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Project Finance and Development
By admin July 27, 2018

 

In a modern economy, companies finance themselves with equities and debts. If their business gets the degree to which they no longer internally finance with founders’ own assets, they start to seek more financial liquidity through external financing. In return, companies pay dividends to equity holders and interests to debt holders, respectively. With this transaction between companies and external stakeholders, companies can invest in a large-scale project and increase their business volume across the country. However, there are projects that may incur so much risk that even companies hesitate to initiate. In an ideal scenario, companies would reap a great return from the projects. If things go wrong, on the other hand, companies may lose its valuable assets and even go bankrupt. Building a large-scale energy infrastructure is one of examples of those projects. This is important because building such a facility will strengthen country’s energy mix portfolio and mitigate energy poverty issues around the world.

Project finance can allow companies to avoid large risk by setting up a project company. Most of assets in the project company are owned by a sponsor company, meaning the project company utilizes sponsor companies’ building know-how and technologies. As for a liability issue, this newly established project company will borrow money from lenders and embark on a risky project. Even if things go wrong, the sponsor company will not have to pay back project company’s liability to financial institutions. Unlike general financing, financial institution lends money, expecting the project’s predicted profitability in the long run.

Then, why do we use the project finance? Can government just use taxpayers’ money to fund a highly risky project and companies just build what governments order? In fact, that is precisely why we use project financing. First of all, even well-developed countries are now sensitive with government spending. In a modern society, social spending costs are rising rapidly. The list goes on and on: Healthcare spending, education spending, military spending, etc. Governments cannot afford to risk its limited budgets. Therefore, developed countries also seek project finance opportunities. For instance, the 32-MW Kumenan Mega Solar park in Japan is a project finance partnership between General Electric, US conglomerate and financial institutions. Japanese government did not take a full financial liability in this project as other private financial institutions participated in. The Mega Solar park was successfully delivered, strengthening Japan’s renewable energy portfolio.

Secondly, in many cases, developing countries simply do not have enough money to initiate a large-scale infrastructure project. Their own private sector is also weak to invest in the project. Then, multilateral development Bank such as World Bank (WB), Asian Development Bank (ADB), Inter-American Development Bank (IDB) take an initiative to finance projects, attracting more investment from private financial institutions. There are many developing countries that need such a support.

Further reading

GE unit unveils commissioning of 32-MW solar park in Japan

GE unit launches Japanese solar fund targeting USD 800m

Energy Finance 101: What is Project Finance?

 

 


Thanks for sharing !


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