31 July 2013
Global Project Financing
During the ongoing process of globalization many countries, both developed and
emerging, are creating opportunities for the development of extremely large projects.
These projects are in excess of $500 million US dollars and are very difficult to design,
build and operate successfully. In order to mitigate the risks involved with these megaprojects, companies and governments both are interested in creating stand-alone entities
that are successful or fail on their own merits, leaving the initiating organizations unaffected. These projects create unique opportunities to study the effects of many of the
underlying questions discussed in corporate finance. For example, the separation of the
financing and investment decision, alternative governance systems, the discipline
created by high leverage commitments and how to structure risk mitigation strategies.
The cases provide vehicles to address many unresolved issues in Corporate Finance. In
the area of cost of capital, two troublesome situations are explored. How does a firm
compute the cost of capital for a project in an emerging economy? The other, how to
value a project when there is not a target capital structure throughout the life of the
Another difficult issue is the process of risk mitigation for a one-project entity. What
affect does the lack of diversification benefits have on the firm’s valuation? How can
risk be best allocated among the stakeholders’ of the project? In these large projects risk
must be addressed in the construction, start-up and operating phases of the project.
Which stakeholders’ can bear these risks at the lowest cost?
High leverage is common in Project Finance. Debt maturities are seldom longer the
fifteen years. Thus, debt repayments must be sculptured to the forecast of the project’s
cash flows. This results in the sophisticated use of senior and mezzanine financing
vehicles which requires insightful financial modelling.
• Large-Scale Investments
• One project firms
• Developed vs. Emerging countries
• Organizational Structure
• Contractual Structure
• Governance Structure
• Cash waterfalls
• Does diversification add value?
• Foreign project cost of capital
• Changing capital structure
Alan Frankle, Boise State University, United States
Structure does affect value! Project Finance provides an alternative to Corporate
Financing and creates an important realistic laboratory to study capital structure, risk
management, valuation, contracting, and corporate governance. The complex cases
provide a bridge from Corporate Financial Theory to actual projects and financial
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