Project Finance

Summary

Long term financing of industrial and infrastructure project is often referred as project finance. The finances are not based on the balance sheets of their sponsors. Instead, it is based on the flaws of cash of that particular project. Various parties are involved in project finance. A number of equity investors are involved. They are known as sponsors too. A bank or other lending agencies also needs to get involved in order to lend financial support or simply loan for various operations. Often, these kinds of loans are non-recourse loan. Non-recourse loan cannot be paid with general assets or trustworthiness of the project sponsors. These loans are secured and paid with the cash flow of the project only. This method is supported by standard model of finance. Revenue producing contracts and all project assets are used to secure the finances. A lien over the assets is provided to project lenders. Lenders are given privileges are given to the lenders to take control over the project if the related company is facing difficulties or not complying with various terms of the loan.

In order to shield other assets of project sponsors to save themselves from detrimental effects or project failures special purpose entities are created for almost every project. Special purpose entity indicates that there are no assets owned by the related company other than those in the project. Financial soundness of the project is assured by capital contribution commitment of the owners. Such commitments also ensure the commitment of leaders towards the sponsors. Project finance method is comparatively complex than other alternative financing methods. This method is widely used in the area of mining, transport and communications projects. Project finance is nowadays highly growing in the field of sports and entertainment also.

Identifying risks and allocating them efficiently is important aspect of project finance. There are various risks involved in a project such as technical risks, environmental and economic risks and political risks as well. These risks are even noticeable in developing countries and newly emerging markets. These risks are considered unacceptable or un-financeable by most of the financial institutions and project sponsors. Various delivery methods are implemented in project finance in order to avoid or decrease these risks. These methods are nothing by various implementation patterns of the project in order to manipulate outputs. According to methods, if risks are a little bit higher, the financing of that project is distributed between more than single parties that can be any number more than one. It will make it sure that both the risk and profit are distributed among several parties equally and in less amount.