Advanced Credit Risk Analysis and Management

11

Credit Risks in Project Finance

Successful projects by both government and the private sector usually determine the well-being of nations. Take any developed country. The number of projects initiated and completed in a developed country is usually much greater than in an under-developed country. Project has opportunities written all over it. It brings the resources of a country into productive use, creates employment, adds new products and output into the economy and a general pickup in demand ensues, which in economic parlance results in a Multiplier Effect. But a project needs capital to begin with. Project finance is a term used to describe the financing of any large capital investment that involves a longer time horizon with long run benefits. A significant part of project finance is arranged through credit.

Usually projects are funded through a mix of debt and equity because it is nearly impossible for the promoters to raise sufficient equity for large projects. The tax advantage of debt is yet another attractive factor. Also a range of suppliers of project finance exists – from regional banks and suppliers of plant and machinery to international financing institutions who are willing to fund both government and private sector projects which are viable.

11.1 DISTINCTIVE FEATURES OF PROJECT FINANCE

Project finance is different from other types of financing. It is this distinction that makes project financing riskier, requiring specialist knowledge. The following are some ...