Some common misconceptions about project finance?

· The assumption that lenders should in all circumstances look to the project as the exclusive source of debt service and repayment is excessively rigid and can create difficulties when negotiating between the projects participants.
· Lenders do not require a high level of equity from the project sponsors. This may be true in absolute terms but should not obscure the fact that equity participation is an effective measure to ensure that the project sponsors are incentivized for success.
· The assets of the project provide 100% security. Whilst lenders normally look for primary and secondary sources of repayment (cash flow plus security on project assets), the realizable value of such assets (e.g. roads, tunnels and pipelines which cannot be moved) are such that the security is next to meaningless when compared against future anticipated cash flows. Security therefore is primarily taken in order to ensure that participants are committed to the project rather than the intention of providing a realistic method of ensuring repayment.
· The project’s technical and economic performance will be measured according to pre-set tests and targets. Lenders will seek flexibility in interpreting the results of such negotiations in order to protect their positions. Borrowers on the other hand will argue for purely objective tests in order to avoid being subjected to subjective value judgments' on the part of the lenders.
· Lenders will not want to abandon the project as long as some surplus cash flow is being generated over operating costs, even if this level represents an uneconomic return to the project sponsors.
· Lenders will often seek assurances from the host government about the risks of expropriation and availability of foreign exchange. Often these risks are covered by insurance or export credit guarantee support. The involvement of a multilateral organization such as the World Bank or regional development banks in a project tends to ‘validate’ a project and reassure lenders’ concerns about political risk.