Project Finance in Emerging Markets

Table of Contents

Abstract

List of Abbreviations

Introduction

1. Theoretical Structure of Project finance
1.1. Definitions and Characteristics
1.2. Subjects and Contracts Involved
1.2.1. Sponsors
1.2.2. Project Company
1.2.3. Lenders
1.2.4. Public Authority
1.2.5. Off-takers
1.2.6. Constructor
1.2.7. Operator

2. Project Finance in Developing Countries
2.1. The Evolution of Project Finance
2.2. Project's Risks and Their Mitigation
2.3. Financial Institution Involved in Project Finance
2.3.1. International Financial Institution
2.3.2. Regional Development Banks
2.3.3. Development Agencies
2.3.4. Export Credit Agencies
2.4. The Economic Impact of Project Finance in Emerging Markets

3. Feasibility Studies of Project Finance in Emerging Markets
3.1. Internal Rate of Return
3.2. Cost of Capital
3.2.1. Cost of Equity
3.2.2. Cost of non-Equity Component
3.3. Net Present Value
3.4. Payback Period
3.5. Debt Service Cover Ratio
3.6. Loan Life Cover Ratio & Project Life Cover Ratio
3.7. Special Focus: Dynamic WACC

4. Project Finance in Practice: a Brazilian Case Study
4.1. "Pointe de Manteiga" Description
4.2. Brazilian Framework in early 2000s
4.3. Risk Matrix
4.4. Feasibility Studies

Conclusions

References (Bibliography and Sitography)

Abstract

Project Finance approach is an important financing mechanism because of its intrinsic features and differences with respect to the conventional corporate finance. It has experienced a rapid development and growth in the last decades both in developed and developing countries. The aim of this dissertation is to study and deepen the Project Finance in Emerging Markets framework. After a brief introduction of the main general features of this approach, it will focus on the developing countries context: the historical evolution overview, the risks evaluation, the international institutions involved and the economic impact of project finance in this scenario. Furthermore, financial feasibility study will be conducted in order to evaluate a project over several financial and economic aspects. Finally, all these theoretical issues will be empirically applied to the PMESA case study. It regards a hydroelectric power plant built in Brazil in the early 2000s through the project finance approach. The project evaluation is time located in these years because Brazil was considered an emerging market and it presented some peculiar economic and financial characteristics.

List of Abbreviations

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Introduction

Every kind of project needed to be financed and there will always be the need to do it. A project may be financed in many ways, and Project Finance is only one of possible approach. In fact, Project Finance is not the same thing as "financing project".

When a company finances a new initiative through the traditional corporate financing, it is reasonable to assume that the firm finances the initiative with its available cash flow and also raising new debt. For instance, in case of the new project were unable to repay debt, creditors could demand reimbursement from cash flows generated by other business of company that has realized the new project¹. However, there are cases in which this traditional corporate financing approach is not the best solution for realizing new projects.

As an effective alternative to conventional direct financing, project financing has become one of the major topic in corporate finance. Unlike other financing project methods, project finance is a “perfect” network that affects all aspects of a project's development and contractual arrangements. Therefore, the finance cannot be dealt with separately. In project finance, not only the finance director and lenders but also those involved in the initiative need to have a general understanding of how project finance works and how the parts involved are linked to and affected by the structure.

Generally, the project finance is considered the most suitable financing technique for such project that shows almost one of the following features²:

- the project is larger than the company's size;
- the project has higher degree of risk than the risk of the company's asset portfolio;
- the project is linked to the company's core business.

It's been said that project finance approach dates back to Greek and Roman times. It was used to finance imports and exports of goods moving to and from their colonies. A further proof in using the approach comes from the English Crown, which financed in 1299 A.D the exploration and the development of the Devon silver mines by repaying the Florentine merchant bank, Frescobaldi, with output from the mine³. The banker held a one- year mining concession, hence they were entitled to as much silver as they could mine during the year. In this examples the financing was ensured with the use of project's output or assets.

