How Do I Finance A Hydropower Project?
Hydropower financing involves resource mobilisation to aid in the implementation of hydropower projects. In most cases, these projects are either implemented by the parent government or through grants. If a hydropower project is to be financed and operated by a private entity, there are a lot of risks to consider. This is because an entrepreneur is always cautious about the recovery of the investment and the payback period. This information guides the entrepreneur in debt servicing. If the project has a more extended payback period it is not a lucrative sector despite its impact to the community. Therefore, basing our argument on these bases, let’s look at several financing options.
A hydropower project can be implementation by borrowing the full amount of the required financial resources. However, this kind of financing spectrum is rare. Such funding is only possible when the developer can provide full collateral and an adequate margin against the loan. On the other hand, the developer can be granted the total cost of the project as a loan if he has an exceptional credit rating or by providing a third-party guarantor. Renowned business people will always run away from this kind of loan since it comes with numerous risks.
A secured debt is a type of financing whereby the borrower provides collateral. Security of a debt may be provided in various ways. The traditional way of securing a loan is by pledging properties as a form of collaterals. The other way in which a loan can be obtained is by the lender retaining the title of the property that was secured with the loan as security. This form of financing is commonly known as “lease-purchase.” Lenders can also loan money if the borrower brings a third party as a guarantor on board.
This type of financing is mainly associated with borrowers who have an impressive credit rating. Hydropower financing through unsecured loans can be achieved if the developer has a good credit rating. In most cases, this type of loan is offered to corporates with outstanding financial muscles.
Project financing can be described as lending money to implement a project which is considered a collateral by itself. In case the borrower defaults in payment of the loan, then the lender has a right to step in and steer the project forward. Though this type of financing is almost similar to hire purchase, there is a slight difference between the two. In project financing, the title of the project is registered in lenders’ name, unlike in hire purchase where the title of the acquired property is registered in the borrower’s name.