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.

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.

Features	Short description
Innovativeness	International project loans is an innovative business finance model. The PF offers members unique benefits that attract lenders despite the lack of collateral.
International nature	Contractual relations within the framework of the PF are concluded between numerous partners from different countries, which requires taking into account the requirements of the current legislation and the characteristics of foreign markets.
Money against future income	The PF is completely dependent on the future financial flows that a particular project will generate. Thanks to this, the initiating companies do not risk their assets and do not provide material security for loans.
Off-balance sheet financing	The off-balance sheet nature of project finance allows companies to maintain high financial stability, since multimillion-dollar debt is not reflected in the reports.
High leverage	PF allows you to attract significantly more funds in comparison with traditional funding models.
Long term	Funding under the PF is issued on average for a longer period than corporate loans.

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.

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