Project Finance

Tackle infrastructure development projects in emerging markets with confidence

In Project Finance: Applications and Insights to Emerging Markets Infrastructure, distinguished professor and author Paul Clifford insightfully applies the fundamental principles of project finance structuring to infrastructure investments in emerging markets.

Using leading emerging market case studies to illuminate the underlying themes of the book, the author provides a practitioner’s perspective and incisive analysis of concepts crucial to a complete understanding of project finance in emerging markets, including:

· Risk management

· ESG and impact investing

· The emergence of new global multilateral development banks

· China’s Belt and Road Initiative

Project Finance bridges the gap between theoretical infrastructure development, investment, and finance and the implementation of that theory with instructive and applicable case studies. Throughout, the author relies on a grounded and quantitative approach, combining the principles of corporate finance with straightforward explanations of underlying technologies, frameworks, and national policies.

This book is an invaluable resource for undergraduate and graduate students in finance, as well as professionals who are expected to deal with project and infrastructure finance in emerging markets.

Preface xi

Acknowledgments xv

Chapter 1 Principles and Application of Project Finance 1

Origins and History of Project Finance 1

Why Sponsors Use Project Finance 2

Project Finance—Asset Class Performance 4

Global Infrastructure Outlook 9

The Infrastructure Gap in Emerging Markets 12

Focus—Asia Infrastructure Needs 13

Endnotes 14

Chapter 2 Project Finance—Risk Analysis and Mitigation 17

Commercial versus Contract Viability 19

Sponsor Risk 19

Political Risk 21

Construction and Completion Risk 22

Operation and Maintenance Risk 25

Supply Risks 26

Reserve Risk 27

Sales/Offtake Risk 27

Approvals and Permits 30

Social and Environmental Considerations 30

Financial Risks 31

Force Majeure Risk 32

Case Study: Mozal Aluminum Project, Mozambique 33

Endnotes 37

Chapter 3 Project Finance Agreements and Loan Documentation 39

Construction Contracts in Project Finance 41

Operations and Maintenance Contracts in Project Finance 42

Offtake Contracts/Concession Agreements 42

Supply Contracts 43

Project Finance Loan Documentation 44

Key Lender Protection Mechanisms and Strategies for Negotiating Finance Agreements 51

Case Study: Samba Drillship Oil and Gas Project, Brazil 52

Chapter 4 Risks and Challenges of Project Financing in Emerging Markets 61

Track Record of Project Finance in Emerging Markets—The Asian IPP Experience 62

Currency Mismatch—Lessons Learned from the Asian Currency Crisis 63

How the Asian Currency Crisis Transformed the Approach to Project Finance 65

Role of Multilateral, Bilateral Development Banks, and Export Credit Agencies 68

Stakeholder Alignment Issues 71

Mitigating Political and Sovereign Risks 71

Case Study: Dabhol Power Project, India 72

Endnotes 80

Chapter 5 Sources of Financing for Emerging Markets 81

Multilateral Development Banks (MDBs) 84

Bilateral Development Banks (BDBs) 85

Export Credit Agencies (ECAs) 85

Commercial Banks 87

Political Risk Insurance Market—Breach of Contract and Non-Honoring of Financial Guarantees 88

Project Bonds 89

Equipment Suppliers and Financing 90

Institutional Lenders (Insurance Companies, Infrastructure Funds, Pension Funds, Private Equity, and so forth) 91

