Project Finance

CHAPTER 1Principles and Application of Project Finance

ORIGINS AND HISTORY OF PROJECT FINANCE

Project finance is a highly versatile, if often misunderstood and misapplied, financing paradigm. There is no one single definition that succinctly captures project finance. Ostensibly, it is the long-term financing of infrastructure and industrial projects based upon the projected cash flows of the underlying project rather than the balance sheet of the project sponsors. Project finance refers to the financing of long asset life infrastructure, industrial and public assets, and services using non- or limited-recourse financing raised by an enterprise with a single line of business/finite asset life in accordance with contractual agreements.

Project finance is a tried and tested financial discipline that has been around for many centuries. The history and origins of project finance can be traced back to the 13th century when Italian banks financed a silver mine in Devon, England, with the loan repayment source being a lease over physical silver production from the mine. It has been used to finance maritime voyages to the new world in the 17th and 18th centuries with the merchant investors dividing the cargo spoils from returning ships. Project finance's application to infrastructure can be traced to the original construction of the Panama Canal and was key to financing wildcat upstream oil and gas investments in the early 19th century in the US along with the development of the North ...