FINANCING PUBLIC-

PRIVATE PARTNERSHIP
PROJECT
Sources of PPP project
finance
Infrastructure timeline: 11,000 years history
 Origins – Göbekli Tepe

•9000-7000 BC in Upper
Mesopotamia
•First known large scale
construction site
•World’s first temple
•Technology = carving &
moving 20 ton limestone
pillars
•500 workers stopped
hunting and gathering over
several years
 First constructed road

•500 BC- Transport and communication

•Darius’ Royal Road 2700km from Susa to Sardes
•Military, communication and trade purpose
•7 days for mounted couriers from end-to-end
 The first PPP contract
Contract of Eretria(300BC)
•Contract between City and foreign contractor
Chairephanes to drain lake Ptekhae:
•all expenses paid by the contractor plus lump sum
of 30 talents paid to the City
•contractor granted exclusive right to cultivate and
retain the products of the reclaimed land for 10
years
•exemption of local taxes and some laws
•4 year schedule, extended in case of war
•obligation on Chairephanēs heirs/collaborators to
complete works in case of death
•contract was "signed" by 230 citizens with six
named Eretria-citizens as guarantors
•extreme sanctions against anyone attempting to
cancel the contract (copy in Delphi)
 Infrastructure means civilization

•Roman Empire 44BC- 476 AD

•Adapted and improved technology
and engineering practices from
Greeks, Etruscans, Persians etc.
•Concessions for exploiting
infrastructure: postal services, river
transport
•Public and Private Legal systems
established
•Infra Finance: State; Local;
Donations; Taxes; Tolls;
Slaves/Military/Contractors
 What did the Ancients do for us

Infrastructure Finance/Resources:

• Temples • Slave labour

• Canals • Military labour
• Cities • Paid labour
• Theatres/Stadia • Gifts
• Water supply • War booty (reverse grants)
• Sanitation/Public baths • Modest concessions
• Roads • Taxes
• Ports • User charges/Tolls
 Definition of Project financing

“Project finance is a method of funding in which the lender looks

primarily to the revenues generated by a single project, both as the
source of repayment and as security for the exposure. This type of
financing is usually for large, complex and expensive installations that
might include”
Basel Committee on Banking supervision
“Project financing as the financing of long-term infrastructure, industrial
projects and public services based upon a non-recourse or limit recourse
financial structure where project debt and equity used ti finance the
project are paid back from the cash flows generated by the project”
International Project Finance Association (IPFA)
 Principles of Project Finance

The project usually relates to major infrastructure with a long construction period
and long operating life.
• So the financing must also be for a long term (typically 15–25 years).

Lenders rely on the future cash flow projected to be generated by the project to
pay their interest and fees, and repay their debt.
• Therefore the project must be ‘ring-fenced’ (i.e. legally and economically self-contained).
• So the project is usually carried out through a special-purpose legal entity (usually a limited company)
whose only business is the project (the ‘Project Company’).

There is a high ratio of debt to equity (‘leverage’ or ‘gearing’)—roughly speaking,

project finance debt may cover 70–90% of the capital cost of a project.
• The effect of this high leverage is to reduce the blended cost of debt and equity, and hence the overall
financing cost of the project.
 Principles of Project Finance

The Project Company’s physical assets are likely to be worth much less than the debt if they are sold
off after a default on the financing—and in projects involving public infrastructure they cannot be
sold anyway.
• So the main security for lenders is the Project Company’s contracts,licenses, or other rights, which are the source of its cash
flow.
• Therefore lenders carry out a detailed analysis of the project’s risks, and how these are allocated between the various parties
through these contracts.

The project has a finite life, based on such factors as the length of the contracts or licenses, or
reserves of natural resources.

• So the project-finance debt must be fully repaid by the end of the project’s life

There are no guarantees from the investors in the Project Company for the project-finance debt.

• So this is ‘non-recourse’ finance.