Nonetheless, modern project finance dates back to the industrial revolution, Victorian age and the post war periods, where those achievements may not have been possible to reach without specialist financing recourse. The 900th was characterized by four wave of project finance. From 1930s to 1970s, the World experienced the finance for natural resources projects as oil field explorations. By early 1980s, with the electricity privatization in United States and then successive deregulation worldwide, the finance for independent power projects (“IPPs”) developed⁴. From early 1990s the finance for public infrastructure advanced through the Public-Private Partnerships (“PPPs”). It constitutes a form of cooperation between public authorities and private sector companies in order to guarantee the functioning, building and maintaining public services. The private part provides a public project and, in some types of PPP the cost of using the service is borne exclusively by the users of the service and not by the taxpayers⁵. In other types of PPP, the capital investment is provided by the private sector and the government bear the total or partial cost of providing the service. The latter is known as Private Finance Initiative (“PFI”).

In Italian experience, this approach is developed since the end of '90 and a it has experienced a strong growth with the “Merloni Quarter”. This low has introduced the possibility to finance public project with private capital.

The purpose of this work is to provide instruments necessary for the understanding of the project finance technique, focusing on the emerging markets framework and to point out the method that can be applied in order to evaluate such projects. In particular, a general overview of a conventional project finance structure, emphasizing the subjects and the main contracts involved are showed at first in order to lay the basis of the argument (Ch. 1.). Secondly, this approach is studied from the point of view of developing countries through its historical evolution, the risks involved in this context, the institutions taking part in the project's development and furthermore, the impact of project finance in emerging markets (Ch. 2.). Moreover, feasibility study is conducted in order to understand how a project is evaluated (Ch. 3.). Finally, a project built up in early 2000 by Impregilo S.p.A. in Brazil is showed up to put in place a real example of these topics (Ch. 4.).

1. Theoretical Structure of Project Finance

An introductive chapter explaining theoretical fundamentals of project finance is reported. In particular, this section would provide a general overview of definitions, structure and features of Project Finance (Ch.1.1.). Afterwards, main subjects involved and salient contracts between the part related to this approach are showed (Ch.1.2.).

1.1. Definitions and Characteristics

Project Finance is the long-term financing of legally and economically self-contained (“ring-fenced”) project through a specific economic entity, that is the Special Purpose Vehicle (SPV) or also known as project company whose only business is the project

The SPV is created by sponsors, which are the investors who provide equity or other financing for as subordinate debt. While, the project finance-based debt is provided by one or more lenders. Apart from Sponsors and investors in general, the other possible financing sources are public-sector grants and bonds issued. Usually, there is a high leverage ratio (debt to equity), the project finance debt may cover 70-90% of the cost of a project^{6 7}.

The SPV isolates the initiative, the cash flows and the risks regarding the project. The SPV and sponsors are two separated entities and the economic relation between them depend on the type of the project finance. The project finance is said to be non-recourse when lenders are satisfied only by the expected project cash flow as guarantee, and in case of failure, they are paid by the assets value of project. Otherwise, Lenders may have limited recourse to the assets of parent companies sponsoring the project. In this case they require additional guarantees. The recourse is limited over the time, on the amou nt and on the assets quality. The limited recourse is the widely used in practice, but the guarantees request by lenders are increasingly growing.

Risk identification an d allocation is a key component of project finance ⁸. This financing approach i s founded on a security package, in fact, there are contracts entered into the Project Company have the correct risk allocation among the subjects involved in the project as objective . The optimal risk sharing follows the principle of better know -how in risk management⁹.

There is no such thing as “standard” project finance, the structure can be different among various industry sectors and from deal to deal and each of them has its own unique features. A simplified structure is showed by Fig. 1.

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Fig. 1.: Simplified Project Finance Structure.

Source: Yescombe E.R. (2002), Principles of Project Finance .

Analyzing the general economic benefits brought by the project finance approach, it is shown that it could be more efficient with respect to the traditional forms of corporate financing. Some reasons support this argument.

Firstly, in project finance context, the financing is subordinated only to the projects ability to generate cash flows¹⁰. The cash flows should be able to repay debt and remunerate capital invested at a rate consistent with the risk tied up with the venture concerned. Thus, it does not depend on the soundness and creditworthiness of the sponsors. The SPV's ability to generate cash flows is initially weak in the project's construction period and growing stronger in the first year of operation. Once the project is completely amortized, since the taxes begin to increase this growth slows down. After that, cash flows pick up again, thanks to the progressive repayment of the debt results in fewer interest payment. The cash flows are destined to the debt services at first, then to pay subordinate debts (please refer to Ch. 1.2.1.) and dividends among sponsors.

Secondly, the project finance is generally faster than traditional forms with respect to the frequency of projects meeting time schedules and frequency of project meeting budgets.

