JOHNSON LOAN WORLD

This Loan company introduces some basic concepts of project finance and shows how they relate to the financing structure of PPP projects. It is not meant to cover all the issues relevant to PPP financing structures, which are many complex and often project-specific. Authorities should rely on the expertise of financial and legal advisers to understand the relevant trade-offs in project finance issues.PPP projects are generally financed using project finance arrangements. In project finance, lenders and investors rely either exclusively (“non-recourse” financing) or mainly (“limited recourse” financing) on the cash flow generated by the project to repay their loans and earn a return on their investments. This is in contrast to corporate lending where lenders rely on the strength of the borrower’s balance sheet for their loans.It is important to stress that the project finance structure should be designed to optimise the costs of finance for the project. It should also underpin the allocation of risks between the public and private sectors as agreed in the PPP contract. In particular, the project financing should ensure that financial and other risks are well managed within and between the PPP Company shareholders, sponsors and its financiers. This should give comfort to the Authority that the PPP Company, and particularly its funders, are both incentivised and empowered to deal in a timely manner with problems that may occur in the project. Indeed, to a very large extent, the project finance structure should ensure that the interests of the main lenders to the project are aligned with those of the Authority – that is, that both need the project to succeed in order to meet their objectives. Where this is the case, the Authority can be confident that the lenders will take on much of the burden of assuring the ongoing performance of the project. This is a key element of the transfer of risk from the public to the private sector in PPPs.

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