Risk allocation matrix 1

EBRD PPP regulatory guidelines collection

Volume III

Annex 1.
Building a PPP
financing model

©️ 2024 European Bank for Reconstruction and Development

This publication has been produced with the assistance of the European Bank for Reconstruction and Development (EBRD). The
contents of this report are the sole responsibility of the authors and contributors and do not necessarily reflect the views of the EBRD.
Nothing in this publication should be taken as legal advice. The publication rights belong to the EBRD.
Annex 1. Building a PPP financing model 2

This bundle has been designed as a practical tool the capacity of relevant public and private bodies
to complement the Regional Study on Financing to finance PPP infrastructure projects by drawing
Models for Public-Private Partnerships in the EBRD’s attention to alternative and innovative ways of
economies. By detailing the benefits and limitations financing and structuring PPP projects, beyond
of the financing structures and instruments available traditional bank lending.
to create a PPP financing model and outlining the
financing sources available, this guide allows a Choosing a financing structure
promoter to quickly build a tailored PPP model. The
relevant pages will be linked to the corresponding To be considered:
sections in the chapter, where more details are
• The size of the project
provided.
• The level of development of the local capital market
A typical PPP financing structure involves the • The bank’s appetite for project finance in the
formation of a special purpose vehicle (SPV), with country
banks contributing roughly 75 per cent of financing • The possibility to mix financing types as an
(via debt) and shareholders/sponsors providing the alternative form of PPP financing structure
remaining 25 per cent (via equity). The aim of this • Management
guide and its corresponding chapter is to improve

Finance structure Benefits Limitations

Non-recourse or limited recourse project Allows projects with substantial capital High costs: development cost, interest
finance and full recourse corporate requirements and inherent risks to attract rates (project finance debt generally more
finance (2.1.1-2) private financing while minimising the expensive), large insurance coverage by
exposure of the sponsors or developers. lenders.
Helpful for raising finance for large, highly Commercial banks and development
leveraged investments. finance institutions do not tend to consider
any project finance project below a certain
threshold (US$ 10 million to US$ 20
million). Thus, for very small local projects,
the sole necessity to create an SPV is itself
an obstacle.
Forfaiting and receivables financing A type of financing through bank loans, Concession PPP projects usually have
(2.1.3) guaranteed by the project proceeds, complex contractual arrangements and
without supporting many project risks. financial structures that may not align with
Transfers significant risk from the bank to features of receivables financing.
the public authority. Receivables financing may not provide
sufficient funds to cover the large capital
requirements often associated with PPP
projects.
Investment partnership A good alternative for rich countries where
(7.1) the technology or local capacity is not
adequately developed.
Financing as part of a PPP contractual Attractive to investors and good to secure Pre-set agreements can be unbalanced
package (stapled financing) the financing for a project in countries in favour of the potential investors and
(7.2) in desperate need of that infrastructure lenders, risky for the off-taker and the
and where limited or no need for any state.
negotiation is seen.
Flexible bid model Meets both governments’ need for a Flexible bid models can face opposition
(7.3) competitive process and investors’ from pension funds, which may be
risk-return appetite, ultimately providing unwilling to accept direct responsibility for
certainty and value for money for projects.
governments, patrons and investors.
3 EBRD PPP regulatory guidelines collection Volume III

Choosing a financing instrument

To be considered:
• Risk appetite and distribution (for example, liabilities, loan defaults, construction delays)
• Cost of loans and equity and the debt-equity ratio.
• Probability of returns and repayments
• Ownership (for example, dilution)

Instruments for financing Benefits Limitations

PPP projects
Equity (4.1) Risk is shared; equity investors have no legal right Return is risky (in both directions), so equity
to the return of or a return on the capital they financing is more expensive than debt. The risk
invest. profile affects both the cost of debt and the cost
Reduces the contingent fiscal liabilities (for of equity.
instance, material construction risks). Increases the weighted average cost of capital.
Senior debt (4.2) Lowest risk – thus, it is the least expensive way to Requires a very high probability of repayment,
finance a project (except for grants). providers of senior debt will normally not accept
to finance the project fully unless almost all risk
of loan default has been removed.
Subordinated debt (4.3) More flexible terms than senior debt. Typically has higher interest rates than senior
Lower interest rates than pure equity financing. debt.
Interest payments made by the SPV to holders of
subordinated debt are often tax deductible.
Mezzanine financing (4.3) Reduces exit risk. While less expensive than equity financing, it is
Can bridge gaps between equity and senior debt. still more costly than traditional debt financing.
Increases a project’s debt-to-equity ratio, improving
equity’s rate of return.
Frees up equity for other projects.
Equity-type features allow investors to share gains
realized by the SPV.
Project bonds (4.4) The long tenor is attractive to investors looking Generally, less flexible than bank loans.
for stable, predictable returns and long-term Unless the deal is exceptionally large, the
investments that match their long-term liabilities. transaction costs for project bonds are likely to
Offer higher yields than traditional bonds. be higher compared to bank loans.
Capital investment grants Cost-free – a form of non-repayable financing.
or subsidies (4.5)

Choosing a financing source

To be considered:
• Bankability of the project – can it borrow the amount of debt required?
• Do both lenders and shareholders have incentives that reduce their risks and maximise their returns?
• How developed are capital markets?
• Is there a risk of excessive renumeration on the private side?

Sources of PPP Financing

Commercial and investment/merchant Development finance institutions (5.2) Project sponsors (5.3)
banks (5.1)
Capital market and bond issuance (5.4) Impact investors (5.5) Mutual funds (5.6)
Private equity funds (5.7) Strategic investment and infrastructure Sovereign wealth funds (5.9)
funds (5.8)
State-owned non-bank finance companies Export credit agencies (5.11) Insurance companies (5.12)
(5.10)
Pension funds (5.13) Investment platforms (crowdfunding) Philanthropic financing sources (5.15)
(5.14)