Since transport infrastructure project financing has traditionally been the responsibility of the state, public-private partnership (PPP) instruments with the direct participation of central governments and local governments play an important role in this context.

The effective development of transport infrastructure is critical for maintaining links within the national and international economic space, free movement of goods and services, competition and freedom of commercial activity, and improving the quality of life of the population.

CP Finance UK Finance has brought together a team of experienced financial and investment experts from different countries to help private companies and government agencies in financing PPP projects (toll roads, bridges, subways, train stations and more).

Among other things, we offer long-term loans, credit guarantees, project finance (PF) schemes, investment engineering services, project management, and much more.

Contact an CP Finance UK Finance representative to learn more and benefit from advanced solutions for your project today.

The role of PPP in the financing of transport infrastructure projects

The fulfillment of the entire range of tasks for the development of transport infrastructure cannot be fully borne by the state.

A very promising mechanism for attracting free funds is public-private partnership, which over the past few decades has become one of the most important innovations in public investment policy around the world. However, despite the highest potential, experts draw attention to the many constraints in financing PPP projects that are typical for developing countries with immature financial markets and imperfect legislation.

Constraints on funding public-private partnership projects include the following:

• Insufficient development of the legislative framework.
• Corruption and excessive political interference.
• Inefficient planning and operation of facilities.
• Insufficient support from the state.
• Slow standardization processes.
• Lack of experience etc.

The world investment practice shows that the introduction of various models of public-private partnership in the transport sector is gaining momentum.

This is especially noticeable in the construction of roads, large tunnels and bridges, which ensure the successful implementation of strategic transport development programs under the control of the government.

In order to attract private capital, effectively manage projects and introduce modern technologies, it is important for the state to find such an economic and organizational mechanism that would support the interest of private investors. In addition, it is necessary to organize a fair tender procedure based on an effective system of criteria for evaluating proposals and increasing the chance for successful implementation of a transport infrastructure project financing

This approach also reduces the overall social costs and risks associated with the project.

The need to develop public-private partnership mechanisms and attract non-budgetary sources of financing can be largely explained by the scale of the tasks of developing the transport system, along with the limited resources of governments.

The most common PPP models applicable to the transport industry include the following:

• Concession agreements of various types and structure.
• Government contract for the maintenance of an infrastructure facility.
• Life cycle contract and other types of contractual relationships.

At the pre-project stage, when property rights are clearly defined, an investment agreement is concluded between the state and a private investor with the establishment of a capital structure and rights to the created objects. An agreement can also be signed for capital investments in a state-owned facility, according to which investors return their funds during the operation of the facility.

Financing schemes for PPP projects in transport infrastructure

The concession agreement is considered the most common organizational structure in terms of the number of transactions and the amount of private capital raised to finance infrastructure projects in the world.

The concession is widely used for the implementation of socially significant projects, making it possible to harmoniously combine the interests of private companies and the state.

The interest of the parties in signing the concession agreement comes from three main principles:

• The concessionaire is responsible for the construction and operation of the facility with a clear understanding of how to minimize the cost of construction and long-term operation.

• Investments in infrastructure construction are based on mutually beneficial financial terms.

• The organization of the project allows financing faster than through budget financing.

These principles significantly expand the freedom of partners in drawing up an agreement.

Life Cycle Contract, which in some countries is called DBFM (Design-Build-Finance-Maintain), is one of the varieties of concessions. This type of contractual relationship provides for the operation of infrastructure facilities free of charge, in contrast to the concession model, which is based on the principle of paid services (toll roads). In this case, the government enters into a contract for the design, implementation and operation of the facility and makes payment to the private contractor after the commissioning of the facility and during its life.

The operation and maintenance of the facility is entrusted to a private partner in accordance with the terms of the contract.

The contracts developed under this scheme for the transport industry are complex long-term contracts of an investment nature. On their basis, a private contractor-investor designs, finances and builds a highway or other infrastructure facility, and then manages the facility for a long period of operation, ensuring the maintenance and repairs at the service level specified in the contract.

The main sources of transport infrastructure project financing include funds from budgets of different levels and funds from private sectors.

In principle, resources from credit institutions, funds from international financial institutions and private investors, and funds from institutional investors also help in Transport infrastructure project financing.

The high cost of capital in developing countries imposes some restrictions on the financing of PPP infrastructure projects. In such countries, two schemes for financing complex long-term contracts seem to be the most appropriate. Both schemes are variants of PPP with the involvement of non-budgetary sources of financing for the implementation of the investment part of the project.

The first scheme involves the design and construction of a transport facility at the expense of budgetary and non-budgetary sources of funding. During the design and construction phase, the contractor receives a partial payment for the work performed (usually 50-80% of the cost of the work), financing the rest of his costs from his own and borrowed funds. The rest of the cost of the investment part of the project, including compensation for the cost of attracted private capital, is paid to the contractor during the operation phase.

Also, during the operation phase, the contractor receives regular payments for maintenance and repairs from the state customer.

The second scheme involves the design and construction of transport infrastructure entirely at the expense of non-budgetary sources of funding. Design and construction works are fully financed by the contractor at the expense of his own funds and attracted financing (credits, bonds, etc.). The government starts paying for the investment part of the project, including compensation for the cost of attracted private financing, from the moment the facility is put into operation.

Payment is made in regular installments until the expiration of the contract.

During the operation phase, the contractor receives regular payments from the state customer for the main order, as well as for the maintenance and repair of the facility.

These schemes are characterized by different levels of risk for potential contractors and different expected rates of return and other performance indicators. The need for private capital in the second financing scheme is much higher, due to the longer period for the project to be paid by the state. This approach is considered more risky for banks and is more dependent on loans, and also imposes higher requirements on the sustainability and solvency of the project.

In the world practice of financing, there are a large number of financial mechanisms through which PPP projects are implemented.

These mechanisms vary depending on the sources of funding:

• Funds from budgets of different levels.
• Funds of public financial institutions of all types.
• Resources of private companies and investors.
• Funds of public structures and non-profit organizations.
• Credit resources of local financial institutions.
• Funds of international financial institutions (IFIs).

Transport infrastructure project financing is implemented through various mechanisms, the most common of which are corporate finance, project finance (PF) and public funding.

In general, PPP includes a wide range of multilateral contractual relations between the public and private sectors in the field of transport infrastructure development.

World experience in using PPP in financing infrastructure projects

Between 1990 and 2015, 1,653 public-private partnership projects were developed in the transport industry, of which 10.5% were for construction and reconstruction of airports, 7.7% for railways and 25.9% for seaports.

The largest share (55.9%) of PPP projects was implemented in the areas of construction, reconstruction and repair of roads, bridges and highways. The volume of public-private partnership investments in the road industry over these 25 years amounted to 248.35 billion US dollars, of which 67.4% accounted for concession agreements.

Analysis of the experience of foreign countries in the field of financing PPP projects shows some differences in such funding. For example, in the United States, the decisive role in PPP is played by the state, whose leadership is the most important factor at the stage of project approval and in the process of its implementation. State control takes the form of regulation of tolls, rates of return on investment, as well as supervision over the operation and technical condition of facilities.

Public companies play an important role in public-private partnerships in the United States.

