A comparative analysis of PPP financing

mechanisms for infrastructure projects

Leny Maryouri1

Abstract: Determining the most appropriate form of finance for Public Private
Partnerships (PPP) is a difficult task for the public sector. This paper compares and
contrasts the various forms of finance available for PPP projects. As a result of this
comparative analysis it is proffered that during the procurement preparation process
the characters of the infrastructure projects need to be aligned to ensure that they lead
to an appropriate PPP financing mechanism. Several PPP financing mechanism have
been reviewed. It is suggested the review presented in this paper can assist the public
sector to choose the appropriate PPP financing mechanism for their particular
circumstances.
Keywords: Financing; Infrastructure; Investment; Public-Private Partnership.

INTRODUCTION
Developing economies in the Asia-Pacific region need adequate and reliable infrastructure to
ensure that they can obtain sustainable growth and improve their competitiveness in
international markets. With increasingly limited budgets and short-term fiscal constraints
being imposed on governments, there is a need and demand for investment from the private
sector to support economic development. Consequently, the public and private sectors have
begun to form partnerships to fund economic and social infrastructure projects. The process
and justification for using PPPs for economic infrastructure is relatively straightforward as
there is a bankable revenue stream, yet this is not necessarily the case for social infrastructure
also for economic infrastructure which built in suburb or remote area which not generate
feasible demand yet. Grimsey and Lewis (2004) have suggested that the economic
infrastructure provides key intermediate services to business and industry and its principal
function is to enhance productivity and innovation. Social infrastructure however is seen as a
provider of basic services to households, with its main role to improve the quality of life and
welfare in the community (Grimsey and Lewis 2004). A major challenge that often confronts
government is the selection of an appropriate finance mechanism. The most common
financing mechanism currently being implemented are the Project Financing and Private
Finance Initiative, other PPP financing mechanism are still not explored yet. The lengthy of
tender evaluation, somehow because of various financing scenarios being developed by
private sectors who involve in the open tender. With this in mind this papers provides a

PhD Candidate, School of Built Environment, Curtin University, PO Box U1987, Australia
PPP International Conference 2013
Body of Knowledge Public Private Partnerships
University of Central Lancashire, Preston, UK
18-20 March 2013
ISBN: 9781901922912
Editors: Prof. Akintola Akintoye, Dr. Champika Liyanage and Prof. Jack Goulding
Page: 209-218

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Maryouri, L.

comparative analysis of the various forms of finance available for both PPP economic and
social infrastructure projects.

PUBLIC PRIVATE PARTNERSHIPS

A Public Private Partnership (PPP) is a long-term contractual arrangement between the public
and private sectors for the delivery of public services. The main characteristics of PPP for
infrastructure investment are (Grimsey and Lewis 2004):
The construction of a new infrastructure asset (or the refurbishment of an existing one) to

be designed, built and financed by the private sector to the procuring agencys services
specification, within a particular deadline and to a fixed price;
Long-term (25 to 35 years) contracts for the provision of infrastructure services associated
with the asset; and
Collection of revenue by operator or the payment by the public sector body to the private
body of a fee or unitary charge, allowing the contractor to make a return on investment
commensurate with the levels of risk assumed.
According to Delmon (2010) a PPP is a contractual agreement between a governmental entity
(national, regional or local) and a private legal entity (generally, as service providers). The
private sector will seek a secure revenue stream to ensure repayment of debt/ investment (and
hence lower interest rates) and profitability over time. There are fundamentally two model
sources of revenue for PPP schemes (Delmon 2010):
Concession model: this is where users pay compensation for public services provided.

This is normally referred to as a Tariff and relates to a revenue stream sourced from
consumers; and
Private Finance Initiative (PFI): This model is related to government compensation for
public services provided. It is a Fee related to a revenue stream originating from one
offtaker/public entity. This structure provides the project company with simplified billing
and collection, and assessment of credit risk.
In addition to the forgoing, Yong (2010) suggests there are performance-based payments
where Governments can provide financial support to PPP projects in the form of shadow tolls
or guarantees for a minimum level of revenue. These are usually linked to the performance of
the project, but may also be provided directly in the PPP contract (Yong 2010).
Measures in finance mechanism of PPP projects
There are various measures that can be used by the Public Authority to determine the
economic viability of a project. The measures include (Yescombe 2007):
Value for money (VfM) which identifies the benefits and costs of the project, including its

