Project Placement and Financing: A Strategic Approach

Project placement involves the financing of long-term infrastructure, industrial projects, and public services based on a non-recourse or limited recourse financial structure. In this model, project debt and equity used to finance the project are repaid from the cash flow generated by the project itself. Project financing is a loan structure that primarily relies on the project's cash flow for repayment, with the project's assets, rights, and interests held as secondary security or collateral. This approach is particularly appealing to the private sector as companies can fund significant projects off balance sheet.

Key Elements of a Build, Operate and Transfer (BOT) Project

A streamlined project financing structure for a BOT project comprises several critical elements:

  1. Special Purpose Vehicle (SPV) Project Company:

    • A newly established SPV with no previous business or record is essential for project financing. This company's sole activity is executing the project by subcontracting most aspects through construction and operations contracts.

  2. Revenue Stream and Debt Service:

    • As new-build projects lack a revenue stream during the construction phase, debt service is feasible only during the operations phase. Consequently, parties undertake significant risks during construction. The primary revenue stream is typically under an off-take or power purchase agreement.

  3. Limited Recourse to Sponsors:

    • Given the limited or no recourse to the project's sponsors, company shareholders are generally liable only to the extent of their shareholdings. The project remains off balance sheet for both the sponsors and the government.

Off-Balance-Sheet Financing

Project debt is generally held in a sufficiently minor subsidiary, not consolidated on the shareholders' balance sheets. This reduces the project's impact on the shareholders' existing debt costs and debt capacity, allowing them to utilise their debt capacity for other investments.

Governments may also employ project financing to keep project debt and liabilities off balance sheet, thereby preserving fiscal space. Fiscal space refers to the amount of money the government can spend beyond its current investment in public services such as health, welfare, and education. The underlying theory is that robust economic growth will generate additional tax revenue from more people working and paying taxes, enabling the government to increase spending on public services.

Non-Recourse Financing

In the event of a loan default, recourse financing grants lenders full claim to shareholders' assets or cash flow. In contrast, project financing provides a limited liability SPV as the project company, thus limiting the lenders' recourse primarily or entirely to the project's assets, including completion and performance guarantees and bonds, in case of default.

A crucial aspect of non-recourse financing is determining whether circumstances might allow lenders to have recourse to some or all of the shareholders' assets. A deliberate breach by the shareholders could provide the lender with recourse to assets. Applicable law may limit the extent to which shareholder liability can be restricted. For example, liability for personal injury or death is typically not subject to elimination.

In summary, project placement and financing involve strategic structuring and risk management to ensure successful execution and financial stability, providing a robust framework for long-term projects in infrastructure, industry, and public services.