These are large enterprises created by the government, as well as state and municipal governments on a commercial or non-commercial basis.

Such companies are always owned by the federal government or local authorities.

The development of PPP projects in the United States is regulated by the Ministers of Economy and Finance, as well as the Department of Defense and other central authorities. Innovative forms of PPP project funding should also be identified. In the United States, State Infrastructure Banks (SIBs) have been established since 1995 under the National Highway System Designation Act to provide affordable loans for municipal transportation projects.

SIBs can issue bonds backed by the bank’s capital and payments on loans from a pool of local borrowers, which helps reduce risk for investors. The SIB also offers credit guarantees that allow private sponsors to borrow money at lower interest rates, as well as grants. However, SIBs cannot use public funds as grants.

Through this structure, the government can increase its debt limits, especially if the debt is secured by fees for the use of toll infrastructure or other fees.

In Canada, transport infrastructure project financing using PPPs are actively implemented primarily at the regional level.

Financing of  large infrastructure projects creates stable jobs and spurs growth in other sectors of the economy.

Infrastructure development is now a priority for the world’s leading economies.

The state and quality of infrastructure is one of the criteria for socio-economic development and a powerful lever for the growth of social welfare.

Energy, water supply, transport and telecommunications directly affect the quality of life of the population.

The key problem in the implementation of new investment projects is the correct choice of financing scheme. This complexity can be attributed to limited government spending and the growing range of potential funding sources offered by markets (including investment loans).

One of the most important models for financing large infrastructure projects is project finance (PF).

In this case, the planning, financing and management of the project is carried out through a special purpose vehicle (SPV), the shareholders of which are companies interested in the project.

With the growing need for financing large infrastructure projects, dissatisfaction with the current quality of infrastructure and limited resources of the state budget, the PF is becoming an increasingly important instrument that meets the interests of business and society.

A prerequisite justifying the need to use long-term loans for financing of large infrastructure project is the convenience of its use in public-private partnership projects.

CP Finance UK Finance finances infrastructure projects around the world, including Europe, the United States, Latin America, the Middle East, Africa, East Asia and other regions.

We offer investment loans for the construction of roads, pipelines, seaports, electrical substations, wastewater treatment plants and other facilities.

Our finance team helps clients obtain large loans from European banks, attract venture capital and interested private investors. We also offer clients all kinds of financial advice, tax optimization and other services.

The essence of financing for large infrastructure projects

Infrastructure can be defined as artificial, permanently located public facilities that form the basis of economic life due to its functions of moving people and goods, supplying electricity, water, and so on.

Leading economists also highlight the so-called social infrastructure, which indirectly supports the development of the economy, satisfying the intangible needs of the population.

Infrastructure plays a leading role in the functioning of the social system. Infrastructure activities are usually controlled at the local level, as the development of roads, urban transport, seaports, water pipelines and power grids is the responsibility of local authorities.

Financing of large infrastructure projects often requires public participation. In Europe, the importance of this issue is emphasized through co-financing from the European budget.

Infrastructure projects can also be categorized according to their range (eg international, national, regional, local).

Economists often distinguish between public and private infrastructure.

The term “infrastructure investment” refers to the investment in infrastructure assets to obtain specific benefits at the perceived risk.

There are the following types of financing for infrastructure projects.

First, an investor can buy securities of an infrastructure investment company.

Secondly, a financial institution can provide an investment loan for the construction or expansion of the related infrastructure.

Finally, it can be subsidies and grants for strategic projects.

The company can also decide on direct investments, including expansion, modernization, reconstruction or construction of a new infrastructure facility. In the context of infrastructure investment, so-called intangible investments are important, including R&D expenditures, which play a critical role in sectors such as communications and energy supply.

Infrastructure investments can be classified according to the source of funds. Here we are talking about public, private and public-private investments made jointly by both sectors.

Infrastructure is characterized by specific features that determine the planning and implementation of investment projects.

Obviously, these features influence the choice of financing models.

• Specific objectives: infrastructure facilities provide public services in the area of production or consumption, therefore financing of such projects is important for the whole society.

• Structural cohesion: Infrastructure projects usually require the construction of the entire facility to achieve planned functionality.

• High capital intensity: the construction and operation of infrastructure facilities are associated with significant costs with a long payback period.

• Longevity: Once built, infrastructures can define the landscape of production and population systems for an extended period of time, continuing to serve for decades or even centuries.

• Lack of mobility: infrastructure facilities are permanently connected to a specific region, which implies the use of local services.

The above information reflects the specifics of the infrastructure.

Funding models for infrastructure projects should take into account capital intensity, high risk and long investment project cycle.

This limits the financing options available, and sometimes excludes the participation of a private investor who expects a return on capital invested in the shortest possible time.

Fundamentals of financing large infrastructure projects

Funding for socially significant infrastructure projects is based on three principles, which clearly indicate the distribution of responsibilities between private companies, authorities, other institutions and users:

• Principle of financial responsibility: public authorities are responsible for project preparation, while private partners are largely responsible for construction and operation.

• The principle of decentralization: each part of the project is carried out by the participant who is most effective in the given conditions. The state usually provides technical assistance, subsidies and regulation of the process.

• Principle of microeconomic optimization: this principle is widely applied to users who cannot be directly attracted to finance construction.

In the case of financing private infrastructure projects, the situation changes dramatically.

According to these principles, responsibility, including investment risk, is allocated mainly between private companies and users.

The financial participation of the state in the implementation of large infrastructure investment projects is determined by numerous factors, including the economic activity of the state, its propensity to invest in public projects.

In addition to financial motives, the private sector can participate in financing  for large infrastructure projects (investment loans) for the following reasons:

• An infrastructure project is essential to achieving business goals.
• Allocated public funds are insufficient to finance the growing business needs for maintenance and infrastructure development.
• The participation of private equity in infrastructure investments is a significant factor in negotiations with the authorities.
• Companies strive to serve the community by providing infrastructure services at a reasonable price, quality and quantity.

In the 1990s, Europe saw a shift in responsibility for the transport infrastructure network and utilities, from state to corporate, as it required the highest possible return on investment.

Today, private companies build, operate, maintain and upgrade numerous roads, bridges, tunnels, seaports and terminals, water treatment plants, gas pipelines and oil pipelines around the world.

All this reflects a clear trend towards shifting responsibility for public projects to private companies.

Against this background, the search for funds to finance large infrastructure projects has intensified, since business is looking for the most convenient and profitable sources both in the form of investment loans and in the form of combined PF instruments.

Private equity in financing infrastructure projects

In many European countries, the provision of infrastructure services is still the responsibility of municipalities, which determines their key role in such projects.

Municipalities are involved in infrastructure construction in a variety of ways:

• Implementation of projects using the resources of the local community.
• Creation of special purpose vehicles to attract external financing.
• Inclusion of private companies in accordance with applicable law.

Project finance is a principle in which the tasks of municipal authorities are partially shifted to an SPV (Special Purpose vehicle) created for these purposes.

This approach is becoming more common.

As previously outlined, the public sector’s objectives in the provision of public services are changing in recent years. Although such projects are traditionally considered unprofitable, it should be noted that there has been a significant increase in the attraction of private equity through SPVs for the implementation of infrastructure projects.

