Project finance is a form of long term financing of infrastructure and industrial projects based upon the projected cash flows of the project rather than the balance sheets of the project sponsors. In most cases, a project financing structure involves a number of equity investors, the sponsors, as well as a group of banks or other lending institutions that provide loans to the operation. The loans are usually non-recourse loans, which are secured by the project assets and paid entirely from project cash flow, rather than from the general assets or creditworthiness of the project sponsors. 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.
Project finance has a long history behind it. Limited recourse lending was used to finance maritime voyages in ancient Greece and Rome. Its use in infrastructure projects dates to the development of the Panama Canal, and was widespread in the US oil and gas industry during the early 20th century. But it was the development of the North Sea oil fields in the 1970s and 1980s that really gave a boost to high-risk infrastructure schemes . For such investments, newly Special Purpose Corporations/Vehicles (SPCs) or (SPVs) were created for each project, with multiple owners and complex schemes distributing insurance, loans, management, and project operations. Such projects were previously accomplished through utility or government bond issuances, or other traditional corporate finance structures.
In the developing world this form of financing peaked around the time of the Asian financial crisis, but the subsequent downturn in industrializing countries was offset by growth in the OECD countries, causing worldwide project financing to peak around 2000. The need for
References: Course material http://en.wikipedia.org/wiki/Project_finance http://www.ipfa.org/ http://www.investopedia.com/