Project Finance and Investment

The options for Financing Projects In the Private Sector or Public Domain are numerous and  sometimes labyrinthine.

 While individual finance instruments span the range of complexities, the basics are not that difficult. For an overview, let’s consider   the fundamental accounting identity:

Assets=Liabilities + Owner Equity

The balance sheet for any company or individual project must obey this simple equation. So, if an individual or company wants to undertake an investment project (i.e., to increase the assets in its portfolio), then it needs some way to pay for these assets. Remembering the fundamental accounting identity, if Assets increase then some combination of Liabilities and Owner Equity must increase by the same dollar amount. Herein lies the fundamental tenet of all corporate and project finance: financing activities that increase the magnitude of Assets must be undertaken through the encumbrance of more debt (which increases total Liabilities) or through the engagement of project partners with an ownership stake (which increases total Owner Equity).

Hence, all projects must be financed through some combination of “debt” (basically long-term loans by parties with no direct stake in the project other than the desire to be paid back) and “equity” (infusions of capital in exchange for an ownership stake or share in the project’s revenues).