This method of financing has certain advantages for local authorities.

First, an SPV can raise significantly more funds than the limits set for municipal companies in many countries.

Second, paying off the investment loan disciplines utility companies, making them more efficient.

Finally, attracting private investors through SPVs requires significantly less bureaucratic procedures than financing directly from the budget.

To avoid abuse in the implementation of infrastructure projects with state participation, it is important to ensure maximum transparency of investments with the involvement of professional financial and management teams.

In general, insufficient investment in infrastructure with limited resources of the state budget is today the main motive for finding new solutions that would make infrastructure projects more profitable for the private sector.

The starting point for private participation in infrastructure investment is the emergence of management initiative. According to this principle, the management of a public service provider or the management of a private company should be based on the same principles.

This management approach delivers customer focus, efficiency and innovation with benefits for business and society as a whole.

Despite the current significant differences between the management of public and private entities, in both cases the goal is to improve efficiency and increase the value of the company.

Why does this approach find application in infrastructure investment?

It should be borne in mind that the traditional management of infrastructure and the provision of public services by state-owned companies has become ineffective.

The reasons for attracting private equity may be as follows:

• Failure of the public sector to provide adequate quantity and quality of public services in the municipal sector.
• Chronic budget deficits and insufficient motivation of local government to work effectively on infrastructure projects.
• Growing social expectations and environmental demands.

On the one hand, modern conditions have required public authorities to train the private sector and use effective mechanisms already developed in this sector.

On the other hand, they opened the way for private companies.

Thus, models of financing infrastructure projects have emerged, involving increased participation of the private sector in the ownership and / or management of infrastructure facilities.

Infrastructure service models

Currently, there are different approaches regarding the allocation of costs, risk and, as a result, the sharing of rewards.

We can distinguish four models in the provision of infrastructure services.

In the traditional (German) model, the responsibility lies with the municipality.

The British model combines the functions of owner and operator in a private company. The private initiative to finance infrastructure services or investments is supported by a related UK government program.

Management contracts, leasing, concession are options of the French model, in which the operator is selected by the municipality through a tender. Without losing control over the infrastructure, the commune can ensure efficient management and modern technology.

Finally, the industrial model refers primarily to industrial infrastructure.

Here, a private owner hands over the infrastructure to specialized operating companies in order to improve efficiency and reduce operating costs.

Each of the listed models has its own advantages and disadvantages. Thus, the German approach to infrastructure projects ensures low cost of public services. On the other hand, the British approach is more flexible and less bureaucratic, independent of politics.

The experience of other countries shows the feasibility of using individual models for specific activities. The German model finds particular application in the water supply, sewerage and heating sectors. It is used in Germany, Portugal, the Scandinavian countries and the USA.

The British model is only popular in the United Kingdom in the water and wastewater sector. The French model, which dominates France and the developing countries of South America, focuses on the wastewater, heating and waste management sectors.

Finally, the industrial model is appropriate when a company that owns an infrastructure wants to improve its functioning. Local government policies also play an important role in this matter.

The World Bank, promoting the French model, describes options for financing infrastructure services in the context of the growing private sector participation in these activities.

BOT, BOOT, concessions, leasing, public-private partnerships, management and maintenance contracts – the implementation of these projects today takes a variety of forms.

An individual or company can participate in infrastructure financing, infrastructure management, and both. Such cooperation can be carried out in the form of leasing, concession, sale of assets or the creation of joint ventures.

Investment loans for infrastructure construction

An investment loan is a type of loan provided to companies to finance new investment projects.

This type of financing is characterized by a significant amount of available funds.

To obtain an investment loan for the construction of infrastructure, a company usually needs to make a contribution of up to 20-30% of the total planned investment costs.

CP Finance UK Finance is ready to provide an investment loan on the most favorable terms with an initial contribution of the project initiator of 10%.

Investment loans for businesses can be provided for up to 15-20 years.

This option has a number of significant advantages. First, the company can repay the loan before the agreed period expires. Secondly, banks can provide grace periods.

The role of project finance in infrastructure development

The above features of infrastructure projects require careful planning of projects, given their high capital intensity and long payback period.

Among the features of project finance for infrastructure projects, it is worth noting the use of high financial leverage, lending to companies without an operating history, and a complex structure of project participants.

History of project finance: global experience

The project finance method is applicable to many investment projects.

PF as a concept based on the use of private capital to finance investment in public services has a long history. As early as the 18th and 19th centuries, the road network was renewed in England, where the source of return on private investment was the toll for the use of the road.

The development of railroads, water, electricity, and telephony in the 19th century also required private equity. In the first half of the 20th century, the state assumed these responsibilities in many countries, but over the past 25 years, the process has reversed again.

Project finance in natural resources (coal, oil, gas) began in the 1930s in the United States.

This was followed by the development of oil fields in the North Sea (1970s) and other projects related to the development of mineral deposits in Australia and other parts of the world.

The use of project finance in the energy sector also began in the United States, where the Private Utlity Regulatory Policy Act was adopted in 1978 to support the development of private energy production (IPPs, or Independent Energy Projects).

A consequence of the processes of privatization and deregulation in the United States were similar processes in the energy sector in the UK in the early 1990s and then around the world.

The growth of PF over the past 20-25 years is mainly associated with global deregulation processes.

Co-financing of large infrastructure projects as roads was intensive in the UK in the 1990s thanks to the Private Finance Initiative (PFI).

Currently, these projects are called public-private partnerships.

One of the areas of use of project finance for infrastructure projects is also telecommunications, in particular the financing of mobile networks, which developed intensively in the late 1990s.

Today, project finance is also supported by the internationalization of investment processes.

Leading investors, consultants and lenders have projects from all over the world in their portfolios and use the experience gained in numerous projects.

Project finance is perceived as a method of financing large infrastructure projects and complex investments with increased risk. However, there are no restrictions on the amount of debt, so the use of the PF is possible for relatively small projects, including those implemented in small settlements for the local community.

CP Finance UK Finance investment services in Europe and beyond

CP Finance UK Finance provides a full range of financial services related to the construction, modernization or expansion of infrastructure around the world.

We offer financing for large infrastructure projects of all types.

Our interests cover the following projects:

• Highways and bridges.
• Sea ports and cargo terminals.
• Power plants, substations and transmission lines.
• Wastewater treatment facilities.
• Oil and gas pipelines.
• Social infrastructure, etc.

Interested in raising funds for the implementation of large infrastructure projects?

CP Finance UK Finance will answer any of your questions regarding investment lending and project finance.

CP Finance UK FINANCE LIMITED
Website:https://c-pfinanceuk.com/
E-mail:finance@cpuk-financeltd.com
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Currently, there is a wide range of instruments for financing for real estate projects of various types.

Usually, developers use financing from internal sources and attract external financial resources by issuing shares or borrowing (loans, leasing, bonds).

The world financial literature gives more than fifty methods financing for real estate projects, classified according to many criteria.

The dilemma of every developer at the stage of preparing a new project is the choice of the most appropriate source of funds and the organizational form of the project.

CP Finance UK Finance has recruited a multidisciplinary finance team with solid experience in financing development projects around the world.

We are ready to offer a large bank loan of 10 million euros or more with a maturity of up to 20 years.

