Question

Project finance is one of the most innovative ways by which public projects can be financed via the Public Private Partnership model. However, it has been noted that project finance is not the panacea for financing all public projects. Discuss.

Answer 1

Project finance is the financing of the project based upon the cash flows generated from long term projects rather than balance sheet adequacy of the borrowers.

It is a modern way of financing in which both debt as well as equity lenders of the company assess the risk associated with the cash flows from the project and after analysing the probability of different cash flows streams lend money to the borrower.

It involves a number of equity investors known as sponsor and a number of syndicate of banks lending debt to the Company.

However, it has been noted that project finance is not the panacea for financing all public projects because of following reasons-

1. It is a highly complex method which involves a lot of forecasting associated with the cash flows related to projects and it can't be predicted accurately.

2.It has a high level of compliance requirements and there is a strict level of regulations involved.

3.It requires continuous expert assistance because of the complexity involved.