An Overview of Project Finance and Infrastructure

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REV: OCTOBER 1, 2007


An Overview of Project Finance and Infrastructure
Finance—2006 Update
This note provides an introduction to the fields of project finance and infrastructure finance as well as 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, €900 million A2 Toll Road in Poland, $1.4 billion Mozal aluminum smelter in Mozambique, and $20 billion Sakhalin II gas field in Russia.a Globally, firms financed $328 billion of capital expenditures using project finance in 2006, up from $217 billion in 2001.

In the United States, firms financed $47 billion of capital expenditures using project finance in 2006. In comparison with other financing mechanisms in the United States, the project-finance market was smaller than the $1,085 billion corporate bond market, $1,051 billion mortgage-backed security market, $1,250 billion asset-backed security market, $401 billion tax-free municipal bond market, and $229 billion equipment-leasing market. Yet compared with that of financing mechanisms for new or start-up companies, the amount invested in project companies was larger than the $43 billion raised through initial public offerings (IPOs) and the $41 billion invested in new firms by venture capital funds.1

Private sector firms have historically used project finance for industrial projects such as mines, pipelines, and oil fields. Beginning in the early 1990s, private firms also began to finance infrastructure projects such as toll roads, power plants, and telecommunications systems.b According to a World Bank study, global investment in new infrastructure assets will be $369 billion per year from 2005 to 2010, with 63% going to projects in developing nations.2 Much of this investment will occur in Asia and Africa. Indonesia alone, as an example, needs $150 billion over the next five years to build roads, communication networks, and power facilities.3 Studies on economic development find that infrastructure investment is associated with as much as one-for-one percentage increases in gross domestic product (GDP).4 A recent study showed that a 1% increase in telephone lines can, for example, increase GDP by 0.2%.5 Similar country-specific studies of development find that inadequate infrastructure severely hinders economic growth. For a Information on some of these and other projects can be found in Benjamin C. Esty, Modern Project Finance: A Casebook (Hoboken, NJ: John Wiley & Sons, 2004).

b The infrastructure sector includes water, transportation, electricity, natural gas, and telecommunications projects. Typically

the users of the project or the buyers of the output or service are individuals rather than companies. ________________________________________________________________________________________________________________ Professor Benjamin C. Esty and Research Associate Aldo Sesia, Jr. of the Global Research Group prepared this note as the basis for class discussion. This is the fourth note in a biannual series dating back to 2000, but the first note to cover infrastructure finance. Copyright © 2007 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School.


An Overview of Project Finance and Infrastructure Finance—2006 Update

example, insufficient or irregular power supply reduces GDP by 1% to 2% in India, Pakistan, Colombia, and Uganda.6 Despite the growing demand...