Thirdly, it can be used to improve the return on the capital invested in a project by leveraging the investment to a greater extent that would be possible in a traditional corporate financing project¹¹.

Lastly, this approach can reduces the cost of agency conflicts inside project companies and the opportunity cost of underinvestment due to leverage and incremental distress costs in sponsoring firms¹².

The project has a finite life, based on the length of contracts, licenses or the reserves of natural resources. Therefore, a project initiative has to be completely repaid at least by the end of this life. Three phases can be distinguished¹³:

- Initiation and Development. After the project conception, a bidding process through the prequalification takes place, and a request for proposal (RFP) to the prequalified bidders (also known as “invitation to tender”) follows it. Then, in case of winning tender, lenders are founded by sponsors, the concession agreement is signed and other contracts negotiated and at least signed in preliminary form, equity and debt put in place. The end of this process is known as “financial close” or “effective date”;
- Building. The greatest part of project risks are concentrated over this period. The project funds are drawn down and the end of this phase is enshrined by the project completion. This process close and the beginning of the next phase is known as “commercial operation date” (COD);
- Operational. The completion of project is proved also with performance tests. The project operates commercially and generates cash flows used to repay lender's debt and equity return.

Generally, the phases of project are related to the type of recourse: usually, during the building period the project finance is limited recourse. The main reason is that, in case of failure, the sponsors has to repay, through some guarantees, a certain percentage of debt. Whereas, the operational phase is usually characterized by non-recourse. The reason underlying the changing in type of recourse is the overcoming of the major part of risks that are related to the project building phase.

In addition, the financing structure of the debt impose that the interests on debt start to be capitalized when the lenders provide financing. The repayment of the debt is subordinated to the beginning of the COD. Hence when the project generates cash flows, these ones have to repay the debt.

1.2. Subjects and Contracts Involved

A project financing operation involves many subjects. This section provides a description of the main actors, their typically feature, their role in the structure of project finance and contracts signed among them. In particular it is reviewed sponsors (Ch.1.2.1.), project company (Ch.1.2.2.), lenders (Ch.1.2.3.), public authority (Ch.1.2.4.), off-takers (Ch.1.2.5.), constructors (Ch.1.2.6.) and operators (Ch.1.2.7.). Since that, there is the possibility that the same subject has a double role or that an actor does not take part in an initiative, the project finance is not a standardized approach.

1.2.1. Sponsors

The equity investor(s) and owner(s) of the Project Company could be a single party, or more frequently, a consortium of Sponsors. They provide equity or/and subordinate debt¹⁴, and assume the major part of the risks of project¹⁵.

Sponsors could have to design the project, then promoting that, and their role depend on to the form of the project (non-recourse or limited recourse).

The investors have to offer priority payment to the lenders¹⁶ in order to obtain project financing debt. In case Sponsor put in place only equity, they will receive their equity return after lenders have been paid of the due amounts. If Sponsors use subordinate debt, they could receive the interest over their subordinate debt during the senior debt repayment (due to the lenders) but only if there is enough cash.

The literature define project initiative as an “off balance sheet” operation for sponsors (while, the traditional corporate financing is defined “on balance sheet”). This concept need to be clarified. When a company finances a new project off balance sheet (thus with project finance), it means that that company isolate the new initiative in an ad hoc vehicle company. Therefore, the financing sources do not result into the Sponsor's balance sheet but into the SPV once in order to avoid that the new project's risks “contaminates” others Sponsor's assets. However, the question about if debt part of project financing sources has to appear into balance sheet of sponsor is regulated by the International Accounting Standard (IAS). The guidelines of these principles, in a nut-shell, say that sponsors who have the control of the SPV has to indicate into balance sheet of their companies the relative part of financial debt¹⁷. Thus, it should be said “in-balance sheet” for the cases mentioned. In fact, firms using project finance have a leverage ratio and debt/EBITDA that seems not to be in “normal range”. Although this accounting rule, analysts have not to take into account debt concerning the projects basket for a correct valuation of sponsors' companies. The amount of debt that has to be subtracted from the total debt of sponsors' firm depend on two factor: the phase of project and consequently the type of recourse, knowing the relation showed in the previous chapter. For example, in case of corporate valuation of sponsor's firm that has a unique project in phase of building, in which has the mid control (50%), an analyst has to take into account only half of debt regarding the project.

The drawback of project finance for sponsors is that structuring and organizing such a deal is much more expensive than the corporate financing option. The high cost are due to the legal, technical, insurance advisor and monitoring cost. Moreover, the lenders are expected to be paid so much in exchange for taking high risks.

