Advantages And Disadvantages Of Project Finance

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Project finance transactions are required for the smooth functioning of the organizations. Capital is the soul of an organization and in order to invest the same there can be two ways i.e. equity fund or borrowed fund. It is needed for the smooth functioning to bridge the financial gap but as everything has its advantages and disadvantages, project financing may also include various issues on the part of parties to agreement. Undoubtedly it is advantageous for a firm but on the same hand needs various precautions to maintain it as advantage.Project finance transactions present a number of potential challenges and issues. Some of the challenges of a project financing are set forth below: 1) Complexity Project finance transactions are complex…show more content…
It means that the upfront transaction costs which are involved in a project financing tend to be significant, and thus thereby precluding the use of project financing techniques for smaller projects, which are less able to absorb substantial upfront costs. 2) Increased Risk to Lenders One of the primary characteristics of project finance which can also be said to be one of the advantages to a project sponsor is that the structure of project finance is nonrecourse or limited recourse to the project sponsors. The revenue generated by the facility is the primary, if not sole, source of repaying the project debt. As a result, lenders in a project finance transaction assume the increased risk of not being repaid if the project is unsuccessful. Additionally, if risk cannot be effectively allocated or credit-enhanced, by default the risk falls upon the lenders. 3) Higher Interest Rates and…show more content…
Although this is the optimum position for the lenders, in practice the party most likely to be required to perform the role of insurer as a last resort is the Authority. It may also be possible to structure the project finance document around any problems caused by insurance gaps. 3) The project agreement The term ‘project agreement’ has already been discussed in the unit XVII of the study where we found that it is an agreement made between two or more parties to accomplish a certain goal in a certain way. As far as the issues are concerned, the agreement includes various typical clauses which may become the matter of concern for the lenders. The optimum position for the lenders in respect of the project agreement itself is as follows: • the terms of the concession should be fixed for the life of the project; • the arrangements for termination of the concession, where this is permitted, should not be deprive Project company of their rights and any compensation to which Project company is entitled should always be sufficient to repay the
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