indirect effects. In preparing a cost-benefit analysis, a key element is determining the

discount rate to be applied to future benefits and costs so as to calculate the economic
return of the project;
Affordability, which is the ability of the project to secure the return of investment, whether
it can actually afford to pay the Service Fees (in the PFI Model), or the Public Authority
will probably have a set budget for the project and in the Concession Model, the Facility
has to be affordable for users, and
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Balance-sheet treatment, The off-balance sheet treatment is a modification in financial

engineering and a structure for purely public-sector balance-sheet reasons to raise a certain
VfM for the Public Authority, since it will probably involve artificial risk transfer of some
kind, whereby the private sector is paid for a risk in actual assumption. There must also be
an implication which adds further pressure to the process of measuring risk that if a
Facility remains on-balance sheet for the public sector, the level of risk transfer has not
been adequate, and hence sometime the result of PSC for the PPP does not offer good
VfM (Yescombe 2007).
The Public Sector Comparator (PSC) is the most common tool used by the public sector to
determine the cost to construct an asset through public funding, which is compared with the
cost to build it as a PPP (Yescombe 2007). The reasons for variation in financing practices
adopted by governments are numerous which include (Chan, Lam, et al. 2009):
Infrastructure characteristics that affect the user profiles and revenue-raising capacities of

particular assets;
Fiscal and macroeconomic conditions that can restrict the use of particular financing

vehicles due to their budgetary consequences;

Institutional arrangements that define the legal and regulatory framework as well as the

intergovernmental relationship within which public infrastructure assets are operated and
financed; and
Perceptions of the role and ability of government which underlie voters expectations for
the involvement of government in delivering specific services and manage the economy.
Moreover refer to Ozdoganm and Birgonu (2000) and Salman et. Al (2007) in Liu and
Wilkinson (2011), PSC is commonly criticised for not being able to precisely reflect the nonquantifiable factors of the proposed project (Liu and Wilkinson 2011). Therefore knowing
that many measures could affect the financial performance as mention above, study focusing
to infrastructure financing and identify key factors that could be quantified would be very
essential to conduct.

INFRASTRUCTURE FINANCING
Basic understanding of according to Chan (2009), PSC estimates the hypothetical riskadjusted cost if a project were to be financed, owned and implemented by government (Chan,
Lam, et al. 2009). The high bidding costs are partially due to the complexity of PPP
arrangements and procurement process. The time from project initiation to reaching financial
closure is extensive. The process involves lengthy preparation of tender documents,
complicated financial and contractual arrangement and negotiation between the relevant
parties (Liu and Wilkinson 2011). The financial decision making in PSC method is based on
the initial financial or base-line cash-flow performance that can be indicated with the results
of NPV, IRR and concession period (DELTA 2008). The decision-making base on the baseline cash-flow in PSC will lead to complexity of defining of criteria in bidding process. With
limit information of the project profiles that offered to open bidding will create the private
sectors offer many variation of financing of the projects in their Feasibility Studies (Foss and
Ellefsen) and it will led high bidding cost for private sectors (Li et al. 2005). The short-listed
companies will tend to have strong arguments to have fair judgments that their FS is the best
one. And this situation will lead longer bidding evaluation and sometime will lead to
lethargic situation that the government doubts to make decision. As mentioned by Chan et.
Al. (2010), lengthy delays in negotiation was become biggest obstacles implementing PPP in
China (Chan et al. 2010; Grimsey and Lewis 2004). While in Hong Kong, the obstacles were
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the project accountability and project costs (Chan et al. 2010; Grimsey and Lewis 2004).
Situation in both countries was almost similar in United Kingdom (Matsukawa and Habeck)
(Chan et al. 2010; Grimsey and Lewis 2004). The same situation also described in Li (2005)
that other obstacles in bidding process were the high transaction bidding costs (Li et al.
2005).

