International project finance is the international financing of public service, infrastructure or industrial project where the projected debt and equity that have been used to finance the project will be repaid with funds that have been earned through the project. In layman’s terms this means that the financing will rely on the repayment to be from cash flow earned from the project which is being held for collateral until funds are repaid.
When funding with project finance there are many benefits such as the providers are extremely organized and have excellent reputations. They are available world wide, all risks involved are understood with structural solutions, it does not impact the sponsor’s balance sheet and the finance cost is comparatively low.
With all of the benefits provided with international project finance there are also some slight downfalls such as there is a long transaction time, it is normally used only on special projects as opposed to corporate finance, there are a number of restrictions and security constraints, there is a continuous monitoring of any and all financial performances, and finally if there is a default in the payment control of the project reverts back to the lender.
There are many risks involved with project financing and all parties involved are well informed in the possible risks. There are at times billions of dollars involved in the transactions, numerous parties are involved and it can literally take several years to negotiate the terms. Risks are a major concern in project financing and include many different forms such as currency inconvertibility, war, local hostility, price, supply reliability, quality and operational cost only to name a few of the many serious risks involved.
Those involved with international project financing could include parties such as lawyers who are needed to verify that all contracts and agreements are to the satisfaction of all parties involved, construction crews necessary to build the project, sponsors to initiate the construction, underwriters for providing the primary debt funding and those responsible for securing the sale of the product in question.
The transaction and the risks involved are basically measured in terms of the overall credit and its worthiness of the final project as opposed the owners of the project which is the primary risk involved in the transactions occurring during an international project financing. All parties involved are aware of the possible length of time involved in the initial phase of the process as well as the risks involved upon beginning the project.