International Development Consultants, LLC
For international project development, several forms of financing can be sought, from initial feasibility and project initiation financing through construction and longer term project operations. This article discusses seven forms of infrastructure (see definition below) financing often encountered in international project development.
Although the emerging markets financial crisis of the past two years has severely affected the volume, flow and risk profile of international investment projects, the elements presented below remain relevant. An overview of various public financing instruments available in the US and other industrial countries is presented, along with a brief discussion of the evolving Asian bond market and its importance in financing Asian growth within the coming decade.
|Note about the author: Dr. J. Michael Cobb has been involved with developing, financing and implementing infrastructure and commercial-industrial projects in many regions of the world, including the Middle East, various regions in Asia, the Caribbean, Africa, Latin America and in the US. Please see his web site for specific examples and further details.|
SOURCES & TYPES OF FINANCING
1. Feasibility Studies and Demonstration Projects
Loans or grants provided by governments, such as the US Trade and Development Administration, for financing the costs of preparing feasibility studies, business plans and in limited very defined cases, demonstration projects.
2. Venture Capital & Infrastructure Funds
Start-up financing from traditional venture capital groups for new enterprises is not usually available for international infrastructure projects, due to the high cost of due diligence and limited exit options for these firms. Typically, high rates of return , often 25-50%, are also required. However, a number of special purpose international investment funds have been created by large insurance companies and other major corporations for investing in major infrastructure projects.
3. Non-Recourse or Project finance
Refers to projects financed on the basis of projected cash flows of the project rather than on the credit worthiness of the borrowers or project's sponsors. Understanding and allocating risks among all parties are key components in project finance, and extensive project preparation and documentation regarding purchase or supply contracts and other documentation is required . Also, because lack of collateral, lenders require substantial equity participation by project developers. Large scale infrastructure projects having significant components of exported equipment, such as power generation projects, may have the following typical BOT project financing structure:
Note: For a further discussion of the importance of project finance in promoting emerging markets development, see the accompanying article, "Promoting Private Infrastructure Finance."
Corporate finance, in contrast to project finance, bases debt and equity financing on a corporations project earnings and balance sheet, with its asset base as collateral for the debt financing. This form of financing is only available to financially strong established companies.
Equity Financing involves providing funding in return for an ownership interest in the project or enterprise. Return are in dividends on equity shares and in appreciation in share values.
Debt Financing involves loans secured by the assets of a corporation or project. Lenders typically require substantially more collateral than their exposure, which usually means that major portions of a project, often 25-50%, be finance through equity.
5. Export Credit Finance
Export credit finance, also termed trade financing, can be available to finance the export of goods and services from countries. It usually requires letters of credit from qualified local banks to assure repayments to the lenders in the exporting country.
6. Public Finance & Bond Funding
Public finance, often termed municipal or special authority borrowing, addresses public sector projects, and increasingly public-private integrated projects. Resulting project debt are usually based on overall tax revenues (general obligation bonds) or targeted revenues streams from specific projects (revenue bonds).
Whereas until recent years the distinction between public and private financing was mostly clear, in recent years integrated public-private revenue and cost-risk sharing arrangements are creating hybrid structures where public or private financing distinctions are not completely separate. (See discussion of Asian bond financing below).
7. Guarantees or Credit Enhancement Programs
Multilateral agencies, national governments and other sponsors often provide insurance, guarantees or other forms of credit enhancement mechanisms such as subordinated debt in order to make projects more attractive to investors or project lenders or investors. These credit enhancement mechanisms help reduce and reallocate project risks among lenders and investors in order to make project more attractive.
PUBLIC FINANCE INSTRUMENTS
There are many type of public finance instruments used in the US and other industrialized countries. These include: general obligation, tax increment, sales tax and assessment bonds; revenue bonds related to industrial, power supply, water supply-wastewater treatment, airports, ports, solid waste disposal, parking, mass transit and other revenue producing projects or programs.
Other types of public finance instruments include refunding bonds, grant and bond anticipation notes, commercial paper, variable rate demand notes, leveraged leases, sale/leasebacks, lease financing certificates of participation, swaps, installment sale contracts and other secondary market derivative products. Discussion of these and other public financial instruments can be found through the FinanceNet home page and other internet sources.
Asian Development Bank Institute: WB 138, May 2009
Source: Asian Development Bank Institute, 2008
bank to issue financial bonds
2002 By chinadaily.com.cn.
Development Bank (CDB), the country's largest policy bank will likely
issue financial bonds to Chinese citizens and domestic institutional
The bank is still
waiting for approval from the People's Bank of China, the country's
"(We) hope to
get the approval as early as possible," said Chen Yuan, CDB
governor, during the 25th annual conference of the Association of
Development Financing Institutions in Asia and the Pacific (ADFIAP).
Once approved, the
CDB will be the only Chinese bank authorized to issue financial bonds to
officials from nearly 30 development financing institutions in over 20
countries and regions in Asia and the Pacific region gathered in Beijing
Wednesday to discuss the strategy of development financial institutions
(DFI) in the future.
chairman of the ADFIAP said that the DFIs, including the CDB, will
continue to play a critical role in promoting economic development in
their countries by providing long-term funds for large projects, and
they should also take measures to meet market challenges.
public financial bond will be a quasi-government bond, because of the
low risks and stable returns. It is a highly safe investment tool,"
said Gao Xinguo, an official with CDB's Bureau of Funds.
non-performance loan (NPL) ratio is now down to 3.58 per cent measured
by the five-category assets classification method.
Though the amount of
the public financial bond has yet to be decided, Gao said that a
good-sized proportion of the bank's 200 billion yuan (US$24 billion)
lending power will bring about certain positive effects to stimulate
Some 700 billion
yuan (US$84 billion) in private savings still lie in Chinese banks for
lack of safe investment channels for individual investors.
The issue of the new
bond will also help accelerate the reform of China's financial sector by
broadening the profit-making methods of domestic banks.
The CDB is a solely
State-owned policy bank established in 1994 to finance China's key
projects in infrastructure construction, the pillar industries, and
The funds raised by
the new bonds will be poured into these key projects, but only some
lucrative projects with reliable guarantees will be selected in order to
reduce risks, Guo added.
The financial bonds
issued by the CDB are currently only limited to financial institutions,
including domestic commercial banks, insurance companies and some