project finance companies

project finance companies

The Role and Impact of Project Finance Companies in Economic Development

1. Introduction to Project Finance Companies

Similar to partnership agreements in joint ventures, partially-owned-incorporated entities such as LLPs and LLCs can also hold project interests in their balance sheets, while project success and income are closely linked to their parent companies. Many large construction companies and energy companies operate finance departments, while associated and affiliated small independent finance companies operate similar niche targeted offices. These non-consolidated entities engage in a rich multitude of PFC forms. Current empirical research fails to document the PFC presence in significant numbers, scale, or importance. American PFC performance research usually focuses on regulatory and accounting issuance factors that best signify the non-recourse and partnership accounting treatment of project finance activities. They often aim to establish the feasibility of financing regulatory arbitrage as applied to project finance income. Keenan classifies PFCs into a three-tier structural hierarchy. Tier 1 companies take an equity interest in the project umbrella. In this primary capacity, PFCs rely on a present value measure to estimate potential risk and discount the need for the player-assuring risk reduction as applied by EPC contractors. They prefer defensive loss-avoidance strategies and maintain conservative sale transaction costs. Their desired long-term product development goal is the investment return characteristics of compliance market products.

Project finance companies exist in many forms, sizes, and vintages. For the purpose of this research report, I will focus on the universe of companies concerned with non-recourse financing. Project finance companies (PFCs) have many purposes that range from serving as EPC turnkey contractors, operators, and equity investors to minor roles of financing, investment, and advisory services that are usually performed in the on-time upfront project stages. PFCs involved in financing activities can be considered pure financial intermediaries under the risk management hypothesis, since the non-recourse nature of project finance separates project rights from corporate balance sheets. Other specialized project financiers may be equity investment arms of large financial institutions, venture capital operations, various industrial firms, real estate corporations, and certain financial market traders.

2. Key Functions and Services Provided by Project Finance Companies

Furthermore, in addition to the provision of technical know-how and management assistance, project finance house advice also helps in the negotiation of multiple-investor arrangements, documentation of plans, management and financing agreements. These features typically enhance the creditworthiness of the proposed project and contribute to a more rapid financial closing. Each project is unique. To address the risks of proposed projects, proposals are required with features that meet the specific needs of investors while simultaneously addressing the necessary adjustments to the project’s development and sophistication.

In summary, although project financing is widely accepted as an efficient and effective tool for mobilization of capital to fund essential infrastructure and other projects, the structure and complexity of such a form of investment presents an array of problems for sponsors and lenders. This paper addresses those issues that sponsors and lenders face in the transportation and infrastructure sectors and describes a set of advisory services provided by project finance houses and their clients. These include providing assistance in preparing project finance plans and ensuring that these plans are consistent with overall company objectives; offering expertise in competitive project development; assisting in the structuring of companies and design of financial instruments to allocate project risks among equity, debt, and third-party participants; and providing project credit ratings and financial instruments to match specific investor requirements.

3. Case Studies: Successful Projects Financed by Project Finance Companies

The cases described below are structured to provide the project finance company’s targets and priorities by superimposing on lessons typical of any specific project finance or political risk insurance case. Since we intervened in case situations only when invited by one of the parties to a dispute to do so, the objective was peaceable state and party adjustment within which the financeable project private interests could deal with the non-public or private sector concerns of the host developing country. We will, therefore, judge success by acceptance and use of our medium and long-term politically-coherent solutions to underlying issues which could have frustrated the project finance and investment.

Project finance is one of several, or perhaps many, alternative ways to meet the needs of developing countries for increasing numbers of basic public goods in roads, energy, education, water, health, and telecommunication. As with any such solution, it is important to ask how general the approach is and how well it works. Have truly useful and economic projects that were unable to obtain funding nevertheless been financed? What are the objectives and strategies used by successful project finance companies? What have been the social benefits that followed from the application by project finance companies of their particular blend of project finance and political risk insurance, and the ability and willingness to legally intervene and enforce their rights in the event of problems over the life of an insured project?

4. Challenges and Opportunities in the Project Finance Industry

Although the project finance approach has been successful in raising large proportions of the financing for some types of projects, for such large projects as nuclear power, high-speed rail, communications, pipeline, and mining projects, existing construction lenders and underwriters are believed to perform comparably well. However, the project finance approach has gained the greatest popularity for certain types of projects, notably for power projects in developing markets, for certain U.S. independent power projects, and for oil and gas projects, especially for offshore oil and gas exploratory drilling projects. For these types of projects, the challenges inherent in construction risk, or market risk, or complex and uncertain merchantability characteristics, seem most manageable by the project finance risk allocation and completion monitoring approach. In a word, the project finance approach is most valuable when the risks of a project can be accurately defined, when they can be controlled and monitored, and ultimately when they can be assigned to investors with the financial capacity to assume them.

The primary characteristic that differentiates the project finance business from other types of financing, such as corporate bank or capital markets lending, is the need for independent on projected future cash flows for repayment of the financing. For this reason, timely completion of the financing, amortization of the debt over the construction and operating periods, and a specified return to the sponsors are essential elements of project finance transactions. To accommodate these requirements, the project finance industry has evolved a specialized set of skills that includes market and management expertise, legal and financial knowledge, and the ability to assess and control large, long-term business risks. Many participants in the industry, such as the large international construction companies and engineering firms and the major insurance companies, frequently serve large sponsors and are themselves financially very strong. Unlike the other classes of lending, project financiers have and must have extensive knowledge of the quantitative and qualitative factors underlying each project’s success.

5. Future Trends and Innovations in Project Finance

First, project finance is confronting a classic growth dilemma: as its market develops, it pays for the occasional outbreak of innovativeness to be quickly ghettoized. Project finance trademarking is confined to names of established relationships. Some innovative products do, of course, break through into the wider capital markets without this happening. But more and more, when a project finance transaction sets a new frontier, its participants are discovering that they are mere scouts, shown up by the comprehensive infrastructure already in place in both the corporate finance and capital markets space.

Project finance develops into a mature market.

Project finance, like all finance, is not immune to radical changes. Over the past decade, however, the changes in project finance have been evolutionary rather than revolutionary. Nevertheless, current indications are that project finance practitioners will soon need to adapt to some major innovations. Some of these owe less to the oft-mentioned drive by project finance participants to sharpen their competitive edge, and more to the external forces at play in the broader corporate and capital markets.