3.4. Project finance = cash flow related lending

In project finance the financial capital is raised by the project itself. A special purpose entity (SPE) serves as legally independent entity for the one specific undertaking only⁴¹, founded and sponsored by the project initiators, who represent the shareholders. The SPE’s only asset is the project itself, the sponsors only supply equity capital and receive proportional ownership. Consequently all risk and chance is depending solely on the project’s business activity⁴².

Illustration 9: Scheme of project financing⁴³

As the only asset of the SPE, the project’s cash flow is the only source to pay liabilities and interest. For this reason the project’s ability to generate positive cash flow is the central element in project finance and the reason for also being called cash flow related lending⁴⁴.

⁴¹ Reuter p 28
⁴² Cf Reuter p 11
⁴³ Own illustration following Reuter
⁴⁴ Reuter p 2