|
There is no single agreed upon definition for project finance. For
example, Finnerty (1996, p. 2) defines project finance as:
. .
. the raising of funds to finance an economically separable capital
investment project in which the providers of the funds look primarily to
the cash flow from the project as the source of funds to service their
loans and provide the return of and a return on their equity invested in
the project.
while Nevitt and
Fabozzi (2000, p. 1) define it as:
A
financing of a particular economic unit in which a lender is satisfied
to look initially to the cash flow and earnings of that economic unit as
the source of funds from which a loan will be repaid and to the assets
of the economic unit as collateral for the loan.
and the
International Project Finance Association
(IPFA) defines project finance
as:
...the
financing of long-term infrastructure,
industrial projects and public services based upon a non-recourse or
limited recourse financial structure where project debt and equity used
to finance the project are paid back from the cash flow generated by the
project.
Relatedly, Standard
& Poor's Corporation (2003, p. 23) defines a "project company" as:
...a
group of agreements and contracts between lenders, project sponsors, and
other interested parties that creates a form of business organization
that will issue a finite amount of debt on inception; will operate in a
focused line of business; and will ask that lenders look only to a
specific asset to generate cash flow as the sole source of principal and
interest payments and collateral.
Although none of these definitions uses the term
“nonrecourse debt” explicitly (i.e., debt repayment comes from the
project company only rather than from any other entity), they all
recognize that it is an essential feature of project finance.
The following definition, albeit slightly more cumbersome, allows one to
distinguish project finance from other financing vehicles, something the
previous two definitions cannot do:
Project finance involves the creation of a legally and
economically independent project company financed with nonrecourse debt
(and equity from one or more corporate sponsors) for the purpose of
financing a single purpose, capital asset usually with a limited life.
For a schematic comparison of project- vs. corporate-financed
investment, click on " project-financed
investment."
References:
Finnerty, J.D., 1996, Project Financing: Asset-Based Financial
Engineering. New York, NY: John Wiley & Sons.
Nevitt, P.K., and F.J. Fabozzi, 2000, Project Financing, 7th
edition, Euromoney Books (London, U.K.).
Standard & Poor's Corporation, 2003, Project Finance Summary Debt
Rating Criteria, by P. Rigby and J. Penrose, in 2003-2004 Project &
Infrastructure Finance Review: Criteria and Commentary, October. |
