Advantages And Disadvantages Of Project Finance

The term “project finance” is used loosely by academics, bankers and journalists to describe a range of financing arrangements. Often bandied about in trade journals and industry conferences as a new financing technique, project finance is actually a centuries-old financing method that predates corporate finance. However with the explosive growth in privately financed infrastructure projects in the developing world, the technique is enjoying renewed attention. The purposes of this note are to contrast project finance with traditional corporate financing techniques; to highlight the advantages and disadvantages of project finance and; to propose that a single structure underlies every project finance transaction; to explain the myriad of risks

Investors would provide financing for trading expeditions on a voyage-byvoyage basis. Upon return, the cargo and ships would be liquidated and the proceeds of the voyage split amongst investors. An individual investor then could decide whether or not to invest in the sailing ship’s next voyage, or to put the capital to other uses. In this early example the essential aspect of project financing is the finite life of the enterprise. In corporate finance terms, we can also think of this mandatory liquidation as a fixed dividend policy. The idea of project finance predated the idea of permanent capital entrusted to a group of professional managers who would decide rather autonomously between paying dividends and

The promoter/Entrepreneur has a wide choice of sources of funds out of which he can choose. The choice is of course, governed by the cost of funds and financial risk involved. Companies are raising record amounts from the capital markets reducing their dependence on institutional finance with beneficial impact on cost of funds.

Funds availability should no longer restrict the choice of a project and technology required to implement it . the project should be technologically sound, second to none in the world and financially viable; otherwise , the competitive strength would be compromised, time has come to assess costs and productivity in international terms. The relevant of the project has to be established in international context. A good, sound and viable project would have no problem in finding market acceptance.

Projects should not only be qualitatively adequate but should also be forthcoming at a quantitatively sufficient rate, since major contribution to economic growth has to come from the industry. Investment in projects is required on a sufficiently larger scale to support adequate growth in GDP. The tempo of funds raised from market has been building up in the last few years and is likely to gain further momentum in