1.

Introduction

Project finance, also known as limited-recourse or non-recourse finance, consists

in financing very specific assets or projects, with the repayment coming only from
the cash-flow generated by that project or asset, without any claims (with some
very specific exceptions) on the companies that develop these projects.

Project finance, comes from a combination of both equity and debt. The split
between equity (investor funding) and debt (lender funding) depends on the
individual project and on the risk profile of each project. The higher the risk, the
greater the share of equity will be required by the lending banks. The risk of an
individual project is also decisive for the level of debt which a project can take on.

The principle is simple. A bank finances a specific asset, and gets repaid only
from the revenues generated by that asset, without recourse to the investors that
own the project. It works well for project with well identified assets with high
initial investment costs, and strong cash flows after that, like big infrastructure
items (toll bridges, pipelines) and energy assets (oil fields, power plants).

 Project Finance Process

 In development process, develop a set of contracts with construction
companies, suppliers and off-takers.
 Once cash flows and contracts are defined, secure bank financing.
 Assure that the return to equity holders is in line with equity returns
generally known to be required for investments.

 In project finance
 The projected cash flows are reviewed by financial experts outside of the
company with no vested interest in the project.
 The amount of gearing drives the return on the project and the gearing is in
turn driven by lenders assessment of the cash flow.
 The rate of return in not subjectively adjusted for risk, it is the lenders who
have their own money at risk – who drive the investment.
 Specific risks can be evaluated and measured.

1
 Risks and Returns in Project Financing

2
2. Development of Project Financing

Project finance has been in use for hundreds of years, primarily in mining and
natural resource projects, its other possible applications especially for financing
large green field projects which was a new projects without any prior track record
or operating history that have only recently received serious attention. The change
in attitude toward project finance can be refer to a number of factors, a prime one
being that most countries today depend on market mechanisms to guide their
economic activity and on the private sector to supply investment. More focus on
the private sector has necessitated major regulatory reforms, which in turn have
created new markets in areas previously the preserve of government activity.
Greater focus on the private sector has necessitated major regulatory reforms,
which have created new markets in areas previously the preserve of government
activity. For example, when the USA passed the Public Utility Regulatory Act in
1978 and established a private market for electric power, it provided a strong
model for the growth of project financing in many other industrial countries.

Similarly, recent large-scale privatizations in developing countries aimed at

strengthening economic growth and stimulating private sector investment have
given further motives to project finance structuring. They were also ready to
provide incentives to encourage private investors into new sectors. That surge was
particularly strong in 1996 and 1997, stimulated by large flows of international
capital. Some market observers are questioning the prudence of this expanded use
of project finance, especially in the wake of the East Asia financial crisis that
happened on 1997 and the dramatic deterioration that ensued in a number of the
major developing markets.

In short order, many large projects undertaken in the previous few years were no
longer economically or financially feasible. Contractual arrangements proved to
be shaky and many projects, with hindsight, had failed adequately to address
potential risks. Private lenders and investors were much less willing to support
projects facing a deteriorating policy or market environment than would have
been public sector promoters. In a few countries these problems were exacerbated
by public criticism of government support given to projects, and by allegations of
corruption in the awarding of initial contracts.

3
Year International Finance Corporation supported projects
1993 In Argentina, 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 Agues
Argentines. 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.
1994 In Hungary, 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 government's
privatization and liberalization program. Because of difficulty attracting
commercial financing at that time, the project relied heavily on $109 million in
debt and equity financing from IFC and the U.S. Overseas Private Investment
Corporation.
1997 In China, Plantation Timber Products (Hubei) Ltd. launched a $57 million
greenfield project to install modern medium-density fibreboard plants in
interior China, using timber plantations developed over the past decade, to
support China's fast-growing construction industry. As part of the limited-
recourse financing for the project, IFC helped arrange $26 million in
syndicated loans, at a time when foreign commercial banks remained cautious
about project financing in China's interior provinces.
1998 In Mozambique, project finance structuring helped establish a $1.3 billion
green field aluminium smelter. Mozal, the largest private sector project in the
country to date, is expected to generate significant benefits in employment,
export earnings, and infrastructure development. IFC fostered the project by
serving as legal coordinator and preparing an independent detailed analysis of
economic results and environmental and developmental impacts. IFC also
supported the project with $120 million in senior and subordinated loans for its
own account.

