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1. Project finance is a popular vehicle used to build large infrastructure projects. Describe project finance. What are some of its salient characteristics? Offer reasons for its use in building large projects. Discuss the benefits of project finance?

Project finance is a method of financing where the lender accepts future revenues from a project as a guarantee on a loan. Project finance has some salient characteristics that are different from traditional finance. In project finance, the repayment of debt is not based on the assets reflected on the sponsoring company’s balance sheet, but on the revenues that the project will generate once it is completed. The focus in project finance is mostly on loans to the project company, with project revenues as the source of the return on the investment to lenders. Generally, large projects require large volumes of capital, such as infrastructure projects. Project finance allows countries to build the infrastructure necessary to increase growth and development. Project finance draws a greater volume of financing than traditional finance because risks are often spread among the various participants, and development organizations mitigate risks by providing political and commercial guarantees. Without project finance, many essential and life-enhancing projects may have never been constructed. Project finance has a lot of benefits:

1. Eliminate or reduce the lender’s recourse to the sponsors

2. Permit an off-balance sheet treatment of the debt financing

3. Maximize the leverage of a project

4. Circumvent any restrictions or covenants binding the sponsors under their respective financial obligations

5. Avoid any negative impact of a project on the credit standing of the sponsors

6. Obtain better financial conditions when the credit risk of the project is better than the credit standing of the sponsors

7. Allow the lenders to appraise the project on a segregated and stand-alone basis

8. Obtain a better tax treatment...