A particular financing vehicle can reduce the total cost of financing where it can
reduce the life-time transaction costs of financing and/or the costs of delay (Chan,
Forwood, et al. 2009).
In Figure 1 a conceptual model of the infrastructure financing as link of PSC and PPP also
link how fiscal policy could support the infrastructure financing itself is presented.
Infrastructure financing will involve the function of finance and accounting. Finance involves
many interrelated functions, including obtaining funds, using funds, monitoring performance,
and solving current and prospective problems (DELTA 2008). Accounting and finance have
different focuses. The primary distinctions between accounting and finance involve the
treatment of funds and decision making. Accounting is a necessary sub function of finance
(DELTA 2008).
Figure 1 has identified interrelated functions. The sources of funds have been indicated from
equity capitals of private sectors, from bank/lenders with commercial lending mechanism,
from donor agency and from bonds or public capital markets and other financial institutions.
The different of sources of funds will also lead to different treatment of interest and return
mechanism. Refer to Chan and Lam (2010), government policy also effect of PPP financing
(Chan et al. 2010), The government policy in infrastructure financing are including managing
the equity capital, subsidy, economic stimulus and government guarantee also asset
contribution. Some other function need to be considered is the micro and macro-economic
assumption; those assumptions have been used in constructing fiscal budget and banking
system applied. Other functions that need to be considered in financial performance are
parameters which affect the costing and potential revenue streams.
For future development of this research, the data that will use to support the study will be
collected from governments official as the owner of the projects and policy making, from
bankers as the lenders to support the financing lending mechanism, the entrepreneurs or the
private sector as the executors of the projects, and additionally from the consultants to
construct the FS and credit rating who applied general financial assumptions. Also the donor
agency which could provide other type of facilitated finance and guarantee. To strengthen the
infrastructure financing study, it will require deep observation in developing financial
models based on the case studies.

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Government Budget/
Fiscal

Government + Private

PSC
Fiscal
Budget

GAP
GAP

Case Study

INFRASTRUCTURE
FINANCING

Data
Bankers
Governments
Entrepreneurs/
Privates
Consultant Big 4
Donors
Credit Rating

PPP

Financing
Sources

Lenders (Banks)
Equity Capital
Bonds
Financial
Institutions

Type of
Infrastructure

Monorail
Water Plants
Toll Road
Hospitals

Parameter Involves
Micro & Macro
Economy/ Policy
Costs
Revenues
Financial Models

Figure 1: Conceptual Model of Infrastructure Financing Study as Gap of PSC and PPP
TYPE OF INFRASTRUCTURE FINANCING
There are inherent differences between the economic functions of investment funding and
financing. Investment pertains to the allocation of economic resources, whereas financing
relates to raising and allocating monies or finances. This distinction has significant
implications for policy issues relevant to the efficient provision of public infrastructure
(Chan, Lam, et al. 2009).
Chan et al. (2009) also considers financing to be a vehicle to raise the cash component to
meet payments for construction and, in some situations the operation, of an infrastructure
project. It can influence the funding gap through the incentives it generates for user charges,
the restraints it imposes on risk management, and the costs of financing which form part of
the lifetime project cost. Financing vehicles may differ in (Chan, Lam, et al. 2009):
Risk management - the assignment of non-diversifiable project risks and management of

the overall project risk;

Transaction costs - the cost of arranging and managing finance, and costs associated with

delay or uncertainties with availability of finance; and

Exposure to market or other disciplines - the extent to which borrowers and lenders share,
signal and can act on information on project prospects and risks in the investment
decision.
There are several types of infrastructure financing available for PPP projects. However
before selecting a particular model, it is important to initially understand the funding
mechanism for each type of infrastructure financing, as well as their constraints.

