Project Finance

Project Finance

Project Finance is a specialised form of capital structuring that enables the various costs, responsibilities, risks and returns of a project to be isolated and assigned to individual stakeholders within a consortium.

Through this approach, a project that may be too capital intensive or complex for an individual firm to undertake can instead be completed by a group of specialists, with each party having a very specific role that relates to their core competency and an economic return profile that reflects their risk participation.

Crucially, this also facilitates various debt funding options that would not be available otherwise and in certain cases allows for funding to be secured on a non-recourse basis.

While highly flexible, a simple Project Finance transaction will generally feature the following core elements:

Project Company – a Special Purpose Vehicle established to house the various contracts and assets of the project. 

• Sponsor: brings the consortium of participants together and negotiates the split of responsibilities and economics.
• Owner: the equity beneficiary of the project. There may be multiple shareholders in the Owner, including the Sponsor. 
• Builder:  responsible for the construction phase of the project, delivering a completed asset to the Owner. This relationship is governed by an EPC contract (Engineering, Procurement & Construction)
• Manager: responsible for day to day management of the completed asset once handed over from the Builder. This relationship is governed by an O&M contract (Operations & Maintenance). 
• Supplier:delivers inputs to the project once in operation, with the volumes, pricing, etc agreed in a long-term contract.
• Offtaker: purchases the output of the project once in operation. Similar to the Supplier role, this relationship will be dictated by a long term contract and will typically include an obligation to purchase the entire output of the project at a pre-agreed price level or via a dynamic pricing formula.
•  Financier: provides senior secured debt capital to fund the majority of the costs of the project.
• Regulator: approves the project and grant the required licences or other consents.

In reality, there may be multiple other participants and each of the individual roles may be further subdivided; for example, there may be multiple builders and suppliers.