Project Finance

Abstract Infrastructure projects are capital intensive, for example, an ultra-mega thermal power project of 4 GW capacity would require about Rs.200 billion to be built. A company could have sponsored a number of these projects and raising the associated amount of capital based on the balance sheet of the company would limit the number of such projects that it can finance. Therefore, it is best to create special purpose vehicles for implementing each of these projects with project financing being used to finance them. This is the best way of accessing infrastructure finance by the private sector as it allows companies to raise finances on the basis of the cash flows generated by the project, with no recourse to the balance sheet of the project sponsor (non-recourse financing). A ring-fenced company (special purpose vehicle) is created whose only purpose is to implement the project and the interests of other stakeholders (construction company, fuel supplier, off-taker, lenders, and so on, in a power plant) are protected through watertight contracts. The chapter discusses the reasons why project finance is used in financing private infrastructure projects, features of project finance, and contractual structure among stakeholders. The chapter also discusses project financing trends in India and the world.