Project finance involves paying for infrastructure improvements or other industrial scale or public use projects. The financial arrangements for these projects usually involve multiple organizations, stakeholders and investors.
The goal of project finance is usually to use the income generated by the improvement to pay for the initial cost of the project over time. Since there are often multiple parties involved, achieving this ideal outcome requires a lot of organization, negotiation and problem solving. This is why experts called project finance advisors are hired. These experts can help create a plan that will benefit everyone involved in large scale industrial developments. A project finance advisor works equally well for infrastructure projects (Eg bridges, wind farms, power stations, etc.).
How does project finance usually work?
Both public and private projects have a similar structure on a very basic level. The project is funded by investors or stakeholders, who are often referred to as “sponsors.” The sponsors get the funding for the project from banks or other lenders. These banks are sometimes referred to as a “syndicate.”
For most large projects that require a project finance advisor, a special organization is established. The project will be funded through this organization, which is often referred to as a “special purpose vehicle (SPV) project company.” This company does not have a long history. In fact, it is created specifically for the project and nothing else.
One of the reasons for this kind of arrangement is that it makes it easier for people or organizations to provide financing for the project. Since the debts created by the project are associated with the specially formed company and not with the “sponsors,” it does not affect their credit-worthiness or ability to invest in other projects. This helps limit the potential drawbacks for stakeholders and makes it easier for them to support the project.
Also, if the project fails, the sponsors are more protected from financial problems related to the failure. A project finance advisor can help with setting up the SPV company in a way that is beneficial to the financial supporters of the project.
Projects usually begin with a pre-work stage when a sponsor or sponsors make a financial plan for the project. This is very important because it will help show that the project is doable and has a good chance of being successful. This means that project finance advisors could potentially be useful very early on in the process.
The initial plan, usually in the form of a spreadsheet, is an integral part of the pitch that sponsors will make to banks and other “syndicate” members when they try to get funding and loans for their project.
Other aspects of project finance
Project finance goes well beyond setting up SPVs. A large part of a project finance advisor’s job involves identifying potential risks and making a plan for dealing with them. This is extremely important during the project’s planning phase. It can determine the overall strategy for accomplishing the project. Also, if the risk is too great, the sponsors may decide to abandon the project or alter their strategy. A project finance advisor can help them understand and minimize these risks.
In certain situations, various incentives and special forms of funding are offered to investors who invest in infrastructure or public works projects. This adds another variable into the equation. Good project finance advisors will be able to find and use advantages like this to lower risk and make a project more feasible.
As you can see, there are many specialized facets to project finance, and an expert adviser can help you take care of the complexities and make a major project as feasible and financially sound as possible.