Friday, June 27, 2014

A Generalized Project Finance Structure

The diagram provides a generalized view of the project financing arrangement for a toll project.  The key to the new world of public-private-partnerships (P3s) is a firm understanding of project finance.  Project finance in the context of infrastructure projects is the off-balance sheet financing of a project via a Special Purpose Vehicle (SPV) with a network of contractual agreements with key counterparts (contractors, purchasers, suppliers, operator agents, etc.).  Key points:
  • The borrower of funds in a project company set up on an ad hoc basis that is financially and legally independent from the sponsors (separate incorporation).
  • All economic consequences generated by the initiative are attributed to the SPV that is designated to secure cash receipts and payments (lenders finance a venture, not an operating firm).
  • The assets of the SPV are the only collateral available to lenders together with the cash flow from the initiative (no-recourse financing).
  • Approval of the financing is a function of the project's ability to generate cash flows to repay the debt contracted and also remunerate capital invested at a rate consistent with the degree of risk inherent to the venture concerned.

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