The Advantages And Disadvantages Of Project Finance

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In addition, one of the principal disadvantages of project finance is that high set-up costs usually associated with establishing a project finance structure can usually be justified for large projects, usually valued at over US$20 million (Ochieng et al. 2013). Moreover, the cost of debt is typically higher in project financing than conventional financing due to the indirect nature of the credit support. The credit support is provided through contractual commitments rather than through a direct promise to pay. The lenders typically will have concerns about the failure of contractual commitments to provide an uninterrupted flow of debt service. Therefore, the lenders require a yield premium to compensate for the risk (Finnerty 2013). Furthermore, lenders will want to closely supervise the management and operations of the project, which include site visits by lender’s engineers and consultants, construction review, monitoring construction progress and technical performance, as well as financial covenants to ensure funds are not diverted from the project. Similarly, the lenders require the project company to provide a steady stream of financial and technical information to enable them to monitor the project’s progress. The reporting includes financial statements, interim statements, reports on technical progress, delays and the corrective measures adopted, and notices such as events of default (Fight 2006). 3.2.5 Risks and its Management in Project Finance All projects are
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