4
 In IFC's experience, however, project finance remains a valuable tool.
Although many projects are under serious strain in the aftermath of the East Asia
crisis, project finance offers a means for investors, creditors, and other unrelated
parties to come together to share the costs, risks, and benefits of new investment in an
economically efficient and fair manner. As the emphasis on corporate governance
increases, the contractually based approach of project finance can also help ensure
greater transparency.

5
 3. Project Financing Research Progress to Date

This work aims to provide an overview of the current state of research in

construction projects finance. Research progress in construction projects finance
draws from interdisciplinary perspectives, leading to relevant research insights
being spread out over a high number of publications. Thus, this section identifies
the main areas of research interest which constitute the majority of published
works between 2012 and 2017.

No Title Type of Description of Resource Author/Year

Resource
This work aims to provide an overview
of the current state of research in
construction project finance. Research
progress in project finance draws from
interdisciplinary perspectives, leading to
Bodie, Z.
1 Investments Book relevant research insights being spread
(2013)
out over a high number of publications.
Thus, this paper identifies four main
areas of research interest which
constitute the majority of published
works between 2009 and 2013.
The book responded accordingly and
the book has undergone a thorough re-
write, eliminating some of the older
material and adding new processes now
Modern considered essential to achieving lean
Harris, F., &
Construction construction. Particular emphasis is
2 Book McCaffer, R.
Management given, for example, to supply chains and
(2013)
networks, value and risk management,
BIM, ICT, project arrangements,
corporate social responsibility, training,
health and welfare and environmental
sustainability.

6
No Title Type of Description of Resource Author/Year
Resource
Give future and current managers a
Financial Manage-
thorough understanding of the financial
ment: Theory & Brigham, E.
3 Book theory that is essential for developing
Practice F. (2014)
and implementing effective financial
strategies in business today.
The book discussed that Regression are
The use of genetic adopted to construct an Enterprise
programming for Operational Performance model and an
the construction of Enterprise Finance Characteristic
Pan, W. T.
4 financial manage- Book model, respectively. Based on the
(2013)
ment model in an results found, it can be concluded that
enterprise genetic programming yielded the best
classification and forecast performance,
compared to the other three techniques.
This authoritative text provides a
detailed insight into how construction
companies manage their finances at
both corporate and project level. It will
Financial
guide students and practitioners through
Management in Ross, A., &
the complexities of the financial
5 Construction Book Williams, P.
reporting of construction projects within
Contracting (2012)
the constraints of accepted accounting
practice. The book is written for non-
accountants and from a contractor’s
perspective and is equally relevant to
subcontractors and main contractors.

7
No Title Type of Description of Resource Author/Year
Resource
The construction industry faces
continual challenges and demands, due
to market conditions and coercion by
governments, for improvements in
Construction McGeorge,
safety, quality and cost control, and in
6 Management: New Book D., & Zou, P.
the avoidance of contractual disputes.
Directions X. (2013)
To meet these challenges construction
enterprises need to constantly seek new
directions and business models in
construction management.
The book provides a rich analysis of
state policies and their impact in
Ohio Canal Era Scheiber, H.
7 Book directing economic change, is a classic
N. (2014)
on the subject of the pre & ndash;
transportation revolution.
This book presents comprehensive
coverage of project finance in Europe
Project Finance in
and North America. The Second Edition
Theory & Practice:
features two new case studies, all new
Designing,
pedagogical supplements including end- Gatti, S.
8 Structuring, and Book
of-chapter questions and answers, and (2013)
Financing Private
insights into the recent market
and Public Projects
downturn. The author provides a
complete description of the ways a
project finance deal can be organized

