Project finance

Project finance is the provision of debt finance for a particular project, to be repaid with the cash flows of that project with no recourse, or limited recourse, to the borrower's other assets.

While the sponsors of a project would ideally like it to be entirely debt financed with no-recourse, this is rare. Either the project receives substantial equity funding from the sponsors, or limited recourse to the sponsors is provided in the form of guarantees, or both.

Some projects, especially those with governments as sponsors, also receive guarantees of sales and similar support to reduce operational risk.

Project finance is usually used for long term projects that require large initial investments, such as infrastructure and property development.

Many projects of this type are ultimately government backed, such as BOO (build, own operate) and BOT (build, own transfer) arrangements. These include British PPP (public private partnership) projects.

The government backed projects are frequently controversial. Common criticisms are that they fail to transfer risk to the private sector (but are on terms that assume they do), that there are conflicts of interest, and that they serve as a method of off balance sheet financing (government accounts are not drawn up to the same rigorous standards as those of listed companies).

Copyright Graeme Pietersz © 2005-2020