Government Funding
Corporate Finance
Project Finance
 Why investors use project finance in PPP
(1)

High Leverage. One major reason for using project finance is that investments in PPP projects such as
power generation or road building have to be long term but do not offer an inherently high return:
high leverage improves the return for an investor.
 Why investors use project finance in PPP
(2)

Lower Cost. If the Project Company is selling a commodity such as electricity into a market, the lower
the financing costs the more competitive its pricing can be, and hence the higher leverage may be
beneficial if the weighted cost of an investor’s capital
 Why investors use project finance in PPP
(3)

Risk Spreading/Joint
Borrowing Capacity. Risk Limitation.
Ventures.
• Project finance increases the • An investor in a project • A project may be too large
level of debt that can be raising funds through project for one investor to
borrowed against a project; finance does not normally undertake, so others may be
moreover non-recourse guarantee the repayment of brought in to share the risk
finance raised by the Project the debt—the risk is in a joint-venture Project
Company is not normally therefore limited to the Company. This both enables
counted against corporate amount of the equity the risk to be spread
credit lines (therefore in this investment. between investors and limits
sense it may be off-balance the amount of each
sheet). It may thus increase investor’s risk because of the
an investor’s overall non-recourse nature of the
borrowing capacity, and Project Company’s debt
hence the ability to financing.
undertake several major
projects simultaneously.
 Why investors use project finance in PPP
(4)

Developer Leverage. Long-Term Finance. Unequal Partnerships. Enhanced Credit.

• Projects are often put • Project-finance loans • Thanks to high • A company’s credit
together by a developer typically have a longer leverage, the relatively rating is less likely to be
with an idea but little term than corporate small amount of equity downgraded if its risks
money, who then has to finance. Long-term required for a major on project investments
find investors. A financing is necessary if project where project are limited through a
project-finance the assets financed finance is used enables project-finance
structure, which normally have a high par ties with different structure.
requires less equity, capital cost that cannot financial strengths to
makes it easier for the be recovered over a work together.
weaker developer to short term without
maintain an equal pushing up the cost
partnership, because if that must be charged
the absolute level of for the project’s end
the equity in the product.
project is low, the
required investment
from the weaker
partner is also low.
 Why investors use project finance in PPP
(5)

Reduces Need for Outside

Tax Benefits. Off-Balance-Sheet Financing.
Investors.
• Another important factor • A further factor that may • If the investor has to raise
encouraging a high level of make high leverage more the debt and then inject it
debt in Project Companies is attractive is that interest is into the project, this will
the more equity that is tax deductible in many clearly appear on the
required, the more complex countries, whereas investor’s balance sheet. A
the project becomes to dividends to shareholders project-finance structure
manage (especially during are not, which makes debt may allow the investor to
the bid- ding and even cheaper than equity, keep the debt off its
development phases) and hence encourages high consolidated balance sheet,
leverage but usually only if the
investor is a minority
shareholder in the project—
which may be achieved if
the project is owned
through a joint venture
Source of PPP project financing
 Benefit for the Public Authority

Lower cost. The higher leverage inherent in a project finance structure helps to ensure the lowest
cost to the Public Authority
 Benefit for the Public Authority

Increased competition.
• For the reasons set out above, project nance enables investors to undertake more
projects by increasing their nancial capacity, the effect of which should be to create a
more competitive market for projects, to the benefit of the Public Authority.

Role of lenders.
• The Public Authority may benefit from the independent due diligence and control of
the project exercised by the lenders

Transparency.
• As project financing is self-contained (it deals only with the assets and liabilities, costs
and revenues of the particular project), the true costs of the service can more easily
be measured and monitored.
 Project Finance Market

COMMERCIAL
BANK LOANS
•Revolving Credit
•Term loan
•Standby Letter of
Credit
•Bridge Loan
 Project Finance Market

Equity contribution
• Sponsor funding
• Less preferred
• Contributors: Local
investors, local government,
other interested or
concerned government,
institutional investors,
bilateral and multilateral
organization
 Project Finance Market

debt contributions
• Commercial loans
• Loans from institutional
investors: export credit
agencies (ECAs),bilateral and
multilateral development
banks (MDBs), issuance of
project bonds and from time
to time, from the local
Government
 Project Finance Market

Loans from state owned

enterprise
• State owned enterprises (SOE)
are often viewed by local
authorities and banks as more
stable partner
• Low profits, projects are not
easy to implement, which cause
private sector to have no or
very little interest in this field.
 Project Finance Market

