With so many different financing structures to choose from, which one is the optimum? That very much depends on the project itself as well as the participants. As with other infrastructure projects, capital intensive energy projects are often financed as stand-alone entities (Project Finance) rather than as part of a corporate balance sheet (Corporate Finance). The main advantages of project finance are:
- Non-recourse/limited recourse financing: There is no or only limited recourse to the project sponsor's assets for the liabilities of the project. Thus, the project preserves the sponsor's debt capacity. Also, lenders will be more keen to participate in a workout.
- Risk Sharing: By setting up a separate legal entity, the project risk is isolated and can be allocated to the parties that can best control, understand and mitigate the risks involved. Consequently, incentives for all involved are optimized. This includes political or country risk.
- Favourable Tax Treatment: Project Finance structures allow tax benefits to be allocated to entities that can make use of them.
- Improved Financing Terms: The project may obtain more favourable financing term than it would based on the sponsor's credit profile alone. This way projects can be carried out that would be too big for one sponsor.
