Summary

In financing industrial projects the balancing of chance and risk plays an important role. The quantification of the possible value and the evaluation of the risks associated with the project is a matter of successfully forecasting scenarios for the development of factors influencing the project economics. The results of this forecast finally have to match the investor’s expectations and risk preference.

The role of institutional investors, especially Pension Funds, in the capital markets is immense, as the assets under their management are often reaching the GDP of the country. In developing countries the function of Pension Funds is more than just to provide adequate pensions. The large amounts of capital need to be channelled to develop the industry, economy, people education and the countries infrastructure and thus to lay the seeds for further growth and prosperity.

For the Peruvian case there are attractive arguments for Pension Funds to invest in a domestic fertilizer project under a project financing scheme.

First, the project itself contributes to the development of the Peruvian economy with a new quality. The production of a commodity with a strong growth forecast for the world market and the domestic market delivers a sound baseline for long term cash flow. Employment and qualification of people and the subsequent development of downstream businesses are further good reasons for the realization of the project with participation of Pension Funds.

Second, the financing through a project financing scheme seems feasible as it allows the arrangement of securities and commitment as the Pension Funds require them, because of regulations or internal portfolio considerations. A project financing scheme can be an independent small economic world with its own rules. The stability of the project and the credit rating are solely depending on the risk sharing agreement of the project sponsors and their ability to fulfil these. Selection of parties for the scheme becomes of great importance as trust and confidence in the other parties competence are essential elements for project realization.

Third, Pension Funds are seeking after low risk, long term and stable cash flow, objectives that, with the right financial vehicle to get the required level of protection for their investment, can be very supportive to a project. Pension Funds actual involvement might be different during the project phases as the project’s risk profile changes significantly also. Indirect financing, e.g. via bonds, might be swapped into direct financing, e.g. direct loans, once the major risks, like project completion, are overcome. Banks, looking for more short term investments with higher margins, might be willing to serve as intermediary, even more so if they can refinance their involvement through taking Pension Funds on board. This would also allow buffering the information asymmetries between project finance and the Pension Funds expertise.

Pension Funds involvement in project financing for large scale industrial projects could be benefiting to all stakeholders, and should be taken to the next level.