machinery. Such an arrangement has attributes that make it, in effect, an alternative form
of direct investment.
Financial counter-operations can be of different types. One commonly known is
switch-trading. Switch-trading, also called triangular compensation, involves three
countries. For example, a Western exporter delivers merchandise to an importing
country. As payment, the importing country may transfer other goods to a third country,
which then reimburses the Western exporter for the goods received. To take a concrete
case, German exports destined for Poland may be financed by the sale of Polish products
to France.
Project Financing
- Characteristics of Projects
Project financing may be defined as financing of an economic unit, legally independent,
created with a view to setting up a big project which is commercially profitable and
financially viable. Future cash flows should be sufficient to ensure, with an adequate
margin of security, coverage of operational costs and servicing of debt as well as owners’
equity.
The promoter of a project may set it up all alone or in association with other partners.
The project company is responsible for debt-servicing and should use, on priority basis,
the cash flow for repaying the debt.
Big international projects are of varied types and cut across all sectors of activity, say
construction of dams, nuclear energy plants, railway network, water treatment plants or
leisure parks. They present, however, certain common characteristics:
- Project is considered as a distinct legal entity and is financed, to a marked extent,
by debt. Therefore, the risk to be borne by lenders is substantial. - Several companies participate in development of the project.
- Project Financing.
There are two major methods of financing international projects.
- Financing with total risk borne by lenders where only the future cash flows ensure
the reimbursement of the loan. This method of financing was used in petroleum
and gas industry in the USA and Canada. Due to increased level of risks, this
method of project financing is generally not preferred.