8
No Title Type of Description of Resource Author/Year
Resource
Value for Money The journal discussed the finding that
and Risk in Public– transferring of construction risks from Siemiatycki,
Private government to the private-sector M., &
9 Journal
Partnerships partners drives VfM results, and may Farooqi, N.
overvalue the extent to which planning (2012)
related risks can be transferred.
The journal aims to identify the critical
Identifying the
factors affecting schedule performance
critical factors
of public housing projects in Singapore, Hwang, B.
affecting schedule
compare the factors affecting schedule G., Zhao, X.,
10 performance of Journal
performance of public housing projects & Ng, S. Y.
public housing
and other building projects in (2013)
projects
Singapore, & provide recommendations
to respond to these factors.
The journal aims to explore the key
Factors influencing successful ingredients to be assessed at
the success of PPP the initial stage of PPP projects as
Ng, S. T.,
at feasibility stage perceived public sector, private
Wong, Y. M.,
11 – A tripartite Journal consortium and general community so
& Wong, J.
comparison study as to attain a “triple win” scenario, via a
M. (2012)
in Hong Kong questionnaire survey and a series of
expert interviews conducted in Hong
Kong.

9
No Title Type of Description of Resource Author/Year
Resource
The authors have presented the
dynamics of the amount and rate of
Research of
the financing of construction projects.
Instruments for
Depending on the segment of
Financing of
construction, the authors have Ekaterina
Innovation and
12 Journal suggested a classification map of K.Chirkunova,
Investment
project financing instruments, (2016)
Construction
depending on their timing,
Projects
membership and possibility of
implementation in the form of a
public and private partnership.
This article presents the results of the
research project of the mechanism of
The Mechanism of
the project financing for investment
the Project
projects in underground construction Roman
Financing in the
Taking into account the advantages Gorshkov, Viktor
13 Construction of Journal
and disadvantages of the project, Epifanov, (2016)
Underground
there were studied the basic stages
Structures
and components of the process of
project financing, its main
participants and sponsors.
How to utilize and integrate present
Construction resources is studied in this paper.
Financing Problem Foreign regulation is referenced to
of Local explore new financing channel in YanBin, ,LiQuan
14 Journal
Government in China. Some countermeasures and (2013)
China suggestions are put forward to solve
present financing problems of local
government.

10
No Title Type of Description of Resource Author/Year
Resource
The journal is based on the observation
Finance and that there is a contradiction between the
Thomas
sustainability: current demands for sustainability and
Lagoarde-
15 From ideology to Journal the way the financial system works.
Segot
utopia Beginning with a discussion of the
(2017)
epistemological assumptions underlying
financial theory
The journal addresses the cost of
financing highway projects, particularly
The price of project the spreads of project finance loans. The
Carlos
finance loans for authors attempt to identify which
16 Journal OliveiraCruz,
highways variables related to the project, loan,
(2017)
and macroeconomic context, have a
greater impact on spreads, and how they
impact on the final spread.
The journal discussed that China must
take the establishment and improvement
of low-carbon finance system to the
Construction of
nation's strategic position, construct
Carbon Finance
carbon finance system from seven
System and
aspects as the environment system,
Promotion of LiKaifeng,
17 Journal control system, regulatory system,
Environmental (2012)
organization system, market system,
Finance Innovation
business system and instruments
in China
system, in order to have more discuss
and decision power in priority of pricing
and participating right of quote
currency.

11
No Title Type of Description of Resource Author/Year
Resource
The journal Detailed analysis of
investments by financial actors into
Financing renewable energy technologies of
renewable energy: varying risks, Financial actors
MarianaMazzucato,
18 Who is financing Journal create directions in innovation by
(2017)
what and why it their investment choices, High risk
matters technologies are dependent for
investments on a small subset of
actors.
The journal aims to analyze the
effect of partnership financing on
Partnership bank efficiency. Partnership
financing and financing, which has similar NorfaizahOthman,
19 Journal
bank efficiency concept with venture capital, refers (2017)
to the equitable sharing of risks and
profits between the client and
bank.
Disclosure of The journal uses a sample of
government China’s provincial government data
financial for the 2006–2012 period to
information and examine the effect of the disclosure
the cost of local of financial information by local
government’s debt governments on their debt
20 financing Journal financing costs. ZhibinChen, (2016)
Empirical
evidence from
provincial
investment bonds
for urban
construction

