All About Financial Modeling for Project Finance

Project Finance - Infrastructure

Project finance enables shareholders to raise finance for a project without the lenders claiming their other assets or known as non-recourse financing.  As the financing is standalone, project finance only fits for investments that generate expected cash flows. Most of the risks are given to the operating vehicle or SPV (Special Purpose Vehicle). These project finance are often large infrastructure government-sponsored programs. To understand this better, we will further explain its  key concept, sources of capital, define involve parties, and elaborate financial modeling for project finance.

What is Project Finance?

Project finance is the financing of long-term infrastructure, industrial projects, and other public services based on a non-recourse or limited recourse financial structure. It is when the project pays back the debt and equity incurred by the project, by making use of the project’s generated cash flow. Basically, Project Financing is a loan structure that is dependent on the project’s cash flow while using its own assets, rights, and interests as collateral.

According to its definition, it is clear to see that project finance is only possible when the project itself has the ability to generate cash to cover all the expenses incurred for the project and at the same time have enough cash to pay off the debt. Hence, it is more popular and attractive to private sectors because companies are guaranteed to fund certain major projects off balance sheet. Thus, this will not affect the credit standing of the stockholders or government regulators and shift some of the project risks to the debtors, resulting in a gain of a higher rate compared to normal corporate lending. For this reason, the project financing model in Excel thrives on various platforms as it helps determine the viability of a certain project finance.

Key Concepts of Project Finance


Non-Recourse Financing

The most prominent project finance feature is a non-recourse debt to individual shareholders, including the project sponsors. It means the borrower has no personal obligation in case of monetary default. Generally speaking, these companies have limited liability, which means the lender’s recourse is only extended to the projects’ assets. 

The Special Purpose Vehicle (SPV) is formed with the definite intention of owning the project. It has no assets nor liabilities, so lenders do not evaluate the project upon underwriting. Instead, it entirely focused on the project’s viability. Though, in some cases, the lender may demand limited recourse from the investors if not entirely convinced with the project’s ability to compensate the loan.

Off-Balance Sheet Financing

In project finance activities, the project company is a stand-alone company known as SPV. Since there are various members and stakeholders in the project, any participant’s ownership interest is merely a minority subsidiary interest. Thus, the project company’s balance sheet is not consolidated into that of the project’s sponsors.

The project finance model off-balance sheet feature encourages investors or project sponsors because this loan does not impact their balance sheet with debt, nor does their available borrowing capacity. Likewise, the Government also find this feature quite pleasing since project debt does not affect their balance sheet, thereby alleviating the burden on an increasingly stressed economic space.

Capital-Intensive Projects

Notwithstanding the recent market volatility, there remains a pressing need for large-scale investment in infrastructure across a broad spectrum of industries worldwide. The capital-intensive project focuses on “greenfield” projects in sectors ranging from power generation to transmission, oil and gas, petrochemicals, infrastructure, mining, and telecoms. The global economic growth and demand for energy and commodities are significant drivers for large-scale investment in these sectors despite market volatility. The fast-growing economies like India and China supported this drift in energy and commodity prices.

Numerous Project Participants

Another salient feature of project financing is it’s numerous project participants. Since the project involves a considerable amount, project sponsors typically add equity investors to the project stakeholders’ list. Moreover, project loans are often too large for one banker to provide. 

Thus, if a project loan would represent a significant percentage of a lender’s capital, the lender usually assumes the lead in a consortium and distribute a part of the loan to other banking institutions. In this case, the risk of delinquencies of the project is also distributed. Aside from multiple financiers and investors, there are also diverse professional stakeholders such as consultants, suppliers, contractors, and off takers.

Project Finance Documents

Each project finance is unique; each structure varies between several industry sectors and from transaction to transaction. There is no standard project finance model that applies to all.

