Flashcards in Tutorial 5 Deck (15):
One or more of the following can be said to be true of project financing
1 - Fund providers look primarily to the cash flow from the project to service their loans as well as providing return on investment
2 - Project financing reduces the cost of resolving financial distress because it doesn’t involve multiple debt financing
Sponsors in project financing are
Owners of the project to be financed
The ‘limited recourse’ principle in project financing is about
Access of lenders only to the cash flow of project assets
One or more of the following would distinguish project financing from conventional direct financing:
1 - The functionality of special purpose vehicles
2 - Project financing increases vulnerability to financial distress
3 - Security against project insolvency
Project sponsors can expand their debt capacity as they can finance the project on the credit of their clients
Project financing is potentially vulnerable to litigations.
One advantage of companies using the project financing scheme is that it allows them to record project debts off their profit and loss accounts.
The private finance initiative (PFI) strategy of procurement was widely adopted by Labour and Conservative Governments in the UK because:
1 - There was a prevailing view at the time that PFI schemes are effective and efficient in the delivery of projects
2 - It was widely believed that PFI would help to shift business risk from public to private sector operators and help Governments to ‘balance the books’ by reducing their public sector borrowing requirements
In the UK experience of PFI projects, investors were attracted to these projects because of one or more of the following:
1 - Possibilities for refinancing loans
2 - Provisions for ‘bail out’ by government in the event of bankruptcy
Evidence on the performance of PFI projects in the UK shows that most PFI projects were not considered to be ‘value for money’ because:
1 - The PFI schemes did not provide an effective mechanism for transferring business risk from public sector to private sector agencies, and for regulating the profits made by the PFI operators.
2 - The PFI schemes were not popular among the public and trade unions.
Refinancing opportunities would arise for PFI contractors when:
Interest rates decrease
In the context of the UK experience, there is no evidence to suggest that PFI projects in general provided improvements in the quality of services to tax payers
In the context of the UK experience, PFI schemes were criticised for allowing excessive profits for private companies at the taxpayers’ expense.
In the context of the UK experience, most of the refinancing done by PFI contractors can be categorised as ‘debt restructuring’.