.