If you are looking for a reliable source of funds for the construction of large properties or refinancing loans, contact us.

Financing for real estate projects: general features

Over the past few decades, developed countries have used a new method of financing large and risky development projects.

This method is called project finance (PF).

This concept is usually characterized as leveraged financing of a project with limited recourse by raising funds through a specially created independent company.

Thus, project finance differs from traditional construction finance in at least two ways.

First, lenders share some of the business risks with the project company.

Secondly, the project finance is provided against the future cash flow generated by the project.

A very important feature of the projects implemented in this way is the sharing the risk between the participants. Each PF initiative is assessed by the participants mainly in accordance with its ability to generate cash flows, which become the main guarantee of debt repayment and return on equity.

Project finance is a flexible combination of financial products / services that makes it possible to finance projects in the field of residential or commercial construction against a guarantee of expected future cash flows.

In order to obtain a safe environment for invested funds, the generated cash flows must be isolated from any other property of the participants.

This is achieved through the establishment of a special purpose vehicle (SPV / SPE). Thanks to a formally independent company, in the event of a project failure, creditors can only seek to satisfy their claims within the assets of the project company. Accordingly, the initiators risk only those funds that were invested in this company.

Conversely, in the event of shareholder insolvency, the SPV / SPE will continue to operate under all circumstances.

This guarantees the completion of the development project regardless of the financial health of the initiating companies.

Financial engineering in project finance

All residential and commercial real estate projects are characterized by a complex planning stage and a long period of operation of finished objects.

Another important characteristic of such projects is the irreversibility of investments.

At the initial stage, the project involves high capital costs, and at a later stage, the maintenance of buildings and residential complexes implies significantly lower operating costs. The revenues / benefits from such a project increase over time, but the costs are stable and predictable.

The implementation of a large development project usually involves a significant proportion of borrowed funds (high debt burden). Moreover, the bulk of the required resources must be provided within the first 1-2 years of construction.

Financial engineering in financing for real estate projects applies to the selection of funding sources and capital structure.

It assumes, in particular, the following actions:

• Calculation of the weighted average cost of capital (WACC).
• Determination of the optimal capital structure and external financing mechanisms.
• Assessment of the project’s creditworthiness and search for optimal sources of funds.
• Financial planning of cash flows after tax.
• Securitization of future financial flows.
• Identification and assessment of project risks.
• Preparation of a hedging strategy to reduce / eliminate risks using derivatives.
• Refinancing of asset-backed securities.

The preparation and implementation of a large development project depends on the impact of other sectors, therefore it is extremely vulnerable to changes in the macroeconomic situation, legislative changes, and so on.

This is clearly demonstrated by projects for the construction of hotels, shopping centers or entertainment complexes, which have suffered as a result of the pandemic and severe restrictive measures.

For this reason, financing for real estate projects requires a professional approach to project risk assessment.

PF assumes a rational distribution of risks between participants, depending on their ability to control these risks.

Project finance looks complex, requiring a flexible combination of various financial instruments, including complex derivatives. It is very difficult, therefore projects according to this formula in many developing countries of the world with a weak financial market are not being implemented.

When modeling financial cash flows, classical discounting methods are used. The finance team needs to calculate whether a given project has a positive or negative value, or calculate the rate of return. Of course, a detailed analysis of the financial projections is necessary.

If you need financing for real estate projects, please contact CP Finance UK Finance.

Bank loans for commercial real estate projects

Currently, bank financing of real estate projects is most often carried out according to the project finance formula (PF).

Moreover, the use of a long-term bank loan is becoming an integral part of the process of buying / building commercial real estate in modern realities.

In the project finance formula, the borrower considers the proceeds from the project as the main source of debt repayment. This type of financing is entirely based on the future cash flows expected to be received under commercial lease contracts, both already signed and ready to sign.

In the case of a PF, the borrower is usually an independent special purpose vehicle (SPV or SPE – Special Purpose Vehicle / Special Purpose Entity), which deals only with the construction and management of real estate.

Thanks to this structure, the project debt does not burden the financial statements of the initiators.

Assets are not used as collateral for debt, and the provider of capital (usually a large bank) issues a loan against future cash flows.

Before the 2020 pandemic, project financing was widely used for the construction of large tourist facilities, hotels, shopping and entertainment centers around the world. Many capital intensive projects in the French Riviera, Barcelona and other tourist destinations in Europe have been built using this mechanism.

But even today, when investors have redefined their attitude towards commercial real estate projects, there are ample opportunities for project finance in various areas.

Banks’ requirements for borrowers and development projects

Before an investor goes to the bank with his project, he must answer a few questions.

First of all, does the project meet the basic requirements of the bank, necessary for the consideration of a loan application?

Below is a list of banks’ requirements for financing for real estate projects:

• Formal legal requirements. A reliable investment project must have an orderly legal status of real estate. In addition, banks pay attention to the presence or willingness of participants to create an SPV / SPE, the presence of building conditions or a building permit.

• Technical requirements of the bank. To finance the project, a positive assessment of the project and a conclusion on the technical feasibility of the project are required. The initial document confirming this possibility is an architectural project, and then a building permit. In addition, the experience of an investor in commercial real estate or the ability to provide expert services is important for most banks.

• Financial requirements. To negotiate with the bank, a potential borrower is required to provide a ready-made financial model with a business plan. Typically, the project initiator must provide 10 to 40% of the investment costs. The documentation must confirm compliance with the DSCR (Debt Service Coverage Ratio) standards.

• Marketing requirements. The Bank requires a positive result of market research, confirming the possibility of leasing retail space or selling real estate on favorable terms.

The choice of the financing bank should not be random.

Financing a construction investment project is a long process.

When deciding to cooperate with a bank, an investor should be aware that for several years he will have to interact with this lender and depend on him.

Ineffective collaboration can negatively impact project implementation. During the construction of real estate, the real estate project can change greatly, so the investor must not only assess the financial conditions, but also analyze the bank’s policy.

How to choose a bank to finance commercial real estate project

Will the bank be able to provide support to the developer throughout the entire financing period?

Support should be understood as the readiness of the bank’s management for flexible and constructive cooperation and dialogue with the borrower. In addition, the financial partner must responsibly respond to any turns in the project.

It is important to consider not only the cost of borrowed funds.

Often the success factors are the experience of financing large construction projects in certain sectors, tailored financial products for a specific client and professional support of borrowers throughout the entire service period.

One of the first elements of the decision-making process should be an introductory meeting with bank representatives. At this meeting, the investor will be able to present his project and receive preliminary information from the bank about the possibility of financing it and the boundary conditions for lending to the project.

Below are the criteria to consider when choosing a bank:

• Stability and reliability of the bank. The predictability of financial indicators and the continuity of the course in working with corporate clients are of great importance for long-term cooperation. Experts recommend choosing large and stable banks with a strong corporate division.

• High professionalism of the team that will support the project. This is an extremely important factor that determines the effectiveness of future negotiations and the possibility of adapting the loan to the needs of the project.

• Experience in financing projects in the field of commercial real estate. The bank’s loan portfolio will allow a potential borrower to assess the standards of work with projects, management and lending efficiency.

