Well, welcome, I'm Bob Dewing. I'm an adjunct professor at Columbia University, and I'm pleased to welcome you to this segment discussing project finance. I've been in the project finance business for some 30 years, and it really is one of the most exciting businesses you can be in. And welcome to the session today. Let me start out by trying to address the obvious question, what is project finance, and where does it come from? Project finance is very much the financing of projects. It is raising capital for capital-intensive projects. The natural resource industries pioneered this, the oil and gas industry in Texas in the 1930s. Mining in the 1960s, when the projects were very large and needed to raise vast amounts of capital. The North Sea was a big development stage in project finance in the offshore oil and gas industry. And a very big growth in project finance occurred in the US when the IPP legislation was put in place and allowed for private development of generating capacity. This has been subsequently followed by electricity privatizations elsewhere, public infrastructure, and telecoms, also, in the big capital investments in the 1990s. What is the first and most important premise of project finance? It's very much a project is a stand-alone entity. This has to be emphasized right from the beginning. This is not corporate finance. This is looking at a project, putting it into a special purpose vehicle, a special purpose entity, and managing that special purpose entity. It is designing a business from beginning to end. It is comprehensive and complete in every fashion. So project finance is a special purpose vehicle. If you do not have a special purpose vehicle, you probably do not have a project finance. The reason you have a special purpose vehicle is to control the cash flows. And you clearly have got contractual obligations. And the financings and the capital that goes into it is limited recourse. This is not financing on a corporate basis. You only have the cash flow and the contract parties that are involved in the cash flow from the specific project. Lenders rely on cash flow. Project finance is cash flow lending, and the lenders look for the cash flow from these projects. Project agreements and other agreements determine all the management and operations of a project financing. Why do people do project financing? Well, the very first benefit, really, is higher leverage. Project financings are very well-structured, they're very contractual. They allow for, really, a very high leverage, much higher leverage than you would have if you were just doing this as corporate finance, because there are more controls on the cash flow. There are some tax benefits to project financing, and sometimes project financing, if it's a joint venture or similar, can be off balance sheet. There's a greater borrowing capacity in projects because they're stand-alone entities, and controlled. And you know exactly what you have within the vehicle. These entities can borrow more than a typical corporation would be able to borrow on the corporate basis. There's risk limitations. Investors in project financing understand that you really only have recourse to the assets and cash flows in the project. And therefore, there's a risk limitation. So investing in a project allows a sponsor or an investor to know exactly how much capital they have invested and how much is at risk. And there isn't a greater risk of this being recoursed to the corporate sponsor. Project financings tend to be very long term. Some project financings can be 30 and 40 years long. This is something that the corporate market, really, other than the very best corporates, would be unable to obtain. And the reason the project financings, really, infrastructure ones, can be this long is because the assets are strictly controlled. The cash flows are strictly controlled, and you have a predictable cash flow over a very long period of time. But overall, other capital projects can raise capital for much longer than a corporate would of a similar standing. Project financings are also put in place when there are unequal partnerships, and you have a stronger and a weaker partner, and the two partners want to be able to work together on a really commercial basis. And the stronger partner doesn't want to be seen to be carrying the weaker partner at no cost. So when you have unequal partnerships, it allows stronger and weaker parties to work together in a single project and on a very equal basis. And some project financings are put in place, major corporations, some of the big, large, multinational oil companies do project financing because they appreciate the third-party due diligence that comes in with the aspect of having outside finances. And project financings have a very extensive due diligence process, and some major corporations really appreciate that due diligence process. There are third-party benefits to project fInancing, especially in infrastructure. Provide lower product life cycle costs, they provide additional investment. Many public sector bodies, there are borrowing limits, but private project financing allows them to acquire assets in advance of money being available in the budget. So there's an additional investment. Project financing is about risk transfer, too. Many sponsors enter into a project financing to have very specific and contractual risk allocations to outside parties. So they know what their risks are and what their risks are not, and how they've allocated those. And because they're in a special purpose vehicle, it's very clearly understood what they are. And overall, for the tenure of the financings and the expected returns, in many cases, project financings lead to lower project costs. Just picking up here, what's the project finance market look like? Last year, this is 2016 now, 2015, global project finance loans were at $276 billion. This was just up slightly from 2014, and is the highest amount of project financings that have been done, just slightly ahead of 2007. The biggest region for project financings is Europe, Middle East, and Africa, and that was 39% of the global market. But as you can see from the slide behind me, these vary over time about what is the most popular. Which sectors and which industries are most keen on project financing? Well, clearly, the power sector is the leading sector. And it generally is, and has been for a very long period of time, if not the number one, then number two. Infrastructure just occasionally approach the power as the biggest sector, but in general, the power sector is, by far, the biggest sector. Infrastructure closely follows, and then oil and gas after that. The other sectors are very much smaller and tend to be a little bit more episodic. Things like telecoms now hardly exist. And yet, 15 years ago, in the large capital expenditures in those businesses, it was a very much bigger segment.
