Project Finance

You run the government of a city located on an island just off the coast of the mainland. Until now, people who want to visit your city (or people who want to get off) have to use a ferry. But you want to build a bridge. You need money to build the project (that is, the project of building the bridge). Time for some project financing.

The term refers to the structures used to raise cash for a particular infrastructure or public service enterprise. It can also be used by companies for large industrial projects.

Typically, the process works like this: an entity is set up just for the project. The so-called special purpose vehicle has no other assets or responsibilities beyond the project at hand (in this case, the bridge to the mainland). The special purpose vehicle will raise money by selling debt and/or equity, using the revenue from the project as backing (for the bridge, you'll collect tolls to pay back the bonds that will be issued).

Because the project is contained within the newly-created entity, a default doesn't impact the larger organization. If the Bridge Building & Toll Co. defaults on the debt it issues, borrowers can't go after the city. They can repossess the bridge (however that would work), but the project is off-balance sheet for the main organization.

This situation makes the debt issued "non-recourse," meaning creditors can't go after your government (or whatever entity sponsored the project originally) if things go badly.