Project Finance 2024

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 have brought 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, and includes:

• 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.

Required Investments and Results

The need for remarkable projects and innovative deals worldwide over recent years 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. See www.worldfinance.com.

In 2017, the McKinsey Global Institute released a report assessing the worldwide demand for increased infrastructure investment. This report estimated that, from 2017 to 2035, the world must invest USD3.7 trillion a year in economic infrastructure (such as transportation, power, water and telecommunications systems) in order to support rates of growth. The report further estimates that emerging economies will demand approximately 63% 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 LSEG (see here), global project finance loans in 2023 totaled USD355 billion from 989 deals – a decrease of 8% compared to 2022, but the second highest annual volume on record. The power sector remained the most active throughout 2023, with financing totaling USD158 billion via 672 deals, of which 608 were renewables.

America’s project finance loans in 2023 reached USD151.1 billion from 455 deals, up approximately USD1 billion compared to 2022. The power sector accounted for approximately 53% of that market, closing for a total amount of USD80 billion from 339 deals – up an impressive 35% in number of transactions compared to 2022.

EMEA (Europe, the Middle East and Africa) project finance loans totalled USD129 billion in 2022, representing a decrease of 18% compared to 2022.

Asia-Pacific and Japan project finance loans in 2023 amounted to USD74.8 billion from 255 deals, which was down 4% compared to 2022.

The climate bond financing market saw an increase in 2023, when climate-aligned issuance rose to USD870 billion – up 3% compared to 2022. In addition, the climate bonds deals were priced in 44 currencies, indicating a global presence of this type of instrument. See https://www.climatebonds.net/market/data/.

Conclusion

Although it is difficult to predict how the markets will react, particularly given concerns about political events and their impact 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.

Structuring project finance that includes multiple funding sources is clearly 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 being the case in the near future.