Project finance means financing of an industrial (or infrastructure) project with myriad capital needs, often based on non-recourse or limited recourse structures, where project debt, equity, and potentially leases used to finance the project are paid back from the cash flow generated by the project, with the project’s assets, rights and interests held as collateral. An incredibly flexible and comprehensive financing solution demanding a long-term and realistic lending approach.
The finance technique was perfected in the 70s for major private-sector projects, mainly in the area of oil and gas exploration and extraction, but has been extended much widely since then. Project finance techniques are now applied across the world to numerous privately promoted infrastructure projects including power stations, tower-wind generators, gas pipelines, waste-disposal plants, waste-to-energy plants, telecommunications facilities, bridges, tunnels, toll roads, railway networks, city-centre tram links, all types of housing projects, and now the building of hospitals, clinic facilities, government accommodation and tourist facilities. Financial markets have become increasingly sophisticated in engineering financial packages to finance almost any type of reasonably predictable revenue stream.
The pace of project financing has been rising at a significant rate, according to Reuters’ Loan Price Corporation, which provides loan market news, data and analytics. In 2004, there was some $1.2 billion of project financing activity in the United States alone. A year later, that number more than tripled to $3.7 billion. While most of these financing related to the energy sector, industrial project finance remains the domain of a selected few institutions, whose specialists closely examine key areas such as its management, capital structure, the company’s position within its industry, and the broader market in which it operates.
(fonseca-robbins, john)
