- Since 1980s, private sector financing of infrastructure investments revive
- projects -toll road, bridge, dams and hydroelectricity, etc
- In recent years, private funding takes the form of project finance
Project finance (continued) - Principal features
- Project -separate company
- Major portion of project equity provided by project manager or sponsor
- Project company - comprehensive contractual arrangements
- High ratio of debt to equity
- Parties to Project Financing
Two Categories: - Stock-type Projects
- exploit the existing stock of goods
- proceeds to service debt and provide a return to investors
- examples --mines, oil and gas field
- Flow-type Project
When Project finance Is Right? - Large, complex, and standalone project
- parent is sensitive to debt capacity
- parent concerns total risk of the project
- Parent wants to maintain operating risk over the project
Risks in Project Finance - Resource risk -- equity-holder
- Input Risk-- suppliers
- Technical Risk--project manager
- Timing risk--project manager and owner
- Completion risk--lenders, project manager
- Market Risk--customers
- Operating Risk--lenders, sponsors
- Political Risk--government, all parties
Functions of Project Finance
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