- It accommodates off balance sheet financing of the project, which will not influence the credit of the shareholders or the government contracting authority, and moves a portion of the project risks to the lenders in return for which the lenders acquire a higher edge.
- A project sponsor has no or limited liability to the lenders for breach or default, and the lender’s primary recourse is to the pledged collateral. Therefore, a project sponsor’s financial risk is constrained to the measure of capital commitment to the borrower. This component helps a project accomplish monetary freedom and shields a project sponsor’s assets from the inconveniences of the project.
- As a general concern, project financing systems may permit value providers off-balance sheet treatment of liabilities relating to the project, including the debt.
- Project financiers evaluate a project based on the merits of the individual project, including the risk allocation. Therefore, the financing terms are often more favourable to a project sponsor than if the lenders were making decisions based upon the project sponsor’s credit.
- In project finance transaction, risk is shared among all of the project participants. This risk sharing encourages project participants to perform well and improves the chances of success of the project.