LOANS FROM DEVELOPMENT BANKS

• Multilateral development banks
• Funding PPP projects using strong currency
with long term to maturity.
• Means of risk mitigation for commercial
banks and investors.
• Support to structure PPP project, advise
government and provide funding for hiring
consultant to improve the structure and
scheme for the PPP project.
• Advise on policy to strengthen PPP policy and
framework.
 Project Finance Market

LOANS FROM DEVELOPMENT BANKS

• Multilateral development banks
• Funding PPP projects using strong currency
with long term to maturity.
• Means of risk mitigation for commercial
banks and investors.
• Support to structure PPP project, advise
government and provide funding for hiring
consultant to improve the structure and
scheme for the PPP project.
• Advise on policy to strengthen PPP policy and
framework.
 Project Finance Market

loans from export credit

agencies
• Bilateral development banks and
export credit agencies
• “Export Credit Agencies” are
financial (or insurance) institutions
providing financial support to
corporations from home country
seeking to do business overseas.
 Project Finance Market

loans from
institutional
investors
• Life insurance
company
• Public pension funds
• Private pension
funds
 Project Finance Market

loans from issuing bonds

• Lower interest rate (lower
cost of capital)
• Longer term to maturity and
higher liquidity
• Less flexible during project
implementation
• Time and cost consuming due
to publication process and
credit rating process
 Project Finance Market

mezzanine/subordinated contributions
• Located somewhere between equity and debt, lower priority than senior debt but higher priority
than equity.
• Mezzanine contributors will be compensated for the added risk bey receiving partial participatition
in the project profits or the capital gains achieved by project equity.
 Project Financing Process
Bank Debt

Debt
Reddiness Pre-
Initial Bid Negotiations Final Bid Funding
for Market Qualification
Competition
 Project Financing Process
Bond

Bond
Reddiness
Initial Bid Final Bid Arranger
for Market
Competition
Financial structure
 How Everything comes together

“The structuring of project financing is a framework in

which ownership structure, project structure, risk
structure, and financial structure decisions are made
and tied together in the project's legal structure which,
in turn, forms a foundation for funding the project on a
limited recourse basis”
 How Everything comes together

Ownership structure
• The ownership structure is how the SPV is organized; that is; as a corporation,
unincorporated joint venture, limited liability partnership, etc.
Project structure
• Project structure refers to the agreement defining responsibilities and transfer or
right and/or ownership of the SPV such as BOT, BOO, BLT,BTL, etc.
Risk structure
• Risk structure is the prioritization and mitigation of risks after the identification,
assessment, and allocation process is completed.
Financial structure
• Financial structure refers to the mix of financing used to fund a project, which
includes equity, short- and long-term loans, bonds, trade credits, etc. and the cash
flows to equity providers and the lenders
Element of project financing structuring
 Equity and debt investor requirements

A key element of successful financing structuring is the financing

strategy that lays out how the SPV will be financed optimally and
consistent with the consensus of project stakeholder objectives.

Financial structuring is not only about the mix of different funding

instruments but, also, about the drawdown schedule, the debt
repayment profile and equity distributions, and the credit support
and security packages required by debt and equity investors.
 The success financing strategy

Private sector Public sector

• project internal rate of • Best value for money

return (IRR) • Which cinsist of least-cost
• net present value (NPV) funding
• debt ratios • efficient project
• short payback periods development
• effective project outcomes
for the money spent
• balanced distribution of
project benefits
 The success financing strategy

Equity investors Project lender

• project internal rate of return (IRR) • Experienced sponsor company and project company
• Project NPV or risk-adjusted NPV management teams and a skilled and competent
• Profit investment ratio or profitability index project team
• payback periods • Fixed completion date and contact price with
appropriate guarantees and insurance and no
• Debt cover ratios
technology risk and security from the engineering,
• Debt service profiles procurement, and construction (EPC) contractor
• Liquidated damages for delays, and performance and
project company output guaranteesInterest rate and
foreign exchange hedging contracts for significant
operating cost items
• Competitive project company output pricing, host
government subsidies, and barriers to discourage
new competitor entry
• Strong and enforceable offtake and supply contracts
and adverse regulatory noninterference
• Adequacy of risk mitigation and a security package
acceptable to all stakeholders
Project Finance Structuring Framework
Project Finance Structuring Process Activities
 Ownership Decisions

