New Ways to Finance Infrastructure Projects without Breaking the Bank
There is a large number of financing mechanisms out there to fund infrastructure projects, in particular for the new model public-private partnership (PPP) projects. If you are into infrastructure development industry, the major three avenues of financing for such projects to be known are:
- Government funds.
- Corporate financing (on-balance sheet finance), and
- Project finance.
Let’s explore these options in more detail.
1) Government fund
Government used to fund the build-operate-transfer (BOT) type of projects as by covering a part or all of the capital investments. This initiative is taken by the government in order to bring more efficacy and expertise in private sector. In BOT projects, the operators are paid a lump sum for the completed stages of infrastructure construction and can get an operating fee to recoup the cost of constructing, operating, and maintenance of the infrastructure.
Another typical scenario where government choose to source funds is for the civil works. In this too, the projects are completed through traditional procurement method, and then a private operator will be brought in to operate and maintain the infrastructure and deliver services.
Even though governments prefer to finance such projects with fundraising through private sector, in some specific areas, it will not be possible as in case of defence for example. In such cases, some aspects of the projects or some risks involved may be more sensible for the government to handle it independently. For all other infrastructure development, there is opportunity for private investment and PPP (public-private partnership) modes.
2) Corporate (on-balance sheet) finance
Some private operators may accept to finance some or whole of the capital investment for the projects and seek funding through corporate financing. It involves getting funds for infrastructure projects on the basis of the balance sheet of the operator rather than the estimate of the project itself. This mode is more typical in case of low-value projects where the financing cost is not adequate to warrant the project financing mechanism. It is also ideal in such cases where the operator is big and chooses to fund the projects from their own balance sheet.
The benefits of corporate finance are:
- The cost of funding will remain the same as the cost of funding of the private operator, which is typically lower than cost of funding of project finance.
- Corporate finance is much lesser complicated when compared to project finance.
- There is also an opportunity cost attached to corporate financing in terms of debt to equity ratio as the company can only raise a limited level of finance against its equity.
- The more investment on one project is, the less it will be on other parallel projects for a fine balance.
3) Project finance
One of the most popular and efficient fundraising arrangements, especially for PPP-type projects is project financing. This is also called limited recourse financing. In this, limited recourse lending is allowed to a special purpose vehicle, which keeps the rights to execute the construction and operate a project. This infrastructure finance is typically used in new constructions or extensive refurbishment.
Along with these three, you can find more infrastructure financing avenues. Stay tuned for more!