Strategies for Multi-Sourced Financing in Emerging Markets 91

Case Study: Nam Theun 2 Hydro Project, Laos 92

Endnotes 99

Chapter 6 Financial Structuring and Debt Sizing 101

The Borrower/Sponsor Objectives 103

Lenders’ Objectives 104

Debt Sizing and Sculpting 104

Financial Structuring—Debt Sizing and Loan Amortization 106

Lender Ratios for Debt Calibration and Stress Testing 110

Cash Traps and Sweeps 110

Case Study: Sabine Pass LNG Project and USA-Asia Energy Flows 112

Endnotes 117

Chapter 7 Environmental and Social Governance (ESG) 119

Sustainable Infrastructure Project Finance and Investing 120

Equator Principles 121

Multilateral Development Banks and ESG

Frameworks 124

IFC Impact Investing Principles 127

Green Bonds 129

Sustainability Project Financing and UN Social Development Goals (SDGs) 131

Unlocking Institutional Capital to Meet Emerging Market SDGs 134

Case Study: Manzanillo Container Port Terminal Project, Mexico 136

Endnotes 141

Chapter 8 Emerging Markets Project Finance Bonds and Local Capital Markets 143

Project Bonds versus Project Loans 145

Project Bonds Investor Base and Market Liquidity 151

Local Currency Project Bonds and Partial Credit Guarantees/Insurance Wraps 154

Case Study: Project Bond Case Study—Mong Duong 2 Power Project, Vietnam 155

Endnotes 159

Chapter 9 China’s Belt and Road Initiative 161

Background and Scope of the Belt and Road Initiative 161

China’s Financing Strategy for BRI Infrastructure Development 170

Emergence of New Multilateral Development Banks—Focus on the Asia Infrastructure Investment Bank 172

Endnotes 174

Chapter 10 Project Finance Market Developments and Finance Structures 177

Mini-Perm Financing Structures 177

Back-Levered Financings for Renewable Energy Projects 180

Infrastructure Guarantee Products—Bond and Private Capital Credit Enhancement 182

Endnotes 187

Bibliography 189

Index 195

PAUL D. CLIFFORD is Adjunct Professor at Columbia Business School. He also teaches at The City University of New York. He is a consultant for in-house programs at international banks and private sector energy companies. Formerly, he was Director of Project Finance for Standard Chartered PLC and ANZ Bank.

Project Finance: Applications and Insights to Emerging Markets Infrastructure teaches you how to apply project finance techniques to projects in emerging markets. You'll learn about topics like risk management, impact investing, and the new appearance of global multilateral development banks. Finally, you'll read about how environmental, social, and corporate governance subjects play out in emerging market infrastructure projects.

Distinguished academic and author Paul Clifford employs a highly practical and quantitative approach to project finance. He integrates core principles of corporate finance with key technological topics and country-specific frameworks and policies. The book is written in a straightforward and approachable style, combining applicable strategies with sound theoretical foundations. The chapters are grounded and utilitarian, suitable for both students of business and finance and professionals currently working in the field.

Exclusively focused on the challenges unique to emerging markets, Project Finance covers the fundamental principles of applying project finance structuring to those markets. It is supported throughout by seminal emerging market case studies and examples that tackle the actual implementation of the theoretical infrastructure development, investment, and finance concepts discussed within the book. Projects like China's Belt and Road Initiative are discussed at length and in the context of the theories and concepts introduced and explained by the book.

Perfect for undergraduate and graduate students of business and finance, Project Finance also belongs on the bookshelves of professionals who regularly deal with the financing of projects in emerging markets. Bankers, infrastructure investors, and others will find this to be an invaluable resource before embarking on their next project. Anyone expected to make decisions with respect to the financing of emerging market infrastructure will significantly benefit from this book.

PRAISE FOR PROJECT FINANCE

"Paul Clifford brings a seasoned financier's perspective to readers seeking real-world, applied insight. Packed with detailed case studies, the text is comprehensive in its overview and timely in its focus on forces at play in global project finance. Clifford elucidates the key principles that underpin this financing discipline, but his practical commentary and transactional insights make this an accelerated guide for those entering or seeking to understand the field of project finance."
—MICHAEL WHALEN, former Head of Project Finance, OPIC, US Ex Im Bank; former Head of Project Finance, HSBC

"Paul Clifford's book brings together and provides a much needed emerging markets perspective in the understanding and teaching of project finance. This book will be useful for both advanced undergraduate and graduate students who want a deeper understanding of project and development finance as well as for practitioners."
—PROFESSOR DAVID YU, PHD, CFA Finance Professor, New York University Shanghai; Chairman, CAVA and AAVA

"Clifford has effectively synthesized years of energy and infrastructure finance experience into a high-value guide for those focused on mastering the issues that must be addressed in structuring an effective limited recourse project financing. The lessons learned will prove invaluable to bankers, advisors, and students alike."
—DAN BARTFELD, Partner, Milbank

"This book provides a comprehensive summary of project finance features in general, alongside case analysis takeaways for emerging markets in particular. The chapter on current ESG issues in infrastructure finance is both timely and rarely found in other books on this topic."
—DR. KARL V. LINS, Spencer Fox Eccles Chair in Banking and Professor of Finance, David Eccles School of Business, University of Utah; Visiting Professor of Finance, London Business School

"This book provides tremendous insights from inside the project financing process that will benefit project developers and lenders in emerging and even developed markets."
—TOM NELTHORPE, Contributing Editor, Proximo; former Editor, Project Finance Magazine and IJGlobal