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.

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 and financing of  transport infrastructure project.

The most famous models applicable of financing of transport infrastructure projects includes the following:

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

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.

The world investment practice shows that the introduction of various models of financing transport infrastructure project 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.

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 transport infrastructure projects: Using Public-private partnership

Since the financing of transport infrastructure projects 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 has brought together a team of experienced financial and investment experts through the help of our high-net-worth angel investors from different countries to help private companies and government agencies in financing large scale transport infrastructure projects (toll roads, bridges, subways, train stations and more).

We offer long-term loans, credit guarantees, project financing (PF) schemes, investment and financial engineering services, project management, and much more.

Contact US to learn more and benefit from advanced solutions for your project today.

Funding schemes in transport infrastructure

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 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.

Thus, the main sources of financing for PPP projects in transport infrastructure include funds from budgets of different levels, funds from the private sector, resources from credit institutions, funds from international financial institutions and private investors, and funds from institutional investors.

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

The most famous applicable methods of financing of transport infrastructure projects remains corporate finance, project finance (PF) and public funding.

World experience in using PPP in funding infrastructure projects

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.

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

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.

In Germany, the Ministry of Finance and regional financial authorities, as well as communities, are responsible for the development of PPP infrastructure projects. Two financing models are used, such as project finance (raising private capital against future financial flows of the project, without a guarantee from the public sector) and forfaiting (financing with guarantees from the public sector).

In Austria, Denmark, Australia, Israel, Finland, Spain, Portugal, Belgium, Greece, South Korea, Ireland, Singapore, much of the funding goes to PPP projects related to the construction and modernization of roads.

CP Finance UK is ready to offer a full range of investment, engineering and consulting services for large companies and government agencies, including financing of PPP projects.

Email:finance@cpuk-financeltd.com
Website:https://c-pfinanceuk.com/

Sustainable urban development project financing in the recent times has a strong environmental component with multiple economic and social benefits to residents.

The transition to a low-carbon economy is a complex issue for municipalities and governments, partly addressed through project finance and public-private partnerships.

In recent decades, European and international discussions have given rise to new concepts of sustainable urban development that require significant sources of long-term financial resources, such as investment loans.

These tools are being actively developed by the joint efforts of representatives of the public, private and municipal sectors.

These capital-intensive investment projects focus on the construction of sustainable urban infrastructure that will improve the quality of the living environment and address the complex set of economic, social, environmental, demographic and other challenges.

Their feature is a long payback period, which requires professional planning and the use of innovative financial models with reliable support from the authorities.

Planning for the sustainable development of cities and the construction of a sustainable urban environment currently requires an increase in the share of capital investments of municipalities and diversification of funding sources.

Given the decline in government funding for public projects, an important trend in project finance in this context is to focus on innovative financial models, attract private capital, enhance cooperation with international financial institutions and enter into external capital markets to attract additional investment.

Urban development project financing

Green bonds financing of sustainable urban development projects

One of the most common forms of investment project financing by municipalities is direct financing from the capital market through the issuance of debt instruments such as bonds.

Since the 2000s, green bonds have been an important innovation in the development of municipal debt instruments, introduced in Europe with the first issuances by public institutions such as the EIB and the World Bank, followed by some municipalities to finance sustainable urban development projects.

According to the United Nations Development Program (UNDP), green bonds are innovative financial instruments for mobilizing resources from local and international capital markets for projects that bring environmental benefits to society.

The main difference between bonds is that they are guaranteed by the cash flows of projects that bring environmental benefits.

According to current sustainability requirements, environmental projects are classified into several categories related to climate change, depletion of natural resources, pollution of water, air and soil, etc. In most cases, these urban projects are aimed at promoting renewable energy, energy efficiency, control pollution and green buildings. According to analysts, in recent years the green bond market has grown exponentially from $13 billion in 2013 to $500 billion in 2021.

The growing interest in innovative bonds from issuers, investors and intermediaries requires the application of standards for assessing the environmental friendliness of bonds. The main tool that allows investors and intermediaries to assess the environmental friendliness of bonds is the Climate Bond Standard and Certification Scheme (currently Standard 3.0).

Certification confirms that a specific investment project brings significant environmental benefits in accordance with the eligibility criteria.

Some of the current requirements are listed below:

• Clear criteria for how financial flows are used and monitored within a particular project.
• Eligibility criteria for projects with low CO2 emissions and minimal environmental impact.
• Guarantee system with independent verifiers and strict procedures.
• Certification by an independent commission.

In all cases, local laws and regulations remain a priority in the preparation and issuance of bonds. The existing recommendations, principles and standards for issuing green bonds that promote sustainable development are voluntary recommendations and practices for wide use by various market participants.

