In project finance, project development is the process of financing a capital-intensive project and preparing it for commercial operations. The stages of project finance starts with the origination of a project, followed by negotiation of project agreements, concluding with mobilizing of financing and successful commissioning of the facility.
Time elapsed for a major project from the award to financial closing can easily amount to one year and occasionally several years. As a rule, project development in emerging markets is more time consuming due to the absence of experience and policies. A World Bank study estimated that in developed economies, transaction costs in financing infrastructure projects were usually 3-5 percent of total project costs.
At pre-bid stage, the sponsor of the project or the Project Company secures a conditional right from a ceding authority pursuant to a tendering process or an unsolicited proposal to build the facility.
- Bidding process: A host country ceding authority may issue a call for proposals from interested private bidders, usually under well-defined procedures for the rights to build and operate a specific infrastructure facility. Multilateral banks that provide technical assistance and financing, such as the World Bank and Asian Development Bank, usually insist on a tightly defined tendering process, referred to as an international competitive bidding (ICB). Under the ICB process, evaluation and award of bids are made according to ground rules set forth at the beginning of the process and adhered to throughout the tendering process. A major drawback is that a formal solicitation can take six months to complete and sometimes much longer.
- Feasibility study: Technical feasibility studies are conducted to consider the appropriateness of the facility’s design relative to the needs to be serviced; capacity and phasing; cost under current or projected market conditions at one or more sites; construction schedule; and price, availability and transportation requirements of major inputs.
Contract negotiation stage
The project participants negotiate and formalize agreements defining the technical, economic, and commercial outlines of the project. The risk sharing provisions of the documents are usually structured in such a way as to remove risk from the project vehicle and allocate it to someone else in a better position to absorb it.
The sponsor is not able to approach the financial markets until the end of the contract negotiation stage of project development.
By the end of the contract negotiation stage, the sponsor will have developed fairly sophisticated and accurate models that portray the economic and financial feasibility of a project under a variety of scenarios and assumptions.
The money-raising stage begins once all project agreements are initialed and ends at the time the facility is build and commissioned. At this stage, the sponsor mobilizes the required financing and supervises the management organization, construction, and successful commissioning of the facility.
Until financial closing is reached, the sponsor is responsible for all development costs.