What is project finance?
Project finance involves evaluating the financial feasibility of a project over its entire duration. Usually, a cost-benefit analysis is applied to compare the economic costs and benefits of the project. This analysis is especially relevant for long-term growth CAPEX projects. The first step of the analysis is to establish the financial structure, a combination of debt and equity, that will be used to fund the project. Then, estimate and value the economic benefits of the project and determine if they exceed the costs.
Project Finance Explained
A build, operate, and transfer (BOT) project has a specific project finance structure that involves several key components.
One of these components is a special purpose vehicle (SPV), which is a company created solely for the purpose of executing the project. The SPV contracts out most of the construction and operation activities to other parties. Since new-build projects do not generate any income during the construction phase, the SPV can only repay its debt during the operation phase.
This implies that the construction phase entails significant risks for the parties involved. The only source of income during this phase is usually a contract to sell the output or service of the project, such as an offtake agreement or power purchase agreement. The project sponsors and the government do not have any obligation or liability beyond their equity stake in the SPV. The project is not recorded on the balance sheets of either the sponsors or the government.
Sponsors Of Project Finance
Investors Or Financial Sponsors