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PROJECT FINANCE
According to Nevitt and Fabozzi (2000) project finance is defined as a particular economic
unit in which a lender examines the cash flow and earnings of an economic unit. This will be
the source of funds from which a loan will be repaid. The assets of the economic unit is
collateral for the loan (Nevitt and Fabozzi 2000). For this form of finance the lender relies on
the projects ability to cover interest and debt repayment, operating costs, and return on
equity (i.e. yield). It is necessary to conduct extensive due diligence in advance of financing
the project. Thus, the evaluation of the project is based upon the expected future cash flows
that influence the financing decision and the interest terms established by the lender.
Essentially, the lender is a partner in the project and therefore takes substantial risks. This
includes the insolvency risk of the private Special Purpose Vehicle (SPV). To estimate the
risk-related financing costs, the lender conducts due diligence checks of the projects
technical and economic viability. Furthermore, controlling measures are installed during the
negotiation process and establish the contract period. Moreover, with the substantial risk
transfer, the interest margin of the lender is higher in project finance. Hence, in this context,
the lenders risk-related financing costs are higher (Daube, Vollrath, and Alfen 2007).
PRIVATE FINANCE INITIATIVE (PFI)
The PFI is a form of public private partnership (PPP) that marries a traditional public
procurement program. The public sector purchases capital items from the private sector, to an
extension of contracting-out, and the public services are contracted to the private sector
(Allen 2001). Referring to Ball (2002) in Dixon (2005) under a PFI, private sector
organizations borrow funds to build infrastructure, and then operate and manage it on behalf
of the public sector. The private sector organization may also provide services in conjunction
with the infrastructure (Dixon, Pottinger, and Jordan 2005)
PFI entails transferring the risks associated with public service projects to the private sector
in part or in full. Where a private sector contractor is judged best able to deal with risk, such
as those related to construction, then these responsibilities should be transferred to the private
sector contractor. Where the private sector is deemed less able to manage the projects risks,
such as demand (i.e. usage of an asset), then at least some of the responsibility must remain
within the public sector. The most common form of PFI, the private sector has tended to
adopt is the design, build, finance and operate (DBFO) model based on output
specifications determined by the public sector. To secure the investment of the private
organization, the availability based payment mechanism is the most common form of PFIbased projects in the UK, being extensively used for hospitals or schools (Akintoye and
Chinyio 2006; Chan, Lam, et al. 2009; Chan et al. 2011; Yong 2010).
FORFEITING MODEL
The Forfeiting Model (Kaufmann and Denk) is a specific arrangement that the private
contractor sells claims for payments that result from the construction contract with the public
sector to the lender (Daube, Vollrath, and Alfen 2007). Forfeiting implies the sale of claims
for payment. The term has been established in export financing, but is currently used for a
special form of funding for a PPP project.
When resorting to a Forfeiting Model, the financing costs associated in the FM are
considerable lower than those in Project Finance. This is due to the levels of risk transfer to
the private contractor and the declaration of a waiver of objection by the public principal. In
Forfeiting model due diligence or controlling measures are not made by the lender (Daube,
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Vollrath, and Alfen 2007). As a result, the transaction costs remain on a relatively lower
level. Furthermore, the Forfeiting Model is based on the creditworthiness of the highly rated
public principal.
CREDIT GUARANTEE FINANCING (CGF)
Credit Guarantee Financing (CGF) was introduced into the United Kingdom (Matsukawa and
Habeck) in 2003 to provide a mechanism for using public debt capital to finance PPP
projects. The nucleus of the transaction is the guarantee furnished by the consortiums
bankers or a credit enhancement agency (i.e. monoline insurer) to the state as security for a
senior debt facility provided by the UK Treasury. The objective of CGF is to reduce the
consortiums cost of capital and thereby improve the long-run and overall VfM outcomes for
the state (Regan, Smith, and Love 2011b).
To lower the cost of debt capital, the SPV will ensure the project is assessed by a credit rating
agency (the underlying rating) with a view to obtaining credit enhancement (credit risk
insurance) from a monoline agency. For a fee, the SPV will secure a guarantee of its
financial obligations from an AAA credit rated monoline insurer, which lowers borrowing
costs. The objective of CGF is to reduce the consortiums cost of capital and thereby improve
the long-run and overall VfM outcome for the public sector. This arrangement is a departure
from traditional project finance principles whereby senior debt is secured by option to the
underlying project assets (Regan, Smith, and Love 2011b). CGF is full recourse debt and this
does affect the traditional incentive mechanisms that are a feature of conventional project and
PPP finance (Regan 2009b).
SUPPORTED DEBT MODEL
The Queensland Government in Australia in 2008 introduced a pilot program for PPPs in the
education sector. They used a hybrid variation of the CGF, which is referred to as a
Supported Debt Model (SDM). The SDM is calculated against a notional risk-free minimum
value for the project which the state can make debt capital available to the project at cost
(Regan, Smith, and Love 2011a). The SDM has several distinguishing characteristics which
include (Regan 2009a):
The SPV arranges private construction finance;
When the asset is commissioned, the state provides a long-term finance facility to repay
construction finance;
The level of state debt employed is calculated using a formula that equates to a minimum
asset value (or recoverable amount) in the event of consortium default. This may be
expressed as a percentage of on-completion value. The state assumes the role of limited
recourse lender although the arrangement does not rule out a requirement for full and
partial guarantees;
The state holds the senior debt position. The SPV will raise additional subordinated debt
and equity capital from private sources. The SDM preserves traditional ex ante incentives
and does not require credit enhancement or supporting private guarantees; and
The lower cost of state debt reduces the cost of capital for the SPV, which should be
reflected in an improved VfM outcome for the state.
Advantages and disadvantages from a preliminary assessment of experiences of the
Queensland Government with SEM suggested (McKenzie 2008):

