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Project finance From Wikipedia, the free encyclopedia Jump to: navigation, search Project finance is the long term financing of infrastructure and industrial projects based upon the projected cash flows of the project rather than the balance sheets of the project sponsors. Usually, a project financing structure involves a number of equity investors, known as sponsors, as well as a syndicate of banks or other lending institutions that provide loans to the operation. The loans are most commonly no
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  Project finance From Wikipedia, the free encyclopediaJump to: navigation, search  Project finance is the long term financing of  infrastructure and industrial projects based upon the projected cash flows of the project rather than the balance sheets of the project sponsors.Usually, a project financing structure involves a number of  equity investors, known as sponsors ,as well as a syndicate of  banks or other lending institutions that provide loans to the operation. The loans are most commonly  non-recourse loans ,which are secured by the project assets and paid entirely from project cash flow, rather than from the general assets or creditworthiness of the project sponsors, a decision in part supported by financial modeling. [1]  The financing istypically secured by all of the project assets, including the revenue-producing contracts. Projectlenders are given a lien on all of these assets, and are able to assume control of a project if the project company has difficulties complying with the loan terms.Generally, a special purpose entity is created for each project, thereby shielding other assets owned by a project sponsor from the detrimental effects of a project failure.As a special purpose entity, the project company has no assets other than the project. Capital contributioncommitments by the owners of the project company are sometimes necessary to ensure that theproject is financially sound, or to assure the lenders of the sponsors' commitment. Project financeis often more complicated than alternative financing methods. Traditionally, project financinghas been most commonly used in the extractive(mining), transportation, telecommunications  and energy industries. More recently, particularly in Europe, project financing principles have been applied to other types of public infrastructure under public  –  private partnerships (PPP) or, inthe UK, Private Finance Initiative (PFI) transactions (e.g., school facilities) as well as sports and entertainment venues.Risk identification and allocation is a key component of project finance. A project may besubject to a number of technical, environmental, economic and political risks, particularly indeveloping countries and emerging markets. Financial institutions and project sponsors may conclude that the risks inherent in project development and operation are unacceptable(unfinanceable). To cope with these risks, project sponsors in these industries (such as powerplants or railway lines) are generally completed by a number of specialist companies operating ina contractual network with each other that allocates risk in a way that allows financing to takeplace. Several long-term contracts such as construction, supply, off-take and concessionagreements, along with a variety of joint-ownership structures, are used to align incentives anddeter opportunistic behaviour by any party involved in the project. [2]  The various patterns of implementation are sometimes referred to as project delivery methods. The financing of these projects must also be distributed among multiple parties, so as to distribute the risk associatedwith the project while simultaneously ensuring profits for each party involved. A riskier or more expensive project may require limited recourse financing secured by a surety  from sponsors. A complex project finance structure may incorporate corporate finance,   securitization, options (derivatives), insurance provisions or other types of collateral enhancement to mitigate unallocated risk . [2]  Project finance shares many characteristics with maritime finance and aircraft finance;however, the latter two are more specialized fields within the area of  asset finance.  Contents [hide]     1 History     2 Parties to a Project Financing     3 Contractual Framework   o   3.1 Engineering, Procurement and Construction Contract - (EPC Contract)  o   3.2 Operation and Maintenance Agreement - (O&M Agreement)  o   3.3 Concession Deed  o   3.4 Shareholders Agreement - (SHA Agreement)  o   3.5 Off-Take Agreement  o   3.6 Supply Agreement  o   3.7 Loan Agreement  o   3.8 Intercreditor Agreement  o   3.9 Tripartite Deed  o   3.10 Common Terms Agreement  o   3.11 Terms Sheet     4 Basic scheme     5 Complicating factors     6 See also     7 References     8 External links  [edit] History Limited recourse lending was used to finance maritime voyages in ancient Greece and Rome.Its use in infrastructure projects dates to the development of the Panama Canal,and was widespread in the US oil and gas industry during the early 20th century. However, project