This Annex introduces some basic concepts of project finance and how they relate to the financial structure of TEN-T PPP projects. It is not meant to cover all the issues relevant to the PPP financing structure, which are many and complex. The project management team should rely on the expertise of financial and legal advisers to understand the relevant trade-offs in project finance issues.
TEN-T PPP projects are generally financed using project finance arrangements. In project finance, lenders rely either exclusively (non-recourse financing) or mainly (limited recourse financing) on the cash flow generated by the project to repay their loans and earn a return on their investments. This is in contrast to corporate financing where lenders take assets on the borrower's balance sheet as security for their loans.
It is important to appreciate that the project finance structure should be designed to optimise the costs of finance for the project. It should also underpin the allocation of risks between the public and private sectors as agreed in the project agreement. In particular, the project financing should ensure that financial and other risks are well managed within and between the private consortium and its financiers. This should give comfort to the public authority that the private partner, and particularly its funders, are both incentivised and empowered to deal in a timely manner with problems that may occur in the project. Indeed, to a very large extent, the project finance structure should ensure that the interests of the main lenders to the project are aligned with those of the public authority - that is, that both need the project to succeed in order to meet their objectives. Where this is the case, the public authority can be confident that the lenders will take on much of the burden of the assuring the on-going performance of the project. This is a key element of the transfer of risk from public to the private sector in PPPs.