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Despite negative coverage reported in the Australian Financial Review, the market sounding
phase of the schools project attracted the interest of a large field of potential financiers; and
The estimated proportion of the projects total financing requirement expected to be risk free
in the operational phase of schools project was estimated to be 70%, which represents the
portion refinanced as senior debt by the Queensland Treasury Corporation. The remaining
capital is expected to consist of 22.5% mezzanine finance and 7.5% equity (DIP 2008).
Savings are expected to accrue from the application of this capital structure compared to the
typical 100% privately financed model, provided the cost of mezzanine finance is below a
break-even benchmark.
STATE GUARANTEE OF PRIVATE DEBT
An alternative form of state support for PPP projects not widely used is the use of state
guarantees to support privately sourced project finance in adverse capital market conditions.
Debt guarantees, unlike the CGF and SDM approaches, are a contingent liability of
government for borrowing limit purposes (Regan, Smith, and Love 2011b). A state
guarantee can be viewed as a trade-off in project and service delivery risks. Conventional
PPPs transfer most project risks to the SPV. In this case the public sector body may initially
adopt a Design-Build (DB) contract and engage a private sector firm or SPV to design and
build a facility in accordance with requirements determined by the government, after the
facility is completed and paid for, the government assumes responsibility for operating and
maintaining the facility. It may then use a service or management contract to outsource all or
part of operations and maintenance. The state may retain full or part responsibility for site
conditions and residual demand or political risk, which principally concerns service delivery
failure. Under a state guarantee arrangement, it assumes a contingent liability for the SPVs
default. Under conventional procurement, subject to specific risk transferred to contractors,
the state carries ultimate responsibility for infrastructure service delivery and the multiplicity
of risks that this involves.
The benefit of state allocation of risk to the SPV is improved VfM. The guarantee risk will
need to be measured, priced and valued and incorporated into the PSC. If the VfM result is
positive, the decision to proceed with a PPP is justified(Regan, Smith, and Love 2011b). Debt
guarantees in the form of a present obligation that may, require a payment in the future are
accounted for as a contingent liability and noted in the financial reports of government
agencies. Where the present obligation probably requires a future payment by the state, the
guarantee is recognized as a provision and disclosed as such in the agencys financial reports
(Regan, Smith, and Love 2011b).
STATE AND MUNICIPAL BONDS
Many central, provincial and local governments raise private capital for infrastructure
development by issuing bonds. In many cases, the bonds are issued by the regional authority
seeking to raise the capital, the interest payable on the bonds offers some form of tax
exemption and the obligations of the issuing authority are fully or partially supported by
central or provincial government guarantee. Developed economies with established capital
markets trade infrastructure bonds in competition with traditional public and private bond
issues. In developing economies, small or inefficient capital markets, unstable exchange
rates, high rates of interest and sub-investment grade sovereign credit ratings limit the
opportunities for this source of capital (Regan 2009a).

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RAISING EQUITY CAPITAL THROUGH IPOS, SPECIFIC-PURPOSE BONDS

Specific-purpose securitized borrowing refers to the issuance of debt instruments such as
bonds, debentures and inscribed stocks for the purpose of financing specific infrastructure by
the public sector (PIF na). These borrowings are usually secured on the asset, or against the
revenue stream arising from the asset. Debts incurred through these bonds are usually repaid
from income generated from the investments or government grants and funds.
RELATED FISCAL POLICY
The implications of PPPs for the government budget are pervasive. The specific public
sector costs that have a bearing on current and future budgets (Posner, Ryu, and Tkaxhenko
2009) include:

Annual payments for the life of PPP projects;

Capital contributions to establish PPPs;
Revenue losses from forgoing user fees;
Contingent liabilities such as guarantees and
Tax expenditures such as accelerated depreciation taken for private investment.

