Bhutan National Workshop on Public-Private Partnerships (PPPs)

Thimphu, 19-20 August 2014

PPP Structure and Financing

Source

Mr Mathieu Verougstraete
UNESCAP Transport Division

Financing Structure (1)

Corporate Finance
The project sponsor borrows directly against its proven credit
profile to invest in the project
Compensate
shortfall
Other
Business
Revenue

Repay Loan

Loan
Build
Infrastructure
Project
Revenue

If project revenue cannot

repay loan

If the project fails, the whole company is at risk

Financing Structure (2)

Project Finance
The project sponsor establishes a project company to borrow money
for investing in the project
Other
Business
Revenue

Financial risk isolated

Repay Loan

Loan

SPV
(Project
Company)

Build
Infrastructure

Revenue from
Project

Bank can rely only on Project Revenue

More risky and complex but

additional scrutiny and
flexibility for risk allocation

Project Finance is the most common structure

for PPP projects

Basic PPP Structure

The key stakeholders
Financing Source

Government
Implementing Agency
Shareholder
Agreement

Equity Providers
Debt Providers
(e.g. Banks)

Concession / PPP contract

Special Purpose Vehicle

(Project Company)
Loan
Agreement
Services
Provided

End users

Revenues

Government
(availability
payments)

EPC
Contractor
O&M
Contractor

Source of financing: Equity

Equity Providers

Project
Developers

capital invested by sponsor(s)

Construction
companies

First in, Last out

Private Equity
Funds

Any project losses are first born by equity investors

Lenders only suffer if all equity investment is lost

More equity = safer investment for Lenders

Higher risk, Higher return

Source of financing: Debt

Commercial
Banks

Debt Providers

Sources

Interest rate depends on risk profile

International
Finance
Institutions
Export Credit
Agencies

Project-finance debt interest rate > Government Borrowing

Guarantees? Public loans?
Debt maturity < project life

Leverage
Tradeoff between risk, cost and bankability
Weighted Average Cost
of Capital (WACC)*
Financing Needs

80%

Debt

Debt

75%

Financing Needs

Return
requested = 15%

20%

Equity

Equity

25%

(25% x 15%) + (75% x 5%) = 7.5%

(20% x 15%) + (80% x 5%) = 7 %

Interest rate = 5%

*simplified WACC as tax deductibility of

debt is not incorporated

Leverage = 3:1

Leverage = 4:1
increases
Average Cost of Capital decreases

Limiting Leverage Allowed ?

Financial Structure More Risky

Refinancing
Risk and Opportunity
Short-Term Debt
Financing

Year 6
Debt Maturity

Year 1
Financial Close

Refinancing need

Long Term Concession

Year 30
End of concession

High Risk

Project Risk Profile

Low Risk

Lower Risk = Cheaper Financing

Refinancing after construction

Treatment of refinancing benefits?
Construction
Phase

Operational
Phase

Conclusion
Key messages
Project finance is complex and involves significant transaction
costs (getting the right advice is fundamental)
High leverage can reduce the project cost but creates additional risk
(be aware of risks)
Public financial support is usually required to attract lenders
(government support is key for PPP success)
In some PPP structures, the private partner is not responsible
for capital investment (alternative models exist)

Th@nk you
www.unescap.org/ttdw/index.asp

Info.: escap-ttd@un.org