Business Case
module 4
9. ensuring commercal viability
This section elaborates on the importance of structuring a PPP project such that it is commercially viable for the private sector and “bankable” for the project’s financiers.
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9.1
Introduction to project finance
Most PPP projects are funded on a project finance basis (where the financing is secured on the basis of the project’s cash flows); as opposed to a corporate finance basis (where funding is secured on the larger corporate balance sheet):
“Project finance is the financing of long-term infrastructure, industrial projects and public services based upon a non-recourse or limited recourse financial structure, in which project debt and equity used to finance the project are paid back from the cash flow generated by the project. Project financing is a loan structure that relies primarily on the project's cash flow for repayment, with the project's assets, rights and interests held as secondary security or collateral. Project finance is especially attractive to the private sector because companies can fund major projects off balance sheet.”78
A project finance structure means that the lenders of the project will look primarily to the cash flows of the project to repay the debt, with limited recourse to either the equity sponsors or the public sector to make up any shortfall. In other words, the company or Special Purpose Vehicle (SPV) created for the PPP project “ring fences” the project’s debt liabilities, and its revenues, which cannot be used for other purposes than the securing the loan financing for the project.
To understand the implications of using a project finance structure to deliver PPP projects, it is important to understand the difference between project and corporate finance. Tool 4.5 highlights the main differences.
http://www.investopedia.com/terms/p/projectfinance.asp
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