• Quality and volume of loan documentation. The preparation of the loan agreement and other related documentation is extremely important for the success of the financing, which is why this work is usually entrusted to large law firms. The quality of the documentation deserves close attention.

• Loan terms and restrictions for the borrower. Usually, banks seek to ensure debt repayment by imposing certain restrictions on the adoption of management decisions by the borrowing company, alienation of assets, participation in capital-intensive projects in other areas, etc.

As mentioned earlier, the scale of the development project determines the size of the banks that will participate in the financing.

In other words, a large project requires contacting a bank with a sufficiently large and strong financial base. Large financial institutions have an experienced expert team to design and manage capital intensive projects of various types.

Alternative sources of financing for real estate projects

Bank financing remains the most popular and affordable type of financing for commercial real estate projects.

However, the pandemic and economic downturn are forcing banks to treat borrowers more selectively, and development companies have become cautious with lending funds.

The greatest difficulties in obtaining loans are experienced by hotel and commercial real estate. Banks are still open to finance investments in warehouses, offices and residential premises, but financing conditions are more conservative.

Funding for commercial real estate after 2020 is still limited to the best projects.

Moreover, today large construction projects are supported only by a few banks, and it is almost impossible to obtain credit funds for hotels.

Banks have also tightened their funding criteria and are now offering lower LTV and LTC options, expecting higher levels of pre-lease retail space and sales for residential properties.

There is also an increase in loan margins and a significant increase in the processing time for loan applications.

Experts point out that this could be an impetus for investors to search for alternative financing methods, the availability of which is still limited in many countries of the world. However, the current situation shows that dependence on one form and lack of diversification of sources of financing for commercial real estate is a critical issue that threatens the survival of the business.

Regardless of the choice of funding sources, companies need to properly prepare for real estate investments.

A business plan, project documentation and financial analysis are the minimum that can become a prologue to serious negotiations on financing real estate construction.

Crowdfunding as an important tool for real estate financing

Attracting financial resources from many private investors for the implementation of a specific project has long been a reality.

Crowdfunding is especially popular today because of the internet platforms that allow companies and individuals to propose funding ideas and seek out private investors who support them.

Relatively recently, this idea began to be actively used in the construction of commercial and residential real estate. This instrument is developing rapidly, outstripping traditional financial instruments in terms of growth rates.

According to Forbes, the real estate crowdfunding market will reach $ 300 billion by 2025.

On this wave, not only investors will be the winners, but also online platforms, which currently remain in their infancy.

For investors in this type of project, the biggest advantage is the investment of small amounts. These are far fewer resources than they would need to acquire property on their own. Low financial requirements lead to diversification and reduced risk, since small investments can be easily spread among different types of real estate in different countries or in different currencies.

The project initiator also gains an important advantage through the use of crowdfunding.

This tool allows the company to start working on a project without being dependent on bank loans or a small number of large investors dictating the rules of the game and threatening the independence of the business.

Another big advantage is that with a well-organized fundraising campaign, the project can be completed faster than if the company relied on institutional investment. Moreover, crowdfunding platforms charge much lower service fees than banks, making financing for real estate projects more affordable.

Equity financing or debt financing?

Crowdfunding instruments come in two main forms, based on equity financing and debt financing.

In the case of investing in shares, the investor becomes the owner of part of the real estate, or, in other words, becomes a shareholder.

In this case, the profitability depends on what the income from the lease or sale of the building will be. If the property is sold, then the investor receives a certain percentage of the sale, corresponding to his share.

In the case of debt financing (bonds), the initiator borrows money from numerous investors.

The company then pays off the debt in several fixed-rate payments as agreed. In this model, there are very wide opportunities for both short-term and long-term loans.

Debt investments are generally considered safer than equity investments. The reason is that if the property is sold, the bondholders are the first to profit from the investment. However, the lower the risk, the lower the profitability.

In the event that an investor decides to participate as a bondholder through borrowed funds, and then the property starts to generate huge returns, the shareholders will benefit. However, in case of failure, the opposite will be true, and bondholders will be one step ahead of shareholders.

Equity investors take more risk, but if the project pays off, they make higher returns.

If they fail, they line up to receive their own money from the bankrupt company.

So, financing of real estate projects through a long-term loan is still the most popular solution among investors.

Almost all institutions on the market offer loans for real estate construction. However, investors are frustrated by the increasingly restrictive approach of banks to assessing a potential borrower.

The pandemic that led to the economic downturn is making it difficult to finance some retail, hotel and sports facilities around the world.

Of course, this situation does not exclude the possibility of concluding a loan agreement, but the proposals of banks may be far from your expectations.

If you are looking for attractive sources of financing for commercial real estate projects, contact CP Finance UK Finance for advice.

CP Finance UK FINANCE LIMITED
Website:https://c-pfinanceuk.com/
E-mail:finance@cpuk-financeltd.com
Alt-Email:admin@cpukfinanceltd.com

As a powerful stimulus for business, project finance and lease financing can help companies upgrade production assets, accelerate the introduction of new technologies, reduce the time it takes to launch new products, and simplify the supply of innovative equipment and its maintenance.

In addition, leasing schemes in project finance can reduce the risk of financial losses during the development of new projects and, to a certain extent, simplify the process of obtaining loans.

As a result, the business is expanding opportunities for its modernization and expansion in many areas.

In other words, Project finance and lease financing serves as an important tool for upgrading the industrial potential of enterprises and increasing the efficiency of investments and innovation.

According to the classical definition, “leasing” refers to the transfer by the lessor to the lessee for a certain period of time of assets that are the property of the lessor or were acquired by him on behalf and in agreement with the lessee from the relevant seller (manufacturer).

This mechanism involves the payment of transferred assets by the lessee in the form of periodic lease payments and often provides for the possibility of purchasing assets after the expiration of the agreement.

Although the object of lease can be almost any asset used in the production cycle, experts note some limitations, depending on the national legislation and other circumstances. In some countries, land plots and other natural objects cannot be leased. Depending on the type of asset, there are leasing of movable assets and leasing of real estate.

A special category in this context is finance lease, which is widely used in project finance (it will be described in detail below).

The following assets can be transferred under a lease agreement:

• Vehicles including trucks, ships and freight cars.
• Construction machinery including heavy equipment for drilling and other work.
• Agricultural machinery, tractors, combine harvesters and equipment of all types.
• Pipelines, roads, overpasses, substations and power lines.
• Digital communications and electronic equipment.
• Machine tools and other production equipment.
• Commercial and industrial buildings.

Given the legislative complexity and numerous market barriers, the organizers of project finance (PF) schemes have to make a lot of efforts to effectively organize lease financing of large projects.

The key to success should be a rational contractual structure of the lease agreement, which protects the interests of all project participants.

Lease participants and their interests

Among the classic participants in this type of relationship are the manufacturer / seller of equipment, lessor and lessee.

It should be understood that the lessor and the lessee are direct parties to the lease agreement. They may be represented by individuals, financial institutions (banks), manufacturers, suppliers, and organizations operating in the leasing field.

The lessor is a legal entity that acquires expensive assets from the manufacturer (seller) and transfers it to the lessee in accordance with the terms of the lease agreement.

The functions of a lessor are usually performed by specialized companies. Banks, other financial institutions and manufacturers (machine-building plants, construction firms, and others) can also be lessors.

