project finance books

project finance books

Exploring the Fundamentals of Project Finance: A Comprehensive Guide

1. Introduction to Project Finance

As a result, operating rent and casual loss or investment in other types of self-sustaining projects have arisen as alternatives to the traditional view of running deficits. In prominent corporations, the new technique has been created through a unique and fresh financing mechanism or tool known as project financing. Still, private infrastructure projects use project financing principally.

Traditionally, both public and private infrastructure projects have been considered money-consuming assets rather than capital-generating assets. Thus, operating units are organized not to make a profit, but only to ensure the provision of important infrastructure. Rapid technological change in some infrastructures has made it desirable to shorten the investment life and to fund short-duration capital needs through other means.

Project finance is the process of creating and implementing a long-term funding package for infrastructure projects. While it is often mentioned in association with privately funded projects, it can also form a crucial part of larger publicly funded projects. Project finance is beneficial as it helps to reduce the risk to lenders (often banks) by sharing the risk between influential stakeholders (lenders) and executing shareholders, where it is best performed, and usually results in a much cheaper and more efficient administration and project operation with the capacity to bring in the private sector expertise in operating the project. The fact that a greater risk operation allows a reduction in funding costs is a primary benefit.

2. Key Concepts and Principles in Project Finance

Asset-backed and project finance techniques can be applied to the financing (or refinancing) of a wide variety of projects. These include: new build and expansion of risky, large-scale greenfield projects, particularly in the private sector; privatization of public sector projects; development, construction and long-term corporate financing of public concessions; non-recourse or limited recourse to finance or refinance a project at the end of the construction period while there is a mismatch between the timing and the amount of the cash flows generated by the project.

The use of project finance techniques enables project risks to be carefully identified and allocated to the relevant project participants. This promotes commercial discipline, particularly in highly structured projects. Experience has shown that the lenders and commercial participants who contribute equity in some cases are very discerning in their risk analysis and due diligence, so controversial issues or stumbling blocks have often been identified and resolved ahead of the project financial close.

3. Structuring a Project Finance Deal

Now, the more that we talk about structure, you may feel like we are going through the algebra class at school. But structure is important. It ensures everyone knows and acts the way they should in any situation. What exactly is the structure of a project finance deal? The task of structuring a project finance deal consists of designing and creating the various arrangements and details. Included within the task is obtaining some sort of arrangement where there is lesser risk for the project lenders. Doing so would mean that the sponsors of the project take on some of the more risky items. Included in the structuring is the structuring of the funds — where to get the funds and how to get them at the best cost.

Welcome to the third article in our series of articles on project finance. We hope the series will give you a good insight into project finance. We look forward to your contribution and commentary on all our articles. We start at the beginning of where everything is built. In the first article, we explored the basics of project finance. In the second article, we investigated the role of the financial adviser. In this third article, we will examine how project finance can be structured, covering a variety of aspects of the loan details. Based on this structuring, we will create a typical project finance model. As a reminder, in project finance, we are financing the building of usually a unique capital-intensive asset. For successful project finance and for the utmost stability of the asset, it is highly important that the proceeding project structuring is beyond the excellent mark. It is at this point that all the parties need to work together to see if it is possible to create a solid structure of the project.

4. Risk Assessment and Mitigation Strategies

In essence, risk management is a three-step process in which investors or owners 1) identify and prioritize the various risks that the project might face, 2) develop a risk management plan whose purpose is to address these risks in the most cost-effective and efficient manner, and 3) evaluate the risk management plan along with the total level of risk taking, and determine whether the residual project risk is acceptable. At the foundation of good project management and risk mitigation strategies is the development of good estimates for project contingencies that represent the risks outside of the control of any of the project managers.

In order to establish an appropriate scaling factor, risk assessments are used to differentiate among discrete projects (in part to distinguish among the various financial scales and operating risk profiles). There are multiple techniques to assess and quantify project risks, which range from simple qualitative lists to complex quantitative analyses. At a minimum, we recommend a project risk assessment workshop with both sponsor and financier representatives. Each technique should be chosen only in light of the questions to be posed and the information required, recognizing the implications of sophistication on the quantified “answers” obtained through these methods.

5. Case Studies and Real-World Applications

Different authors approach the issue of providing case study support in project finance in different ways. For example, some texts cover particular project financings in detail but leave most detailed explanations to appendices. Other texts dedicate a large portion of a chapter specifically outlining different tax and exploitation approaches to project finance in particular industries without necessarily giving examples. Others look at a case in some detail but do not make comparisons across cases that might be useful in helping us to understand projects in the context of corporate finance generally. While these are useful in helping practitioners or those new to the area to understand the type of financial arrangements specific to a particular industry, none of these types of case study-specific project finance applications provides a comprehensive overview of the typical financial issues of the project finance issue. Of course, much of the difficulty of providing examples in project financing in this comprehensive sense is due to the diverse legal and informational settings in which the contracts are executed. This chapter discusses the many features relevant to the case studies in question and shows whether the project finance literature is successful in providing theoretical rationales for the observations discussed.

Project finance has seen a rapid amount of growth and interest in recent years. This growth is evident in the many papers and texts that either apply project finance techniques to new areas or seek to explain best practices in project financing. Project finance is somewhat unique among corporate finance topics in that it requires more comprehensive descriptions of issues and more anecdotes or case study support than do many other areas of finance. This is largely because project finance is both complex and nebulous and very often without any convenient benchmark. It is also true that project financing techniques, risk structuring, tax engineering, and so on, are largely specific to the industry they serve. Thus, the new legal environment, incomplete contracting, or long-standing, if not longstanding, tailored project financing techniques are difficult to understand without numerous examples. This chapter explores some of the real-world applications of project finance issues relevant to the corporate finance context.