Project Finance Vs Corporate Finance


This research has the main objective of determining why project funding is preferred to corporate finance in financing high-profile projects. The economic problem experienced by the world economies marred with the world economic crisis, financing of high-profile projects or large-scale projects is more difficult in this kind of situation. It is evident that project finance has been on the rise in the recent past and has been growing tremendously. A study by Allen, Morris, and Shin (2004) reveals that the growth has been catalyzed by the enormous spending in high-profile projects by the companies and the limited ability of the company’s statement of assets to fund such projects. Companies are, therefore, required to determine the best available technique of project financing, which is subject to its diversity and distinctive style, and extent of use (Barberis and Thaler 2003).

The choice of investment type to be used in financing these projects sets a challenge for companies and therefore, the company has to make an intelligent decision before settling on one. This paper will examine the advantages of project finance as opposed to corporate finance.

While project finance is for financing high-profile projects, it is characterized by a hybrid of debt and equity. The project will be paid back with the cash inflows from the project rather than assets and the creditworthiness of the company as in the case of corporate finance. Corporate finance deals primarily with how companies raise their capital and efficient operation of such capital, the investment decisions, and how the benefit is shared between retaining some and sharing it amongst the shareholders.

Purpose of the Study

The rationale of the study is will be to examine the fundamental reasons why Balfour Beatty, HSBC Holdings, and Goldenberg Real Estate companies prefer the use of project finance to corporate finance in funding high-profile projects. Hennessy and Whited (2005) show a study on “The standard practice of debt and equity in funding high-profile projects as opposed to corporate finance” (p.80). The study will also demonstrate the advantages of project finance over corporate finance.

Research Questions

  1. What are the advantages of project finance to corporate finance in funding high-profile projects and what are the main differences?
  2. What areas are corporate finance useful in the companies’ development?
  3. What are the specific areas in project finance that further research is needed?

Literature review

The literature review will cover the methods of financing the company’s investment to determine the reasons why project finance is the most preferred

  • Project finance
  • Corporate finance

Project finance

Project financing is a uniquely innovated and convenient way that leading organizations and the government have used to support high-profile corporate projects like the Eurotunnel and Euro Disneyland. It involves the company’s use of mixed financing to fund its long-term projects with substantial capital outlay. Mostly it is employed in funding enormous volume natural resource projects. Gompers and Lerner (2003) research indicate that in recent days project funding has increasingly been used by companies investing in high-profile projects to finance their high profile projects as an alternative to traditional methods known before as in the case of Balfour Beatty, HSBC Holdings, and Goldenberg Real Estate in their recent expansion investments. This new method (Project finance) of financing high-profile projects by companies need exclusive research needs to be undertaken to prove its effectiveness.

A discrepancy exists on the exact advantages that will accrue to a company that uses project finance and eschew the use of corporate finance in funding high-profile projects. A study by Bolton and Dewatripont (2005) in discussing project financing indicates that “corporate finance is only used to maximize the shareholder’s equity but not for business projects that will reduce what the shareholders receive” (p.201). The risks should be reduced to lower levels in order to protect the shareholder’s equity. The funds that are available for corporate finance are shareholders’ equity. Project finance is both debt and equity (Allen and Gale, 1994 Cited in Penrose, 1996).

Abreu and Brunnermeier (2003) say that the structuring of projects is better on debt-equity relations; this allocates and reduces risk to some acceptable levels. Beenhakker’s book of risk management in project finance and Implementation contains the principles of managing high-profile projects. Graham (2003) argues that high-profile projects need to regard and cautious to eliminate possible losses. Allen, Brealey, and Myers (2005) make much explanation on how corporate governance of large projects and financing has advantages on these projects. The question is on how such projects are funded and the cash flow assessment of their returns.

There is more existing literature on the valuation of project finance and theories of project finance, where the standard valuation is by reason of Discounted Cash Flows that encompass Free Cash Flow or Equity Cash Flows. Esty (2003) says that this approach involves straightforward calculations. Project Finance evolves, and there have been intensified and complex calculations that result in explicit values needed for the establishment of returns.

Data from Balfour Beatty, HSBC Holdings indicates that Valuations have been refined further in an effort of refining the process calculations of returns is concerned. Landier and Thesmar (2004) explain that this has been achieved by the introduction of Real Options Analysis in Project Finance.

The international finance corporation supports the use of project finance as an acceptable way of managing risks. Bavaria (2002) Research indicates that currently 90% of high-profile projects are financed by project finance as in Goldenberg Real Estate company.

Logan (2003) indicates that “High profile projects have substantial capital structure and a well-developed finance theory need to be established in funding such projects” (p.208). The only option finance system is project financing with a number of well-developed theories. Lewellen and Lewellen (2004) indicate that “These theories explain the capital structures of companies’ projects”.

The loans acquired in this category are secured and at the time of compensation, they are paid using the cash flows from the project. This decision is in line with the modeling performance of project financing. Beenhakkeh (1997) reinstates that the lenders are given lien and are guaranteed the sovereignty of the project in case the project holders are unable to repay the loan.

Corporate finance

Studies show that the fundamental part of corporate finance is to raise the price of the shareholder’s equity but not necessarily expand the investment. Delmon (2005) in his research indicates “The financial issues associated with corporate finance are driven into achieving the goal of shareholders equity, as opposed to growth aimed at in project finance” (p.303). Tesco financial data indicates that by using corporate finance, the risks undertaken are meant to minimize and protect the value of the shareholders. Balcombe and Smith’s (1999) study indicates the companies’ only emergency on this type of financing is to increase shareholders value but not the firms’ and the financial commitment made must follow this purpose of shareholders equity. Heaton (2002) makes a clarification that, in this kind of financing there is no conflicting finance; only value is used and the shareholders have no right to repossess the company if the management cannot make proper returns.