In addition to government budgetary payments, some countries provide more indirect forms
of subsidies for PPPs and concessions. Guarantees and other forms of payment are often
triggered when projects fall below certain financial thresholds, constituting a contingent
liability. In most countries, budget and accounting rules do not require appropriations for
these contingent claims.

COMPARISON ANALYSIS
The result of this literature study is the comparison. Table 1 is the comparative analysis for
key factors of PPP financing; the key factors to support the financing that have been indicated
include source of financing; return or payment methods; and the character of the PPP
projects. As the result of this comparative analysis the characters of the infrastructure projects
need to be aligned that will lead to appropriate PPP financing mechanism.
Table 1: Comparison of PPP financing mechanism
Type of Financing

Source of financing/
investment

Return/ payment

Character of projects

Conventional
Procurement

Public budget

Progress work or turn key Any PSO infrastructure

Project Finance

Capital from equity SPV

User charges in concession
Construction costs and other period
from lender loan under
project collateral

High profit projects High

Return, high IRR, high NPV
Profit Oriented
Bankable (Project as
Collateral)
The lender is involved as a risk
partner and therefore takes
substantial risks
High Effort in Due Diligence

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Type of Financing

Source of financing/
investment

Return/ payment

Character of projects

PFI

Capital from equity SPV

Construction costs and other
from bank loan under SPV
loan

Annual payment from

government or availabilitybased payment in
concession period

Less profit project

Moderate Return, moderate
IRR, moderate NPV
Private Sector take Risk (ex.
Construction risk)
Private sector is deemed less
able to manage the projects
risks

Forfeiting Financing

Capital from equity SPV

Private contractor sells
Construction costs and other claims for payments, bank
from bank loan under SPV paid by Government
loan

Less investment projects

High Moderate Return,
moderate IRR, moderate NPV
The transaction costs remain
on a relatively lower level
Bankable (?)
Due Diligence or controlling
measures are not made by the
bank

CGF

Capital from SPV with public Senior debt agreement from

capital loan
the government
Construction costs and other
from bank loan and
government provide senior
debt with lower rate and it
will be paid only after 70%
commissioning to increase
VfM

Less investment projects

High Moderate Return,
moderate IRR, moderate NPV
The transaction costs remain
on a relatively lower level
Bankable (?)
Due Diligence or controlling
measures by rating agency

SDM

Capital from equity SPV or Senior debt agreement from

mezzanine loan
the government
Construction costs and other
from bank loan and
government provide senior
debt with lower rate and it
will be paid only after 70%
commissioning to increase
VfM

Less investment projects

High Moderate Return,
moderate IRR, moderate NPV
The transaction costs remain
on a relatively lower level
Bankable (?)
Due Diligence or controlling
measures are by rating agency

State Guarantee

Capital from SPV

Construction costs and other
from bank loan under SPV
loan, government provide
state guarantee (contingent
liability) for residual demand
or political risk

Moderate Return, moderate

IRR, moderate NPV
Private and Public share Risk
Calculated Risks

Municipal / Specific
Purposed Bonds

Under a state guarantee

arrangement, the state
assumes a contingent
liability for the SPVs
default under either
agreement.

Government issued
Projects income and the
municipal bonds or specific interest payable on the
purpose bonds to finance
bonds offers some form of
specific/ certain infrastructure taxes

High Return, high IRR, high

NPV
Profit Oriented
Calculated Value of Shares to
offer to public/ capital markets

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Type of Financing

Source of financing/
investment

Return/ payment

Other Fiscal Policy

Subsidy for equity and

capital
Senior debt funding, direct
public-sector lending with
private-sector bank or
insurance-company
guarantees

Character of projects

Project for-profit
Availability based
payment and/or
performance based
payment
Annual payments for
the life of PPP
projects.
Capital contributions
to establish PPPs.
Revenue losses from
forgoing user fees.
Contingent liabilities
such as guarantees.
Tax expenditures such
as accelerated
depreciation taken for
private investment.