On the other hand, project finance offers benefits. Sponsors, through this approach, may have the access to financing sources that could not have in simple corporate financing. In addition, as Tab.1. shown, the high leverage leads high return on equity (equity IRR) and 18 tax benefits because interest expenses are tax deductible unlike dividends to shareholders¹⁸.

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Tab. 1.: Example of Benefit of Leverage Investors Return.

Project sponsors can be classified as industrial sponsors, who feel the initiative as linked to their core business (often oil companies); public sponsors, who have the well­being growth and social welfare their aim; contractor/sponsors, who develop, build or run plant and are interested in participating in the initiative by providing equity and/or subordinate debt; purely financial investors, who are attracted by the high return on equity invested¹⁹.

1.2.2. The Project Company

All the contractual and financial relationships in project finance have to be contained inside the Special Purpose Company or Vehicle.

The Project Company cannot carry out any other business which is not part of the project. The SPV may not always be directly owned by the Sponsor; for tax reasons the Sponsors could use an intermediary holding company in a favorable country tax jurisdiction.

If there is more than one Sponsor, once the Project company (that is responsible for the project) has been set up, the Development Agreement previously signed by the Sponsors is superseded by a Shareholder Agreement that covers issues such as: percentage share ownership, procedure for future equity subscriptions, voting of shares at the annual general meeting, board representation and voting, provisions to deal with conflicts of interest (e.g., if the EPC Contractor is a Sponsor, participation in board discussion or voting on issues relating to the EPC contract are not allowed), appointment and authority of management, distribution of profits and sale of shares by Sponsors.

It's important to specify that the operation of the project could be carried out by Project Company personnel or by a third-party operator under an O&M contract.

1.2.3. Lenders

Commercial banks represent a primary source of funds for project financings²⁰. The large size of projects being financed requires, often, the syndication of the financing. The syndicate loan exists for two main reasons: at first, often anyone of the lenders does not have the balance sheet availability, due to capitalization requirements, to provide the entire project loan; secondly, for de facto political insurance²¹. Even though commercial banks are not generally very comfortable with taking long term project finance risk in emerging markets, they are very comfortable with financing projects through the construction period. In addition, a project might be better served by having commercial banks financing the construction phase because banks have expertise in loan monitoring on a month-to-month 22 basis. Moreover, the bank group has the flexibility to renegotiate the construction loan²².

It is usually preferable to raise funding from banks operating in project's country because they have the best understanding of local conditions and because the funding can 23 be provided in the currency of country, hence avoiding foreign exchange risks²³.

Lenders are not parties to the sponsors' shareholders agreement. Indeed, they are interested to know, for example, which shareholders can form a voting majority. The lenders' interest in the sponsors' equity goes beyond due diligence. They want to ensure that they have the right to force the sponsors to inject the equity they are relying on. This is typically done through having the sponsors enter into an equity subscription agreement directly with lenders²⁴.

In development process, after the tender is won, Sponsors find lenders through a tender or directly inviting banks to participate to the project. Letters of intent could be provided by the banks confirming the basic interest in getting involved in the project²⁵. Other agreed documentations have to be obtained by the SPV to demonstrate that the financing can be provided. The disadvantage of a full underwriting commitment by banks involve fee payments.

1.2.4. Public Authority

Local governments can participate directly as well as indirectly in project. In the first case, they provide public-sector debts as a kind of subsidy and often on a subordinated basis (hence the repayment will come in second place to the senior lenders). Even if they are not direct investors, their role can be most influential in several points such as the approval of the project, control of the state company that sponsors the project, responsibility for operating and environmental licenses, tax holidays, supply guarantees, and industry regulations or policies and providing operating concession.

The public-sector-entity sign a contract with the Project Company, under which a project is constructed to provide a service directly or indirectly to the public²⁶. It is the Concession Agreement. Generally, this agreement concedes the use of a government asset (such as a plot of land) to the SPV for a specified period. This type of contract is also known as Service Agreement or Project Agreement. Various acronyms are used for different types of concession, the following are the most common²⁷:

- BOT (build, operate and transfer), the grantor (public authority) provides the SPV the task to build up the project and to operate throughout the concession period for a fee. When the concession agreement expires, then the SPV transfers for free the project to the public authority;
- BOOT (build, own, operate and transfer), the grantor provides the SPV the task to build up the project and operates throughout the concession period without a fee. The SPV receives the net income from the project and when the agreement expires, then the SPV sell the project to the public authority;
- BOO (build, operate and own), the concession period could be extended up to cover all the project life, with a de facto privatization. Hence the SPV builds up, operates and gives back the project only if the public authority require its.