Capital raised through bonds is used to finance low-carbon and sustainable infrastructure in areas such as transport, energy generation and transmission, building retrofits, industrial energy efficiency, water resources, pollution and waste control, agriculture and forestry.

Further development of the bond market based on the distribution of capital is associated with alternative financial instruments.

These are Social Bonds and Sustainable Bonds, which refer to bonds where project profits will be used solely to finance social projects or a combination of environmental and social projects, respectively.

The Green Bond Principles (GBP), the Social Bond Principles (SBP) and the Sustainability Bond Guidelines (SBG) proposed by the International Capital Markets Association (ICMA) contain the following requirements.

Innovative tools for financing sustainable urban projects

International practice shows that public-private partnership is the leading tool for financing investments in the construction of public infrastructure facilities and the provision of related services in the absence of the necessary resources in the state and municipal budgets.

Environmental protection as an integral part of public policy at the local, national and international level requires close cooperation between the public and private sectors to create sustainable assets in cities and municipalities.

Investments in sustainable urban environments usually include financial engineering tools, which are most often implemented in the form of project finance and public-private partnerships.

Sustainable urban development project financing covers projects such as green energy, transport infrastructure, waste management, and more.

The budget for such projects varies, ranging from tens of thousands of euros for the construction of a bike rack to hundreds of millions of euros for solar power plants. Accordingly, the financial needs of municipalities and the role of project finance schemes in such initiatives also varies.

Project finance: Project finance is a method of financing sustainable urban projects, public infrastructure and public service projects in which the source of debt repayment and return on equity involved in the project is the cash flows generated by this project.

A specific feature of project finance is a very high share of loans in the financial structure (up to 90% of the project cost). This requires the establishment of an independent company, referred to as a special purpose vehicle (SPV) or special purpose company (SPC).

SPV/SPC acts as a borrower and is fully responsible for the debts of the project.

Structures involved in sustainable urban development project financing are listed below:

• General contractor. Project finance schemes usually include a single general contractor who, alone or in cooperation with subcontractors, is responsible for launching the project (such projects may be carried out on the basis of an EPC contract).

• Municipal authorities. The local government takes responsibility for creating the proper legal conditions for the proper implementation of investments

• Operator. The project should be managed and maintained by a specialized company with relevant experience, which, after the completion of the project.

• Sponsors. In essence, these are the initiators of the project (private companies, organizations, municipal enterprises or local government) who promote the investment project and receive support from the authorities and the local community or other key organizations.

• Lenders. During urban development project financing, the lenders are most often local banking institutions that provide financial support directly to the Special Purpose Vehicle.

During the implementation of an urban project using PF schemes, other entities may also participate, which depends on the specifics of the investment.

This include manufacturers and suppliers of certain goods or equipment, large municipal customers who enter into long-term contracts in this area, as well as insurance companies (insurance policies are usually required to minimize the risk of investment failure).

Properly organized project finance makes it possible to create a modern municipal infrastructure using long-term funds and the experience of the private sector. In this way, the quality of services provided and the overall efficiency of projects such as power grids, water supply facilities, wastewater treatment plants and even residential buildings can be improved.

At the same time, each PF participant specializes in a certain area, such as attracting resources, risk assessment, construction and engineering, infrastructure management, and more.

Public-private partnership: Public-private partnership (PPP) mechanisms tend to be used in the most capital-intensive projects, which would otherwise be a heavy burden on the municipal budget.

When it comes to large urban projects, experts identify the following main advantages and potential benefits of PPP:

• Effective way to attract private capital to the public sector for the implementation of projects of public importance.

• Additional opportunity to accelerate social, economic, infrastructural and environmental transformations in local communities.

• Important tool for improving the infrastructure and quality of local public services (transport, security, healthcare, etc.)

• Basis for better planning and evaluation of investment projects, which is explained by the strict control of the private sector over the spending of funds.

• Participation of a private partner at all stages of the project leads to a simplification of the engineering stage, construction, financing, maintenance and operation of the facility.

• Improving the efficiency of investment projects.

• Better management of facilities and provision of better services of public interest.

• Transfer of experience and knowledge from the private sector.

• Rational distribution of risks.

• Growth of innovation.

A promising basis for achieving a balance of interests between the public and private sectors and the implementation of successful public-private projects is project finance.

The global market for green, social and sustainability bonds is growing at a rapid pace, given the growing demand for funds to create assets that bring environmental, social and other benefits.

This famous means of Urban development project financing has a very wide range of applications, and further growth in debt instruments in financing projects that meet the criteria for sustainable development is expected.

Email:finance@cpuk-financeltd.com
Website:https://c-pfinanceuk.com/