The new 2020 Project Finance guide features 17 jurisdictions. The latest edition of the guide provides expert legal commentary on PPP transactions, guarantees and security, enforcement of collateral, foreign investment, licence requirements, bankruptcy and insolvency, insurances, and tax.
Last Updated: November 03, 2020
Project Finance Developments
In recent years, the number of participants in global project finance markets has increased notably, as a wider range of lenders and sponsors, located in various parts of the world, have become active players.
The capacity to fund large-scale projects and historical experience in cross-border transactions have led commercial banks to act as a traditional source of financing. However, the financial crisis and the changes in the financial regulatory framework, such as the Basel III standards, have limited the availability of credit and made multi-sourced financing for commercial banks into the main structure filling the funding gap worldwide.
This means that large-scale projects are now financed using more sophisticated and complex financial and legal instruments, provided by a diverse set of public and private institutions. In recent years, the diversity of market participants has risen, including capital markets investors, export credit agencies (ECAs), multilateral development finance institutions and government lending institutions.
Notwithstanding this increased complexity, a combination of local market expertise, sound commercial structures (and relationships), due diligence and robust security packages has helped to ensure that the new structures are used effectively.
Moreover, global economic growth and the consequent increased demand for energy have become a major driver for capital investment; this is especially the case in fast-growing countries. In emerging markets, despite the political uncertainty and tighter fiscal policies, the flows from developed financial markets have driven the search for yields, and led the bond market in Latin America to a record high of USD140 billion in 2017.
Required Investments and Results
The need for remarkable projects and innovative deals worldwide over the last year has dominated the headlines. For example, the Asian Development Bank estimated that investment in infrastructure in Asia must add up to approximately USD1.7 trillion per year by 2030 in order to maintain growth momentum, tackle poverty and respond to the issue of climate change. To fill the gap, the private sector would have to increase investment from USD63 billion per year to as much as USD250 billion per year between 2016 and 2020.
In 2016, the McKinsey Global Institute released a report assessing the worldwide demand for increased infrastructure investment. This report estimated that the USD2.5 trillion invested around the world every year in transportation, power, water and telecoms systems is not enough and that, from 2016 to 2030, the world must invest USD3.3 trillion a year in economic infrastructure in order to support rates of growth. The report further estimates that emerging economies will demand approximately 60% of that amount.
However, despite high demand for a greater number of projects, the market continues to be adversely affected by the instability of commodity prices and the difficulties arising from global political events.
As a result, according to data from Thomson Reuters, global project finance loans in 2019 amounted to USD296.6 billion from 816 deals, an increase of 5% on 2018. The power sector remained the most active throughout 2019, with financing totalling USD123.5 billion.
America's project finance loans in 2019 reached USD91.4 billion, down 4.7% from 2018. The power sector accounted for 51.7% of that market, closing for a total amount of USD47.28 billion.
EMEA (Europe, the Middle East and Africa) project finance loans totalled USD121.6 billion in 2019, up 10.4%. The power sector posted a decrease of 19% in activity compared to 2018, with deals amounting to USD42.44 billion.
Asia Pacific and Japan project finance loans in 2019 amounted to USD83.59 billion, which was up 9.3% compared to 2018 figures.
Along with the increase in the global volume of project loans, the green bond financing market has also been fostered over recent years and has an increased presence in the international market. In 2019, the climate-aligned issuance rose to USD257.7 billion, an increase of 51% on the final 2018 figure of USD170.6 billion. Of the total, USD10 billion (4%) were green loans.
Although it is difficult to predict how the markets will react, particularly given concerns about political events and the impact of COVID-19 on the global economy, the demand for infrastructure projects is as high as ever, and the growth of major project financing is likely to continue.
It is clear that structuring project finance that includes multiple funding sources is becoming more complex every year. It is therefore key for market participants (including lawyers) to be fully familiar with market trends and a diverse pool of businesses and risks associated with the projects.
Despite all recent results and developments, project finance has frequently proved to be a resilient way to fund infrastructure projects. Therefore, it remains one of the main sources of funds worldwide and there is no reason to believe that this will cease to be the case in the near future.