What Is International Project Finance?

Geri Terzo

International project finance is the launch of a new project overseas in which financial institutions, mainly investment banks, provide debt and equity to fund the endeavor. These projects could occur in emerging markets whose economies are still developing and where financing efforts involve a great deal of risk. International project finance allows for the expansion of individual industries and entire economies in other countries through extensive projects that are expected to produce cash flow. After the construction of some international project is complete, the financing for that endeavor also ends.

Because financial institutions often interact with foreign clients, it's important that some employees are fluent in a second language.
Because financial institutions often interact with foreign clients, it's important that some employees are fluent in a second language.

Risks in project finance might be high, and this can be especially true for international endeavors. A business that turns to project finance relies on loans and equity extended by financiers. The guarantee for repayment is tied to the future cash flow expected to be generated exclusively from a project even if a business is earning revenues in its separate operations. When projects are being performed in other nations, particularly emerging economies, those risks become amplified because of potential instability surrounding politics or the economy that could compromise the completion of a project.

Nonetheless, international project finance contributes to the expansion of economies in developing countries. It is a process that is relied upon for the development of bridges and roads in addition to the creation of energy production in a nation. The financial institutions that become involved in international project finance are taking on risk, with the only collateral being the assets used in the project itself. Typically, the duration for international project finance is long-term in nature because these endeavors often take years or decades to complete. The process involves forecasting what the anticipated cash flow from a project will be and extending debt and equity financing based on those projections.

Funding for international project finance might be extended by a global investment bank that has an interest in sharing in the profits of a growing economy's expansion efforts. It might also derive from a specialty financing firm that focuses exclusively on supporting international endeavors. Certain companies might specialize in extending capital to projects in a certain industry, such as tourism. This segment of project developers might first raise money from other institutional investors, including pension funds and asset managers, to fund the international project finance activities. In turn, the outside investors become entitled to the profits and risk exposure that are accepted by the developer.

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