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Project Finance

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Project Finance
1. How should PDVSA finance the development of the Orinoco Basin? Can you define project finance? Is Petrozuata a project? What are the costs and benefits of using project finance instead of the traditional (debt) finance – as Mr. Bustillos said, PDVSA could have finance the debt internally (p.7 of the case)?

Project finance is a kind of Financing that has a priority does not depend on the creditworthiness of the sponsors proposing the business idea to launch the project. Approval does not even depend on the value of assets sponsors are willing to make available as collateral. Instead, it is basically a function of the project’s ability to repay the debt contracted and remunerate capital invested at a rate consistent with the degree of risk inherent in the venture concerned.

We deem Petrozuata as a project for it will be a totally standalone entity and the ability of repayment and financing risks are mainly associated with the entity.

According to a huge body of literature, we summarize the main difference between project financing and the traditional finance as followings.

One major disadvantages of project financing is that structuring and organizing such a deal is actually more costly than the other option. According to some evidence available on the subject shows an average transaction costs on the total investment of around 5–10%. The reasons for this can be listed as followings:
1. The legal, technical, and insurance advisors of the sponsors and the loan arranger need a great deal of time to evaluate the project and negotiate the contract terms to be included in the documentation.
2. The cost of monitoring the project in process is very high.
3. Lenders are expected to pay significant costs in exchange for taking on greater risks.

On the other hand, there are many benefits as compared to Debt.
1. Project Finance allows for a high level of risk allocation among participants in the transaction.
2. From the accounting side, contracts

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