Project Finance Key Concepts

Project Finance – Key Concepts
Full Description
Project Finance - Key Concepts[1]

Typical Project Finance Structure
The typical project financing structure (simplified for these purposes) for a build, operate and transfer (BOT)
project is shown below. The key elements of the structure are:
Special purpose vehicle (SPV) project company with no previous business or record;
Sole activity of project company is to carry out the project – it then subcontracts most aspects through
construction contract and operations contract;
For new build projects, there is no revenue stream during the construction phase and so debt service
will only be possible once the project is on line during the operations phase (parties therefore take
significant risks during the construction phase);
Sole revenue stream likely to be under an off-take or power purchase agreement;
There is limited or no recourse to the sponsors of the project (shareholders of project company are
generally only liable up to the extent of their shareholdings);
Project remains off-balance-sheet for the sponsors and for the host government.
As can be seen, there are a number of contracts and the arrangements are complex. The interrelation between
the different parties needs to be carefully provided in the agreements.
Off-Balance-Sheet
Project financing may allow the shareholders to keep financing and project liabilities off-balance-sheet.
Generally, project debt held in a sufficiently minority subsidiary is not consolidated onto the balance sheet of
the respective shareholders. This reduces the impact of the project on the cost of the shareholder’s existing
debt and on the shareholder’s debt capacity, allowing the shareholders to use their debt capacity for other
investments. Clearly, any project structure seeking off-balance-sheet treatment needs to be considered
carefully under applicable law and accountancy rules.
To a certain extent, the government can also use project finance to keep project debt and liabilities off-
balance-sheet, taking up less fiscal space. Fiscal space indicates the debt capacity of a sovereign entity and is
a function of requirements placed on the host country by its own laws, or by the rules applied by supra- or
international bodies or market constraints, such as the International Monetary Fund (IMF) and the rating
agencies. Those requirements will indicate which project lending will be treated as off-balance-sheet for the
government.
Keeping debt off-balance sheet does not reduce actual liabilities for the government and may merely disguise
government liabilities, reducing the effectiveness of government debt monitoring mechanisms. As a policy
issue, the use of off-balance-sheet debt should be considered carefully and protective mechanisms should be
implemented accordingly. For more on management of government risks and contingent liabilities, go to
Management of Government Risks.
Non-Recourse Financing
Recourse financing gives lenders full recourse to the assets or cash flow of the shareholders for repayment of
the loan in the case of default by the SPV. If the project or SPV fails to provide the lenders with the
repayments required, the lenders will then have recourse to the assets and revenue of the shareholders, with
no limitation.
Project financing, by contrast is “limited” or “non-recourse” to the shareholders. In the case of non-recourse
financing, the project company is generally a limited liability special purpose project vehicle, and so the
lenders' recourse will be limited primarily or entirely to the project assets (including completion and
performance guarantees and bonds) in the case of default of the project company. A key question in any
non?recourse financing is whether there will be circumstances in which the lenders do have recourse to part
or all of the shareholders' assets. The type of breach of covenant or representation which gives rise to this
would typically be a deliberate breach on the part of the shareholders. Applicable law may also restrict the
extent to which shareholder liability can be limited, for example liability for personal injury or death is
typically cannot be limited. [1]J Delmon - Private Sector Investment in Infrastructure, Project Finance, PPP
Projects and Risk (2nd Ed) Kluwer Law International
Related Content
Financing and Risk Mitigation
Main Financing Mechanisms for Infrastructure Projects
Investors in Infrastructure in Developing Countries
Sources of Financing and Intercreditor Agreement
Key Issues in Developing Project Financed Transactions
Risk Allocation Bankability and Mitigation in Project Financed Transactions
Risk Mitigation Mechanisms (including guarantees and political risk insurance)
Government Support in Financing PPPs
Government Risk Management
Further Readings on Financing and Risk Mitigation
Additional Resources
Managing PPP risks with a new guide on guarantees

Project Finance Key Concepts

Uploaded by

Copyright:

Available Formats

Project Finance Key Concepts

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Project Finance Key Concepts

Uploaded by

Copyright:

Available Formats

Project Finance – Key Concepts

Project Finance - Key Concepts[1]

You might also like