There are many advantages to this seemingly unsecured form of lending. First, the merits of the project, rather than the creditworthiness of the borrower, will determine the cost of capital. Explains the RPG Group's Hari Mundra: "Even financially-weaker companies, or groups, will not be constrained by their overall rating when seeking the finances for a viable project." Indeed, with blue-chips increasingly leveraging their brand equity in the market to obtain finer rates, a large part of the DFIs' clientele tomorrow will consist of small- and medium-sized companies.

Second, non-recourse financing translates into off-balance-sheet financing for the parent company. Not only does this enhance the parent firm's borrowing capacity, it also allocates project-specific risks to parties that are better-equipped, or more willing, to manage such risks. Thus, the parent company can undertake larger, more risky projects. This is especially important for infrastructure projects as the promoters are often unable to guarantee such vast undertakings, rendering their financial closure well-nigh impossible.

But the transfer of project risk away from the parent company's balance-sheet does not mean that the promoters are free to recklessly run up project bills. Since financing is extended solely on the basis of the future cash-flows of the project, the lenders will have to be closely associated with the project. The DFIs will have to amass a wealth of commercial and technical expertise in order to closely monitor project implementation. Safety can be further enhanced by the creation of an escrow account. Administered by a third party, the escrow mechanism funnels the cash-flows from the implementation of the project towards the repayment of the loan.

EXTERNAL COMMERCIAL BORROWINGS (ECBS). Disintermediation is not the only force that fashions new financial products; the growing share of ECBS in the financing pie has also expedited the process of innovation. Look for that share to rise even more as investment needs outdistance the growth of domestic savings. Points out Uday Kotak, 38, vice-chairman, Kotak Mahindra Finance: "Foreign funds will have to bridge the savings-investment gap in this country."

In theory, since domestic interest rates exceed international rates by a minimum of 600 basis points, there should be a number of companies queuing up for ECBS. In practice, access is rationed through a battery of restrictions. To keep the external debt of the nation within sustainable limits, there is an overall ceiling on ECBS, with sub-ceilings for specified priority sectors. End-uses, as well as the minimum average maturity of seven years, are specified.

Of course, the move towards the convertibility of the rupee will loosen many of these restrictions. Burgeoning foreign exchange reserves have already lifted the ecb ceiling to its present level of $8 billion dollars, and have led to a progressive relaxation of end-use stipulations. While the Tarapore Committee has, rightly, recommended the abolition of all end-use restrictions, the notion of a ceiling remains in place and, oddly enough, so does the specification of an average tenure. However, borrowings with maturities that exceed 10 years are not included in the ceiling specifications.

Unfortunately, it is the tenure specification that has dammed up the ECB rush. Except for a handful of blue-chip companies, finding takers for seven-year paper is no easy task, and it could add upto 50 basis points to the interest cost. CFOs are further hamstrung by the restrictions on early exit through puts and calls. One innovative solution: step-up structures that progressively increase rates over the life of the loan. Last year, both TELCO and L&T used this mechanism to raise $72 million and $115 million, respectively, via syndicated loans. Explains L. Krishnakumar, 38, chief treasurer, L&T: "A company that needs money only for three to five years, but is forced to raise money for seven, can still keep its interest costs low through step-up structures."

Alternatively, explore other markets. Although the traditional hunting grounds for the CFO have been the Euromarket (for syndicated loans) and the Euro-bond market, the American debt market is still an unexplored territory. Given the sheer depth of this market, it may be easier to place longer-term paper here. For instance, investors lapped up Reliance Industries' $614-million Yankee Bonds issue, which offered maturities varying from 20 years to 100 years, and coupon rates ranging from 8.25 per cent to 10.50 per cent.

Why stop at Yankee Bonds? Once the rupee is fully convertible, the portfolio of financing options will expand further. CFOs can also consider yen-denominated bonds (Samurai Bonds) and sterling-denominated bonds (Bulldog Bonds), depending on the perceptions of the interest rate and exchange rate movements.

Circa 2000, much of project financing will, no doubt, resemble project financing circa 1997. After all, the basic blocks--debt and equity--will remain the same. But they can be re-arranged along with a host of extra features to create mezzanine structures, enabling the CFO to tailor the financing mix to smoothly adjust to the contours of a project instead of vice-versa. And that is the vital difference that will define project financing strategies in the next millennium.