Project financing systems are designed to minimize risk and increase investor returns.

Project finance involves the long-term financing of industrial projects and infrastructures that are based on projected cash flows of the intended project like in the power sector (Gupta & Sravat, 1998). The funds used are received through sponsorship which includes investors and the lending institution which grant the loans for the operation. These funds are mostly secured by the project assets which are entirely paid through the cash flows generated. For this cash flow to be generated there is the need to make the project worthy (Gupta & Sravat, 1998).

Generally, to add value to the project, demand must out-strip supply. For example in the case study of Dabhol Power Company, they were set to be responsible for developing and operating all the phases of the power station and its fuel facility. Having a superior ability to access reserves which are difficult to find helps in creating value (Gupta & Sravat, 1998). By using economies of scale and its scope facilitates lowering cost per unit thus creating value. Having a relatively lower cost of the external source of financing for large projects creates value. Risk identification is a way of adding value to the project and allocation of key components (Gupta & Sravat, 1998). This involves the number of technical experts involved, environmental risks as well as political and economic risks. Identification of the risk type and whether it is inherent to the project development and whether it is unfinanceable. Joint ownership and concession agreements such as pre-emption and disposal rights, injection of share capital and resolution of force and disposal policy create value since it deter opportunistic behavior and aligns incentive to the parties involved. Project delivery methods play a great role in creating the value for the project. This involves pattern implementation of financing resources to the involved parties. This is the distribution of risk that is associated with the project meanwhile simultaneously ensuring returns to the involved parties (Gupta & Sravat, 1998). This ensures each member involved in the project performs to their best in order to make better returns.

Given the immensity of long-term financing risk, share prices and cash- flows are more often affected. The volatility of the project associated with the long-scale financing has an effect on the share prices. The less the volatility the market return on shares is considered to be high. Due to the financing structure of the project that comprises of debt and equity is likely to affect the price of the shares (Lucy, 2015). Different shares will be affected differently. The gearing ratio level is determined by the level of debt. The higher the risk the higher the returns and the share price increases.  Debt financing is cheap and through the long- term financing the share prices may fluctuate. Debt financing does not dilute the earnings per share but has a financial risk to the project. The addition of equity financing by investors the share is diluted hence the shares value reduce (Betty & Russell 2013).

Projected cash flows determine the project value and the liquidity of the project .The project is expected to be gained in the project is subject to the long-term financing. The impact may result to the investors sacrificing some of their control and ownership since debt and interest have to be paid upon maturity (Betty & Russell 2013). The impact of large-scale on cash flows may affect the operating cash flow and the terminal cash flow. This depends on how the project is performing. The cash flows realized varies from one period to another depending on the factors in each period. The Large- scale is subjected to unpredictable economic factors and some risks may arise due to the changes affecting the realization of the projected cash flows (Betty & Russell 2013).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reference

Betty .S & Russell .S & Kolb WR (2013); Energy Finance and Economics: Analysis and Valuation, Risk Management, and the Future of Energy. ProQuest ebrary.

Lucy B (2015) The evolving role of finance in South Africa’s renewable energy sector

            School of Global Studies, University of Sussex, Brighton BN1 9RH, UK. Elsevier Ltd

Gupta J.P & Sravat A.K (1998); Private power projects in developing countries. School of             management. Asian institute of management Bangkok Thailand SSGSSJSJSSSNJSC