The benefits of lease financing for the lessor are listed below:

• Acceleration of business development
• Promoting the marketing of innovative products.
• Simplify the sale of used equipment.
• Obtaining significant income after the sale of assets at a high salvage value using accelerated depreciation schemes.
• Promoting the maximum use of productive resources.
• Reducing the risk of customer insolvency.
• An additional source of profit for companies.
• Tax incentives and so on.

The lessee is a legal entity that receives assets for temporary use under a lease agreement.

From the point of view of the lessee, the economic benefits of leasing operations can be divided into four groups, which are listed below.

Project finance and lease financing provides the lessee with the following advantages:

• An available source of resources for the renewal of fixed assets.
• Reducing the company’s need for initial equity capital.
• Diversification of sources of financing for capital-intensive projects.
• Minimize the use of internal business resources.
• Flexible schedule for paying the cost of assets.

An important place in this list is given to tax incentives. In some countries, lessors may “pass on” depreciation tax credits to lessees.

In addition, lease payments are usually charged to the company’s gross expenses, which reduces the tax base.

A manufacturer or seller is a legal entity acting as the owner of the property selected by the lessee, which enters into an agreement for the sale of a specific asset. This function in the leasing market is most often performed by manufacturers, but this role can also be played by large firms engaged in wholesale trade in machinery and equipment (including international companies).

Any legal entity operating legally and whose activities do not contradict international and national standards, including the requirements of the UNDROIT Convention on International Financial Leasing (Ottawa), can act as a manufacturer or seller of leasing objects.

It may be one of the many international suppliers of industrial equipment, vehicles, agricultural machinery and technology.

Most of the leasing companies at present are affiliated banking structures and companies actually created by industrial organizations to promote their products around the world. Commercial leasing companies created by banks, as well as specialized divisions of commercial banks, are the most powerful group of leasing companies active in developing countries.

They provide leasing services to a wide range of customers, but in some cases the bank prefers to serve a limited circle of regular customers. In the practice of many countries, it is accepted that commercial banks not only finance the activities of leasing companies, but also recommend their clients to be serviced by a certain leasing company.

Obviously, such companies, which are part of the structure of large commercial banks, have a high potential, a significant range of clients and a high position in the leasing market.

Indirect participants in project finance and lease financing of large projects include the following entities:

• Reputable insurance companies that protect the property and financial interests of lessors, lessees and manufacturers.

• Joint investment institutions that accumulate significant financial resources for the purpose of further investment in promising leasing projects.

• Investment banks lending to the lessor and acting as guarantors of the safe implementation of large leasing operations.

• Consulting companies that help the lessee to receive high-quality consulting services and learn more information about the leasing market.

In order to support financial and business activity at a certain level, government bodies are also actively involved in leasing, regulating the leasing business, creating conditions for increasing the interest and initiative of all subjects in organizing and implementing important projects.

Finance lease in project finance schemes

Although leasing has various features, below we will focus only on those that are related to the financing of large investment projects.

It is necessary to dwell in more detail on finance lease and leverage leasing. In the context of project finance, finance lease plays a vital role in financing investment projects, such as power plants, factories, infrastructure, etc.

Finance lease agreements are agreements that provide for the payment, within a clearly defined base period, of lease payments that are sufficient to fully reimburse the lessor’s costs associated with the acquisition of property, as well as to earn an adequate profit. 

Finance lease (capital lease) is the acquisition of assets for the purpose of their subsequent transfer for temporary use for a period approaching the period of its operation and depreciation of all or most of the value of these assets. During the term of the agreement, the lessor recovers the entire value of the assets through lease payments and receives an adequate profit, and the lessee acquires ownership rights at the end of the lease agreement.

The main features characterizing finance lease:

• The lessor initially acquires the asset not for its own use, but specifically for leasing it.

• The client has the full right to choose the leasing assets and the seller company.

• The seller of the assets knows that the asset (equipment) is being purchased for leasing.

• The asset is directly delivered to the customer and put into operation.

• The object of leasing is taken on the balance sheet of the company-lessee.

• Claims for the quality of assets and a request for the correction of defects during the warranty period, the lessee sends directly to the seller.

• The risk of loss and damage to the asset passes to the lessee after signing the Transfer-Acceptance Act of leasing assets.

It is an important mechanism within project finance schemes.

Large companies using finance lease can carry out large investment projects in order to expand existing production facilities by purchasing fixed assets. SMEs and young companies, including those at the development stage, can use leasing leverage to implement capital-intensive investment projects to acquire assets that are not available to them through bank loans or other sources of funds.

The large-scale modernization of companies and the development of large projects with a long payback period require businesses to look for new approaches to increase the scale and timing of financing and reduce the cost of attracted financial resources.

This can be achieved using leverage leasing, which is considered one of the most complex lease financing schemes.

This scheme best meets the needs of project finance.

For example, investment projects for the purchase of equipment for hydropower plants (turbines) or the construction of oil platforms in the ocean. It is clear that at the end of the term of the agreement, such assets cannot be dismantled by lessees and returned to the lessor, so clients will have to buy such assets from the owners.

Leverage leasing requires a clear coordination of the actions of a significant number of participants in the framework of large-scale investment projects with an implementation period of 20-25 years or more. The complexity of leverage leasing is explained by the fact that a significant number of participants participate in this operation, among which there may be several owners, shareholders, creditors and sellers.

The group of co-investors of the project on the part of the lessor may be the shareholders of a special company (lessor) that directly enters into a lease agreement.

Such participants finance a certain part of the funds necessary for the purchase of assets. They use a limited amount of their own funds, typically around 20% of the initial asset value. Funds are usually raised through the issuance and placement of securities. The main part of the funds (about 80%) for the acquisition of assets is attracted by a group of creditors, which usually consists of commercial banks. In the scheme above, the leverage ratio is 4.

Leveraged leasing transactions involving multiple parties typically involve two representatives. One of them coordinates actions and represents the interests of banks. In turn, the representative of the lessor manages the actions of another group of participants (the management company).

Such a company acts in the person of the lessor, concludes a lease agreement, signs agreements for the sale of assets for leasing, a loan agreement and an insurance contract. Also, this company distributes the profit from the leasing project among the shareholders.

Here the similarity between leveraged project finance and leasing becomes apparent.

The use of leasing to finance a complex investment project gives the lessor the right, with insignificant own participation, to use tax and other benefits or preferences that apply to participants in finance lease, for example, accelerated depreciation. These benefits can reduce the amount of lease payments and provide savings to project participants compared to investment loans.

A typical leverage leasing model looks like a combination of a number of elements:

• A contract for the sale and purchase of an asset at the expense of the lessor’s own capital or funds received as a result of syndicated lending with limited recourse to the borrower.

• A lease agreement drawn up and signed on the terms and conditions detailed above.

• Assignment of receivables for lease payments due to repayment of debt on principal and interest.

Thanks to leverage leasing, the number of investment financial products is growing, which contributes to competition between various sources of financing and the expansion of financial opportunities for the implementation of investment projects in the most beneficial mode for participants.

The similarity of leverage leasing with syndicated lending, as world experience shows, can become a powerful “long” investment resource, involving the use of a complex and flexible contractual structure between participants. This scheme also increases the lessor’s interest in the lessee’s business.

