A project is Finance when the project company must provide a material amount of private financing in the early stages of the project, that cannot be addressed using available project revenues, for example:
• Predefined, upfront financing of construction obligations, equipment or supplies
• Investment needed to address operating losses until the revenue stream can be improved or costs reduced
• A purchase price for the project, land or other essential assets, paid to the grantor or anyone else
• An obligation to refinance existing debt.
Therefore, Finance would not include normal funding facilities associated with the project company's business, for example working capital facilities, or lines of credit to be sourced at some point in the future but with no firm undertaking by lenders (e.g. financial close) in the beginning of the project.
Risks associated with a Finance obligation relate primarily to the availability of funding, cost of funding, the cost and time associated with arranging funding and the risk that the project will not be able to satisfy debt service obligations. Lenders will have their own requirements for the project, the security rights they will seek and any undertakings required from the grantor and shareholders.
The risks associated with Finance will depend partly on the nature of the funders (debt and equity) and its influence on the project. Each funder (whether domestic or foreign; private, public or institutional; bank or non-bank) will have its own particular requirements, interests, concerns and strengths. Integral to the provision of debt to the project company is the need for the project company to give up control of its assets, finances and even operations to the lenders, who will want to keep control of certain of these key decisions, and of the monies available to the project company.
The classification methodology uses the term Finance to include both debt and equity funding.