PPPs in infrastructure are normally financed on project basis. 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 the investors; may allow more debt in the financing structure; results in limited liability on project sponsors and more careful project screening.
However, project financing also has many disadvantages which include: more complex transactions than corporate or public financing; higher transaction costs19; protracted negotiations between parties; requirement of close monitoring and regulatory oversight (particularly for the potential expostulate guarantees).
When investors and financiers consider financing a project, they carry out extensive due diligence works in technical, financial, legal and other aspects of the PPP deal.20 This due diligence is intended to ensure that the project company's (or SPV's) business plan is robust and the company has the capacity to deliver on the PPP contract.
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19. See footnote 2 for the definition of transaction cost.
20. Often the term "bankability" is used in the industry to refer to feasibility of a PPP project. The term, however, may mean different things to different parties in a PPP. Generally it may be used if the project is financially viable (from financial perspective), legally tenable (from legal perspective), and administratively implementable.