lien<\/a> on all of these assets and are able to assume control of a project if the project company has difficulties complying with the loan terms.<\/span><\/p>\nThe financing of long-term infrastructure, industrial projects and public services based upon a non-recourse or limited recourse financial structure where project debt and equity used to finance the project are paid back from the cashflow generated by the project.<\/span><\/p>\n
\nGenerally, a special purpose entity is created for each project, thereby shielding other assets owned by a project sponsor from the detrimental effects of a project failure. As a special purpose entity, the project company has no assets other than the project. Capital contribution commitments by the owners of the project company are sometimes necessary to ensure that the project is financially sound or to assure the lenders of the sponsors’ commitment. Project finance is often more complicated than alternative financing methods. Traditionally, project financing has been most commonly used in the extractive (mining), transportation, telecommunications industries as well as sports and entertainment venues.<\/span><\/p>\nRisk identification and allocation is a key component of project finance. A project may be subject to a number of technical, environmental, economic and political risks, particularly in developing countries and emerging markets. Financial institutions and project sponsors may conclude that the risks inherent in project development and operation are unacceptable (unfinanceable). “Several long-term contracts such as construction, supply, off-take and concession agreements, along with a variety of joint-ownership structures are used to align incentives and deter opportunistic behaviour by any party involved in the project.\u00a0The patterns of implementation are sometimes referred to as “project delivery methods.” The financing of these projects must be distributed among multiple parties, so as to distribute the risk associated with the project while simultaneously ensuring profits for each party involved.<\/span><\/p>\nA riskier or more expensive project may require limited recourse financing<\/b> secured by a surety from sponsors. A complex project finance structure may incorporate corporate finance, securitization, options (derivatives), insurance provisions or other types of collateral enhancement to mitigate unallocated risk.<\/span><\/p>\nProject finance shares many characteristics with maritime finance and aircraft finance; however, the later two are more specialized fields within the area of asset finance.<\/span><\/p>\n\u00a0<\/span><\/div>\nHistory<\/span><\/h2>\nLimited recourse lending was used to finance maritime voyages in ancient Greece and Rome. Its use in infrastructure projects dates to the development of the Panama Canal, and was widespread in the US oil and gas industry during the early 20th century. However, project finance for high-risk infrastructure schemes originated with the development of the North Sea oil fields in the 1970s and 1980s. Such projects were previously accomplished through utility or government bond issuances, or other traditional corporate finance structures.<\/span><\/p>\nProject financing in the developing world peaked around the time of the Asian financial crisis, but the subsequent downturn in industrializing countries was offset by growth in the OECD countries, causing worldwide project financing to peak around 2000. The need for project financing remains high throughout the world as more countries require increasing supplies of public utilities and infrastructure. In recent years, project finance schemes have become increasingly common in the Middle East, some incorporating Islamic finance.<\/span><\/p>\nThe new project finance structures emerged primarily in response to the opportunity presented by long term power purchase contracts available from utilities and government entities. These long term revenue streams were required by rules implementing PURPA, the Policy resulted in further deregulation of electric generation and, significantly, international privatization following amendments to the Public Utilities Holding Company Act in 1994. The structure has evolved and forms the basis for energy and other projects throughout the world. Project financing, Project finance, worldwide project funders,
\nbusiness loan, business loan lender, business loan lenders, business loan companies
\n<\/span><\/p>\nParties to a project financing<\/span><\/h2>\nThere are several parties in a project financing depending on the type and the scale of a project. The most usual parties to a project financing are;<\/span><\/p>\n\n- Sponsor<\/span><\/li>\n
- Lenders<\/span><\/li>\n
- Financial Advisors<\/span><\/li>\n
- Technical Advisors<\/span><\/li>\n
- Legal Advisors<\/span><\/li>\n
- Debt Financiers<\/span><\/li>\n
- Equity Investors<\/span><\/li>\n
- Regulatory Agencies<\/span><\/li>\n
- Multilateral Agencies<\/span><\/li>\n<\/ol>\n
Project development<\/span><\/h2>\n\u00a0<\/span><\/div>\nProject development is the process of preparing a new project for commercial operations. The process can be divided into three distinct phases:<\/span><\/p>\n\n- Pre-bid stage<\/span><\/li>\n
- Contract negotiation stage<\/span><\/li>\n
- Money-raising stage<\/span><\/li>\n<\/ul>\n
Financial model<\/span><\/h2>\nA financial model is constructed by the sponsor as a tool to conduct negotiations with the sponsor and prepare a project appraisal report. It is usually a computer spreadsheet designed to process a comprehensive list of input assumptions and to\u00a0provide outputs that reflect the anticipated real life interaction between data and calculated values for a particular project.<\/span><\/p>\nProperly designed, the financial model is capable of sensitivity analysis, i.e. calculating new outputs based on a range of data variations.<\/span><\/p>\nContractual framework<\/span><\/h2>\nThe typical project finance documentation can be reconducted to four main types:<\/span><\/p>\n\n- Shareholder\/sponsor documents<\/span><\/li>\n
- Project documents<\/span><\/li>\n
- Finance documents<\/span><\/li>\n
- Other project documents<\/span><\/li>\n<\/ul>\n
Engineering, procurement and construction contract<\/span><\/h3>\nThe most common project finance construction contract is the engineering, procurement and construction (EPC) contract. An EPC contract generally provides for the obligation of the contractor to build and deliver the project facilities on a turnkey basis, i.e., at a certain pre-determined fixed price, by a certain date, in accordance with certain specifications, and with certain performance warranties. The EPC contract is quite complicated in terms of legal issue, therefore the project company and the EPC contractor need sufficient experience and knowledge of the nature of project to avoid their faults and minimize the risks during contract execution.<\/span><\/p>\nAn EPC contract differs from a turnkey contract in that, under a turnkey contract, all aspects of construction are included from design to engineering, procurement and construction whereas in the EPC contract the design aspect is not included. Alternative forms of construction contract are a project management approach and alliance contracting. Basic contents of an EPC contract are:<\/span><\/p>\n\n- Description of the project<\/span><\/li>\n
- Price<\/span><\/li>\n
- Payment<\/span><\/li>\n
- Completion date<\/span><\/li>\n
- Completion guarantee and Liquidated Damages (LDs):<\/span><\/li>\n
- Performance guarantee and LDs<\/span><\/li>\n
- Cap under LDs<\/span><\/li>\n<\/ul>\n
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