International Corporate Finance: Value Creation with Currency Derivatives in Global Capital Markets, + Website

CHAPTER 22

Project Finance

The objects of a financier are, then, to secure an ample revenue; to impose it with judgment and equality; to employ it economically; and when necessity obliges him to make use of credit, to secure its foundations in that instance, and forever, by the clearness and candor of his proceedings, the exactness of his calculations, and the solidity of his funds.

Edmund Burke

Investments in large-scale infrastructure projects such as oil, gas, utilities, transportation, and mining constitute a growing portion of foreign direct investment. Indeed, one of the most daunting tasks of the twenty-first century is how to finance the surge of such infrastructural investments necessary to sustain population growth while improving living standards. This chapter explores the unique architecture of project finance that is playing a pivotal role in enabling infrastructure projects.

Project financing of single-purpose, large-scale infrastructural business undertakings has a long history that predates the limited liability corporation. An often-cited venture involves the English Crown, which reportedly negotiated a loan in 1299 from the House of Frescobaldi—a leading Italian bank of that era—to finance the development of the Devon silver mines. The lender had full control of the mines for the first year, during which time it would pay itself back by appropriating as much silver ore as it could mine. There was no provision for interest payment, forbidden then by canon law, ...