Handbook of Finance: Investment Management and Financial Management

Chapter 78. Project Financing

HENRY A. DAVIS

Editor, Journal of Structured Finance

FRANK J. FABOZZI, PhD, CFA, CPA

Professor in the Practice of Finance, Yale School of Management

Abstract: Among its many applications, structured finance may be used by corporations to fund major projects so that the lenders look to the cash flow from the project being financed rather than corporation or corporations seeking funding. This financing technique is called project financing (or project finance) and uses the special purpose vehicle (SPV) to accomplish its financing objectives. Both project financing and asset securitization use SPVs, yet project financing involves cash flows from operating assets, whereas asset securitization involves cash flows from financial assets, such as loans or as receivables. Project finance is often used for capital-intensive facilities such as power plants, refineries, toll roads, pipelines, telecommunications facilities, and industrial plants. Before the 1970s, the majority of project lending was for natural resource ventures such as mines and oil fields. Since then the applications of project finance have broadened considerably, but power has been the largest sector. Industries engaged in the production, processing, transportation, or use of energy have been particularly attracted to project financing techniques because of the needs of such companies for new capital sources. Enterprises located in countries privatizing state-owned companies have made extensive use ...