A. Thillairajan and Monalisa Behera
Private equity (PE) has emerged as an important source of capital for infrastructure in recent years. There have been more than 2,000 deals by PE infrastructure funds till 2012…
Abstract
Purpose
Private equity (PE) has emerged as an important source of capital for infrastructure in recent years. There have been more than 2,000 deals by PE infrastructure funds till 2012, with annual investments in the range of $100-120bn. Substantial proportion of these investments has been in the energy and the power sector. This paper aims to compare power generation projects with and without PE investment.
Design/methodology/approach
In this study, 148 power generation projects that were implemented in India during 2004-2011 were used for the analysis. Ordinary least squares and three-stage least squares regression have been used to analyze the impact of PE investment on unit project costs and project commissioning time.
Findings
Projects with PE investment had lower unit capacity costs as compared to power projects that did not have PE investment. This indicated the ability of PE investors to select, invest and develop those projects that are cost-effective. However, projects with PE investment had longer commissioning time. This can be attributed to the active monitoring and governance practices that were associated with PE investment.
Practical implications
The results highlight the key role that PE investors can play in power sector development in developing countries. Apart from providing capital to capital-starved economies, PE investors can help in developing cost-effective projects and contribute to sector development by institutionalizing robust processes and governance practices.
Originality/value
This is one of the earliest studies to analyze the impact of PE investment on the power sector.
Details
Keywords
Thillai Rajan Annamalai and Nikhil Jain
Privately financed infrastructure projects commonly use a project finance structure. Project finance is expected to facilitate investment flow in risky environments. The objective…
Abstract
Purpose
Privately financed infrastructure projects commonly use a project finance structure. Project finance is expected to facilitate investment flow in risky environments. The objective of this paper examines the link between the use of project finance and investments in risky environments.
Design/methodology/approach
Project Finance International database has been used as the data source for this study. 3,372 transactions from power, oil and gas, transportation, telecommunication, and water supply sectors have been considered means analysis and multi-variate regression models have been used in the analysis.
Findings
The average project cost in a developing country was higher than that of developed countries. Gearing ratio, however, was higher in the developed countries. This indicated that the projects had a lower level of inherent risk, which enabled them to get funded at high gearing levels. The proportion of foreign banks in the syndicate was higher in the developing countries, which indicated that the use of project finance has helped to attract investment from foreign investors.
Practical implications
Practitioners and project development companies in the developing countries should actively consider using project financing technique for achieving financial closure of large infrastructure projects. Simultaneously, policy makers should create appropriate supporting institutional framework (regulatory, legal, contractual arrangements) that supports the use of project finance.
Originality/value
As far as the authors know, this study uses a dataset that has not been used in the previous studies. The results of this paper strengthen the understanding of project financing.