Project Financing Initiative

Project Financing Initiative

Project financing initiative (PFI) or Public-Private Partnership (PPP) is where the debt incurred by a project is paid back by the income that comes from the completed asset. It can also be known as nonrecourse (or limited recourse if mixed with other financing) unsecured or off-balance-sheet financing. Non recourse means that the financial lenders have no recourse to claim against if the project is a failure. It is unsecured because the loan is not secured by any assets other than those of the project itself and its future income. It is called off balance sheet because the capital invested in the project will not appear on the balance sheet of the parent company. Project financing differs to the more common way projects are paid for (which is when the parent company or from capital or revenue expenditure) by being a stand-alone entity. PFI is generally associated with larger complex projects which become more complex with the added difficulty of financial planning. Finance is important to a project because it is often the largest cost in a project particularly on longer duration projects. This is because the interest on loans used to finance the project can start at 20% but can rapidly increase during the project lifecycle until the loan is paid off. This is financing cost will be much greater than the costs of materials, labour , design and construction. PFI has been commonly used in the UK with one of the first notable projects using this method being the channel tunnel between England and France.

What is the difference between PFI and financing of a project?

Project Finance structure

Why PFIs became popular and then unpopular

Added complexity

Added Risks and feasibility reviews