There is no need of this contract in case of Private Finance Initiative. For example, if a subject want to install a photovoltaic system in his land, then he has only to sign an off­take contract with the purchasing power company.

The Government Support Agreement is a contract with purposes to facilitate the completion and operation of the project by providing government support for any aspect of the project where the parties agree this is required²⁸. It is often confused with the previous contract but is only supplementary to a Concession Agreement and it is in no way required. If it is signed with the same authority of Concession Agreement, the Support Agreement is included in that one.

1.2.5. Off-takers

A project that produces goods or product (as electricity) need purchasers who commits to buying all the project company's output based on long-term contract. The buyers are called off-takers. Off-take Contract provide the purchaser with a secure supply of the required product and the Project Company with the ability to sell its product on a pre­agreed basis. The agreement can take various forms:

- take-or-pay contract, the off-taker must take the product or make a payment to the SPV in lieu of purchase;
- take-and-pay, the off-taker only pays for the product taken on an agreed price basis;
- long-term sales contract, the off-taker agrees to take agreed-upon quantities of product but the price is based on market price at the time of purchase²⁹.

As said before, project finance has not a unique structure. It is not always necessary an off-take contract for a project. For a toll-road project is required only to indicate the price into the Concession Agreement; for a project with commodity as product there is a wide market; a project concern mobile phone network is usually built without fixed price. Contrariwise, for IPP project, there has to be a particular off-take contract known Power Purchase Agreement (PPA). Firstly, a Preliminary Purchase Agreement is signed, and based on this, sponsors develop financial model and all the valuation they have to do. As soon as the plant is built, hence it becomes operative, the definitive off take contract (PPA) is signed.

1.2.6. Constructor

Since most project financing are infrastructural, the constructor (also known as contractor) is typically one of the key players in the construction period. It is the company, or a consortium of companies, that wins the tender for the design and construction of a given project on the basis of an EPC Contract. This contract agrees to deliver the engineering, procurement and construction on a "turnkey" basis, i.e., at a certain pre­determined fixed price, by a certain date, in accordance with certain specifications, and with certain performance warranties³⁰.

The contractor is normally responsible for damages resulting from delays in completing the facilities and it is usually required to provide a bond , called performance bond, for a certain percentage of contract value as security for general performance under the contract.

1.2.7. Operator

Operator is the counterparty who takes over the plant after the construction phase is complete and it is responsible for maintaining the quality of the project's assets and operating the project built up at maximum efficiency. It plays a central role during the operating period.

The operator may be an already-in-place company or a joint venture created to serve as operator by shareholders of SPV. In these cases, two or more sponsors constitute an ad hoc service company and grant equity. The ownership structure of the service company may or may not be the same as in the SPV³¹.

The O&M contractor is usually paid a bonus if project operates better than initially agreed levels and on the other hand it may suffer penalties if operates below agreed levels.

It is possible the Operating and Maintenance Contract is included in EPC contract.

2. Project Finance in Developing Countries

Some definitions and clarifications in terminology have to be put in place before entering into the core of this work in order to avoid misunderstanding.

Emerging economies (or markets) and developing countries are used as synonyms during this study and does not imply political independence, but refers to any territory for which authorities report separate social or economic statistics.

According to the World Bank, developing countries denotes the low-middle-income countries, thus with a Gross National Income per capita (with Atlas method³² ) up to $12.746. It does not imply that all economies in the group are experiencing similar levels of development. Just to give an idea, a list of GNI pro capita in 2013 follows: Bermuda has $104.610, Switzerland has $80.950, United States has $53.670, Italy has $34.400, Brazil has $11.690, Kosovo has $3.890 , Cameroon has $ 1.270 and Malawi has $270³³. It is used GNI instead of GPD is used, because the first one is the total domestic and foreign output claimed by residents of a country, consisting of GDP plus incomes by foreign resident minus income earned in domestic economy by nonresident.

Emerging markets generally do not have the level of market efficiency, standards and regulations as much as the developed economies. Investments in such countries come with high risk due to political instability, domestic infrastructure problems, currency volatility and limited equity opportunities. Moreover, local stock exchanges may not offer liquid markets for investors.

