8. ppp structure - financing source

8/20/2019 8. PPP Structure - Financing Source

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Mr Mathieu Verougstraete

UNESCAP Transport Division

PPP Structure and FinancingSource

Bhutan National Workshop on Public-Private Partnerships (PPPs)

Thimphu, 19-20 August 2014


2/10

If project revenue cannot

repay loan

Financing Structure (1)

Corporate Finance

The project sponsor borrows directly against its proven creditprofile to invest in the project

Loan

Build

Infrastructure

ProjectRevenue

Repay Loan

If the project fails, the whole company is at risk

Compensate

shortfall

OtherBusiness

Revenue


3/10

Financing Structure (2)

Project Finance

Loan

Build

Infrastructure

Revenue from

Project

Repay Loan

SPV(Project

Company)

Financial risk isolated

Bank can rely only on Project Revenue

The project sponsor establishes a project company to borrow money

for investing in the project

More risky and complex but…

… additional scrutiny and

flexibility for risk allocation

Other

Business

Revenue

Project Finance is the most common structure

for PPP projects


4/10

Loan

Agreement

Shareholder

Agreement

Special Purpose Vehicle

(Project Company)

Equity Providers

Debt Providers

(e.g. Banks)

GovernmentImplementing Agency

End users

Concession / PPP contract

Basic PPP Structure

The key stakeholders

Financing Source

Services

Provided

Revenues

Government(availability

payments)

O&M

Contractor

EPC

Contractor


5/10

Source of financing: Equity

Equity Providers

capital invested by sponsor(s)

ProjectDevelopers

Constructioncompanies

Private EquityFunds

“First in, Last out”

Higher risk, Higher return

Any project losses are first born by equity investors

Lenders only suffer if all equity investment is lost

More equity = safer investment for Lenders


6/10

Source of financing: Debt

Debt Providers

Sources

CommercialBanks

InternationalFinance

Institutions

Export CreditAgencies

Interest rate depends on risk profile

Debt maturity < project life

Project-finance debt interest rate > Government Borrowing

Guarantees? Public loans?


7/10

Limiting Leverage Allowed ?

Leverage

Tradeoff between risk, cost and bankability

D e b t

F i n a n c i n g N e e d s

E q u i t y

25%

75%

D

e b t

F i n a n c i n g N e e d s

E q u i t y20%

80%

increases

Weighted Average Cost

of Capital (WACC)*

Average Cost of Capital decreases

Leverage = 3:1 Leverage = 4:1

Financial Structure More Risky

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

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

*simplified WACC as tax deductibility of

debt is not incorporated

Return

requested = 15%

Interest rate = 5%


8/10

Low Risk

High Risk

Refinancing

Risk and Opportunity

Project Risk Profile

Construction

Phase

Operational

Phase

Long Term Concession

Year 30

End of concession

Year 1

Financial Close

Short-Term Debt

Financing Year 6Debt Maturity

Refinancing need

Lower Risk = Cheaper Financing

Refinancing after construction

Treatment of refinancing benefits?


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Conclusion

Key messages

•

In some PPP structures, the private partner is not responsiblefor capital investment (alternative models exist)

• Public financial support is usually required to attract lenders

(government support is key for PPP success)

• 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)


10/10

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