Introduction to Project Finance

A PPP is a model or structure that uses private investment to undertake infrastructure development that has historically been the preserve of the private sector. ‘Project Finance’ is the cornerstone of the PPP approach. The PPP concept does not   involve a new or novel mechanism for obtaining finance for a project or for structuring it. It uses the well-established approach and legal instruments of a technique known as Project Finance! It means essentially that lenders look to the project’s assets and revenue stream for repayment rather than to other sources of security such as government guarantees or the assets of the project sponsors.

In a PPP project, a private company is given a concession to build and operate a facility that would normally be built and operated by a government. The facility might be a power plant, airport, toll road, tunnel, bridge, water treatment plant, hospital, school or government building. The private company is also responsible for financing and designing the project. At the end of the concession period the private company returns ownership of the project to the government.

The concession period is determined primarily by the length of time needed for the facility’s revenue stream to pay off the company’s debt and provide a reasonable rate of return for its effort and risk.

In our Documents section various examples of the use of project finance in practice are explained, in particular the developing role of the model – Public Private Partnerships across the world and acronyms for models such as PFI, BOT, BOOT, DBFO etc.