Project finance is the funding (financing) of long-term infrastructure, industrial projects, and public services using a non-recourse or limited recourse financial structure. The debt and equity used to finance the project are paid back from the cash flow generated by the project.
Project financing is a loan structure that relies primarily on the project’s cash flow for repayment, with the project’s assets, rights, and interests held as secondary collateral. Project finance is especially attractive to the private sector because companies can fund major projects off-balance sheet (OBS).
Key Takeaways:
- Project finance involves the public funding of infrastructure and other long-term, capital-intensive projects.
- This often utilizes a non-recourse or limited recourse financial structure.
- A debtor with a non-recourse loan cannot be pursued for any additional payment beyond the seizure of the asset.
- Project debt is typically held in a sufficient minority subsidiary not consolidated on the balance sheet of the respective shareholders (i.e., it is an off-balance sheet item).
Understanding Project Finance:
The project finance structure for a build, operate, and transfer (BOT) project includes multiple key elements.
Project finance for BOT projects generally includes a special purpose vehicle (SPV). The company’s sole activity is carrying out the project by subcontracting most aspects through construction and operations contracts. Because there is no revenue stream during the construction phase of new-build projects, debt service only occurs during the operations phase.
For this reason, parties take significant risks during the construction phase. The sole revenue stream during this phase is generally under an off take agreement or power purchase agreement. Because there is limited or no recourse to the project’s sponsors, company shareholders are typically liable up to the extent of their shareholdings. The project remains off-balance-sheet for the sponsors and for the government.