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What is Project Finance?

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  • João Pinto

    () (Faculdade de Economia e Gestão - Universidade Católica Portuguesa, Porto)

Abstract

Project finance is the process of financing a specific economic unit that the sponsors create, in which creditors share much of the venture’s business risk and funding is obtained strictly for the project itself. Project finance, often used for capital-intensive facilities and utilities, is commonly used to segregate the credit risk of the project from that of its sponsors so that lenders, investors, and other parties will appraise the project strictly on its own merits. Project finance creates value by reducing the costs of funding, maintaining the sponsors financial flexibility, increasing the leverage ratios, avoiding contamination risk, reducing corporate taxes, improving risk management, and reducing the costs associated with market imperfections. Besides describing the economic motivations for using project finance, this paper provides details on project finance characteristics and players, presents the recent trends of project finance market, and provides some statistics of project finance (PF) lending activity in Western Europe between 2000 and 2011.

Suggested Citation

  • João Pinto, 2014. "What is Project Finance?," Working Papers de Economia (Economics Working Papers) 01, Católica Porto Business School, Universidade Católica Portuguesa.
  • Handle: RePEc:cap:wpaper:012014
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    File URL: http://www.feg.porto.ucp.pt/docentes/repec/WP/012014-Pinto-What_is_Project_Finance.pdf
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    References listed on IDEAS

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    2. Francesco Corielli & Stefano Gatti & Alessandro Steffanoni, 2010. "Risk Shifting through Nonfinancial Contracts: Effects on Loan Spreads and Capital Structure of Project Finance Deals," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(7), pages 1295-1320, October.
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    Cited by:

    1. Giulio Pasi, 2014. "Challenges for European welfare systems. A research agenda on social impact bonds," Review of Applied Socio-Economic Research, Pro Global Science Association, vol. 8(2), pages 141-150, June.

    More about this item

    Keywords

    project finance; structured finance;

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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