Project financing involves raising finance for the design, construction and development of a project's infrastructure and the procurement of any equipment and assets required for the operation of the project. This is done in a way that the debt and equity capital and interest, as well as all returns on the share capital, are repaid from future cash flows of the project.
The introduction of public-private partnership (PPP) transactions in 2001 caused project financing to come of age in South Africa. The Public Finance Management Act, No. 1 of 1999, and the regulations that the National Treasury published thereunder govern PPPs. Through PPPs, public and commercial interests look to banks to fund infrastructure development.
PPPs were initially introduced to fund prisons and toll roads, which depended on State occupancy payments or traffic volumes with concomitant toll fees, to service and repay debt over periods of 20 to 30 years. However, the use of project financing has recently been extended to greenfields mining, oil and gas, and energy projects.
In the absence of large corporate guarantees or corporate assets, a combination of debt and equity is used instead of solely relying on project cash flows that may be subject to market fluctuations. Banks' risk may be mitigated through a variety of mechanisms including the introduction of a strategic equity partner who has interest in the development and exploitation of the resource. Project companies may also consider raising junior or mezzanine debt to improve returns to equity shareholders and to reduce the risk to senior debt providers.
“Project financing involves raising finance for the design, construction and development of a project's infrastructure and the procurement of any equipment and assets required for the operation of the project.”
For a comprehensive document outlining the implications of this area of law in South Africa