Thursday, April 19, 2012

Project Finance as Business Finance

I received today an email solicitation from Euromoney Books promoting a series of publications on Project Finance.

Topics covered include: modeling a base case and sensitivities; structures for allocating risk; and sector-specific considerations.

The last topic is the one of greatest interest, for this reason.  Project Finance as it is currently practiced is largely viewed as an alternative to governmental funding for infrastructure projects: transportation, energy, water and wastewater, telecommunications and the like.

The Capital Markets, not these private partnerships, are generally viewed as the financing solution of choice for general business activities.  Partnership are reserved for quasi-governmental finance.

Is that a technology choice, or an accident of history?

Project Finance is actually a more recent innovation in capital formation than the Capital Markets.  It is only really possible in this, our own Computer Age, where forward commitments, rather than past performance, can be used as the basis for establishing investment needs and return expectations using the powerful computerized spreadsheets that we take for granted today, but only came to be in our own life times; and where computerized information can be shared among multiple participants from remote locations in real time, using desktop/laptop computers, email, the Internet, the World Wide Web and cell phones.  All powerful inventions and innovations that have only become fully available for routine use for connecting Enterprise and Investment in our times.

The Capital Markets, by contrast, are a vestige of the 19th Century.  They are place-based solutions for making indirect connections between Enterprise and Investment in the days before technology made real-time, direct communication possible.

Project Finance is leading innovations in finance in the 21st Century, powered by technologies for computerized data collection, information construction and remote communication.

Right now, mostly, governments are using these innovative solutions.  It is only a matter of time, however, before they make their way into general business.  Not as Project Finance, but as Base Case Cash Flow Partnerships.

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