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Project Finance:  Definitions 


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  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.[1]  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."



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.

[1] Limited recourse debt—debt that carries a repayment guarantee for a defined period of time, for a fraction of the total principal, or until a certain milestone is achieved (e.g., until construction is complete or the project achieves a minimum level of output)—is a subset of nonrecourse debt.  The distinguishing feature is that at least some portion of the debt becomes nonrecourse at some point in time.

If you have any suggestions for additional content, please contact Professor Benjamin C. Esty.
Last updated August 30, 2004

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