Project finance exemplifies modern globalized business transactions in that a single project can bring together numerous participants from across the world, and in that sense it is a truly international undertaking. A general definition of project finance is "the financing of an economic unit in which the lenders look initially to the cash flows from operation of that economic unit for repayment of the project loan and to those cash flows and other assets comprising the economic unit as collateral for the loan." The "economic unit" is often referred to as a Special Project Vehicle (SPV). Project finance is commonly used to finance large-scale infrastructure projects such as toll roads, power plants, airports, and desalination plants, as well as natural resource exploitation projects such as hydroelectric dams, mining projects, oil and gas assets, and paper mills. These types of projects often require larger amounts of capital than one company alone can raise, or entail greater amounts of risk than one company alone can bear. Thus, project finance enables companies to pool capital and spread risk. Moreover, because the project is its own economic unit, it is "off-balance sheet" from the vantage point of the sponsor companies, thus further insulating the sponsors from the project's liabilities. Also, governments will sometimes look to project finance to undertake projects that would be difficult for the government to finance through its own resources, or because the host country and its government lack the expertise to domestically construct and operate the project. In sum, project finance is common in both the public and private sector, and has been since the mid 1970s.
Alan J. Alexander,
Shifting Title and Risk: Islamic Project Finance with Western Partners,
Mich. J. Int'l L.
Available at: http://repository.law.umich.edu/mjil/vol32/iss3/5