12
No Title Type of Description of Resource Author/Year
Resource
The main objective of the paper is to
Export Financing contribute to identification of
in International exporter's key success factors, when
Construction: Case delivering project on export financing JanPícha,
21 Journal
Study of Siemens principles. In order to clearly introduce (2014)
Power Division in key aspects of this advanced export
Oman financing concept, case study as a
research methodology was selected.
The journal analyzes Ohio’s capital
subsidy program which distributed
Impacts of new
over $10B for school construction in
school facility
231 school districts between 1997 and
construction: An
2011. Using an instrumental variables
analysis of a state- MichaelConlin,
22 Journal estimation, we find the percentage of
financed capital (2017)
students meeting test score proficiency
subsidy program in
thresholds decrease in math and
Ohio
reading in the first couple years after
the capital expenditures and then
increase in subsequent years.
In this paper the BT construction
engineering project financing model is
The risk analyzed to identify the 5 major factors
assessment model that affect the risk of financing, and to
of BT construction formulate the questionnaire report. It LuoFu-zhou,
23 Journal
engineering project applies the standardization processing (2012)
financing and model application to data after
investigating, and get the risk synthesis
value, then judge the risk level of the
project A.

13
No Title Type of Description of Resource Author/Year
Resource
The journal provides model with
sector-specific debt-collateral
constraints to analyze how
Macroeconomic
asymmetric financing conditions
adjustment under
across sectors affect the aggregate
loose financing ÓscarArce,
24 Journal investment, credit and output
conditions in the (2013)
composition. In our model,
construction sector
investments in the construction
sector allow for higher leverage
than investments in the non-
durable consumption goods sector.
The journal examines the
relationship among environmental
Understanding the
management practices and the
relationships
financial performance of
between
multinational construction firms.
environmental
The sample of construction firms is
management
drawn from the Engineering News- Po-HanChen,
25 practices and Journal
Record (ENR) Top International (2016)
financial
Contractor list. Content analysis
performances of
was used to extract and measure
multinational
the degree of proactivity, and
construction firms
stepwise regression was adopted to
screen for practices associated with
financial performance.
The journal presents the results of
Financial Risk
studies focused on separating and
Estimation in AgnieszkaDziadosz,
26 Journal determining the frequency of
Construction (2015)
financial risk factors in
Contracts
construction projects.

14
No Title Type of Description of Resource Author/Year
Resource
Educational The paper presents the experience
Simulation in gained in the master program of
Construction PM in Construction held in the AugustinPurnuş,
27 Journal
Project Financial Technical University of Civil (2014)
Risks Engineering Bucharest.
Management
Usage of External This article presents the influence
Influence Groups of external interest groups on the
to Increase management efficiency of regional
Financial construction projects in the sphere KristinaKarmokova,
28 Journal
Efficiency in the of underground construction that (2016)
Construction of rearrange resources in order to gain
Underground their goals.
Objects
The paper explains the reasons that
Motivation toward
construction project participants
financial incentive
are motivated to pursue voluntary TimothyRose,
29 goals on Journal
incentive goals are examined (2013)
construction
through four Australian case
projects
studies.
The article presents the research
The Efficiency
results of the efficiency and
and Financial
financial feasibility of the
Feasibility of the
underground infrastructure
Underground
construction assessment methods. VarvaraDikareva,
30 Infrastructure Journal
The efficiency types, performance (2016)
Construction
criteria, basic assessment
Assessment
principles for project efficiency
Methods
throughout the accounting period
are considered.

15
 4. Future of Project Financing

The challenge: to create a resilient, accessible financial system that people trust.
Savings, investments and other financial products are essential for long-term
economic growth and development. Whether running a household or a corporation,
people need access to reliable, affordable financial services and these are what the
global financial system should provide.

The global financial crisis shook both the financial system and the public’s
confidence in it. In its wake, there has been closer scrutiny of the financial system and
debate over the role regulation has to play and how extensive it should be. It is a
debate that will help shape the future of the financial system along with other
significant challenges such as enabling more inclusive growth and the effect
technology is having on the way financial services can be delivered and used.

 Impact of the Financial Crisis

The global financial crisis revealed significant weaknesses in the financial system
and some of the vulnerabilities that can result from having such an interconnected
global market.

Several years after the crisis, the world economy is still struggling with slow
growth, unconventional monetary policy in major economies, and constrained
government budgets. It is vital that we find ways of making the financial system
more resilient and able to withstand shocks in the market.

The crisis also caused a significant drop in levels of public trust and confidence
in financial institutions. To function efficiently, the system needs to re-establish
that trust.

