During the past four decades, the project finance (PF) has emerged as an important method of financing large-scale, long-term, high-risk domestic and international industrial ventures, based upon the projected cash flows of the project rather than the balance sheets of its sponsors. This is usually defined as limited or nonrecourse financing of a new project to be developed through the special purpose vehicle (SPV). It involves a number of the equity investors (sponsors), as well as a syndicate of banks or other lending institutions that provide loans to the operation. The financing is typically secured by all of the project assets, including the revenue-producing contracts. Project lenders are given a lien on all of these assets and are able to assume control of a project if the project company has difficulties complying with the loan terms.
Generally, the SPV is created for each project, thereby shielding other assets owned by a project sponsor from the detrimental effects of a project failure. As a special purpose entity, the project company has no assets other than the project. Capital contribution commitments by the owners of the project company, are sometimes necessary to ensure that the project is financially sound or to assure the lenders of the sponsors’ commitment. The project finance is often more complicated than alternative financing methods. Traditionally, the project financing has been most commonly used in the extractive (mining), transportation, telecommunications industries as well as sports and entertainment venues.