--- title: "Project financing; structures; capital structure steps" subject: "Project Engineering" chapter: 6 key: "semester_7/project_engineering:project-finance-define-structures-steps" source: https://www.bctengineer.com/q/semester_7/project_engineering/project-finance-define-structures-steps site: BCT Engineering --- # Project financing; structures; capital structure steps Project Engineering · Chapter 6: Introduction to Project Financing - Asked in: 2082 Bhadra, 2+4 marks - Video: [Typical Structure of a Project Financing Transaction](https://www.youtube.com/watch?v=71Gn1GeuJxY) — Tauro Group Education - Answer checked by Claude Opus 5.5 (high effort) on 2026-10-14 - Page: https://www.bctengineer.com/q/semester_7/project_engineering/project-finance-define-structures-steps - Whole chapter: https://www.bctengineer.com/md/semester_7/project_engineering/chapter-6 ## Question What do you mean by project financing? Also write down the different structures of project financing. Write down the steps of capital structure planning. ## Short answer Project finance is long-term financing of a specific project where lenders rely mainly on the project's cash flow and assets, usually through a special purpose vehicle. Structures include non-recourse, limited-recourse, full-recourse, SPV, BOT/BOOT/BOO, PPP/joint venture, and syndicated loans or bonds. Capital structure planning steps: estimate capital, identify sources and costs, analyze cash flow and risk, compare by EBIT-EPS, check constraints, select optimum, and review. ## Answer #### Project financing **Project finance** is the long-term financing of a specific project (such as a hydropower plant, road or pipeline) in which the lenders and investors look mainly at the cash flow and assets of the project itself, not at the balance sheet of the sponsors, for repayment of the debt and return on equity. A separate legal entity (special purpose vehicle, SPV) is usually formed for the project. #### Structures of project financing 1. **Non-recourse financing:** lenders look only at the project's cash flow and assets; the sponsors are not liable for the debt. The lenders' risk is high, so strong contracts and guarantees are needed. 2. **Limited-recourse financing:** the sponsors give limited guarantees (e.g. during construction or for completion) and the project cash flow repays the debt. This is the most common form. 3. **Full-recourse financing:** the sponsors guarantee the full debt (similar to corporate finance). 4. **Special purpose vehicle (SPV) / project company:** the sponsors form a separate company that holds the contracts, assets and debt. 5. **BOT / BOOT / BOO structures:** a private company builds and operates the project and recovers its investment from the revenue. In BOT it builds, operates and transfers; in BOOT it also owns the project during the concession; in both it hands the project to the government at the end of the concession period. In BOO it builds, owns and operates with no transfer. These are used for hydropower, roads and bridges. 6. **Public-private partnership (PPP) and joint venture:** the government and the private sector share investment, risk and revenue. 7. **Syndicated loans and bond-based structures:** the lending amount is shared among many lenders. ```text Sponsors --equity--> [ SPV / Project company ] <--loan-- Lenders | ^ EPC contract <---+ +--- offtake (PPA) contract ``` #### Steps of capital structure planning 1. Estimate the total capital requirement of the project. 2. Identify the available sources (equity, preference, debt) and their costs. 3. Analyse the cash flowability and the risk of the project. 4. Prepare alternative capital structures and compare them by EBIT-EPS analysis and cost of capital. 5. Check control, flexibility, legal and lender conditions. 6. Select the optimum structure and arrange the funds. 7. Review the structure regularly. ## Check yourself The answer's key points as multiple-choice questions, with the correct option and why. 1. What is non-recourse financing? A. Sponsors guarantee the full debt B. Lenders look only to project cash flow and assets; sponsors are not liable C. Lenders hold the sponsors' assets D. The government repays the debt Answer: B. Non-recourse means lenders rely only on the project; sponsors are not liable. (Key point: Non-recourse) 2. Which is the most common project finance form? A. Full-recourse B. Grant only C. Limited-recourse financing D. Cash purchase Answer: C. Limited recourse, with sponsor guarantees during construction or completion, is most common. (Key point: Common form) 3. What happens in a BOT structure? A. Government builds and sells to public B. Private company keeps it forever C. Lender builds the project D. Private company builds, operates and transfers the project after the concession period Answer: D. In BOT/BOOT/BOO a private company builds, owns/operates and transfers after the concession. (Key point: BOT) 4. Which step comes right after estimating total capital requirement? A. Identify the available sources and their costs B. Select the optimum structure C. Review the structure D. Arrange funds Answer: A. Order: estimate capital, identify sources/costs, analyse cash flow and risk, compare alternatives, check conditions, select, review. 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