Project finance documentation has been continually premised on eliminating risk to the greatest extent possible or identifying risk at the earliest possible opportunity. And it will only be plausible if a detailed business plan and financial projection are in place. Building a detailed project finance model in Excel is quite complex and therefore requires an expert. Fortunately, there are a lot ready-to-use financial modeling for project finance templates available on our website to help you begin your investment journey.

Project Finance-Risk

Risk Allocation

One of the core elements of the project finance model is the allocation of risk among deal participants. Project finance activities work well when risks are identified clearly and passed on to the parties most capable of managing them. The project finance documents such as financial projection, contracts, business plan and etc. are used to allocate those risks.

Special Purpose Vehicle And Finite Life

 Project ownership is frequently held in a single-asset called Special Purpose Vehicle (SPV) with a limited life formed for the express purpose of owning a project according to a project financing transaction by the project sponsors. In most cases, the only defined termination of the project is upon the transfer of the SPV.

Cost of Financing

One of the most common project financing features is the cost, which is frequently more expensive than typical corporate financing options. In addition, project financing frequently involves using highly-specialized financial structures that drive costs higher and liquidity lower. The cost of underwriting project financing is ultimately higher than in other financings. Underwriting project finance takes a lot of work, time, and effort, given the complexity of originating and structuring a specialized financing structure. Thus, the project finance cost is substantially higher than any other form of financing. Furthermore, it may be even higher in some countries typically driven by higher premiums for emerging market and political risk.

Project Finance Structure

Generally, the sponsors create a legally independent company called a Special Purpose Vehicle (SPV) in which they are the principal shareholders. The lender typically demands 10 to 30 percent of the total project cost equity requirement to issue debt at a reasonable cost. For legal and accounting purposes, individual sponsors must ensure that they hold small shares of equity so that it cannot be construed as a subsidiary.  The SPV involves an enormous capital requirement, risks, and usually beyond the financial and technical capabilities of a single sponsor. Thus, it requires multiple sponsors, which normally complement each other.

Project Finance Structure

This illustrates a simple project financing structure. The promoter usually the government initiate a project primarily providing services to the public, in which the sponsors typically participates in promoting the project. A team or consortium of private firms establish a special purpose vehicle to build, own, and operate a  particular infrastructure project. The new company is capitalized with equity contributions from each sponsor. The SPV seek funds from lenders to complete the specific project. The lender analyzes the projected revenue stream generated by the project and assesses its assets to repay all loans.

 Large infrastructure projects may establish several legal entities to perform specific functions such as construction, maintenance, etc which are also complex in nature when it comes project financing modeling.  In other words, the sponsors may create legal vehicles in the area where they see themselves fit. This structure is frequently dictated by tax, credit, and other legal provisions of each participant. The government govern the relationship between the sponsors and the SPV in a concession contract. Sponsors are not precluded from being the lenders, which often overlap in practice.

Investment Case: Perks sponsoring of government-driven projects


Project Finance Sample Photo

The purpose of using project financing to raise capital is to form a bankable structure of interest to investors and limit the stakeholders’ risk by diverting some risk to parties that can better manage them.  In project financing, an independent legal entity is formed to raise the fund required for the project. Debt repayment, dividend, and operating expenses are obtained from the project’s revenues and assets. In both debt and equity, the investors require certain necessary legal, regulatory, and economic conditions throughout the project’s life. The project’s revenues are taken from the government and tariffs imposed on the user of service. In some cases, the private sector provider also pays concession fees to the government in exchange for the use of the government’s assets and the rights to provide the service, which is frequently a monopoly. Take the case of toll roads and port projects; the concession fee is based on the service’s use or the net income, giving the government a vested interest in its success. Thus, the likelihood of the success of the project is nearly guaranteed. However, an SPV will be terminated once its purpose is completed, which means its life is finite.  In some cases, toll roads in developed countries could increase to 40 years, while water and social infrastructure can bring down to 10 years for emerging markets and developing countries. This could be driven by limited terms available for financing,  potentially higher law restrictions, or higher political concern of granting too much profit to the private sector.