finance for high-risk infrastructure schemes srcinated with the development of the North Sea oil fields in the 1970s and 1980s. For such investments, newly created Special Purpose Corporations (SPCs)were created for each project, with multiple owners and complex schemes distributing insurance,loans, management, and project operations. Such projects were previously accomplished throughutility or government bond issuances, or other traditional corporate finance structures.Project financing in the developing world peaked around the time of the Asian financial crisis,  but the subsequent downturn in industrializing countries was offset by growth in the OECD  countries, causing worldwide project financing to peak around 2000. The need for project  financing remains high throughout the world as more countries require increasing supplies of public utilities and infrastructure. In recent years, project finance schemes have becomeincreasingly common in the Middle East,some incorporating Islamic finance.  The new project finance structures emerged primarily in response to the opportunity presentedby long term power purchase contracts available from utilities and government entities. Theselong term revenue streams were required by rules implementing PURPA, the Public UtilitiesRegulatory Policies Act of 1978 . Originally envisioned as an energy initiative designed toencourage domestic renewable resources and conservation, the Act and the industry it createdlead to further deregulation of electric generation and, significantly, international privatizationfollowing amendments to the Public Utilities Holding Company Act in 1994. The structure hasevolved and forms the basis for energy and other projects throughout the world. [edit] Parties to a Project Financing There are several parties in a project financing depending on the type and the scale of a project.The most usual parties to a project financing are;1.   Project company2.   Sponsor3.   Borrower4.   Financial Adviser5.   Technical Adviser6.   Lawyer7.   Debt financiers8.   Equity Investors9.   Regulatory agencies10.   Multilateral Agencies11.   Host government / grantor [edit] Contractual Framework The typical project finance documentation can be reconducted to four main types    Shareholder/sponsor documents    Project documents    Finance documents    Other project documents [edit]Engineering, Procurement and Construction Contract - (EPC Contract) The most common project finance construction contract is the EPC Contract. An EPC contractgenerally provides for the obligation of the contractor to build and deliver the project facilities ona turnkey basis, i.e. at a certain pre-determined fixed price, by a certain date, in accordance withcertain specifications, and with certain performance warranties. EPC contract is quite  complicated in terms of legal issue therefore the project company the EPC contractor shall haveenough experiences and knowledge about the nature of project in order to avoid their faults andminimize the risks during the contract execution. Other alternative forms of construction contractare project management approach and alliance contracting. Basic contents of an EPC contractare:    Description of the project    Price    Payment    Completion date    Completion guarantee and Liquidated Damages (LDs):    Performance guarantee and LDs    Cap under LDs [edit]Operation and Maintenance Agreement - (O&M Agreement) An agreement between the project company and the operator. The project company delegates theoperation, maintenance and often performance management of the project to a reputable operatorwith expertise in the industry under the terms of the Operations and Maintenance (O&M)agreement. The operator could be one of the sponsors of the project company or third partyoperator. In other cases the project company may carry out by itself the operation andmaintenance of the project and may eventually arrange for the technical assistance of anexperienced company under a technical assistance agreement. Basic contents of a O&Mcontracts are:    Definition of the service    Operator responsibility    Provision regarding the services rendered    Liquidated damages    Fee provisions [edit]Concession Deed Agreement between the project company and a public-sector entity (the contracting authority).The concession agreement concedes the use of a government asset (such as a plot of land or rivercrossing) to the Project Company for a specified period of time. A concession deed would befound in most projects which involve Government such as in infrastructure projects. Theconcession agreement may be signed by a national / regional government, a municipality, or aspecial purpose entity set up by the state to grant the concession. Examples of concessionagreements include contracts for the following:    A toll-road or tunnel for which the concession agreement giving a right to collect tolls / fares from public or where payments are made by the contracting authority based onusage by the public.    A transportation system (e.g. a railway / metro) for which the public pays fares to aprivate company)
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