Choosing leasing to finance large projects

The rapid development of the financial sector, including long-term lending and project finance in Singapore, has contributed to the successful implementation of multi-million dollar projects in industry, energy, infrastructure, transport, trade, real estate, healthcare and other areas.

Singapore, a small state in Southeast Asia, has undergone major economic changes since the end of World War II.

As a result of these transformations, this former British colony is now one of the most economically developed countries in the world, significantly influencing the geopolitical situation in the region.

Today, innovative financial instruments play an important role in the development of big business and international cooperation between Singaporean companies and foreign partners.

Brief overview of economy of Singapore

Southeast Asia is the most politically, culturally and economically diverse region on the planet.

Here, the highly developed countries and the poorest countries in the world coexist side by side. Singapore is of exceptional interest among the most investment-attractive countries that have achieved a high level of development.

A small island state, devoid of valuable minerals, is surrounded by much stronger neighbors, both in territory and in economic power. It is important that the region is torn apart by political, ethnic and religious contradictions. The Lion City, as Singapore is sometimes called, has managed to create an efficient political and economic system that has allowed not only to survive on the world stage, but also to effectively use the available local resources for the prosperity of business and society.

Singapore is a city-state with an open economy based primarily on the international trade.

It is the leading financial, shipping and trade center in the Asia-Pacific region and a gateway for expanding trade and investment in the rest of Asia.

Singapore’s policy is aimed at developing friendly relations with all neighboring countries, supporting activities within the ASEAN framework, liberalizing international trade, and establishing close trade and economic ties with all interested partners.

Singapore’s Gross Domestic Product reached US$397 billion in 2021, which is impressive given its population of just 5.45 million. Economic growth at the level of 3.8-4.5% per year contributes to the further development of this promising market by foreign companies and the attraction of additional investments in all key sectors. This is also facilitated by the balanced policy of local authorities.

The Singapore government pursues a business-oriented economic policy, creating an attractive investment climate in almost all areas.

Singapore’s economy is dominated by services, the most important of which are trade, banking and financial services, and infrastructure and transportation.

Industrial production is also important, especially high-tech industries with high added value. A favorable investment climate and stability facilitate the implementation of capital-intensive projects based on project finance (PF) and other advanced financing schemes.

Singapore is considered to be a well organized country in terms of legal, tax, regulatory and political issues.

It is highly trusted by large foreign investors due to its economic and social stability, a well-developed financial sector operating in accordance with the best international standards, as well as a large number of high-qualified specialists in the local labor market.

Singapore has been pursuing a successful pro-export policy in recent decades. The electronic industry, shipbuilding, mining machinery and petrochemical industries are at a high level, attracting the attention of investors from all over the world. Singapore is also one of the world leaders in biotechnology, medicine and many other science-intensive fields.

The prosperity of Singapore is largely based on its favorable location, as the city plays the role of a world trade center.

The weaknesses of the Singaporean economy are the lack of raw materials, which makes local investment projects highly dependent on the import of minerals, raw materials, semi-finished products and energy.

But this fact did not prevent Singapore from becoming the third oil refining center in the world after Rotterdam and Houston. Agriculture plays a minor role in the local economy, so almost all necessary food is imported.

Some features of project finance and lending in Singapore

Project financing is a method of attracting long-term debt financing for large investment projects, in which the source of debt servicing is the cash flows that the project generates or will generate in the future.

This method came to Southeast Asia later than to the European market, where it showed itself in the financing of large oil and gas projects. Despite the high cost of organizing PF schemes, this method allows companies to attract huge financial resources on an off-balance sheet basis, using special formally independent companies (SPV, SPC).

Lending and project finance in Singapore is traditionally well developed and has a long history of commercial success.

This market is replete with large-scale public-private projects (PPP) designed to develop infrastructure, energy, manufacturing and trade.

This concept has been widely used by Singaporean companies for the construction of water treatment facilities, marine infrastructure, waste processing plants and other facilities. Since the mid-2000s, official guidelines have recommended increased use of project finance to modernize and expand high-value facilities worth over S$50 million (about US$35 million).

Major projects in Singapore are financed by dozens of financial institutions, among which we should mention such reputable institutions as Standard Chartered Bank, United Overseas Bank, BNP Paribas, Bank of America and a number of others.

Singapore banks play a huge role in project finance schemes throughout the region. According to some reports, more than half of all project finance loans issued to companies in Southeast Asia are issued by financial institutions in Singapore. In 2018, the Infrastructure Asia was created, which is designed to help Asian businesses in the development of large infrastructure projects.

An important feature of the implementation of investment projects in Singapore is the smaller scale and, accordingly, the lower cost of projects compared to countries such as India, China, Japan or Saudi Arabia.

This is reflected in a peculiar approach to contractual relations, financing terms and capital structure. In particular, financing without recourse to the borrower is used less frequently.

Non-recourse financing gives the lender the right to repay the debt only from the profit generated by the project. From the borrower’s point of view, the risk is limited to the funds that he has invested in the project. Thus, most of the risk lies with the providers of capital.

To finance expensive projects, partners use innovative mechanisms to ensure the safety of capital, increase the creditworthiness of companies and collateral. This includes mezzanine financing, the collateralization of a loan with highly liquid assets, the issuance of bonds, and more.

For example, a bank may issue a large long-term loan for the construction of a new facility.

Large investors provide liquidity by issuing asset-backed securities.

The borrower provides this liquidity to lending banks in exchange for long-term loans, which are converted into securities and contribute to a credit rating upgrade.

Singapore law does not restrict foreign participation in special purpose vehicles that are registered in the country. Exceptions are such sectors as banking, media, as well as some projects in licensed industries. Restrictions usually relate to the ownership of a controlling stake in a company, which is important to consider when designing a project finance structure in Singapore.

In general, the local system is quite liberal and does not require special permissions to organize project finance schemes. Additional costs associated with obtaining permits and licensing may be required only for the registration of land, the operation of communal infrastructure, as well as some issues related to energy, telecommunications, access to water and waste management.

When planning investment projects in Singapore, investor should also take into account laws that allow the authorities to forcefully buy land from private companies for public purposes.

These rules are rarely enforced and are all clearly defined in local legislation.

Project finance services in Singapore: Our core business service

Contact our consultants and learn more about CP Finance UK Finance opportunities in international project finance.

CP Finance UK FINANCE LIMITED
Website:https://c-pfinanceuk.com/
E-mail:finance@cpuk-financeltd.com
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According to the Basel Committee on Banking Supervision, international project loans is a form of financing the construction of capital facilities based on debt repayment through cash flows generated by the facility.

To this end, the initiators of the project create a legally independent company (Special Purpose Entity or Special Purpose Vehicle), which is responsible for the development of the project and attracts borrowed funds, guaranteeing the return of the debt exclusively by the assets of the project.

international Project loans are based on the participation of private capital in the implementation of large state and public projects.

Back in the 18th and 19th centuries, England underwent a massive modernization of the road network, using tolls as the main source of repayment of borrowed funds for Italian banks. The development of transport infrastructure, electricity and communications in the 19th century required active participation of private capital, laying the foundation for project finance in Europe.

