Simply put in layman's language, 'Project Finance' is a long-term funding for infrastructure, industrial projects, and public services using a nonrecourse or limited-recourse financial structure. The debt or equity based loan structure required to finance the project is based primarily and entirely on the projected cash flows and hence, are repaid solely from the cash flow generated by the project's assets, rights, and interests serving as secondary collateral. This approach is especially attractive to the private sector because companies can fund major projects off-balance sheet, which means the debt used to fund the project does not appear on the company's balance sheet and has no impact on its credit rating or borrowing capacity.
Some of the common sponsors of project finance include the following entities:
- Contractor sponsors: for subordinated or unsecured debt. They are crucial to the project's establishment and operation
- Financial sponsors: are mainly focused on achieving a big return on their investment
- Industrial sponsors: companies with a strategic interest in the project, as the project may align with their core business
- Public sponsors: include governments at various levels
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