Project finance is based on cash flow of the project which is also known as a long term infrastructure or financing. This is not based on project sponsors. In a structure of project financing there is the involvement of sponsors known as equity investors and the use of banks where loans can be obtained known as a syndicate. The loans are paid through the use of cash flow in the project and they are non recourse loans which provide a security by using project assets. The use of project assets secures financing which includes revenue producing contracts. Lenders in the project can assume some control in case the project company faces difficulties complying with the terms of the loan.
During the initial stages of each project assets which belong to other sponsors are shielded by creating for the project special purpose entity. The project company has no other assets. The assets which come under the project generally are created for the special purpose entity. Lenders in the project make a capital contribution simply to ensure that there is a financial balance in the project. Alternative financing methods are relatively easy compared to project finance. Project finance has been made use of in transportation, mining, public utility industries and telecommunication. In certain parts of Europe the principles of project financing have been made use of in the public infrastructure.
The identification of risk and its allocation comprise of project financing key elements. In developing countries there may be many risks based on economy, politics and the environment. Sponsors may decide that the risks posed during such circumstances are unacceptable. In such situations sponsors in financing projects such as railway lines or power plants work with other specialist companies where the inherent risks can be allocated in case it takes place. This is known as the project delivery method where the implementation of various patterns is put into place. The risk is distributed among the other specialist companies while at the same time ensuring that each party receives its share of profits. Project financing that may seem riskier and more expensive will require a sure security made by the sponsor known as limited recourse financing.
This project financing method was initially used in Greece and Rome during ancient times. By the twentieth century it had spread across the United States and was widely used in the gas and oil industry. The high risk project financing was created after the seventies. When investments were made in such project financing, project operations such as multiple owners, complex schemes, management and the distribution of insurance loans were created.