What is project finance?

  • Received December 24, 2016;
    Accepted February 15, 2017;
    Published May 8, 2017
  • Author(s)
    João M. Pinto
  • DOI
    http://dx.doi.org/10.21511/imfi.14(1-1).2017.06
  • Article Info
    Volume 14 2017, Issue #1 (cont.), pp. 200-210
  • TO CITE АНОТАЦІЯ
  • Cited by
    10 articles
  • 3611 Views
  • 2674 Downloads

Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License

Project finance is the process of financing a specific economic unit that the sponsors create, in which creditors share much of the venture’s business risk and funding is obtained strictly for the project itself. Project finance creates value by reducing the costs of funding, maintaining the sponsors financial flexibility, increasing the leverage ratios, avoiding contamination risk, reducing corporate taxes, improving risk management, and reducing the costs associated with market imperfections. However, project finance transactions are complex undertakings, they have higher costs of borrowing when compared to conventional financing and the negotiation of the financing and operating agreements is time-consuming. In addition to describing the economic motivation for the use of project finance, this paper provides details on project finance characteristics and players, presents the recent trends of the project finance market and provides some statistics in relation to project finance lending activity between 2000 and 2014. Statistical analysis shows that project finance loans arranged for U.S. borrowers have higher credit spreads and upfront fees, and have higher loan size to deal size ratios when compared with loans arranged for borrowers located in W.E. On the contrary, loans closed in the U.S. have a much shorter average maturity and are much less likely to be subject to currency risk and to be closed as term loans.

view full abstract hide full abstract
    • Fig. 1. Typical structure of a project finance deal
    • Table 1. Distribution of the sample of PF deals by year
    • Table 2. Industrial distribution of the sample of PF deals
    • Table 3. Geographic distribution of the sample of PF deals
    • Table 4. Contractual characteristics of the sample of PF loans
    • Allen, F., and D. Gale. (1999). Comparing Financial Systems. MIT Press, Cambridge, MA.
    • Beale, C., M. Chatain, N. Fox, S. Bell, J. Berner, R. Preminger, and J. Prins. (2002). Credit Attributes of Project Finance. The Journal of Structured and Project Finance, 8(3), 5-9.
    • BIS. (2001). Working Paper on the Internal Ratings-Based Approach to Specialised Lending Exposures. BCBS Working Papers No 9, Bank of International Settlements.
    • Blanc-Brude, F., and R. Strange. (2007). How banks price loans to public private partnerships: Evidence from the European markets. Journal of Applied Corporate Finance, 19, 94-106.
    • Bonetti, V., S. Caselli, and S. Gatti. (2010). Offtaking agreements and how they impact the cost of funding for project finance deals: A clinical case study of the Quezon Power Ltd Co. Review of Financial Economics, 19, 60-71.
    • Brealey, R., I. Cooper, and M. Habib. (1996). Using project finance to fund infrastructure investments, Journal of Applied Corporate Finance, 9, 25-38.
    • Buscaino, V., S. Caselli, F. Corielli, and S. Gatti. (2012). Project finance collateralised debt obligations: An empirical analysis of spread determinants. European Financial Management, 18, 950-969.
    • Carey, M., and G. Nini. (2007). Is the corporate loan market globally integrated? A pricing puzzle. Journal of Finance, 62, 2969-3007.
    • Caselli, S., and S. Gatti. (2005). Structured Finance: Techniques, Products and Market. Springer: Berlin.
    • Chakraborty, S., and T. Ray. (2006). Bank-based versus market-based financial systems: A growth-theoretic analysis. Journal of Monetary Economics, 53, 329-350.
    • Corielli, F., S. Gatti, and A. Steffanoni. (2010). Risk Shifting through Nonfinancial Contracts: Effects on Loan Spreads and Capital Structure of Project Finance Deals. Journal of Money, Credit and Banking, 42, 1295-1320.
    • Demirgüç-Kunt, A., and R. Levine. (1999). Financial structures across countries: stylized facts. Mimeograph, World Bank, Washington, DC.
    • Esty, Benjamin. (2003). The Economic Motivations for Using Project Finance. Boston: Harvard Business School publishing.
    • Esty, Benjamin. (2004a). Modern Project Finance – A Casebook. John Wiley & Sons, Inc.
    • Esty, Benjamin. (2004b). Why Study Large Projects? An Introduction to Research on Project Finance. European Financial Management, 10, 213-224.
    • Esty, B., and A. Sesia. (2007). An Overview of Project Finance & Infrastructure Finance – 2006 Update. Boston: Harvard Business School publishing.
    • Esty, B., and W. Megginson. (2003). Creditor rights, enforcement, and debt ownership structure: Evidence from the global syndicated loan market. Journal of Financial and Quantitative Analysis, 38, 37-59.
    • Fabozzi, F., H. Davis, and M. Choudhry. (2006). Introduction to Structured Finance. Wiley Finance.
    • Foley, C., and R. Greenwood. (2010). The evolution of corporate ownership after IPO: the impact of investor protection. The Review of Financial Studies, 23, 1231-1260.
    • Gatti, Stefano. (2008). Project Finance in Theory and Practice – Designing, Structuring, and Financing Private and Public Projects. Academic Press Advanced Finance Series.
    • Gatti, S., S. Kleimeier, W. Megginson, and A. Steffanoni. (2013). Arranger Certification in Project Finance. Financial Management, 42, 1-40.
    • Kleimeier, S., and W. Megginson. (2000). Are project finance loans different from other syndicated credits? Journal of Applied Corporate Finance, 13, 75-87.
    • Klompjan, R., and M. Wouters. (2002). Default risk in project finance. Journal of Structured and Project Finance, 8, 10-21.
    • Nevitt, P., and F. Fabozzi. (2001). Project Financing. London: Euromoney, 7th Edition.
    • Pinto, J., and P. Alves. (2016). Project finance in Europe: An overview and discussion of key drivers. EIB Working Papers, No. 2016/04.
    • Sorge, M., and B. Gadanecz. (2008). The term structure of credit spreads in project finance. International Journal of Finance and Economics, 13, 68-81.
    • Standard & Poor’s. (2004). When Projects Fail: Ten Years of Project Finance Ratings. Global Project Finance Yearbook, London: Standard & Poor’s.
Related Articles

