| PPPs in infrastructure are normally financed on project basis (as opposed to corporate financing). This refers to financing in which lenders look to the cash flows of an investment for repayment, without recourse to either equity sponsors or the public sector to make up any shortfall. This arrangement has several advantages: reduces the financial risk of investors; may allow more debt in the financing structure; more careful project scrutiny, risk analysis leading to change in project structure, reduction in level of risk and more appropriate allocation of risks between parties. | Project financing and its advantages |
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| However, project financing also has many disadvantages which include: more complex transactions than corporate or public financing; higher transaction costs 28 (the due diligence process conducted by parties results in higher development costs, which could be up to 5-10 per cent of project value); protracted negotiation between parties; requirement of close monitoring and regulatory oversight (particularly for the potential expostulate guarantees). | Disadvantages of project financing |
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28 See footnote 7 for the definition of transaction cost.