Companies using corporate finance aims at reducing risks but not expanding into high-profile projects. Olivier (2000) the companies investing in such projects need to take funding that can take care of the risk as well as that is capable of meeting the financial need of such large projects. Landier and Thesmar’s (2004) studies show that Corporate finance is, therefore, not the best option since it cannot receive the full requirement of financing such projects, this is reinstated by the data from AstraZeneca company when they used the same in 2006 expansion investment. Project finance is used in long-term projects and their value is only paid from the cash inflows derived from such investments but after some period of time.

Allen, Morris, and Shin (2004) discussed a number of factors that are considered when choosing the right funding for different projects. He also discusses the advantages of each type of funding as a concern to their effects on the company’s shareholders as well as management’s interests of business.


The research questions will be administered on the basis of companies that have invested in high-profile projects. Constantinides, Harris, and Stulz (eds) (2003) in their handbook demonstrate how comparison of projects can be done. The information model will be used for the comparison of risk minimization on the two ways of financing projects. The research will use both quantitative and qualitative data. The qualitative data will be used to determine the resultant difference in companies that use project finance and corporate finance. The quantitative data will be used to establish the number of companies applying the concept of finance in financing their projects. The written statement showing tremendous benefits resulting from the employment of project finance will be exploited.


The study will be carried out from data available from locally established companies that have invested in high-profile projects and have used both the project and corporate finance. The sectors to be covered are the construction, real estate, and finance sectors. For real estate and construction companies, the research will use Balfour Beatty, HSBC Holdings and Goldenberg Real Estate are the companies that have used project finance while in the financial sector Tesco and AstraZeneca are the companies with data showing the use of corporate financing.

These five companies will be selected at random from the record I identified. The main source of the data will be secondary data available from the financial releases. These data have been analyzed and only verification will be done to establish their effectiveness.

Data analysis and selection

Research questions The source of data time analysis
  1. What are the advantages of project finance to corporate finance in funding high profile projects and what are the main differences?
The data from Company surveys on project financing. Corporate and project finance options 1stmonth The data will be analyzed statistically.
  1. What areas are corporate finance applicable in the companies’ development?
Questionnaires and journal filling. These questionnaires will be filled from the data available in libraries. Establishing the facts and compiling information. 2ndmonth Different theories of the project and corporate financing will be used to analyze the data.
  1. What are the specific areas in project finance that further research is needed?
The establishment of facts on both financing options.
Finalizing the research and verifying data.
3rdmonth Comparison of the data will be used to get the exact reason for preferring project finance.


  1. All the officers in charge will give reliable information for data collection.
  2. The companies must have used both the corporate and project financing their project.


The findings from this research will be limited to the number of companies chosen and will be critical to the companies which will undertake high-profile projects in the future.


The study might change the traditional direction on how companies used to see methods of financing and where which one is most suitable. Data analysis and collection


Abreu, D. and Brunnermeier, M. (2003) Bubbles and crashes. Econometrical 71:173–204.

Allen, F. and Gale, D. (1994) Financial Innovation and Risk Sharing. Cambridge, MA: MIT Press.

Allen, F., Brealey, R. and Myers, S. (2005) Principles of Corporate Finance, 8th edn. New York: McGraw-Hill.

Allen, F., S. Morris, and H. Shin. (2004) Beauty contests and iterated expectations in asset markets. Mimeo, Wharton School, Yale and London School of Economics.

Balcombe and Smith. (1999) Refining the use of Monte Carlo Techniques for Risk Analysis in project planning, the journal of development studies, 26(2), 113-135.

Barberis, N. and Thaler, R. H. (2003) A survey of behavioral finance. In Handbook of the Economics of Finance (ed. Constantinides, M. Harris, and R. Stulz). Amsterdam: North-Holland.

Bavaria, S.M. (2002) syndicate loans: Related Market, at last! Standard & Poor’s corporation, 2/12/02.

Beenhakkeh, H.L. (1997) Risk Management in project finance and implementation, Quorum Books (Westport, CT).

Bolton, P. and Dewatripont, M. (2005) Introduction to the Theory of Contracts. Cambridge, MA: MIT Press.

Constantinides, G., M. Harris, and R. Stulz (eds). (2003) Handbook of the Economics of Finance. Amsterdam: North-Holland.

Delmon, J. (2005) Project Finance: BOT Projects and Risk, Kluwer Law International (The Hague Netherlands).

Esty, B.C. (2003) Teaching Note, Financing the Mozal Project, Harvard Business School, Boston.

Gompers, P. and Lerner J. (2003) the really long-run performance of initial public offerings: the pre-Nasdaq evidence. Journal of Finance 58:1355–1392.

Graham, J. R. (2003) Taxes and corporate finance: a review. Review of Financial Studies 16:1075–1129.

Heaton, J. (2002) Managerial optimism and corporate finance. Financial Management 31:33–45.

Hennessy, C. A. and Whited, T. (2005) Debt dynamics. Journal of Finance 60:1129–1165.

Landier, A. and D. Thesmar. (2004) financial contracting with optimistic entrepreneurs: theory and evidence. Mimeo, New York University and HEC, Paris.

Lewellen, J. and Lewellen, K. (2004) Taxes and financing decisions. Mimeo, MIT.

Logan, T. (2003) Optimal Debt Capacity for BOT projects in emerging Economies. The Journal of structured project finance volume: fall 2003 p71-79.

Olivier, J. (2000) Growth-enhancing bubbles. International Economic Review 41:133–151.

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