While helpful for raising finance for large, highly leveraged investments, project finance comes at a cost. Interest rates for project-finance debt are more expensive than government borrowing, and often more expensive than borrowing by established companies. The transaction cost-setting up the contractual structure, and carrying out adequate due diligence-can make it unattractive for smaller deals. For this reason, many smaller PPP projects adapt the non-recourse project finance structure, to achieve greater contractual flexibility, or lower the financing cost.
One option is for project shareholders to back up the project company by providing a corporate guarantee to the lender, for repayment for all or part of the project debt. Box 1.8: Examples of Project Finance Structure with Corporate Guarantees provides examples.
Box 1.8: Examples of Project Finance Structure with Corporate Guarantees In some cases, a project company may be unable to raise finance on a non-recourse basis. One option is for a major project shareholder to provide a partial or full guarantee on the project debt. For example: • In 1997, a concession for the eastern section of metro Manila was awarded to the Manila Water Company, a consortium led by the Ayala Corporation of the Philippines, with interests from United Utilities, Bechtel, and the Mitsubishi Corporation. In the wake of the Asian Financial Crisis, the Manila Water Company was unable to raise debt to finance investments on a non-recourse project finance-basis, so Ayala provided a corporate guarantee to back up the project company • In 1992, an oil pipeline in Colombia was being developed as a joint-venture between the national oil company and international oil companies with the IFC as the main lender. At the time, the IFC was concerned about possible guerilla attacks and the project stalled. To move forward, the shareholders provided a full loan guarantee on the project. Sources: Esguerra, J. (2003) The Corporate Muddle of Manila's Water Concessions, New York , USA: WaterAid and Tearfund, page 19; International Finance Corporation, Project Finance in Developing Countries (Lessons of Experience Number 7), Washington, DC, Box 5.7, page 68 |
Another alternative to lower the cost of finance for a PPP is for the government to participate in the finance structure, as described in Section: 1.4.3: The Role of Public Finance in PPPs. The government-or a government-owned financial institution-could provide finance as a lender to the project company, or could provide a guarantee to some or all of the project debt.