The age-old desire of business to go beyond the possible in search of new sources of income leads to the creation of unprecedented masterpieces of technical and engineering thought.

One such example was the construction of the Suez Canal, which was made possible by the use of new financial instruments. Nowadays, the funding of international projects has received effective tools to implement grandiose investment ideas.

In 2015 alone, International project loans accounted for several hundred projects worth about $ 275 billion worldwide.

The experience of recent decades shows that international project financing is applicable to many investment projects. PF can be used both in the real sector of the economy and for large-scale financial projects. This has been proven by the examples of the rapid development of the countries of the European Union, China, the United States, Saudi Arabia and many other successful global players.

The largest private banks and international financial institutions, such as the EIB and the EBRD, actively use PF instruments in their activities.

CP Finance UK Finance offers funding of large international investment projects by providing long-term loans from € 50 million on flexible terms.

We also offer a full range of engineering, organizational and legal services for large businesses anywhere in the world.

International project loans: practical basis

International project loans refers to the cross-border method of realizing capital intensive investments through a legally and financially independent project company (SPV).

The complexity of implementing such projects on an international scale is not limited by the legal peculiarities of creating an SPV and providing borrowed funds in different countries. Multilateral contractual relations concluded by partners must reliably protect the interests of creditors and guarantee funding for the project on the most favorable terms.

Although there is no single universally accepted definition of project finance, this method has the following features:

• The initiators create an independent company, the life of which is limited by the period of implementation of a specific project.

• The share of borrowed funds usually reaches 80-90% of investment costs, and all funds are attracted by the project company.

• Project assets include valuable property, the value of which is expected to grow in the long term or which provide an opportunity to enter a promising business.

• The risks of the project are evenly distributed among the participants in such a way as to increase the chances of the success of the entire project.

• The future financial flows of the project must be sufficient to service the debt.

• Financing is provided without recourse or with limited recourse to the borrower.

There is currently no consensus on the superiority of international project loans over other forms of funding such as bank loans.

The main advantage of the PF is non-recourse financing, which allows companies to use a high level of leverage without burdening financial statements with high levels of debt.

Table: Features of international project loans in brief.

A wide range of PF contractual options allows the initiator to share risks with foreign partners and ensures more efficient project implementation compared to traditional funding methods.

The disadvantages of PF are associated with the complexity of the organization due to the increase in the number of participants in the scheme. PF is associated with higher transaction costs, so the cost of borrowing is usually higher compared to other financial alternatives.

Banks’ requirements for international project loans also include extensive financial, legal and technical analysis of the project.

The essence of international project loans covers aspects such as organizational structure, financing and risks.

They are connected and mutually condition each other. The connecting link in this process is the SPV. Special purpose investment companies are created for a specific purpose, which may be, for example, an investment in the modernization of production, the construction of a large facility, or the purchase of real estate.

This is a flexible organizational structure, which primarily allows the companies that initiate the project to obtain loans based on the future income projected from the project.

SPV in international practice is an independent business entity, and all relations with the project participants follow from the general principles of law, concluded agreements and contracts.

Doing business in this form is justified by the peculiarities of large and capital-intensive projects, as well as certain advantages arising from the separation of the company from the sponsors’ assets.

The SPV (SPE) has ownership of the assets being funded and the sponsor is not financially liable for the debt of this entity (unless it has provided appropriate guarantees). The investment process is focused on assets created as a result of the project, which are a source of generating cash flows and at the same time protect the interests of investors.

When setting up a special purpose investment company, sponsors should choose a suitable legal form that will determine their impact on company management, control methods, profit sharing, etc.

The choice of the legal form of SPV in international project finance should also be dictated by the need to comply with the number of partners and the size of capital investments, international requirements and the need for public disclosure of performance results.

It is also necessary to take into account the specifics of a particular project and the legal regulations of the host country in which it is being implemented.

The choice of the organizational and legal form of the SPV is one of the key steps in the pre-investment phase of the project development cycle. In many cases, companies prefer joint stock companies or limited liability companies, which have a number of advantages for the initiating companies. In such companies, the participants are liable for the debts of the project solely within the framework of their contribution to the capital of the SPV or its shares.

Placing individual projects in separate project companies means diversifying investment risk.

SPV is also considered to be a relatively safe solution from the point of view of the lender bank.

The bank is confident that a particular company will limit its activities to specific investments only and that the possibilities for securing claims and meeting them are significant. The procedure for a possible bankruptcy of the project is also simplified.

With its ability to carry out large-scale investment activities on multiple fronts, international project finance is well suited to large companies active around the world.

In fact, unlimited opportunities to raise capital allow them to quickly implement promising projects without burdening the company’s balance sheet with large debts.

Among the determining factors for choosing an SPV form, it is important to consider maximizing a positive tax effect for both the project company and its sponsors.

Correctly chosen form and structure of its activities can provide significant tax “savings“. Both value added tax and numerous corporate taxes and fees applied in different countries of the world are taken into account. In some cases, there is a risk of double taxation at the level of the company’s capital and the payment of dividends, which should also be avoided.

In project finance, subordinated capital is also widely used, which, in fact, being external capital, is considered as equity in order to determine the capital structure ratios. This is especially useful in terms of financial engineering and project bank analysis.

As a rule, interest on subordinated loans is not taxed, however, exceptions are possible.

The global project finance market today and tomorrow

The growth of project finance over the past 25-30 years is mainly associated with the global processes of deregulation of the economy.

This trend is supported by the ongoing internationalization of investment processes.

During the period from 1991 to 2012, about 6,000 investment projects were implemented using project finance for a total of US $ 2.5 trillion.

Leading investors, consultants and lenders have projects from different countries in their portfolio and successfully use the practical experience gained in other similar projects.

The global financial crisis caused a sharp reduction in lending to government projects and contributed to a shift in project activity towards China and other Asian countries. If in the countries of the Americas, the PF volume in 2015 reached $ 95 billion, while in the developing countries of Asia, the Pacific region and Japan, projects worth $ 75 billion were implemented.

Today, trends are changing again, fueled by geopolitical tensions and unpredictability that have affected a number of regions of the planet and even industries.

However, government projects have repeatedly demonstrated high resilience to financial shocks.

The use of PF has helped to maintain growth in Latin America, Africa, South and East Asia.

This confirms that international project finance is most effective for developing countries with weak business infrastructure and high external capital requirements. Interestingly, a significant proportion of North American and European investment today is directed to high-risk Third World countries.

Analysts believe that international project loans is more about large investments made outside the country by sponsors or investors.

Numerous publications provide us with information on the successful use of PF to refinance already completed projects, including in the energy sector, heavy industry, transport, oil and gas sector and mining. These industries are characterized by high project implementation costs, long construction times and the need to attract numerous suppliers and qualified contractors, often from several countries.

Our financial team is ready to assist you in the implementation of large investment projects anywhere in the world.

We have experience in providing engineering and financial services in dozens of countries in Europe, Africa, the Middle East, East Asia and Latin America.

Contact our consultants and learn more about CP Finance UK Finance opportunities in international project finance.

CP Finance UK FINANCE LIMITED
Website:https://c-pfinanceuk.com/
E-mail:finance@cpuk-financeltd.com
Alt-Email:admin@cpukfinanceltd.com