From Principles of Project Finance


The life of a project can be divided into three phases:

  • Development. The period during which the project is conceived, the Project Contracts are negotiated and signed, and the equity and the project finance debt are put in place and available for drawing the end of this process is known as "Financial Close" (or the "Effective Date").

  • Construction. The period during which the project finance is drawn down and the project is built the end of this process is often known as the "commercial operation date" (or "COD").

  • Operation. The period during which the project operates commercially and produces cash flow to pay the lenders' debt interest and principal repayments and the investors' equity return.

The Sponsors (cf. 4.1) play the primary role during the development phase of the project, managing this process (cf. 4.2) and making use of external advisers (cf. 4.3). Where more than one Sponsor is involved, a joint-venture structure has to be agreed to (cf. 4.4). The Project Company is usually set up towards the end of the development phase and manages the project from Financial Close (cf. 4.5s). The project may also be developed initially by parties other than the Sponsors through a bidding (public procurement) process for a Project Agreement, organized by the Off-taker or a public-sector authority (cf. 4.6).


In order to obtain project finance debt, the investors have to offer priority payment to the lenders, thus accepting that they will only receive their equity return after lenders have been paid their amounts due. Therefore, investors assume the highest financial risk,...

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Topics of Interest

OVERVIEW This chapter covers the procedures for raising project finance from private-sector lenders, in particular commercial banks (cf. 5.1) and bond investors (cf. 5.2), with a comparison between...

OVERVIEW This chapter reviews the main building blocks of information and assumptions used for projections that are assembled to create inputs for a project financial model (cf. 12.1, 12.3 12.6), the...

13.2 DEBT SERVICE Debt service (i.e., loan interest payments and principal repayments) is one of the biggest factors in the financing structure that influences an investor's rate of return. The...

OVERVIEW This chapter examines some of the main financial structuring issues likely to arise once the commercial fundamentals and risks of the project, and the cash flow that results from these, have...

13.3 DRAWDOWN OF DEBT AND EQUITY 13.3.1 Priority of Drawing Once the debt:equity ratio has been agreed to with the lenders, the question arises about which is to be spent first, debt or equity?...