§Definition - Project finance is the long-term financing of Economically independent

(seperable) infrastructure and industrial projects either on non-recourse or limited recourse

basis based upon the projected cash flows of the project rather than the balance sheets of its
sponsors.
Usually, a project financing structure involves a number of equity investors, known as
'sponsors', a 'syndicate' of banks or other lending institutions that provide loans to the operation.
They are most commonly 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, a decision in part supported by financial modeling.[1] 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.
- Flow type projects – eg. Highways
- Stock type projects – eg. Oilwell, mines

Types of sponsors
1. Industrial s. – Backward and forward integration
2. Public sponsors – govt, municipalities
3. Purely financial sponsors – ICICI
4. Construction s. – Golden quadrilateral
Generally, a special purpose entity 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. Project
finance is often more complicated than alternative financing methods. Traditionally, project
financing has been most commonly used in the extractive (mining), transportation,
telecommunications, power industries as well as sports and entertainment venues.

Risk identification and allocation is a key component of project finance. A project may be
subject to a number of technical, environmental, economic and political risks, particularly in
developing countries and emerging markets. Financial institutions and project sponsors may
conclude that the risks inherent in project development and operation are unacceptable
(unfinanceable). "Several long-term contracts such as construction, supply, off-take and
concession agreements, along with a variety of joint-ownership structures are used to align
incentives and deter opportunistic behaviour by any party involved in the project."[2] The
patterns of implementation are sometimes referred to as "project delivery methods." The
financing of these projects must be distributed among multiple parties, so as to distribute the
risk associated with the project while simultaneously ensuring profits for each party involved.
In designing such risk-allocation mechanisms, it is more difficult to address the risks of
developing countries' infrastructure markets as their markets involve higher risks.[3]
A riskier or more expensive project may require limited recourse financing secured by a surety
from sponsors. A complex project finance structure may incorporate corporate finance,
securitization, options (derivatives), insurance provisions or other types of collateral
enhancement to mitigate unallocated risk.[2]

Parties to a project financing

There are several parties in a project financing depending on the type and the scale of a project.
The most usual parties to a project financing are;
Sponsor (typically also an Equity Investor)
Lenders (including senior lenders and/or mezzanine)
Off-taker(s)
Contractor and equipment supplier
Operator
Financial Advisors
Technical Advisors
Legal Advisors
Equity Investors
Regulatory Agencies
Multilateral Agencies / Export Credit Agencies
Insurance Providers
Hedge providers
Project development

Project finance model

A financial model is constructed by the sponsor as a tool to conduct negotiations with the
investor and prepare a project appraisal report. It is usually a computer spreadsheet designed
to process a comprehensive list of input assumptions and to provide outputs that reflect the
anticipated real life interaction between data and calculated values for a particular project.
Properly designed, the financial model is capable of sensitivity analysis, i.e. calculating new
outputs based on a range of data variations.
Shareholders Agreement
The shareholders agreement (SHA) is an agreement between the project sponsors to form a
special purpose company (SPC) in relation to the project development. This is the most basic
of structures held by the sponsors in a project finance transaction. This is an agreement between
the sponsors and deals with:
Off-take agreement
An off-take agreement is an agreement between the project company and the offtaker (the party
who is buying the product / service that the project produces / delivers). In a project financing
the revenue is often contracted (rather than being sold on a merchant basis). The off-take
agreement governs mechanism of price and volume which make up revenue. The intention of
this agreement is to provide the project company with stable and sufficient revenue to pay its
project debt obligation, cover the operating costs and provide certain required return to the
sponsors.

Loan agreement
A loan agreement is made between the project company (borrower) and the lenders. Loan
agreement governs relationship between the lenders and the borrowers. It determines the basis
on which the loan can be drawn and repaid, and contains the usual provisions found in a
corporate loan agreement. It also contains the additional clauses to cover specific requirements
of the project and project documents.

Turnkey - Turnkey is a traditional public sector procurement model for infrastructure facilities.
Generally, a private contractor is selected through a bidding process. The private contractor
designs and builds a facility for a fixed fee, rate or total cost, which is one of the key criteria in
selecting the winning bid. The contractor assumes risks involved in the design and construction
phases
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