Project Finance and Projects in the Energy Sector in Developing Countries

The purpose of this study is to show the importance of using project finance in infrastructure investments in developing countries. The paper will be focused only on one infrastructure sector, which is energy. Structurally, power project finance has involved largely buildown-transfer (BOT) project structures and long-term contracts. The projects largely reflect a rational allocation of risks among public and private participants. Private sponsors and lenders generally assume risks for completion and performance. Governments assume substantial risks in nearly all projects, mostly in areas in which they have control, such as utility performance, currency convertibility, fuel costs, inflation, and political event. The aim of this research is to empirically examine a financing and governance structure called Project Finance that typically funds large scale, capital intensive, infrastructure investments in risky countries. The methodology used in this paper is literature review of the main theories for project finance. I will empirically test the propensity of the firms to use project finance, using data of some projects in South –East countries. For this purpose the study compares project financed and corporate financed transactions in the energy sector. I find that the propensity of firms to use project finance is high and statistically significant when large sunk investments have state owned primary buyer firms in risky countries.