3. Process of Financial Close
| A project is generally funded through equity, debt, grant or a combination of the three. More on sources of financing a project is explained in Module 6. The equity in the project is brought in primarily by the private partner and financial investor, if any. The majority stakes in the project are normally held by the private partner who, while submitting a bid for the project, has usually made a commitment to financing it. |
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The financial investor could form a part of the project either during the bidding stage or after the project has been awarded. If the financial investor is part of the consortium which bids for the project, then by virtue of being the bidder, it will also commit funds (equity contribution) for the project. If the financial investor invests in the project after the selection of the private partner, it will need to buy out the equity stake of the private partner in the project to the extent provided for in the agreement. However, in both cases, the financial investor will undertake sufficient due diligence prior to making equity investments in the project.
In cases where financial closure is linked to the conditions precedent, the lenders/ banks also emphasise the need for the conditions precedent to be fulfilled in order to disburse the first tranche of funding. The debt component of the cost is brought in by a single lender or a consortium of lenders. In such cases, the process normally followed by the private partner to secure a term loan for the project is set out below:
