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Project finance of power plant - Essay Example

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Project financing refers to an arrangement where lenders loan money to be used in developing a project based only on the project’s risks and cash flows upon completion. The lender therefore has little or no recourse to the company that develops the project (the Sponsor). This…
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Project finance of power plant
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Project finance of power plant

Download file to see previous pages... Emerging markets have also employed the concept3. For instance, a company may want to undertake some oil exploration and extraction. The process is very expensive. The company may convince several sources to finance its project, with an agreement that upon finding the oil and extracting it, they will have a share of the proceeds. Repayment is therefore based on the success of the project and the future cash flow determines the amounts each source gets4.
The principal participants project financing transaction include both national and international banks; national and international sponsors; government banks; capital markets; amongst others. The company seeking financing for the project will usually formulate a proposal that it presents to the various participants. Based on the strength of the project proposal, the company will get the funding subject to repayment terms. The terms are not fixed. They depend on the bargaining power of each of the contracting party5. The risk factor in such an arrangement is evident. The creditors lend the company undertaking the project the money not having a clear picture of whether or not they will get repaid6. They undertake a risk analysis that informs their decision to come aboard. We shall look at project financing, how it works, the risk involved and how lawyers go about addressing the risk issues and cushioning their clients from loss as much as possible.
Given the complexity of a project financing transaction, the number of players involved and their nature and the amount of money invested, the risk is very high. There is need to effectively manage the risk to ensure every party is cushioned from possible losses that may arise as a result of an unforeseen circumstance. Heinz-Peter Berg provides a 7 steps risk management procedure.7
Establishing goals and context: In this step, the environment of the project is reviewed to ...Download file to see next pagesRead More
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