Project finance is mainly used to provide funds for long-term physical assets with limited returns. It has great potential in conservation, although the demands on organizational capacity are large.
Project finance is the raising of funds to finance a particular project or economic unit in which the providers of the funds look to cash flow and earnings from the project to repay the loan, not to the cash flows or balance sheets of the sponsoring organizations. The debt repayment comes from the project company only, it is “non-recourse debt”.
Project finance is not a new idea. Both the British East Asia Company and the Dutch East Asia Company were financed as projects. Investors provided funds and were repaid according to their share of the cargo when it was sold. Railroads, mines and oil fields have also traditionally used project finance.
In the U.S., project finance really took off after the 1978 Public Utility Regulatory Policy Act, which required local utilities to purchase the output from qualified power producers under long-term contracts. Power plants could then be financed using these contracts.
Compared to other financing mechanisms for new ventures in the U.S., at $34 billion in 2004 it was smaller than the $73 billion raised through initial public offerings (IPOs), but larger that then $25 billion invested in new ventures by venture capital funds.
One of the current trends in project finance is public private partnerships (PPPs). The idea here is that the private sector companies manage construction and operations, while the public sector bears the market risk.
For an introduction to project finance, see the very useful Project Finance Portal.