Bankability

A PPP project is considered "bankable" if lenders are willing to finance it -and this generally means on a project finance basis<7>

The majority of third-party funding for PPP projects normally consists of long-term debt finance, which typically varies from 70 percent to as much as 90 percent of the total funding requirement (for example, in a PFI-model 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 project financing or limited-recourse financing) looks to the cash flow of the project as the principal source of security (see the Annex for an introduction to project finance issues as they apply to TEN-T PPP projects).

The public contracting authority and its advisers need to assess financial risks thoroughly. The financial risks experienced by transport PPPs projects tend to be related to some or all of the following factors: <8>

□ Too much reliance on "best case" scenarios for 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;

□ Governments that do not consider the allocation of risks properly and ignore the incentives for strategic renegotiation; or

□ Refinancing can also create unforeseen benefits for the private operator, in which the government might not share if the co ntract does not explicitly provide for this possibility. (see Box 6, Sharing the gains from refinancing).