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Introduction to Project Finance -1

Introduction to Project Finance -1

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Published by: nenu_100 on Jun 21, 2009
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10/14/2012

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Introduction to Project FinanceOrigin
Private Investment in major infrastructure projects is not unusual. Prior toWorld War I, railways, roads, bridges, power plants, ports, water works andgas-distribution systems were being built all over the world by privateentrepreneurs. These projects were financed largely by private capital, provided by entrepreneurs willing to risk all in return for high rewards.Fortunes were made and lost.During the 19
th
Century ambitious projects such as the Suez Canal and theTrans-Siberian Railway were constructed, financed and owned by privatecompanies. However, the private-sector entrepreneur disappeared afteWorld War I and as colonial powers lost control, new governments financedinfrastructure projects through public-sector borrowing. The state and public-utility organisations became the main clients in the commissioning of  public works, which were then paid for out of general taxation.During this post-World War I period in Europe, states invested in thereconstruction of war-damaged infrastructure and new nationalisedindustries. After World War II most infrastructure projects in industrialisedcountries were built under the supervision of the state and were funded fromtheir respective budgetary resources of sovereign borrowings.This traditional approach of government in identifying needs, setting policyand procuring infrastructure was by and large followed by developingcountries, with the public finance being supported by bond instruments or direct sovereign loans by such organisations as the World Bank, the AsianDevelopment Bank and the International Monetary Fund.
 
Development in the early 1980s
The convergence of a number of factors by the early 1980s led to the searchfor alternative ways to develop and finance infrastructure projects around theworld. These factors include:
Continued population and economic growth meant that the needfor additional infrastructure – roads, power plants, water-treatment plants – continued to grow;
The debt crisis meant that many countries had less borrowingcapacity and fewer budgetary resources to finance badly needed projects; the debt burden required them to adopt an austereapproach when planning fiscal spending, compelling them to look to the private sector for investors for projects which in the pastwould have been constructed and operated in the public sector;
  Major international contracting firms which in the mid-1970s had been kept busy, particularly in the oil-rich Middle East, were, bythe early 1980s, facing a significant downturn in business andlooking for creative ways to promote additional projects;
  Competition for global markets among major equipment suppliersand operators (particularly in the power and transportationindustries) led them to become promoters of projects to enablethem to sell their products or services;
  Outright privatisation was not acceptable in some countries or appropriate in some sectors for political or strategic reasons andgovernments were reluctant to relinquish total control of what may be regarded as state assets.
 
During the 1980s, as a number of governments, as well as internationallending institutions, became increasingly interested in promoting thedevelopment of the private sector, a consensus developed. It supportedtapping in the energy and initiative of the private sector, and thediscipline imposed by its profit motive, to enhance the efficiency and productivity of what had previously been considered public-sector services.It is now increasingly recognised that the private sector can play adynamic role in accelerating growth and development. Many countriesare encouraging direct private-sector involvement and making strongefforts to attract new money through new project financing techniques.Such encouragement is not borne solely out of the need for additionalfinancing, but it has been recognised that private-sector involvement can bring with it the ability to implement projects in a shorter time, theexpectation of more efficient operation, better management and higher technical capability and, in some cases, the introduction of an element of competition into monopolistic structures.Project Finance is being introduced in both developed and developingcountries as an alternative way to finance infrastructure and industrial projects, both small and large. The concept is being used intransportation (tolled roads, tolled estuarial crossings and railways);energy (private power stations, waste-to-energy plants and gas-distribution pipelines); sewage and water-treatment plants; health care(construction and operation of new hospital buildings and clinical wastedisposal plants); education (provision of student accommodation andfacilities for universities, colleges and schools); and provision of government offices.

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