Even if the essential project finance structure is the same in both developed and emerging markets, there are some generalized differences between them with respect this approach³⁴.

The ability to get deals done in developing countries is highly correlated with the entrepreneurialism of the host government because, in emerging markets, there is a greater governmental interaction, even when governmental institutions are not explicitly part of a transaction. Consequently, the great flexibility of the project structure and government may to provide land, lower taxation or other supports. On the contrary, the serious drawback is the threat of corruption. Moreover, there are involved several number of financial institutions investing in emerging markets and supporting the growth in developing countries. As will be showed in Ch. 2.3., these organizations provide equity, "low-cost loans", insurances and advisory services.

This chapter would provide the bases for a detailed framework regarding project finance in emerging markets showing at first the historical evolution of the financing methodology (Ch. 2.1.). Then, the project's risks are studied in order to better understand how it is possible mitigate them (Ch. 2.2.). Furthermore, the financial institutions involved in financing projects in emerging markets are showed (Ch. 2.3.) and, finally, the economic impact of that financing approach in the emerging markets is debated (Ch. 2.4.).

2.1. The Evolution of Project Finance

Let's retracing the evolution process of project finance at global level and then focusing on emerging markets over the last 40 years.

The modern project finance approach started with the development of railroad from 1840 and 1870 and the exploration of oil field from 1930. Afterward it spread to Europe as well in the 1970s, again in the petroleum sector. From that moment, project finance became the financing method used for extracting crude off the England and the Governments have been willing to encourage private investors into new sector . One of the major regulatory reform was provided by United States in 1978, when they passed the Public Utility Regulatory Policy Act (PURPA)^{35 36 37} and established a private market for electric power, advancing a strong input for the growth of project financing in many other industrial countries . By the early 1980s, the large-scale privatization aimed at stimulating private sector and strengthening economic growth have given further impetus to project finance, moreover, exporting this financing technique to developing countries. The increasing application of this approach was supported by the enhancing globalization and integration of global financial markets³⁸. Furthermore, the support offered by export credit agencies (please refer to Ch. 2.3.) played a key role in the developing process as a whole. As consequence, there was an increasing cross-border capital flows to take advantages of news investment opportunities in emerging markets. With the 1990s, project finance market was tested in more traditional sectors, in particular to realize³⁹:

- projects with less market risk coverage, as for leisure facilities and city parking lots;
- projects in which public organizations participate in promoting initiative for the public good.

As the Graph 2.1. shows, the project finance success of the nineties was interrupted by the Asian financial crisis, which began in mid-1997, raising concerns about the viability of some projects and highlighting the importance of careful structuring and risk mitigation.

Private investors and lenders were less and less willing to support project in a deteriorating policy framework and with public criticism of government support. Many large projects undertaken in that period were no economically or financially feasible, because in some cases, contractual arrangements had failed to address potential risks adequately.

Despite the crisis, the investment need in many developing markets have remained enormous. Project finance still remained one of the best way to finance both public and private project through private investments, with such a mechanism for sharing costs and, consequentially, to reduce risks. In fact, only after few years, the volume of transactions reached a peak, in 2000, and then followed by precipitous decline (please refer to Graph 2.1. ) due to oil price crisis, Argentine depression and the “dot-com” bubble.

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Graph 2.1.: Emerging market project finance transaction. Source: www.pfie.com

The 2003-2006 time frame indicates a steady growth in project finance at global level, with a compound annual growth rate (CAGR)⁴⁰ equal to 21,5%. The increase in the value initiative is various among the geographic area as table 2.1. illustrates. The macro regions with higher concentration of developing countries show a stronger growth rate in the application of project finance than that found in countries where this instrument is traditionally used. The case of Africa exemplifies the trends with a compound annual growth rate equal to 54%⁴¹.

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Table 2.1.: Global value of project finance by geographical area from 2003 to 2006. Source: wwwpfie.com

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¹ Gatti S. (2008), Project Finance in Theory and Practice, London, Academic Press.

² Gatti S. (2008), Project Finance in Theory and Practice, London, Academic Press.

³ Kensinger J.W. and Martin J.D. (1988), “Project Finance: Raising Money the Old- fashioned Way”, Journal of Applied Corporate Finance, Vol. 1, Issue 3, pp. 69-81.

⁴ Yescombe E.R. (2002), Principles of Project Finance, London, Academic Press.

