1.2.3 Bankability

A PPP project is considered bankable if lenders are willing to finance it (generally on a project finance basis). Guidance 9

The majority of third-party funding for PPP projects consists of long-term debt finance, which typically varies from 70% to as much as 90% of the total funding requirement (for example, in an availability-based PPP), depending on the perceived risks of the project. Debt is a cheaper source of funding than equity, as it carries relatively less risk. Lending to PPP projects (usually referred to as non or limited-recourse finance) looks to the cash flow of the project as the principal source of security (see Annex 1 for an introduction to project finance issues as they apply to PPP projects).

The Authority and its advisers need to assess financial risks thoroughly. The financial risks experienced by PPP projects tend to be related to some or all of the following factors: Guidance 10

• reliance on optimistic revenue assumptions and on levels of demand from a poorly chosen "baseline" case;

• lack of attention to financing needs in the project feasibility, which leads to larger amounts of debt in projects;

• long-term PPP projects that are financed with short-term debt, coupled with a sometimes unjustified assumption that the short-term debt can be rolled over at the same or even better refinancing conditions;

• floating rate debt that creates interest rate risk;

• Authorities which ignore the incentives the PPP Company may have to renegotiate the contractual arrangements in its favour; and

• refinancing that can create unforeseen benefits for the PPP Company, which the Authority might not share if the contract does not explicitly provide for this possibility (see Box 5)