Using international financing Availability based payment Project for-profit

Donor Funding,
and/or performance based Project not-for-profit
International Financing institutions
payment
Institutions (IFIS)

A PPP Contract integrates finance with construction and operation of the facility and also a
post-construction take-up (or assumption of risk). As the highest-risk phase for a PPP is
during construction, the construction finance arrangement needs to be planned very well. The
most common method to reduce construction risk by the SPV is with the project risks
transferred to subcontractors. Transfer of risk to the subcontractor with turn-key based
payment can be implemented to all methods of PPP financing mechanisms.
Financial risk will also need to be considered, these are the main pre-Financial Close costs,
for example, the Sponsors own staff costs and those of external advisers, including lenders
advisers. There is often a time gap between when the total CAPEX (Capital Expenditure)
budget is agreed with the lenders and Financial Close, and during that time there is a risk that
legal and similar costs which are not fixed may mount up more than budgeted. Commonly it
will be treated as part of the initial equity investment. Negotiations will arrange these
development costs as reimbursement to the Sponsors at Financial Close, but if they are above
budget by that time, lenders may require reimbursement of the excess to be deferred until the
end of the construction period, at which time reimbursement may be allowed if sufficient
funds are then available.
Using public-sector funding for the SPV may impose debt to the government as a way of
reducing the SPVs capital-cost disadvantages, while leaving the rest of the standard PPP
structure in place. The benefit from this is limited if any financing risks are retained in the
private sector. The CGF and SDM apply public debt of the construction cost in a different
way. The SPV arranges private construction finance. When the asset is commissioned, the
state provides a long-term finance facility to repay construction finance. Another method is a
Joint-Venture PPP where the public authority becomes an equity shareholder, the idea of this
being to ensure that the public sector shares in equity returns and any funding windfalls.
However this is liable to lead to a conflict of interest which may not be in the public
authoritys best interests.
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There are two revenue streams that are commonly generated from PPP projects. One revenue
stream user charges based payment and the other is availability based payment. There are
natural caps on the level of revenue stream which can be fed into the financial structure at the
time of bidding, insofar as the SPVs revenues are derived:
o In the case of a Concession, projected demand and willingness to pay will determine the
levels of usage and the rates to be charged for tolls etc.
o In the case of a PFI-Model project, the Public Authoritys VfM and Affordability
requirements have to be taken into account.

CONCLUSION
PPP financing mechanisms are required by governments to continue on their path towards
financial sustainability. Governments must make best use of available funding. This does not
only mean optimizing income from rates and fees; it requires innovative procurement models,
coordination at a regional level, alternative ownership structures for network assets and
responsible borrowing within the financing mechanism.
Governments should therefore investigate a demonstration project for which a financial
product can be developed and marketed to private investors. Furthermore governments
should also create sustainable revenue streams that provide a direct link between those who
benefit from new investments and those who pay for them.
Inadequate investment in infrastructure leads to: constrained economic activity; lower
productivity and competitiveness; reduced amenity for users; and declining social equity. To
support economic development, the implementation of PPP to develop infrastructure will be
continually used. The problem of implementing PPP in infrastructure projects is to find the
most efficient methods or types of financing to increase the VfM in order to attract private
entities to participate.
Identification of the finance methods available for use in PPP projects with appropriate PPP
financing mechanisms has been summarized above. The aim of this paper was to compare the
differences of the various forms of finance available including Project Finance, Private
Finance Initiative, Forfeiting Finance, Credit Guarantee Finance, Obligations and Bonds.
Each of the financing mechanisms has indicated suitability for certain types of PPP projects.
It can be concluded that infrastructure projects which have sustained income streams would
be better using the project finance mechanism and specific purpose bond financing. For
projects which need support capital from governments, it would be better using the forfeiting
model and the PFI model. CGF and SDM model are financing methods that are more
complicated because it will need a rating agency for the SPV to get a guarantee of senior debt
arrangement from the government. State guarantee is a financing method for infrastructure
projects where risk is more predictable and could be budgeting in fiscal contingent fund.
This research will continue to be developed by examining financial models for particular
types of PPP financing mechanisms in order to determine the most appropriate financing
methods to secure the investment return for infrastructure projects.

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