16
  Future Need for Change

As well as restoring public trust and improving resilience, there is an urgent need to
allow more people to access the financial system.

Amid increasing concerns about rising income inequality and its negative
economic and social impact, there is no bigger policy challenge preoccupying
political leaders than expanding social participation in the process and benefits of
economic growth.

Providing access to credit and savings is a major challenge in the battle

against global poverty—yet two billion people do not have access to high-quality,
affordable financial services. Additionally, there are 200 million small and
medium-sized enterprises worldwide that have no access to formal financial
services.

17
 While there is demand for financial services at all levels of income, many at
the lower end of the income bracket are not able to access formal services and
instead have to turn to riskier methods which are also more expensive.

The gap is also being filled with companies who use technology to decrease
cost and measure risk in new and innovative ways. These companies have created
an entire new industry, often referred to as “fintech” (a contraction of “finance”
and “technology”), defined as the use of technology and innovative business
models in financial services

18
  Challenges of New Finance Technology

Through their ability to adapt to the ever-changing financial environment, these new
agile, tech-led companies are disrupting the financial services industry and making
headway in providing alternative financing opportunities for small and medium sized
enterprises.

From 2013 to 2014, equity investment in fintech companies quadrupled from

$4 billion to more than $12 billion, fuelling innovation in the sector.

New players are redefining the way services are delivered and used, putting
pressure on more established firms. Big companies that once relied on regulation and
the size of their investment portfolios as a source of competitive advantage are
realizing that these factors can actually hold them back in the current digital context.

Traditional banks will continue to play a large part in the financial services
industry but fintech companies, with their ability to adapt quickly and use technology
to lower costs and provide novel credit-analysis systems, are bringing rapid change.

19
5. Conclusion and Recommendation

The financial system is the cornerstone of economic activity, which is critical for
long-term economic growth and development. However, the global financial crisis
demonstrated the downside of interconnectedness and revealed a range of
systemic vulnerabilities.

As the global financial system recovers, major collaborative efforts are

required to rebuild public trust, respond to regulatory and technological change
and overcome barriers to financial inclusion. The World Economic Forum’s
System Initiative on Shaping the Future of Financial and Monetary Systems aims
to build a more efficient, resilient and equitable international system by:

enhancing financial stability, innovation and economic growth by analyzing

the implications of industry transformation in an effort to better understand the
competitive, human capital, and regulatory dynamics that will exist in the
financial sector of the future; promoting global financial inclusion through a
portfolio of in-country impact projects, identifying the highest potential
opportunities to increase access to quality, affordable financial services for the un-
served and underserved; and better understanding disruptive innovation in
financial services by exploring how innovations are changing business models and
restructuring ecosystems in specific areas of financial services.

20
6. References

Cotter, D. (2012). Advanced financial reporting: A complete guide to IFRS.

Financial Times/Prentice Hall.

Dobrovolskaya, C. V., & Dobrovolskyy, O. I. (2015). Economic-mathematical

model of new construction investors crediting in the scheme of construction
financing by means of the Collective Investment Institutions.

Fabozzi, F. J., & de Nahlik, C. (2012). Project financing 8th edition. Euromoney.

Finnerty, J. D. (2013). Project financing: Asset-based financial engineering. John

Wiley & Sons.

Horta, I. M., Camanho, A. S., & Da Costa, J. M. (2012). Performance assessment

of construction companies: A study of factors promoting financial soundness and
innovation in the industry. International Journal of Production Economics

Kapelko, M., Lansink, A. O., & Stefanou, S. E. (2014). Assessing dynamic

inefficiency of the Spanish construction sector pre-and post-financial
crisis. European Journal of Operational Research

Mwangi, C. I., & Jerotich, O. J. (2013). The relationship between corporate social
responsibility practices and financial performance of firms in the manufacturing,
construction and allied sector of the Nairobi Securities Exchange. International
Journal of Business, Humanities and Technology

Pan, W. T. (2012). The use of genetic programming for the construction of a

financial management model in an enterprise. Applied Intelligence

Siew, R. Y., Balatbat, M. C., & Carmichael, D. G. (2013). The relationship

between sustainability practices and financial performance of construction
companies. Smart and Sustainable Built Environment

21