The project ownership-structure decision is made after

evaluations and conclusions about the effects of the following:
• Strategic, financial, competitive, and other objectives the sponsors expect to
achieve from investing in the project
• Upfront investment requirements and future investment contributions as well
as the tax treatment of the SPC and benefits to be obtained in the host
country
• Constraints or conditions of the legal and regulatory requirements of the host
country
• Nature of the project, expected obligations, and control and management of
the SPV
 Project Structure Decisions

The decisions on how to manage the project risk structure take place after
the following process steps are completed:
• Project risks and their root causes are identified and categorized as controllable and
uncontrollable
• Controllable risks are evaluated in terms of likelihood of occurrence and potential adverse
impacts
• Allocation of risks to the party best able to handle is made or sharing of risks in proportion
to the benefits obtained by the project
• Risk-avoidance efforts are made to minimize or eliminate the number of risks
• Making provisions to absorb the risks that are uninsurable or have a low probability of
occurrence
• Obtaining guarantees from the parties where risks emanate from and insurance, credit
support, and enhancements from the host government, ECAs, and multilateral institutions
• Developing contingency plans to address unknown, uncontrollable, and black swan risks.
 Contract Structure Decisions

An EPC contract with an appropriate completion date, price, performance guarantees,

and liquidated damages for delays and nonperformance
A sound offtake contract with quantity targets and price increases to offset inflation,
equipment upgrades, and changes in tax treatment or tax-rate increases
Wide-ranging supply contracts for production inputs, supplies, and power and other
utilities with price stability and quality clauses
Private and ECA and multilateral institution insurance contracts for risks not allocated
or absorbed and third-party insurance policies
Credit support agreements, guarantees, counter-guarantees, hedging contracts, and
other credit enhancements
A decent O&M agreement with performance, output, and quality clause
 Operational Decisions

Factors influencing decisions about the sources of

financing and funding instruments evolve around
the following
• Project stakeholder equity contributions and their timing
• Equity returns measured by the projects NPV or the investors'
IRR
• The debt service profile and debt ratios
• Sponsor and other project stakeholder guarantees
• Security on loans to the project company
 Financial Structure Decisions

The project financing structure is based on the results of

analyses and assessments of the feasibility study results, the
due diligence report, and judgments and decisions made
concerning the structures mentioned earlier
• Equity and preferred equity decisions are influenced by evaluations on how
the SPV is organized and planned to be capitalized, management and control
of the SPV, how disputes between equity participants will be resolved, and
the terms and conditions of the SPV's termination of operations.
• On the other hand, debt-financing decisions involve evaluations of sources of
funding and availability, terms and conditions, compliance requirements,
guarantees, insurance, and costs, advantages and disadvantages of different
debt-funding options.
 Determinant of Project Financing

Economic and political state of the host country, the size of the project, and the
funding needs
Updated sponsor and other investor analysis, and evaluation and equity contributions
consistent with other project stakeholder expectations
Verification of continuity of stakeholder objectives and alignment consistent with
updated sponsor objectives
Reasonableness of cost and revenue forecasts established by scrutinizing and testing
the assumptions and underlying scenarios
Sound project-management processes and safeguards and the ability to integrate
decisions effectively in the project financing plan
Project economic viability validated by a sound, independent, and critical assessment
and supported by the findings in the due diligence report
 Determinant of Project Financing

Reassessment of project risk mitigation through allocation to parties best able to handle, insurance contracts, and
counter-guarantees
Validation and verification of the due diligence findings by professionals engaged by the lenders' group

Verification of the adequacy of EPC, offtake, supply, hedging, and O&M contracts along with guarantees, financing
support, and enhancements
Strong host government political support and enforceable offtaker and “supplier contracts

Sponsor contacts, relationships, alliances, and understanding of processes and requirements of potential debt and
equity sources
Availability of suitable cost of financing, support in local and hard currency, and interest rate and exchange rate
hedging contracts
Participation of, support, and enhancements by ECAs and multilateral institutionsSatisfactory debt ratios tested
though simulations of alternative plausible scenarios
Proper management of project company accounts according to lender covenants and restriction.
Typical Project Finance Structure
Typical Project Finance Structure
Typical Project Finance Structure
Typical Project Financial Structure
 Case study

Phu My 2-2 BOT Power Project