Introduction to project finance
Introduction to project finance

The following Banking & Finance guidance note provides comprehensive and up to date legal information covering:

  • Introduction to project finance
  • Concept of project finance
  • Structure of documentation in a project finance
  • Key risks and risk allocation in project finance
  • Security in project finance transactions

This Practice Note provides an introduction to project finance. It explains:

  1. the concept of project finance, including the nature of typical projects, the key parties involved and the type of financing used

  2. the typical documentation structure in a project finance transaction

  3. the key risks involved in a project finance transaction and how those risks are typically allocated, and

  4. the typical security package in a project finance transaction

Concept of project finance

A typical project finance transaction involves finance being provided to:

  1. construct and/or operate a new asset or facility

  2. acquire and/or refinance an existing asset or facility, or

  3. exploit something tangible like oil or gold

Project finance can also be used for an arrangement where a concession to run an existing asset is given in return for payment of a capital sum (for example, an airport).

Projects which involve the construction of a new asset are known as greenfield projects whereas projects which involve the acquisition of an existing asset are known as brownfield projects.

The types of assets which could be eligible for project finance are almost limitless.

The common thread between the types of assets which are financed by project finance techniques tends to be that the asset has a predictable revenue stream. The revenue stream is essential because it is typically the project's revenues which are used to service the borrower's