⁵ Barlow J., Roehrich J.K.,Wright S. (2013), “Europe Sees Mixed Results From Public-Private Partnerships For Building And Managing Health Care Facilities And Services”, Health Affairs, 32(1), pp. 146-154.

⁶ Yescombe E.R. (2002), Principles of Project Finance, London, Academic Press.

⁷ Yescombe E.R. (2002), Principles of Project Finance, London, Academic Press.

⁸ Morrison R. (2012), Th e Principles of Project F inance, Burlington, Gower Publishing Company.

⁹ In accordance with the principle, the subject's aim is allocating risk to the parties who are most capable of managing the specific risks or, where this is no possible, mitigating risks in other ways.

¹⁰ Gatti S. (2008), Project Finance in Theory and Practice, London, Academic Press.

¹¹ Nevitt P.K., Fabozzi F.J. (2000), Project financing, London, Euromoney Books.

¹² Esty B.C. (2003), The Economic Motivations for Using Project Finance, Mimeo.

¹³ Yescombe E.R. (2002), Principles of Project Finance, London, Academic Press.

¹⁴ This type of debt is subordinated to other SPV's debts, included senior debt and bond. It produce benefits to both SPV and Sponsor. It is less expensive than equity for SPV and, on the sponsors hand, it enhances return on equity and avoid dilution, it provide tax benefits to their issuers and it is more flexible than equity.

¹⁵ Gardner D., Wright J., Project Finance, Ch. 12, HSBC, http://www.hsbcnet.com.

¹⁶ Yescombe E.R. (2002), Principles of Project Finance, London, Academic Press.

¹⁷ Principles can be viewed at the IAS website http://ec.europa.eu.

¹⁸ Corner B., Bodnar G.M. (1996) , Project Finance Teaching Note, Teaching note.

¹⁹ Yescombe E.R. (2002), Principles of Project Finance, London, Academic Press.

²⁰ Corner B., Bodnar G.M. (1996) , Project Finance Teaching Note, Teaching note.

²¹ “A syndicate of banks might be chosen from as wide a range of countries as possible to discourage the host government from taking action to interfere with the project and thus jeopardize its economic relations with those countries.” - Fight A. (2006), Introduction to Project Finance, Burlington, Elsevier.

²² Corner B., Bodnar G.M. (1996) , Project Finance Teaching Note, Teaching note.

²³ Yescombe E.R. (2002), Principles of Project Finance, London, Academic Press.

²⁴ Graham D.V. (2006), Project finance, London, Sweet & Maxwell.

²⁵ It is used “could” because such letters should not be regarded as any kind of commitment on the bank's part.

²⁶ The purchaser is a retail market.

²⁷ Colombi F. (2013), Tecniche per il Project Financing, Teaching note.

²⁸ Yescombe E.R. (2002), Principles of Project Finance, London, Academic Press.

²⁹ Yescombe E.R. (2002), Principles of Project Finance, London, Academic Press.

³⁰ Gatti S. (2008), Project Finance in Theory and Practice, London, Academic Press.

³¹ Gatti S. (2008), Project Finance in Theory and Practice, London, Academic Press.

³² In calculating GNI and GNI per capita in U.S. dollars for certain operational purposes, the World Bank uses the Atlas conversion factor. The purpose of the Atlas conversion factor is to reduce the impact of exchange rate fluctuations in the cross-country comparison of national incomes.

³³ www.worldbank.org

³⁴ Morrison R. (2012), The Principles of Project Finance, Burlington, Gower Publishing Company.

³⁵ Fight A. (2006), Introduction to Project Finance, Burlington, Elsevier.

³⁶ The PURPA is a United States Act passed as part of the National Energy Act. It was meant to promote energy conservation (reduce demand) and promote greater use of domestic energy and renewable energy. The law was created in response to 1973 energy crisis.

³⁷ Gatti S. (2008), Project Finance in Theory and Practice, London, Academic Press.

³⁸ Ahmed P.A., Fang X. (1999), Project Finance in Developing Countries, Washington, International Financial Corporation.

³⁹ Gatti S. (2008), Project Finance in Theory and Practice, London, Academic Press.

⁴⁰ CAGR measures the return on an investment over a certain period of time: CAGR(t0,tn) = (Vtn/Vt0) tn-t0 -1

⁴¹ Gatti S. (2008), Project Finance in Theory and Practice, London, Academic Press.