An Overview of Project Finance - 2004 Update

Abstract:     
SUBJECT AREAS: project finance, capital investment

This note provides an introduction to the field of project finance and a statistical overview of project-financed investments over the last five years. Examples of project-financed investments include the $4 billion Chad-Cameroon pipeline, $6 billion Iridium global satellite telecommunications system, Euro 900 million A2 Toll Road in Poland, and the $1.4 billion Mozal aluminum smelter in Mozambique. Globally, firms financed $234 billion of capital expenditures using project finance in 2004, up from $172 billion in 2003. Despite a few setbacks (e.g., in 1998 due to the Asian crisis and in 2002 due to crises in the U.S. power and telecommunications industries), the use of project finance has grown at a compound rate of almost 20% over the past 10 years.

The note begins by defining project finance and contrasting it with other well-known financing mechanisms such as asset-back securities and secured debt. The next section describes the evolution of project finance from its origins in the natural resources industry in the 1970s to the U.S. power industry in the 1980s and to a much wider range of industrial applications and geographic settings in the 1990s and 2000s. The third section provides a statistical overview of the project-financed investment over the last five years (2000-2004). It covers a variety of institutional details at the industry, project, and participant level. For example, it presents data on the average size of projects ($400 million) and their capitalization (69% debt-to-total capital) as well as league tables for project loans, project bonds, and advisory work. The final section discusses current and likely future trends. This note can be used by itself to explain project finance or in conjunction with specific cases on project finance.

Working Paper Series