This appendix introduces some basic features of project finance. It also identifies some different approaches to, and the principles of, financing PPP projects. It provides an explanation of major sources of funding and outlines some benefits and limitations of project finance. This appendix should be read in conjunction with chapter 1 as not all the issues, complex and often project-specific, relevant to PPP financing structures are discussed in this summary.
For PPP projects, project finance is the mechanism adopted for obtaining debt financing from lending institutions. Project finance is a specific kind of financing in which lending institutions look primarily at the expected project revenue stream as the only means for payment of the interest and repayment of the outstanding debt. The lending institutions do not look so much into the firm's asset and liability portfolios when deciding to extend a loan. Rather, they look at a project as a distinct entity with its own project assets, project-related contracts and project cash flow segregated to a substantial degree from the entity sponsoring the project. For this reason, project finance is also known as ‘limited recourse' or ‘non-recourse’ financing as lenders will normally not have recourse to the entities (sponsors and shareholders) which have initiated the project if the project has difficulty in servicing the debt. This is in contrast to corporate lending in which lenders rely on the strength of the borrower’s balance sheet for their loans.