CHAPTER 3The Record of Project FinanceLessons to Avoid Failures

Project finance deals are commonly viewed as sound investments because of the security packages and the web of negotiated contracts. The prevailing view is that failures are limited and losses are minimized when the security package includes a security agreement, a pledge of assets agreement, a mortgage or a deed of trust, and a direct agreement. Other considerations that limit failures are the following:

  1. Sponsor equity investment is usually adequate in the 20% to 40% range of project costs
  2. Sufficient risk insurance across all common project risks and strong host government guarantees are pledged
  3. Tight engineering, procurement, and construction (EPC), offtake, supply, and operations and management (O&M) contracts are negotiated and signed
  4. Interest rate and foreign exchange rate hedging contracts are in place
  5. The ECA and/or multilateral agency providing support and help in project approvals is present
  6. Lenders always get rights to control project company assets in the event of underperformance
  7. Waterfall accounts, covenants, and restrictions are included in the financing documentation
  8. Depository account agreements control the flow of cash from the project company

For large capital investment projects, it is difficult to measure success or failure for three reasons: Assessment is done along several dimensions, political considerations cloud project performance ratings, and failure grading is usually subjective. For ...

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