Sources of Capital for Project Finance

Bank and other Financing Sources

Project finance may come from various sources. The primary sources include equity, debt, and government grants. Financing from these sources has significant impact for the project’s overall cost, cash flow, liability, and claims to project incomes and assets.

Senior debt holds preference in terms of repayment over all other forms of financing. Common in project finance is the mezzanine debt which is subordinated to senior debt in terms of repayment but ranks above equity for cash distributions. Since mezzanine debt repayment could be influenced by the SPV’s  poor performance and senior debt gaining repayment priority, it usually commands higher returns than senior debt.

Debt related to this project is customarily priced based on the lender’s underlying cost, plus a fixed component or margin to cover default risk and other lender’s costs. It may be provided by commercial banks, international financial institutions, or directly from the capital market. In this case, project companies issue bonds held by financial institutions, such as pension funds or insurance companies looking for long-term investments.


Equity is typically provided by the project sponsors, which may likely include contractors who will build and operate the project. A substantial portion of the equity may be in the form of shareholder subordinated debt for tax and accounting benefits. Because equity holders carry the prime risks under this project, seeking a higher return on the funding they provide is expected.

Government Support

Government support could be defined as direct funding support by way of public sector capital contributions or grants. These may come from the community, national, regional, or specific funds allocation. They may be intended to make a project bankable or affordable. They may also be for particular types of risks that cannot be effectively controlled or alleviated by the Company or other private sector participants.

Preparing a Project Finance Model XLS

As investors and lenders became more familiar with project finance, it is no wonder that they showed increasing risk tolerance as well as vigilance towards the feasibility of the project. How do companies, investors (public or private equity), lenders, banks, etc., assess the economic feasibility and ability of the project to pay back? It is none other than preparing a project finance model to help assess the economic feasibility of the project. This will be used in creating a proper framework for a project finance deal. Most importantly, it is used to determine the maximum amount of debt the project can incur and a proper repayment plan.

Generally, the framework of any financial model is very simple: input – calculation algorithm – output. While in the financial model for project finance, it is more or less uniform and the calculation algorithm is predetermined by the accounting rules, where the input is highly project-specific. It is subdivided into categories such as:

  • Variables for forecasting revenues
  • Variables for forecasting expenses
  • Capital expenditures
  • Financing

Did you notice that most financial models end with an xls file extension? XLS file extension stands for an excel file. To have a better outlook or view on a structured model, using Excel is preferable. Since building a project finance model xls typically consist of the usual accounting spreadsheets like balance sheet, income statement, cash flow, retained earnings, taxes, present values, etc.

You might have heard of the term Debt Sculpting as it is common in project financing modeling. Basically, it calculated the principal repayment liability to make sure that the principal and interest liabilities are matched properly to the expected pattern of the cash flows in each period. The calculation algorithm will be easily understood and done by making use of the excel tool features.

A project financing in Excel is usually build to serve as a basis of conducting financial and sensitivity which are critical in determining the effects and changes in input variables on key outputs such as internal rate of return, net present value and payback period.

Project Finance Financial Model– Downloading Financial Model Project Finance Templates

Financial modeling project finance is, of course, not an easy task. Building a project financing in Excel will require one the know-how behind the industry as well as how to build the model itself. If you are interested in project finance models, then you can try out our selection financial model templates related to project finance such as: Infrastructure Industry Financial Model Templates.

Since project finance modeling involves a complex structure as well as huge amount of funds, the need to conduct a proper risk analysis is needed especially for ensuring the rate of return. If you plan to build a financial model project finance analysis targeting the IRR, you can check out this model template as well: IRR Project Finance Analysis. This template will allow you to forecast the expected financials for a greenfield project and calculate the levered and unlevered IRR.

Here’s an exhibit of a IRR Project Finance Analysis Model.

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Our model templates are downloaded and used by various users from different countries such as Australia, Japan, Germany, Switzerland, Singapore, and many more who are in need of help with their tasks in financial modeling.

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