Evolution of Project Finance and Market Segments

Beginning of 1980s the project finance followed two development trends, first involved exporting the financing techniques to developing countries. since room in the market in developed countries was gradually diminishing, the entrepreneurs offered project finance to governments in developing countries as a quick way to reach a decent level of basic infrastructure with a greater contribution of private capital. the support offered by export credit agencies in the home countries of contractors and multi nationals played a key role in the process of developing the project finance technique.

The second trend in the project finance market emerged in those industrialized countries that initially tested the technique in more traditional sectors in fact these nations began to use project finance as an off-balance sheet technique for realizing project with less market risk coverages for example in sectors where there is no single large buyer, such as toll roads, leisure facilities and city parking lots. And project in which public administration participates in promoting works for the public goods.

The figure above summarizes these points Cell II refers to the best example project finance initiatives. In fact this is where the PFI initiated. The two arrows indicate the market trends under way. note that Cell IV shows a risk combination that is not suited to project financing. In fact high uncertainty, an extremely rigid contract structure, and high financial leverage make it difficult for management to respond quickly or to adapt to change. In these cases a corporate finance loan is a more appropriate solution.

 

Source:Gatti, Stefano – Project Finance in Theory and Practice. Academic Press. 2008. chapter 2.