Abstract

"Financing the Future: The evolution and diffusion of project finance as a global financial commodity to support major infrastructural investments (1980-2022)"

Daniele Corbino, Bayes Business School, City St George's, University of London (daniele.corbino@bayes.city.ac.uk), Alessandro Giudici, Bayes Business School, City St George's, University of London (alessandro.giudici01@gmail.com), Barbara Casu, Bayes Business School, City St George's, University of London (b.casu@city.ac.uk)

This paper traces the historical evolution and diffusion of project finance, which has emerged since the late 1970s as an innovative technique for financing large, multiparty infrastructure projects that might otherwise be unfeasible. Infrastructure investments, such as power plants, railways, and oil facilities, are inherently risky, and information asymmetries between project sponsors often exacerbate these risks, potentially hindering successful project realization. Project finance mitigates these risks by shielding sponsors from recourse in case of failure through the creation of legally independent special-purpose vehicles, which insulate their assets.
Using detailed archival data from 12,370 transactions between 1980 and 2022, corroborated by expert interviews and documentary sources, we identify five diffusion milestones. We document them through a systematic analysis of several historical landmark projects, demonstrating how and why project finance has become a dynamic risk management tool, effectively reducing adverse selection and moral hazard in long-term, highly leveraged infrastructure investments.
We show how, after a rise in adoption in the 1980s, project finance encountered numerous failures due to inadequate risk management, including poor identification, measurement, and allocation of risks. This led to several innovations in the technique, and by the early 2000s, project finance had evolved into a reliable financial tool, cementing its position as a global financial commodity. This status was further reinforced when the first credit derivatives contracts using it as the underlying asset were structured in 1998.
Over the last decade, project finance has been widely adopted to support the energy transition, particularly in the context of international climate change initiatives. We discuss our findings from the perspective of the diffusion of financial innovations and highlight the growing potential of project finance to address the unique financing challenges of the future, especially in high-tech sectors with high risks and high rewards, such as the emerging space economy.