The Importance of Project Finance
Project Finance in Developing Countries
THE IMPORTANCE OF PROJECT FINANCE
Chapter 1
In the past twenty years there has been a new wave of global interest in project finance as a tool for economic investment. Project finance helps finance new investment by structuring the financing around the projects own operating cash flow and assets, without additional sponsor guarantees. Thus the technique is able to alleviate investment risk and raise finance at a relatively low cost, to the benefit of sponsor and investor alike. Though project finance has been in use for hundreds of years, primarily in mining and natural resource projects, its other possible applicationsespecially for financing large greenfield projects (new projects without any prior track record or operating history) have only recently received serious attention. This is particularly so in developing markets, but here its application is also broadening, as illustrated by the following examples of IFC-supported projects: In Argentina, in 1993, project finance structuring helped raise US$329 million to finance investment in the rehabilitation and expansion of Buenos Aires water and sewerage services based on a new 30-year concession awarded to Aguas Argentinas. The investment, financed with IFC support, has helped improve water quality and service to a city of more than 6 million people. At that time, private sector participation in a water concession in a developing country was an untested idea, and there was virtually no precedent for a private company operating in such an environment raising substantial resources in international capital markets. In Hungary, in 1994, project finance structuring helped finance a 15-year concession to develop, install, and operate a nationwide digital cellular network. The $185 million joint venture project was an important part of the governments privatization and liberalization program. Because of difficulty attracting commercial financing at that time, the
THE IMPORTANCE OF PROJECT FINANCE
Chapter 1
In the past twenty years there has been a new wave of global interest in project finance as a tool for economic investment. Project finance helps finance new investment by structuring the financing around the projects own operating cash flow and assets, without additional sponsor guarantees. Thus the technique is able to alleviate investment risk and raise finance at a relatively low cost, to the benefit of sponsor and investor alike. Though project finance has been in use for hundreds of years, primarily in mining and natural resource projects, its other possible applicationsespecially for financing large greenfield projects (new projects without any prior track record or operating history) have only recently received serious attention. This is particularly so in developing markets, but here its application is also broadening, as illustrated by the following examples of IFC-supported projects: In Argentina, in 1993, project finance structuring helped raise US$329 million to finance investment in the rehabilitation and expansion of Buenos Aires water and sewerage services based on a new 30-year concession awarded to Aguas Argentinas. The investment, financed with IFC support, has helped improve water quality and service to a city of more than 6 million people. At that time, private sector participation in a water concession in a developing country was an untested idea, and there was virtually no precedent for a private company operating in such an environment raising substantial resources in international capital markets. In Hungary, in 1994, project finance structuring helped finance a 15-year concession to develop, install, and operate a nationwide digital cellular network. The $185 million joint venture project was an important part of the governments privatization and liberalization program. Because of difficulty attracting commercial financing at that time, the