  • Project finance risk management for public-private partnership

    Oleh KolodizievORCID Researcher ID, Viktoriia TyschenkoORCID , Kateryna AzizovaORCID Researcher ID doi: http://dx.doi.org/10.21511/imfi.14(4).2017.14
    Investment Management and Financial Innovations Volume 14, 2017         Issue #4         pp. 171-180 Views: 1455 Downloads: 236 TO CITE АНОТАЦІЯ

    The development of public-private partnership in Ukraine in recent years has become very important as an instrument of anti-crisis orientation. The real economic situation objectively creates the preconditions for more effective use of this mechanism and institutes of public-private partnerships in order to ensure sustainable economic development, obtain new ones and improve the quality of public services provided to the population.
    The objective of the research is to identify the components of project finance risk management and to provide justification of effective and balanced sharing of risks between public and private partners as the prerequisite and the main principle of effective implementation of public-private partnership.
    The authors used the following research methods: systemic approach, theoretical and empirical methods of scientific knowledge.
    This paper examines types of investment project financing by banks based on public-private partnership. It defines the structure of public-private partnership according to sources of capital investment in the project vehicle. The paper identifies components of the risk management process in project finance. It proves that a balanced distribution of risks between the private and public partners is the key requirement and the primary principle of effective public-private partnership. In this way, the need for mobilization of additional financial resources for implementation of investment projects calls for extended cooperation of state agencies and banks as a part of the effort of economic crisis management.

Download Preview
Close
Investment Management and Financial Innovations
Investment Management and Financial Innovations